Case nº AAR Nos. 637, 638 and 640 of 2004 of Authority for Advance Rulings, May 09, 2005 (case In Re: Abdul Razak A. Meman, In Re: Mrs. Akila A. Meman, In Re: Manish Bhatia Vs)
| Judge | For Appellant: S.E. Dastur, Adv. and For CIT: Pradip Menrotra, Adv. |
| President | Syed Shah Mohammed Quadri, J. (Chairman) and K.D. Singh and A.S. Narang, Members |
| Resolution Date | May 09, 2005 |
Judgment:
Syed Shah Mohammed Quadri, J., Chairman
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The applicants in these three applications, under Section 245Q(1) of the IT Act, 1961 (for short "the Indian Act"), are citizens of India. They are non-resident individuals. Inasmuch as the facts and the questions in these applications are similar, we would refer to the facts and the questions in the first mentioned application, In re, Mr. Abdul Razak A. Meman, UAE, which will be representative of other cases.
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The applicant says that he has been working with Abu Dhabi Islamic Bank from August, 1999 (asst. yr, 2000-01). He claims to be a resident of UAE and a non-resident in India. He has been receiving dividends and interest income from investments made in shares, debentures, etc. of Indian companies. He is also receiving interest which accrues to his NRI account and other accounts from the banks in India. He is regularly selling and intends to sell his shares, debentures, etc. in Indian stock market which would yield short/long-term capital gains. He is proposing to invest moneys from out of his NRO/NRE/FCNR account, in shares, debentures and other securities of movable nature in India with the intention to hold them as short-term/long-term investments within the meaning of the Indian Act. He claims that he is entitled to the benefit of the provisions of the India-UAE treaty (Double Taxation Avoidance Agreement). To have a clear position of his tax liability in India he seeks advance rulings of the Authority on the following questions:
(1) Whether the applicant, an individual, residing in the UAE is entitled to claim the benefit of the provisions of the tax treaty entered into between India and UAE.
(2) Whether in terms of Article 13(3) and Article 4 of tax treaty between India and UAE, the applicant, an individual Indian national residing in UAE, is liable to capital gains tax in India on the transfer effected in India of movable assets in the nature of shares, debentures and other securities?
(3) Whether the applicant is liable to capital gains tax on the transfer effected in India of movable assets in the nature of shares, debentures and other securities r/w Section 112 of the IT Act 1961, and the provisions of the tax treaty between India and UAE?
(4) Whether in terms of Article 13(3) r/w Article 4 of tax treaty between India and UAE, the applicant is liable to capital gains tax on the transfer effected in India of movable assets in the nature of shares, debentures and other securities:
(a) acquired prior to the coming into effect of the tax treaty between India and UAE;
(b) acquired prior to his becoming a non-resident;
(c) after his becoming a non-resident but from out of non-repartriable funds in India.
(5) Whether in terms of Act (article) 10 of the tax treaty between India and UAE, the income received/receivable by the applicant in India by way of dividend is liable to tax in India at 15 per cent. However, as per Finance Act, 1997, dividend income is totally exempted from tax in the hands of recipient. Therefore, whether dividend income is totally exempted in the hands of the applicant, (Abdul Razak Meman in AAR/637/2004, Mrs. Akila A. Meman in AAR/638/2004 and Mr. Manish Bhatia in AAR/640/2004), for dividend income.
(6) Whether in terms of Article 11 of treaty between India and UAE, income received/receivable by the applicant in India by way of interest on debentures/bonds and deposits with bank and companies is liable to tax in India at 12.5 per cent?
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In the comments of the Director of IT (International Taxation), Mumbai (hereinafter referred to as "the CIT"), the following aspects have been highlighted. As per Section 245N of the Indian Act, the applicant is entitled to advance ruling when a transaction has been undertaken or is proposed to be undertaken but the applicant has not furnished any concrete facts, therefore, the application is liable to be" rejected as being academic in nature. The principal question, it is submitted, is whether the applicant is a resident of UAE within the meaning of the term in Article 4 of the treaty. The facts furnished by the applicant are inadequate therefore the application is liable to be rejected. Individuals are not subjected to income-tax or capital gains tax in UAE, therefore, the applicant is not entitled to the benefit of the treaty, in view of the ruling of the Authority in the case of Cyril Eugene Pereira, In re (1999) 239 ITR 650 (AAR) (for short Pereira's case). On the above facts, the applicant is not entitled to the benefit of the treaty and consequently Articles 10, 11 and 13 of the treaty do not apply to him.
