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TMI Blog2024 (11) TMI 1252X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and circumstances of the case and in law, the Ld. Assessing Officer (AO) and consequently the Dispute Resolution Panel (DRP) have grossly erred by denying the appellant, the benefit of Article 13 (5) and any other benefits under the India- UAE DTAA on capital gains on sale of debt mutual funds of Rs. 1,54,01,166 /-, on the premise that an individual (the appellant herein) is excluded from the definition of person under UAE Tax Decree of 1969 and that in absence of any existing Income tax law in the UAE on Individuals and in the absence of any actual payment of Income tax and filing of any Income Tax returns in the UAE, the subject capital gains of Rs. 1,54,01,166 /- does not get the benefit of any article under the India- UAE DTAA. 2. In the facts and circumstances of the case and in law, the Ld. Assessing Officer ( AO) and consequently the Dispute Resolution Panel ( DRP) have grossly erred by concluding that since appellant is not liable to any taxes in the UAE and since there are no existing Income tax laws in the UAE applicable on Individuals, the question of giving benefit of the India UAE DTAA to the appellant does not arise. 3. In the facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponse dated 06 12 2022 submitted the following: (a) That actual payment of tax in UAE is not required. Right to tax of UAE is sufficient to invoke provisions of the DTAA. (b) That decisions of Hon ble Courts/tribunals in the cases of Azadi Bachao Andolan, Ramesh Kumar Goenka vs. IT dept., Assistant Director of income- tax vs. Green Emirates Shipping are applicable in his case. (c) That claim of the assessee had been allowed in earlier years. (d) That tax liability also includes future tax liability as well. 4. Response of the assessee has been perused by the AO in the light of facts of the case and relevant provisions of the law. The AO held that, the assessee contends that he may be allowed benefits of tax treaty and capital gains from sale of mutual funds may not be taxed in India. After considering response of the assessee, the issues for consideration and adjudication are: (a) Whether provisions of the double tax avoidance agreement between India and UAE can be invoked even when there is no double taxation? (b) Can tax treaty impose tax liability when there is no domestic tax law on the matter? (c) Can tax treaty provisions be invoked when the taxpayer is not covered by taxes t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 30 of the said agreement. ARTICLE 1 PERSONAL SCOPE This Agreement shall apply to persons who are residents of one or both of the Contracting States. ARTICLE 2 TAXES COVERED 1. There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on elements of income or of capital including taxes on gains from alienation of movable or immovable property as well as on capital appreciation. 2. The existing taxes to which the Agreement shall apply are; (a) In United Arab Emirates: (i) Income tax; (ii) Corporation tax; (iii) Wealth- tax (hereinafter referred to as U.A.E. tax ) 3. This Agreement shall also apply to any identical or substantially similar taxes on income or capital which are imposed at Federal or State level by either Contracting State in addition to, or in place of, the taxes referred to in paragraph 2 of this Article. The competent authorities of the Contracting State shall notify each other of any substantial changes which are made in their respective taxation laws. ARTICLE 3 GENERAL DEFINITIONS 1. In this Agreement, unless the context otherwise requires: (e) The term person includes an individual, a company, and any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of IT Act which is reproduced below: 90(1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,- (a) for the granting of relief in respect of- (i) income on which have been paid both income- tax under this Act and income- tax in that country or specified territory, as the case may be, or (ii) income- tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, [ without creating opportunities for non- taxation or reduced taxation through tax evasion or avoidance ( including through treaty- shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory),] or (c) for exchange of information for the prevention of evasion or avoidance of income- tax chargeable under this Act or under the corresponding law in force in tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subsequent years. Thus, plea of the assessee is not acceptable and the same is hereby rejected. A perusal of preamble of the tax treaty and relevant background at the time of signing of the tax treaty makes it clear that the objective of the tax treaty is to provide relief from burden of double taxation. The taxes which the UAE government was contemplating to impose on individuals as per recommendations of the IMF, as noted by the Hon'ble AAR in its order in case of Sh. Abdul Razak Memon; and which have not been imposed till date, keeps the individuals excluded from tax treaty. Thus, keeping in view the objective of tax treaty enshrined in the preamble of tax treaty and exclusion of individual tax residents from existing tax laws of UAE as per article 2 of tax treaty, remaining provisions of the tax treaty are not applicable in case of the assessee. Capital gains from sale of mutual funds are covered within scope of income us 5 of the Act. Accordingly, capital gains from sale of mutual funds are hereby added to income of the assessee . 