Expression ‘liable to tax’ used in the India-UAE tax treaty does not necessarily imply that person should actually be liable to tax in UAE

ITAT Mumbai has in the case of ITO Vs. Mahavirchand Mehta [2011] 11 taxmann.com 194 (Mum) held that the expression ‘liable to tax’ as used in Article 4(l) of India- UAE tax treaty (the tax treaty) does not mean that the person should actually be liable to tax in that contracting state by virtue of an existing legal provision. It will also cover cases where the other contracting state has the right to tax such person, whether or not such a right is exercised.

Facts of the case

• The taxpayer is an individual and a resident of UAE. During the previous year, he earned short term capital gain on sale of shares in India. The taxpayer contended that since it was a resident of UAE, it is only UAE which has a right to tax capital gain in view of Article 13(3) of the tax treaty.
• The Assessing Officer (AO) rejected the claim of the taxpayer on the ground that the taxpayer is not paying taxes in UAE. The AO relied upon the decision of the AAR in the case of Abdul Razak Meman (2005) 276 ITR 306 (AAR) and held that the taxpayer has failed to discharge the onus on it to prove that it is liable to pay tax in UAE.
• The AO observed that it is not sufficient for a person to claim the benefits of Article 13(3) to be just a “Resident of the other contracting State”, but he must  also have paid tax on the income in respect of which the benefit of Article 13(3) is claimed.
• On appeal by the taxpayer, the CIT(A) held that the taxpayer was entitled to the benefits of Article 13(3) of the tax treaty and capital gains cannot be brought to tax in India. In doing so, he followed the decision of the Tribunal in the case of ADIT v. Green Emirate Shipping & Travels [2005] 100 ITD 203 (Mum).
• In the case of Green Emirate Shipping, the Tribunal while dealing with a similar issue had held that the judgments of Cyril Eugene Pereira (1999) 239 ITR 650 (AAR) and Abdul Razak A. Meman do not lay down the correct law. The Tribunal, relying upon the judgment of Supreme Court in the case of UOI and Anr. v. Azadi Bachao Andolan and Anr. (2003) 263 ITR 706 (SC), had observed as under:
• the avoidance of double taxation is not dependent on tax being actually paid in one of the Contracting States;
• proposition that double taxation avoidance is not permissible unless the tax is paid, is contrary to the intendment of section 90 of the Income-tax Act, 1961;
• tax ability in one country is not sine qua non for availing relief under the treaty from tax ability in the other country. All that is necessary is that the person should be liable to tax by reason of domicile, residence, place of management, incorporation or any other criterion of similar nature which essentially refers to fiscal domicile.

Issue before the Tribunal – Whether the expression ‘liable to tax’ in contracting state as used in Article 4(1) of the tax treaty implies that a person should actually be liable to tax in that contracting State?

Tribunal’s ruling –The Tribunal relying on the decision of Green Emirate Shipping upheld the order of CIT(A). The Tribunal held that the expression ‘liable to tax’ in a contracting state as used in Article 4(1) of Indo¬UAE tax treaty does not imply that the person should actually be liable to tax in that contracting state. It is enough if other contracting state has right to tax such person, whether or not such a right is exercised.

Our Comments

• The decision is in line with another decision of the Mumbai Tribunal in the case of Rameshkumar Goenka6 where on similar facts the Tribunal held that the expression ‘liable to tax’ as used in Article 4(1) of India¬UAE tax treaty does not necessarily imply that person should actually be liable to tax in that contracting state. This judgment reinforces the view that the term liable to tax does not mean that tax should have actually been paid.
• In some treaties, such as USA, the terms ‘subject to tax’ and ‘liable to tax’ have been used simultaneously. The term ‘subject to tax’ is associated with income whereas the term ‘liable to tax’ is associated with a person. In the case of General Electric Pension Trust v. DIT [2005] 280 ITR 425 (AAR), the AAR had held that the taxpayer was indisputably a person ‘liable to tax’ in the USA but it cannot be said that its income is subjected to tax as its entire income is exempt from taxation in the USA. Consequently, the person was held to be not liable to tax and not a resident of the USA.
• It is pertinent to note that India signed a protocol on 26 March 2007 with UAE where the definition of ‘Resident’ in case of UAE has been amended to state that an individual becomes resident if he is present in the UAE for at least 183 days in a calendar year. Further, a company becomes resident if it is incorporated in UAE and which is managed and controlled wholly in UAE.

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