Whether the clients liable to tax in India on the capital gains and if yes, whether the bank is required to deduct tax at source on the remittance?

ADIT (International Taxation)-3(1) Vs. ICICI Bank Ltd. (ITAT Mumbai)- The issue in this appeals is with reference to the capital gains arising to various persons of Indian origin or non-resident Indians residing in UAE, who are clients of the Bank. These clients have invested in Government of India T-Bills, which has a tenure of 364 days. The T-Bills are also transferable before maturity. The clients purchased and sold these T-Bills during the year for which Bank, according to the guidelines of the RBI has opened a second subsidiary general ledger in their own name on behalf of their constituents/investors as required by the guidelines.

They also have separate designated NRE account with the Bank. An agreement has been entered between the bank and the constituents/ investors for opening CSGL account. The constituents/investors purchased and sold Government Bills through the designated account maintained by the ICICI Bank. The funds in the NRE accounts were utilised for purchase of securities whereas the proceedings of sales are remitted to the same account maintained with the bank. The contention of the Revenue is that the capital gains that has arisen to the said constituents!investors is liable to tax in India and since the Bank has not deducted tax at source the liability under section 201(1) and consequently under section 201 (1A) were imposed on the said bank.

It was the contention of the Bank that those constituents/ investors comprises of non-resident Indians as well as persons of Indian origin residing in UAE and these investors are entitled for the benefit of Article 13 of the Treaty and hence the Bank is not required to deduct tax at source on the capital gains arising from the sale of T-Bills. The bank contended that the Treaty is more beneficial to the investor and hence the Treaty should be applied. It was further contended that the Indian Government entered into a comprehensive DTAA with the Government of UAE being fully aware that there was no Income Tax or Wealth Tax on Individuals in the Emirates. It further contended that there are a number of Articles in the DTAA between India & UAE solely concerning with individuals (in particular, Article 14 to 21). If the intention was not to make the DTAA applicable to individuals, there was no need to have such Articles dealing with taxation of income in the hands of the individuals. The Bank further contended that the DTAA applies to all persons residing in UAE and there is no justification for excluding individuals from the purview of the relevant provision. The Bank contended that whenever the government intended the provisions of Treaty should not be applicable if the resident of one state is no subject to tax in that state a specific restrictive clause to that extent is included in the Treaty. In this regard the Bank has made references to the DTAA signed by India with Ukraine, Jordan and Sweden. The Bank further argued that since no such provision is available in the Indo-UAE Treaty the individuals residing in UAE cannot be taxed in India. The Bank further contended that the provisions of DTAA entered into between the Governments allocate jurisdiction between contracting states for the purpose of levy of tax and limits rate of tax leviable under the treaty. Article 13 of the DTAA between India & UAE provides that capital gains arising in India to a resident of UAE will not be subjected to tax in India. Accordingly, the jurisdiction to tax capital gains on transfer of movable property is allocated to UAE under Article 13 of the said DTAA. The jurisdiction to tax in respect of dividend and interest is allocated to the state of residence of the recipient of such income while maintaining the jurisdiction of the source state, viz. India to tax at the specified rates under Articles 10 & 11 of the DTAA. The DTAA has granted the jurisdiction of taxing capital gains from alienation of shares, debentures, securities, etc. to the country of which the alienator is a resident. The Bank contended that its client, the alienator, is not a resident in India within the meaning of the definition of resident under the Indian I.T. laws. UAE only has the jurisdiction to tax such gains. The jurisdiction to tax capital gains solely rests with UAE and hence the capital gains cannot be taxed in India. The Bank further contended that the CBDT Circular No. 734 dated 24.01.1996 has indicated that the availability of DTAA benefit to individual residents in UAE and this Circular is clarificatory in nature. This circular supports the view that the Treaty applies to all types of income though the circular has specifically dealt with the dividend & interest. In view of the above, the appellant contended that no tax is required to be deducted at source from the capital gains arising from transfer of Government of India T-Bills. The Bank also relied on the decision of the Green Emirates Shipping and Travels 100 ITD 203. The A.O. has not accepted the contentions of the Bank. The A.O. is of the view that since the individuals are not taxable in UAE, they cannot be considered as residents within the meaning of Article 4(1) of the Treaty and hence the provisions of the Treaty are not applicable to the individuals residing in UAE. The A.O. relied on the decision of the AAR in Cyril Ugene Perera 239 ITR 650 and the A.O. has relied on the following observations of the Hon’ble AAR in that decision.

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