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In somewhat similar backdrop, the Authority in Mohsinally Alimohammed Rafik, In re (1995) 213 ITR 317 (AAR) (for short Rafik's case), purporting to interpret Article 4(1) of the treaty liberally, held that the treaty applies to individuals residing in UAE even though they are not liable to pay tax therein under the UAE Decree. This ruling is said to have been followed in more than 60 cases by various Benches of two Hon'ble Members as well as three Hon'ble Members. However, in Cyril Eugene Pereira (supra) having considered its earlier ruling in Rafik's case (supra), the Authority took a diametrically opposite view holding that an individual residing in UAE (a nonresident in India) is not a taxable unit under the UAE Decree so he will not be entitled to claim benefit of the treaty. The applicant drew support from the Rafik's case (supra) and the CIT placed heavy reliance on Pereira's case (supra).
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Mr. S.E. Dastur, learned senior counsel appearing for the applicant, has, in support of the ruling in Rafik's case (supra), contended that the treaty allocates jurisdiction between the Contracting States for the purpose of levy of tax and limits rate of tax leviable under the treaty and accordingly the jurisdiction to tax capital gains on transfer of movable properties is allocated to UAE (Article 13); the jurisdiction to tax dividends of companies and interest, is allocated to the State of residence of the recipient of such dividends while maintaining the jurisdiction of the source State to tax at the specified rate (Articles 10 and 11, respectively); the principles governing the interpretation of the treaty, it is argued, are different from those of the interpretation of a statute, and the approach should be to make the provisions of the treaty effective and not to render them non est or of no consequence; the interpretation should result in breathing life into it and not to make it a dead letter. In the interpretation of the treaty, it is contended, the principle of contemporanea expositio will apply and reliance is placed on (1) Circular No. 734 dt. 24th Jan., 1996 of the Central Board of Direct Taxes (CBDT), and (2) the press notes issued by the CBDT when India entered into treaty with UAE as well as the press note issued when a similar treaty was entered into with the Government of Qatar, to persuade us to hold that notwithstanding the fact that an individual is not a taxable unit under the UAE Decree, the treaty will nonetheless apply to the applicant. It is asserted that unless the treaty is so construed as to include an individual physically residing in UAE as a resident within the meaning of Article 4(1) of the treaty, Article 4(2) will become redundant and many provisions of the treaty particularly Articles 14 to 21 will be rendered inoperative and meaningless because they ex facie deal only with individuals and if the contention of the Department is sustained an individual cannot claim benefit of any of the provisions of the treaty, not even Article 7; so also Clause (b) of Article 10(2) and Article 28 will be rendered inoperative and similar treaty entered into between Government of India and the Government of Oman, will also be of no consequence insofar as individuals are concerned.
Mr. Pradip Mehrotra, Addl. DIT, Mumbai, has appeared for the CIT and argued that the treaty is for an indefinite period, therefore, the possibility of the Government of UAE enlarging the tax base in future by including individuals was kept in view in drafting the treaty and in that background its provisions have to be interpreted; he would submit that a treaty provision may have an unequal effect; the applicant being an individual is not a taxable unit under the UAE Decree as on date so he is not a resident of UAE within the meaning of the treaty as such he cannot take advantage of Articles 10, 11 and 13 of the treaty.
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It may be mentioned at the outset that out of the aforementioned questions, the first question in all the applications is common and any ruling of the Authority on it may have a bearing upon rulings on the other questions which relate to income by way of dividends (Article 10), interest (Article 11) and capital gains (Article 13). We, therefore propose to deal with the first question here.
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Section 90 of the Indian Act empowers the Central Government to enter into an agreement with the Government of any country outside India for purposes specified in Sub-section (1) thereof, which, inter alia, include avoidance of double taxation of income, prevention of fiscal evasion and granting of relief in respect of income-tax chargeable under the Indian Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment. Sub-section (2) of Section 90 provides that in relation to the assessee to whom such agreement applies, the provisions of the Indian Act shall apply to the extent they are more beneficial to that assessee. In exercise of the power conferred under Section 90 of the Indian Act, the Government of Republic of India entered into agreement with Government of the United Arab Emirates (for short the 'UAE') for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains on 29th April, 1992 which was brought into force on 22nd Sept., 1993 and was notified...
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