5. Aggrieved, the assessee filed appeal before the Tribunal. 6. The issue before us is whether the assessee is eligible for exemption from tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in, it has been, inter alia, held that the expression ' liable to tax' in the Contracting State does not necessarily imply that the person should actually be liable to tax but would also cover the cases where other Contracting State has the right to tax such persons- irrespective of whether or not such a right is exercised by the Contracting State. The sole reason adopted by the CIT (A) for giving the impugned relief is that as long as UAE has right to tax the assessee in respect which, whether such right has been exercised or not, the assessee is entitled to benefits of Indo UAE DTAA. The Assessing Officer is aggrieved and is in appeal before us. 3. We have heard the rival contentions and perused the material on record. We find that, as rightly noted by the CIT (A), the issue is covered in favour of the assessee by the decision of the Tribunal in the case of ACIT v. Green Emirates Shipping Travels, (supra), wherein, on identical facts, the Tribunal has held that the assessee is entitled to the benefits of Indo UAE DTAA. We have also noted that in the case of Meera Bhatia Vs Income Tax Officer, 38 SOT 95(Mumbai), a co- ordinate Bench of this Tribunal, elaborating upon the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion liable to tax ' is not to read in isolation but in conjunction with the words immediately following it i. e., ' by reason of domicile, residence, place of management, place of incorporation or any other criterion of similar nature ' That would mean that merely a person living in a Contracting State should not be sufficient, that person should also have fiscal domicile in that country. These texts of fiscal domicile which are given by way of examples following the expression liable to tax by reason of i. e., domicile, residence, place of management, place of incorporation etc. are no more than examples of locality related attachments which attract, residence type taxation, that ' person ' is to be treated as resident and this status of being a ' resident ' of the Contracting State is independent of the activity of tax on that person. Viewed in this perspective, we are of the considered opinion that being ' liable to tax in the Contracting State by the virtue of an existing legal provision but would also cover the cases where that other Contracting State has the right to tax such persons irrespective of whether or not such a right is exercised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uence of which the company became a Greek resident. This was not in dispute in May, 2000, the taxpayers informed the authorities that, since their relocation, they had endeavoured to register the company with Greek tax authorities, but failed to succeed because of the Greek tax authorities, but failed succeed because of the Greek bureaucracy the company had not yet been assessed to the corporate income- tax. These facts were not contested by the Dutch authorities. But in 2004 they assessed the taxpayers for the Dutch corporate income- tax retrospective for the year 1995. The tax Inspector argued for applying art. 4(1) of the Netherlands- Greece tax liability is not sufficient rather a subjective indebtedness ( een feitelike subjective onderworpnheld ) is required. The however, refuted this argument it pointed out that the tax treaty did not postulate factual taxation: instead a legal obligation to pay tax on worldwide income was called for, which under Greek was established. 7. In legal matters like interpretation of international tax treaties and with a view to consistency in judicial interpretation thereof under Assessment year: 2003- 04 different tax regimes, it is desirable tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This protocol has since been notified by the Government of India Notification No. 282 of 2007, dt. 28 th Nov., 2007 [(2007) 213 CTR ( St) 64]. One of amendments made by this protocol is the change in definition of ' resident' in art. 4 ( 1 )( b) now provides that for the purpose of the Indo- UAE tax treaty, resident of a Contracting State, the case of the UAE, means an individual who is present in the UAE for a period or periods aggregating totalling in aggregate at least 183 days in the calendar year concerned, and, company, which is incorporated in UAE and which is managed and controlled wholly in UAE . Amendment in the definition of resident of UAE, thus accepts the broad proposition that taxability in one of the Contracting States is not a sine qua non to avail treaty benefits in the other Contracting Assessment year: 2003- 04 State. The fundamental assumption by the AO that an individual who is not liable to pay tax under the UAE law cannot claim any relief from the only tax which is payable in India under the agreement and that the provisions of DTAAs do not apply to any cases where the same income is not liable to be taxed twice by the existing laws of both the Cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich has a right to tax capital gain and not India. Article 13 of the agreement for avoidance of double taxation between India and the UAE (hereinafter referred to as the India- UAE Treaty ) provides an exemption from capital gains tax in India to residents of UAE. It reads as under:- Article 13 : Capital gains : 1) Gains derived by a resident of a contracting state from the alienation of immovable property referred to in paragraph 2 of Article 6 and situated in the other Contracting State may be taxed in that other state. 