Case Law Details
Mumbai Income-tax Appellate Tribunal (the “Tribunal”), in the case of DDIT Vs. The Hongkong and Shanghai Banking Corporation Limited [201 0-TII-1 61 -ITAT-MUM-INTL], held that an authorized dealer did not have any liability to withhold tax from the amount credited to the Non-Resident (External) (“NRE”) Account of the non-resident individual on account of short-term capital gains. The Tribunal also reiterated the principle laid down in the case of ADIT v. Green Emirate Shipping and Travels [2006] 286 ITR (A.T.) 60 , where it was held that the expression ‘liable to tax’ would cover cases where a sovereign country has the right to tax a person irrespective of whether or not that right was exercised.
Facts
The assessee, a banking company, was engaged in portfolio investment business under the Portfolio Investment Scheme for its non-resident clients.
The assessee remitted funds due to the non-residents based in UAE from the sale of Indian government securities (Treasury Bills). While doing so, it refrained from withholding taxes in the context of the underlying capital gains, based on a certificate issued by a chartered accountant. It was stated in the certificate that the gains were exempt from tax under Article 13(3) of the India-UAE tax treaty.
The assessee contended that the short-term capital gains were outside the purview of sub-section (iia) of section 204 of the Income-tax Act, 1961 (the “Act”). Therefore, the assessee could not be regarded as a ‘person responsible for paying’ any income to a non-resident, and hence, there was no liability to withhold tax. Furthermore, the India-UAE tax treaty was claimed to be applicable even if the non-resident clients were not actually taxed by virtue of an existing law in the UAE.
The AO held that the individual customer of the assessee residing in UAE was not liable to pay tax in UAE, and hence, could not be treated as a resident of UAE in terms of the India-UAE tax treaty. Accordingly, the capital gains did not qualify for exemption under the tax treaty. Hence, since the remittances should have been subjected to withholding tax, interest under section 201 (1A) of the Act would be leviable for the non-withholding of tax.
On appeal, the Commissioner of Income-tax (Appeals) (the “CIT(A)”) invoked clause (iii) of section 204 of the Act for holding the assessee to be ‘the person responsible for paying’ any sum chargeable to tax. However, the CIT(A), after referring to the decision in the case of Green Emirates Shipping and Travels(above), held that the capital gains were not taxable in India and the assessee was not obliged to withhold tax.
Both the assessee and revenue went in appeal to the Tribunal.
Issue :- Whether the authorised dealer can be regarded as a ‘person responsible for paying’ any sum or income in terms of the provisions of section 204 of the Act, for the purpose of withholding tax from remittance of short-term capital gains to non-resident clients in UAE and whether the benefit of the India-UAE treaty can be availed even if the non-resident clients are not liable to tax in UAE by virtue of the laws of UAE?
Assessee’s contentions
The assessee contended that:
- The assessee could not be regarded as a ‘person responsible for paying’ any income to non-resident, and therefore, there was no liability to withhold tax.
- The India-UAE tax treaty would be applicable even if the non-resident clients were not liable to pay tax under the tax laws in the UAE.
- Clause (iii) of section 204 of the Act is applicable to a person other than an authorised dealer. If clause (iii) of section 204 of the Act was taken to include an authorised dealer, there would be no need to provide for the liability of an authorised dealer in clause (iia) of section 204 of the Act.
Revenue’s contentions :- The revenue contended that UAE residents were not entitled to the benefit of the India-UAE tax treaty since they did not pay any income tax.
Tribunal Ruling
After considering the contentions of the assessee and the revenue, the Tribunal observe and held that:
In terms of the language of clause (iia) of section 204 of the Act, the liability to deduct tax arises only where long-term capital gains are earned.
Clause (iii) was existing in section 204 of the Act right from the beginning. Clause (iia) was inserted in section 204 of the Act with effect from 1 June 1986. As explained by Circular No.461 dated 9 July, 1986 [1986] 161 ITR (St.) 17 , the clause was inserted to avoid delay and inconvenience in case the non-resident proposes to remit the sale proceeds of foreign exchange assets. For this purpose, an authorized dealer, responsible for remitting that sum to a non-resident or crediting it to an NRE account, was included within the definition of ‘person responsible for paying’ under section 204 of the Act.
A special provision in clause (iia) relating to authorized dealer would override the general provision made in clause (iii) relating to the payer. Therefore, the assessee was not liable to withhold tax from the amount credited to the NRE account.
Even though the tax law in the UAE does not levy tax on capital gains on non-residents residing there, the benefits of the India-UAE treaty cannot be denied and the assessee was not liable to withhold tax from the amounts credited to the NRE account of the non-residents of the UAE. While holding as such, reliance was placed on the decision in the case of 1. Green Emirates Shipping and Travels (above) 2. Hiindustan Petroleum Corporation Ltd. v. ADIT [2010] 36 SOT 120 (Mum), 3. Meera Bhatia v. ITO [2010] 38 SOT 95 (Mum), 4. ITO v. Rameshkumar Goenka [2010] 38 SOT 95 (Mum).
Conclusion:-The decision is relevant to authorized dealers making remittance to non-residents. Though the decision is rendered in the context of remittance to individual’s resident in the UAE, all non-resident Indians can benefit from the principle laid down in it since it enables authorized dealers to remit proceeds on transfer of short-term capital assets without withholding tax.
