Case Law Details

Case Name : ADIT (International Taxation)-3(1) Vs. ICICI Bank Ltd. (ITAT Mumbai)
Appeal Number : ITA No. 645/Mum/2007
Date of Judgement/Order : 16/09/2011
Related Assessment Year :
Courts : All ITAT (5937) ITAT Mumbai (1824)
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.

The learned CIT(A), following the decision of the Hon’ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan 263 ITR 706 wherein the decision of the Authority for Advance Ruling in the case of Cycil Ugene Pereia 239 ITR 650 was considered and also the decision of the Tribunal in the case of ACIT vs. Green Emirates Shipping & Travels 100 ITD 203, came to a conclusion that there is no tax liability on the capital gains on the constituents who are residents of UAE and hence the Bank is not responsible for deducting tax.

 If the treaty is not applicable to the individual persons living in UAE then the same individual will not be resident of India and also not a resident of UAE and hence capital gains arising from sale of such securities cannot be taxed in any of the country because Article 13(3) of the Treaty says that capital gains shall be taxable only in the contracting state of which the alienator is a resident.

The term resident’ has been defined in the notification as individual who is present in that UAE for a period or periods totaling in the aggregate at lease 183 days in the calendar year concerned”. In this case there is no dispute with reference to the fact that these persons are residents of UAE. Therefore, we are of the opinion that there is no liability to tax the capital gains arising to the individual constituents/investors on the transactions in Government Treasury Bills undertaken through the Bank. Since there is no liability to tax in India, obviously the Bank is not covered by the provisions of TDS. In view of this, the order of the CIT(A) is upheld and the Revenue grounds are dismissed.

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ADIT (International Taxation)-3(1) Vs. ICICI Bank Ltd.

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