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February 02, 2010

Double Non-Taxation not to debar treaty benefits: Recent Tribunal ruling

In an interesting decision involving interpretation of the India-UAE Double Tax Avoidance Agreement (“Indo-UAE DTAA”), the Income Tax Appellate Authority (“ITAT”) laid down the principle that once the right to tax an assessee, in a specified circumstance, was vested in one Contracting State under a DTAA, then whether such right was exercised or not, was a prerogative of such Contracting State. Further, if the resultant effect of the Treaty leads to double non-taxation of such income, then it had to be accepted by such other State as a fact of international taxation and due respect given to the treaty that provided for it.

The facts involve an individual assessee, resident of the UAE, who claimed the benefit of Article 13(3) under the Indo-UAE DTAA. Article 13(3)1 of the Indo-UAE DTAA provides that capital gains earned on alienation of shares are ‘taxable only in the Contracting State of which the alienator is resident’. In this regard, the issue at hand was that since UAE did not imposed any taxes on an individual, whether capital gains on alienation of shares realized by a resident of UAE would be exempt from tax in India under Article 13(2) of the Indo-UAE DTAA.

The assessee’s claim was denied by the Assessing Officer on the basis of AAR ruling in Cyril Eugene Pereira’s case, which provides that an individual not liable to a tax under UAE law, is not eligible to claim relief for that tax payable in India under the provisions of Indo-UAE DTAA. He further went on to say that the provisions of the said DTAA did not apply to income which may come under the purview of double non-taxation. The same conclusion was reached by the Commissioner of Income Tax (Appeals) on appeal.

Subsequently, the question came up before the ITAT bench on appeal made by the assessee. While allowing the assessee’s appeal, the ITAT relied on an earlier decision of the ITAT in a similar case, ADIT v Green Emirates Shipping and Travels2, which laid down the position that actual payment of tax in one of the contracting States is not a condition precedent to avail the benefits of the DTAA in another contracting State because a tax treaty prevents not only ‘current’ taxation but also ‘potential’ double taxation.

The ITAT, while reiterating the principle laid down by the Hon’ble Supreme Court judgement in Azadi Bachao Andolan3 and Klaus Vogel’s Commentary on Double Taxation Conventions, held that if two contracting States consciously entered into a DTAA which left scope for double non-taxation, then the same had to be interpreted by the judicial forums as they exist.

Interestingly, the ITAT also relied upon a foreign court decision given in a similar case by a Dutch Court of Appeal, which had confirmed the decision given in ADIT v Green Emirates Shipping and Travels, a few months after it was pronounced. While according a persuasive value to the reasoning and the decision applied by the Dutch Court to the case on hand, the ITAT observed that reference to similar foreign cases involving interpretation of international tax treaties could achieve consistency in judicial interpretation under different tax regimes.

Analysis

The above decision emphasizes that a tax benefit provided under the DTAA by one contracting State to another is independent of whether such income is taxed in such other contracting State.

This also reiterates the position that the Revenue should respect the DTAAs entered into by the contracting States and accept the double non-taxation is also a fact of life and also a reality in international taxation, just as tax sparing, which finds place in several Indian tax treaties. This is especially important for an assessee who plans his tax liability relying on the interpretation of such DTAA.

Further, the view postulated by the ITAT, that in matters of international taxation with a view to provide consistency in judicial interpretation under different tax regimes, it is desirable that the interpretation given by a foreign court should also be given due respect, is of prime importance. This is an expansion of the views postulated by the same Learned Judge in the case of Daimler Chrysler India Private Limited v. DCIT, where it was held that the decisions on treaty interpretation from a treaty partner country are, in principle, relevant while interpreting a provision of a treaty entered into with that treaty partner country. This move towards a global understanding of tax treaties with a view to remove inconsistencies marks a shift in the approach adopted by the judicial authorities. The Indian judicial forums have come a long way in making an effort towards achieving harmonious interpretation while interpreting international agreements.

It may be noted that in any event the India- UAE treaty was amended with effect from 1st April, 2008, wherein the definition for residency was amended and which now provides that a resident of a contracting State, in case of the UAE, means an individual who is present in the UAE for a period or periods totaling in the aggregate at least 183 days in the calendar year concerned, and a company which is incorporated in the UAE and which is managed and wholly controlled in UAE. In other words, a resident of UAE would be eligible for treaty benefits though it is not actually taxed in UAE, so long as the residency criteria set out above is met.

 

-          Hanisha Amesur & Rajesh Simhan

 

 

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1 Now substituted by Articles 13 (3), 13(4) and 13(5)

2 (2006-TIOL-74-ITAT-MUM)

3 supra

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