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Case Law Details

Case Name : ITO (IT) Vs. Rameshkumar Goenka (ITAT Mumbai)
Appeal Number : Appeal No: ITA No. 3562/Mum/2009
Date of Judgement/Order : 16/04/2010
Related Assessment Year :

CASE LAWS DETAILS

DECIDED BY: ITAT, MUMBAI BENCH `L’,

IN THE CASE OF: ITO (IT) Vs. Rameshkumar Goenka, APPEAL NO: ITA No. 3562/Mum/2009, DECIDED ON April 16, 2010

RELEVANT PARAGRAPH

This is an appeal by the revenue against the order dated 31.3.2009 of learned CIT(A)-XXXIII, Mumbai relating to A.Y. 2006-07.
2. Grounds of appeal raised by the revenue reads as follows :-

1) On the facts and circumstances of the case and in law, learned CIT(A) erred in :

(i) holding that the assessee a resident of UAE, is entitled to the benefits of DTAA between India and UAE.

(ii) Holding that the assessee is not liable to pay any tax on the short term capital gains earned in India.

2) the appellant prays that the order of learned CIT(A) on the above grounds be set aside and that of the Assessing Officer restored.

3. The Assessee is an individual. He is a resident of UAE. During the previous year he earned short term capital gain of Rs. 5,04,89,379/ -. He claimed that die short term capital gain cannot be brought to tax in India in view of Article 13(3) of the Indo-UAE DTAA. Since the Assessee was a Resident of UAE, it is only UAE which has a right to tax capital in 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 the contracting state of which the alienator is a resident.

Article 4 of the India UAE DTAA defines resident of a contracting state as any person who under the laws of that State is liable to tax therein. There is no dispute that the Assessee is a resident of UAE.

The AO however rejected the claim of the Assessee on the ground that the assessee Is not paying taxes in UAE’. The Assessing Officer relied upon the decision of the AAR in the case of Abdul Razack Menon 276 ITR 306 which had considered the decision of the Honourable Supreme Court in the case of Azadi Bachao Andolan 263 ITR 706 (sc) and held that the assessee has failed to discharge the onus on it to prove that it is liable to pay tax in UAE. According to the AO 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. In UAE the capital gain in question was admitted not charged to tax.

4. On appeal by the Assessee, the CIT (A) held that the Assessee was entitled to the benefits of Article 13(3) of Indo-UAE treaty and therefore capital gain cannot be brought to tax in India. In doing so he followed the decision of the Mumbai Bench of the Tribunal in the case of Assistant Director of Income-tax (International Taxation), Range 1(2) vs. Green Emirate Shipping & Travels 100 ITD 203 (Mum) ITAT. In the case of Assistant Director of Income-tax (International Taxation), Range 1(2) vs. Green Emirate Shipping & Travels 100 ITD 203 (Mum) ITAT, the Mumbai Tribunal had an occasion to deal with an identical case. The facts of the case were that the assessee was 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 Double Taxation Avoidance Agreement , the assessee’s income was liable to tax only in the country of domicile i.e., UAE, but this contention was rejected by the Assessing Officer on the ground that the assessee Is not paying taxes in UAE’. The Assessing Officer relied upon the decision of the AAR in the case of Cyril Eugene Pereria, In re [1999] 239 ITR 6501 in support of the proposition 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’.

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 Vs. Azadi Bachao Andolan [2003] 263 ITR 7061, at page 742. The tribunal held that: –

6. Undoubtedly, in Cyril Eugene Pereria’s case (supra), Honourable 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 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 Klaus Vogel “Double Taxation Conventions establishes an independent mechanism to avoid double taxation through restriction of tax claims in areas where overlapping tax claims are expected, or at least theoretically possible. In other words, Contracting States mutually bind themselves not to levy taxes or to tax only to a limited extent in cases when the treaty reserves taxation for the other Contracting State either entirely or in part. Contracting States are said to waive ‘tax claims’ or more illustratively to divide ‘tax sources’, ‘taxable objects’, amongst themselves”. Double taxation avoidance treaties were in vogue even from the time of the League of Nations. The experts appointed in the early 1920 s 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’ (Verteilungsnorm) . 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”. Further, according to Vogel, “only in exceptional cases, and only when expressly agreed to by the parties, is exemption in one of the Contracting States dependent upon whether the income or capital is taxable in the other Contracting State, or upon whether it is actually taxed there.”