2) Gain from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a contracting state has in the other contracting state or of movable property pertaining to a fixed base available to a resident of a contracting state in the other contracting state for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the enterprise) or of such fixed base may be taxed in that other state. 3) Gains from the alienation of any property other than that mentioned in paragraph 1 and 2 shall be taxable only in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot liable to be taxed twice by the existing laws of both the Contracting States . 5. The Tribunal firstly disagreed with the view expressed by the AAR in the case of Cyril Eugene Pereria ( Supra) on the ground that the said decision was held to be not laying down the correct law by the Hon ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [ 2003] 263 ITR 7061 at page 742 The tribunal held that:- 6. Undoubtedly, in Cyril Eugene Pereria s case ( supra), Hon ble Authority for Advance Ruling, deviating from the stand taken by it in the earlier rulings including ruling in Mohsinally Alimohammed Rafik, In re [ 1995] 213 ITR 3171, concluded that an individual who is not liable to pay tax under the UAE law cannot claim any relief from the only tax on income which is payable in India under the agreement and that the provisions of the Double Taxation Avoidance Agreement do not apply to any case where the same income is not liable to be taxed twice by the existing laws on both the Contracting States . However, in Azadi Bachao Andolan s case ( supra), Their Lordships of Hon ble Supreme Court, after referring to the said ruling and after elaborate discussions on the variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also not good law. 7. The Tribunal dealt with the argument of the Learned Departmental Representative that as non- corporate entities are not taxable entities under the UAE Tax Treaty such non- corporate entities, even though based in UAE, cannot be treated as resident for the purposes of the India- UAE DTAA as follows: Our attention is also invited to the learned Assessing Officer s observations to the effect that the provisions of the DTAA do not apply to any case which the same income is not liable to be taxed twice by the existing laws of both the Contracting States and that since the assessee has failed to prove that it is paying taxes in UAE, the DIT relief sought by the assessee is rejected but it is the very proposition underlying these observations which was rejected by the Hon ble Supreme Court holding that it is not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States . As we have noted earlier also, the revenue is on record to have opposed the very argument that the revenue has taken in the present case, as evident from the Hon bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avoidance treaties were in vogue even from the time of the League of Nations. The experts appointed in the early 1920s by the League of Nations describe this method of classification of items and their assignments to the Contracting States. While the English lawyers called it classification and assignment rule , the German jurists called it the distributive rule (Vertei- lungsnorm). To the extent that an exemption is agreed to, its effect is in principle independent of both whether the Contracting State imposes a tax in the situation to which the exemption applies, and irrespective of whether the State actually levies the tax. Commenting particularly on the German Double Taxation Convention with the United States, Vogel comments: Thus, it is said that the treaty prevents not only current but also merely potential double taxation . [Emphasis supplied] It is thus clear that a tax treaty not only prevents current but also potential double taxation. Therefore, irrespective of whether or not the UAE actually levies taxes on non- corporate entities, once the right to tax UAE residents in specified circumstances vests only with the Government of UAE, that right, whether exercised or not, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is independent of the actual levy of tax on that person. Viewed in this perspective, we are of the considered opinion that being liable to tax in the Contracting State does not necessarily imply that the person should actually be liable to tax in that Contracting State by the virtue of an existing legal provision but would also cover the cases where that other Contracting State has the right to tax such persons - irrespective of whether or not such a right is exercised by the Contracting State. In our humble understanding, this is the legal position emerging out of Hon ble Supreme Court s judgment in Azadi Bachao Andolan s case (supra). The plea taken by the revenue that the assessee was not liabile to tax , which was anyway not taken by the Assessing Officer or before the CIT(A), is also not sustainable in law either. 