9911796707
TMI Blog2023 (7) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. 3. Petitioner was a non-resident Indian and was regularly assessed to tax in India in respect of income that accrued or arose to him in India or arisen in India or received by him in India. Petitioner was a resident of Dubai for several years and was carrying on business as a sole proprietor of two concerns. He had invested in shares and debentures issued by Indian Companies as well as units issued by mutual funds registered in India. Petitioner was a resident of United Arab Emirates (UAE) within the meaning of the said expression in the Double Taxation Avoidance Agreement entered into between India and UAE (DTAA). 4. In order to ensure finality and certainty as to the taxability of income that he earned from sources in India, Petitioner made an application to the Authority for Advance Ruling (AAR), seeking a ruling to the taxability as well as the rate at which tax payable on income earned by him by way of dividends, interest and capital gains from sources in India. The application filed by Petitioner to the AAR was not made for any specific Assessment Year but was made seeking an answer to questions as to the taxability of his income from dividends on shares in Indian Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the provisions of the tax treaty between India & UAE? The taxability of capital gains on the realisation of the Indian movable assets referred to will be governed by Article 13(3) read with Article 4 of the agreement treating the applicant as a resident of the UAE. No such income arising on or after 1.4.1994 will be taxable in India. The difference in the source of the assets giving rise to the income is of no relevance in this regard. (4) Whether in terms of tax treaty between India and UAE, the applicant is liable to capital gains tax on the transfer effected in India of movable assets in the nature of shares, debentures and other securities which are : (a) acquired prior to the coming into effect of the tax treaty between India and UAE; (b) after his becoming a non-resident but from out of non-repatriable funds in India. (5) Whether in terms of Article 10 of the tax treaty between India and UAE, the income received/receivable by applicant in India by way of dividend is liable to tax in India at 5/15 per cent as the case may be. In terms of Article 10 of the DTAA, the dividend income accruing to the applicant from shares held in India will be liable to tax at 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The return filed by Petitioner for A. Y. 2000-01 was processed under Section 143(1) of the Act and the intimation dated 25th January 2002 was issued, determining the income at Rs. 16,30,190/-. The tax thereon, however, was determined at Rs. 4,63,057/- and after quantifying the interest chargeable under Sections 234-A, 234-B and 234-C a demand of Rs. 6,43,100/- was raised. 11. For A. Y. 1997-98 and 1999-2000, at the time of filing Petition, Petitioner had not received any intimation under Section 143(1) of the Act. Whether Petitioner received later is not material at this point of time. 12. In response to the intimation dated 25th January 2002, for A.Y. 2000-01, Petitioner through his Chartered Accountant filed an application for rectification under Section 154 of the Act. The application was disposed by an order dated 29th November 2002, accepting the contention of Petitioner. 13. Subsequently, Petitioner received notices dated 2nd December 2002 for A. Y. 1998-99, 1999-2000 and 2000-2001 and notice dated 5th December 2002 for A. Y. 1997-98, under Section 148 of the Act by which Respondent No. 1 stated there were reasons to believe that Petitioner's income for the relevant Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of prohibition or any other appropriate writ, order or direction under Article 226 of the Constitution of India prohibiting Respondent No. 1 from taking any steps in furtherance of the impugned notices dated 2.12.2002 and 5.12.2002 being Exhibits, "N", "O", "P", and "Q" hereto; (d) pending the hearing and final disposal of the present petition the Respondents be restrained by an order and injunction from taking any further steps in pursuance of the impugned notices dated 2.12.2002 and 5.12.2002 being Exhibits, "N", "O", "P", and "Q" hereto; (e) for ad-interim reliefs in terms of prayer (d) above; (f) for costs of and identical to the present petition; (g) for such further and other reliefs as the nature and circumstances of the case may require." 14. Rule was issued on 23rd April 2003 and ad-interim relief in terms of prayer clause (d) granted. 