It is, therefore, 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.”

6. The Tribunal also held that the decision of the Authority for Advance Ruling in the case of Abdul Razak A. Menon, In re [2005] 276 ITR 306 was 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 Honourable Supreme Court’s following observation :

“The appellants (i.e.. Union of India) contend that, acceptance of the respondent’s submission that double taxation avoidance is not permissible unless the tax is paid in both countries is contrary to the intendment of section 90. It is urged that clause (b) of subsection (1) of section 90 applies to a situation where income-tax has been paid in both the countries, but clause (b) deals with the situation of avoidance of double taxation 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 – subsection (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 Honourable Supreme Court. It cannot be open to us to take any other view of the matter than the view so taken by the Honourable Supreme Court.”

8. The Tribunal then dealt with the question as to whether existing liability to pay taxes in UAE is a sine qua non to avail the benefit of India-UAW tax treaty in India as follows:

“8. Although the Assessing Officer’s objection to applicability of India-UAE tax treaty was only on the ground that the provisions of double taxation avoidance agreements 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 judgement of Honourable Supreme Court in the case of Azadi Bachao Andolan (supra). Referring to the Klaus Vogel’s Commentary on Double Taxation Conventions, Their Lordships, inter alia, observed as follows :

“In other words, Contracting States mutually bind themselves not to levy taxes or to tax only to a limited extent in cases when the treaty reserves taxation for the other Contracting State either entirely or in part. Contracting States are said to waive ‘tax claims’ or more illustratively to divide ‘tax sources’, ‘taxable objects’, amongst themselves. Double taxation 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, continues to remain exclusive right of the Government of UAE. As noted above, the exemption agreed to under the ‘assignment’ or ‘distributive’ rule, is independent of ‘whether the Contracting State imposes a tax in the situation to which exemption implies’. In the case of John N. Gladden v. Her Majesty the Queen 85 TC 5188, which was quoted with approval by the Honourable Supreme Court in Azadi Bachao Andolan’s case (supra), Federal Court of Canada was observed that “the non-resident can benefit from the exemption (under the treaty) regardless 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 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 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 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 tests 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 that attract residence type taxation. Therefore, as long as a person has such 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 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 Honourable Supreme Court’s judgement in Azadi Bachao Andolan’s case (supra). The plea taken by the revenue that the assessee was not ‘Habile 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 easel expression liable to tax’ in that contracting state as used in Article 4(l)of Indo-UAE-DTAA does not necessarily imply that the person should actually be liable to tax in that contracting state land that it is enough if other contracting state has right to tax such person, whether or not such a right is exercised.! In the light of the ratio laid down in the aforesaid decision, which has been followed by CIT (A), we find no grounds to interfere with the order of CIT (A). We therefore confirm the order of CIT (A) and dismiss the appeal by the revenue.

Order has been pronounced on 16 Day of April, 2010.

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0 Comments

  1. Gagan says:

    With reference to the above post, I would like to know whether the position with regard to applicability of Indo UAE DTAA has been clarified by the amendment in 2007.

    I would also like to know what will be the position with regard to the following case:

    An Indian Govt servant is on deputation to UAE Govt and getting salary from UAE Govt. He was in India for 9 months in a FY and 3 months in UAE. For that FY he is resident in India for income tax purpose in India. Whether article 15 of Indo UAE DTAA will be applicable to him so that he will not be charged income tax on the 3 months UAE salary income. Here can he seek the benefit of DTAA as a resident of Indiia?

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