9. Aggrieved by the order of CIT(A), the revenue is in appeal before the Tribunal. We have heard the submissions of learned Departmental Representative who relied on the order of the Assessing Officer. In our view decision in the case of Green Emirate Shipping Travels (supra) is squarely applicable to the facts of the present case. As held in the aforesaid case, ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be cancelled and that of the AO may be restored. 3. Brief facts of the case are as follows: The assessee, an individual, is non- resident for the relevant assessment year, viz., A. Y. 2012- 2013 The assessee Sri.K.E. Faizal. had sold units of equity oriented mutual funds during the relevant assessment year and derived short term capital gains ( STCG) on the same amounting to Rs. 1,34,99,407. For the assessment year 2012- 2013 the return of income was filed on 31 07 2012 by claiming the short term capital gain amounting to Rs. 1,34,99,407 as exempt to tax in India by virtue of Article 13(5) of India- UAE Treaty. The assessment was completed u/ s 143(3) of the I.T. Act vide order dated 30 03 2015 The Assessing Officer held that the underlying instrument of any equity oriented mutual funds is nothing but a `share', and therefore, as per Article 13(4) of the Treaty, STCG would be taxable in India. Accordingly, he added a sum of Rs. 1,34,99,407 4. Aggrieved by the above said addition under the short term capital gains, the assessee preferred an appeal to the first appellate authority. The assessee raised various contentions before the first appellate authority and the same was repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficial to the assessee as compared to the corresponding provisions of the Act. The Assessing Officer also does not state that the assessee is not entitled to the beneficial provisions of the DTAA entered between India and UAE. The Assessing Officer negated the assessee' s contention by holding Article 13(4) of the Treaty would apply and not Article 13 (5) of the Treaty. To understand the issue in controversy, it is necessary to reproduce Article 13 of the India- UAE Tax Treaty and the same reads as follow:- ARTICLE 13 : CAPITAL GAINS 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in paragraph (2) of Article 6 and situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a perman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mutual funds, in India can be established only in the form of trusts , and not companies . Therefore, the units issued by Indian mutual funds will not qualify as shares for the purpose of Companies Act, 2013. Further, under the Securities Contract (Regulation) Act, 1956, a security is defined to include inter alia - (a) shares, scrips, stocks, bonds, debentures, debenture stock or other body corporate; and (b) units or any other such instrument issued to the investors under any mutual fund scheme. 6.3 From the above definition of securities , it is clear that shares and units of a mutual fund are two separate types of securities. Applying the above meaning to the provisions of the tax treaty, the gains arising from transfer of units of mutual funds should not get covered within the ambit of Article 13(4) of the tax treaty, and should consequently be covered under Article 13(5) of the tax treaty. Therefore, the assessee, who is a resident of UAE for the purposes of the tax treaty, STCG arising Sri. K. E. Faizal. from sale of units of equity oriented mutual funds and debt oriented mutual funds should not be liable to tax in India in accordance with the provisions of Article 13(5) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance raised by the Revenue in this appeal is as follows : On the facts and in the circumstances of the case and in law, the learned CIT( A) erred in directing the AO to allow the benefit of DTAA merely on production of the xerox copy of the tax residency certificate issued by the Ministry of Finance and Industry in UAE without appreciating the fact that the assessee- company failed to produce any evidence that it was liable to pay taxes or paying taxes in UAE and that the provisions of the Double Taxation Avoidance Agreement did not apply to any person where the income was not liable to be taxed twice by the existing laws of both the Contracting States. 2. The short factual matrix, in which this issue arises, is this. The assessee is a shipping line based in United Arab Emirates. In the relevant previous year, the assessee had a taxable income of Rs. 28,35,628 from shipping operations. The assessee' s claim was that in terms of Article 8 of the Indo- UAE DTAA [(1994) 205 ITR (St) 49], the assessee' s income was liable to tax only in the country of domicile, i.e., UAE, but this contention was rejected by the AO on the ground that the assessee ' is not paying taxes in UAE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see was liable to tax in UAE or not. Therefore, whether the assessee was resident in UAE or not would not have really mattered from the point of view of the AO. For this reason, we are unable to approve the reasoning and stand of the CIT(A). Having held so, the next question that we are required to address ourselves to is whether or not the AO was justified in raising the objection that he did. Is it really the liability to pay tax in UAE which is sine qua non to avail the benefits of the India- UAE DTAA or a fiscal domicile or residency in UAE per se will be sufficient for an assessee to claim the benefits of the India- UAE DTAA? Is it taxation liability at present which is material for this purpose or is it even prospect of future tax liability which is sought to be prevented by the said DTAA? 5. As for the AO' s reliance on ruling given by the Authority for Advance Ruling in Cyril Eugene Pereiria' s case ( supra), we deem it necessary to reproduce the following extracts from the judgment of Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan ( 2003) 263 ITR 706 ( SC), at p. 742 wherein Their Lordships of Hon'ble Supreme Court had an occasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity for Advance Rulings in Cyril Eugene Pereira' s case (supra). 