15. Mr. Pardiwalla submitted as under:- (a) prior to the issuance of the notices, the Assessing Officer must have reasons to believe that income chargeable to tax has escaped assessment. The belief must be formed on the basis of certain materials and the material which is relied on must have live link and make rational ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner and the Revenue. Respondent No. 1 has ignored this clear mandate of the statutory provisions. (f) In the case of Cyril E. Pereira (supra) relied upon in the reasons to believe, Mr. Pardiwalla submitted that the Apex Court in the case of Union of India v/s. Azadi Bachao Andolan & Another 263 ITR 706, has stated that it was not persuaded to follow the view taken by the AAR in Cyril E. Pereira (supra). The Apex Court in Azadi Bachao Andolan (supra) has also held that the expression used in clause 4 of the DTAA was "liable to taxation therein" and not "pays tax". The Apex Court has held that liable to tax is legal situation, whereas payment of tax is a fiscal fact. For the purpose of application of Article 4 of the DTAA, what is relevant is the legal situation namely - liability to taxation and not the fiscal fact or actual payment of tax. If these were not so, the DTAA would not have used the words "liable to taxation" but would have used some appropriate words like "pays tax". Therefore, a person does not have to be actually paying tax to be "liable to tax", otherwise, a person who had deductible losses or allowances, which reduced the tax bill to zero would find himself unabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and revenue in respect of applicant and the said transactions, can the Assessing Officer, relying on ruling in the case of another Applicant where AAR has taken a different view, form a reason to believe that income chargeable to tax has escaped assessment?" 20. As noted earlier, the only basis on which the Assessing Officer has formed a reason to believe that income has escaped assessment is that the benefits of the DTAA were wrongly given to Petitioner because the ruling in the case of the Petitioner by AAR was on the basis of an early ruling in the case of M. A. Rafik (supra). The AAR, however, in the subsequent ruling in the case of Cyril E. Pereira (supra) after considering and discussing the ruling in M. A. Rafik (supra), came to the conclusion that the benefits of the DTAA would not be available as the Petitioner therein was not chargeable to tax in the UAE. In view thereof, Respondent No. 1 concluded that the ratio of the subsequent ruling would be applicable in the case of Petitioner and Petitioner would, therefore, not be entitled to the benefit available under the DTAA. 21. A similar case came up for consideration in Prudential Assurance Co. Ltd.(supra). That was a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner in view of the ruling of the AAR in the case of Prudential. This was for A. Y. 2004-05. For A.Y. 2005-06, the Assessing Officer as part of the inquiry, called upon Prudential to submit comments on position of law as to whether the income of FIIs in India would be capital gains or business income with reference to the latest judicial decisions. Prudential responded and also annexed a copy of the order passed by AAR in the case of Prudential. Prudential also submitted an explanatory note on the questions raised. The Assessing Officer once again called upon Prudential to make further disclosures and to explain as to why Prudential should not be considered as having a PE in India and to state as to why the activity involving the sale and purchase of shares should be regarded as trading activity and not as investment. An order of reassessment under Section 143 (3) of the Act for A. Y. 2005-06 was passed after considering Prudential's response. The dispute that came up before the Court for consideration arose out of a notice issued by the Director of Income Tax (International Taxation), calling upon Prudential to show cause as to why the assessments for A. Y. 2004-05 and 2005-06 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 245-S of the Act shows that the ruling by the AAR binds the Applicant, Commissioner and the Income Tax Authorities subordinate to him and shall apply in relation to the transaction in which the ruling was sought and, therefore, the ruling rendered in the case of Fidelity Northstar Fund (supra) by AAR could not bind Prudential nor can it displace the binding effect of the ruling rendered in the case of Prudential. The Court held that the Commissioner had ignored this clear mandate of the statutory provisions that the ruling would apply and be binding only on the Applicant and the Revenue in relation to the transaction for which it is sought. The ruling in the Fidelity Northstar Fund (supra) cannot, as a matter of plain intendment and meaning of Section 245-S of the Act displace the binding character of the advanced ruling rendered between Prudential and the Revenue unless the binding ruling in the case of Prudential displaced by the requisite procedure under law. Paras 8, 9 and 10 of Prudential (supra) reads as under:- "8:- ... ... ... ... Sections 245S stipulates that an advance ruling pronounced by the Authority under section 245R shall be binding only on (a) The Applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeable to tax accordingly. The Commissioner notes that in that ruling the Authority held that FIIs are not permitted to trade in equities. According to the Commissioner, the subsequent ruling of the AAR which clarifies the position on the subject as to the taxability of and the nature of income would be applicable to the facts of the petitioner's case. Hence, it has been held that the provisions of section 245S(2) are applicable to the case of the petitioner for assessment years 2004-05 and 2005-06 and the profits derived on account of the purchase/sale of shares would be chargeable to tax as capital gains. There is merit in the submission which has been urged on behalf of the petitioner that the Commissioner has manifestly exceeded his jurisdiction in relying upon the ruling of the AAR in the case of Fidelity Northstar Fund (supra) as a ruling which would apply to the petitioner. Ex facie, section 245S shows that a ruling of the AAR binds the applicant, the Commissioner and the Income-tax Authorities subordinate to him and shall apply in relation to the transaction in which the ruling was sought. The ruling rendered in the case of Fidelity Northstar Fund (supra) by AAR canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transaction for which it so sought, it is clearly evident that the Assessing Officer has ignored this clear mandate. The ruling in Cyril E. Pereira (supra) cannot as a matter of plain intendment and meaning of Section 245-S of the Act displace the binding character of the ruling rendered between Petitioner and the Revenue. Section 245-S of the Act states that advance pronouncement binds the authority under Section 245-R of the Act. It was binding on the Applicant who had sought in respect of the transactions in relation to which the ruling had been sought and on the Commissioner and the Income Tax Authority subordinate to him in respect of Applicant and the said transaction. Sub-section 2 of Section 245-S of the Act constitutes that the ruling shall be binding unless there is change in law or facts on the basis of which Advance Ruling has been pronounced. There was no change in law or facts that has taken place before us or mentioned in the reasons to believe. The subsequent ruling in Cyril E. Pereira (supra) cannot be stated to be covered under sub-section (2) of section 245-S of the Act. It cannot be considered as a ruling that changes the law. For the reasons mentioned above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctually paying tax to be "liable to tax" - otherwise a person who had deductible losses or allowances, which reduces his tax bill to zero would find himself unable to enjoy the benefits of the convention. The Court has also observed that the ruling of the AAR in M.A. Rafik (supra) holds that an assessee was entitled to the benefits of the DTAA but the AAR subsequently reversed this position in the case of Cyril E. Pereira (supra) and they were not persuaded to accept the view in Cyril E. Pereira (supra). The relevant portions in Azadi Bachao Andolan (supra) read as under:- " ... ... ... ... ... ... ... ... ... In our view, the contention of the respondents proceeds on the fallacious premise that liability to taxation is the same as payment of tax. Liability to taxation is a legal situation; payment of tax is a fiscal fact. For the purpose of application of article 4 of the DTAC, what is relevant is the legal situation, namely, liability to taxation, and not the fiscal fact of actual payment of tax. If this were not so, the DTAC would not have used the words, "liable to taxation", but would have used some appropriate words like "pays tax". On the language of the DTAC, it is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority subsequently reversed this position in the case of "Cyril Pereira", In re [1999] 239 ITR 650 (AAR) where a contrary view was taken. The respondents placed great reliance on the decision by the Authority for Advance Rulings constituted under section 245-O of the Income-tax Act, 1961, in Cyril Eugene Pereira's case [1999] 239 ITR 650 (AAR). Section 245S of the Act provides that the Advance Ruling pronounced by the authority under section 245R shall be binding only: (a) on the applicant who had sought it; (b) in respect of the transaction in relation to which the ruling had been sought; and (c) on the Commissioner, and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction." It is, therefore, obvious that, apart from whatever its persuasive value, it would be of no help to us. Having perused the order of the Advance Rulings Authority, we regret that we are not persuaded. There is substance in the contention of Mr. Salve learned counsel for one of the appellants, that the expression "resident" is employed in the DTAC as a term of limitation, for otherwise a person who may not be "liable to tax" in a Contracting State by ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