6. Undoubtedly, in Cyril Eugene Pereira' s case ( supra), Hon'ble Authority for Advance Rulings, deviating from the stand taken by it in the earlier rulings including ruling in Mohsinally Alimohammed Rafik, In re ( 1995) 213 ITR 317 ( AAR), concluded that, an individual who is not liable to pay tax under the UAE law cannot claim any relief from the only tax on income which is payable in India under the agreement and that the provisions of the Double Taxation Avoidance Agreement do not apply to any case where the same income is not liable to be taxed twice by the existing laws on both the Contracting States . However, in Azadi Bachao Andolan' s case ( supra), Their lordships of Hon'ble Supreme Court, after referring to the said ruling and after elaborate discussions on the various aspects of this issue, concluded that It is... not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States . The reasoning given by Their Lordships included the following : According to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court have binding force on all of us. Much as we respect the Hon'ble Authority for Advance Rulings, we regret our inability to follow the ruling which, in our humble understanding, has been clearly disapproved by the Hon'ble Supreme Court. It is not even open to us, even in a case in which our understanding of the issue on merits concurs with that of the Hon'ble Authority for Advance Rulings in Cyril Eugene Pereira' s case, to follow that school of thought. 7. Learned, Departmental Representative has invited our attention to the ruling given by the Authority for Advance Rulings in the case of Abdul Razak A. Meman, In re which supports the case of the Revenue and is said to be on exactly the same material facts. We are, however, unable to accept this plea and we decline to treat this as a sort of, to use the phraseology employed in legal parlance, a covered matter. As Hon'ble Supreme Court has duly taken ( note) of in Azadi Bachao Andolan' s case ( supra), a ruling given by the Authority for Advance Rulings is not even binding on the CIT and authorities subordinate thereto, in any case except in the case of that very assessee in which such a ruling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axation of income, inasmuch as Parliament has distinguished between the two situations, it is not open to a Court of law to interpret Clause ( b) of Section 90 Sub- section (1) as if it were the same as situations contemplated under Clause ( a). The very contention which has been raised by the Revenue in this case was successfully challenged by the Union of India before the Hon'ble Supreme Court. It cannot be open to us to take any other view of the matter than the view so taken by the Hon'ble Supreme Court 8. Although the AO' s objection to applicability of India- UAE tax treaty was only on the ground that the provisions of DTAAs do not come into play unless it is established that the assessee is paying tax in both the countries in respect of the same income, in the grounds of appeal before us it is also contended that the assessee- company failed to produce any evidence to the effect that it was ' liable to pay taxes' in UAE. The question then arises whether an existing liability to pay taxes in UAE is a sine qua non to avail the benefit of India- UAE tax treaty in India. On this issue also, we find guidance from the judgment of Hon'ble Supreme Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of whether or not he is taxable on that capital gain in his own country. If Canada or the US were to abolish the capital gains tax completely, while the other country did not, a resident of the country which has abolished the capital gains would still be exempt from capital gains in that other country . It is thus clear that taxability in one country is not sine qua non for availing relief under the treaty from taxability in the other country. All that is necessary for this purpose is that the person should be ' liable to tax in the Contracting State by reason of domicile, residence, place of management, place of incorporation or any other criterion of similar nature' which essentially refers to the fiscal domicile of such a person. In other words, if fiscal domicile of a person is in a Contracting State, irrespective of whether or not that person is actually liable to pay tax in that country, he is to be treated as resident of that Contracting State. The expression ' liable to tax' is not to read in isolation but in conjunction with the words immediately following it, i.e., 'by reason of domicile, residence, place of management, place of incorporation or any ot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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