1999 (5) TMI 582 - AAR - Income Tax

Whether the applicant s stay in India in a year is less than 182 days and the stay in four preceding years is less than 365 days hence he is non-resident in India under section 6 of the Income-tax Act 1961? Whether the applicant would be entitled to be taxed at the lower rate of tax as per article 10-para. 2(b) and article 11-para. 2(b) of the said Double Taxation Avoidance Treaty at the rate of 15 per cent. on gross dividend income arising in India (for dividend income prior to July 1 1997) and at the rate of 12.5 per cent. on gross interest income on investment accruing and arising in India to the applicant from the investments made in debentures and bonds of Indian companies or any other interest income on loans/advances made out of his moneys from his Non-Resident External Account ? Whether on the facts and in the circumstances of the case and having regard to the fact that the applicant is a resident of UAE in terms of article 4 of the said Double Taxation Avoidance Treaty gains arising on sale/transfer of his movable properties would be taxable only in the UAE and not in India as per article 13-para. 3 of the said DTA ?

Summary

Issues Involved:
1. Determination of Residency under Double Taxation Avoidance Agreement (DTAA) between India and UAE.
2. Entitlement to lower tax rates on dividend and interest income under DTAA.
3. Taxability of capital gains on sale/transfer of movable properties under DTAA.

Issue-wise Detailed Analysis:

1. Determination of Residency under DTAA:
The primary question is whether the applicant, who has stayed in India for less than 182 days and has a permanent home in both UAE and India, can be considered a resident of UAE under Article 4 of the DTAA between India and UAE. The applicant claims to be a non-resident in India under Section 6 of the Income-tax Act, 1961, and asserts that his habitual abode is in UAE due to his employment there.

Analysis:
- Section 6 of the Income-tax Act: Defines residence in India based on the number of days stayed in India.
- Article 4 of the DTAA: Defines a resident of a contracting state as any person who is liable to tax in that state by reason of domicile, residence, place of management, etc.
- Applicant's Claim: The applicant argues that he should be considered a resident of UAE even though he is not liable to pay any tax in UAE.
- Judgment: The judgment clarifies that the applicant cannot be considered a resident of UAE under Article 4(1) because he is not liable to pay any tax in UAE. The definition of "resident" in Article 4 is based on the liability to pay tax, which the applicant does not have in UAE. The tie-breaker clause in Article 4(2) does not apply as the applicant is not a resident of both contracting states.

2. Entitlement to Lower Tax Rates on Dividend and Interest Income:
The applicant seeks to be taxed at lower rates on dividend and interest income arising in India, as per Article 10-para. 2(b) and Article 11-para. 2(b) of the DTAA.

Analysis:
- Article 10 (Dividends): States that dividends paid by a company resident in one contracting state to a resident of the other contracting state may be taxed in that other state. However, if the recipient is the beneficial owner, the tax shall not exceed 15% of the gross amount of the dividends.
- Article 11 (Interest): Specifies that interest arising in one contracting state and paid to a resident of the other contracting state may be taxed in that other state, but if the recipient is the beneficial owner, the tax shall not exceed 12.5% of the gross amount of the interest.
- Judgment: The judgment concludes that since the applicant is not a resident of UAE under Article 4, he cannot benefit from the lower tax rates specified in Articles 10 and 11. The provisions of the DTAA are meant to avoid double taxation, and since the applicant does not pay tax in UAE, there is no double taxation to avoid.

3. Taxability of Capital Gains on Sale/Transfer of Movable Properties:
The applicant contends that gains arising from the sale/transfer of his movable properties should be taxable only in UAE and not in India, as per Article 13-para. 3 of the DTAA.

Analysis:
- Article 13 (Capital Gains): States that gains from the alienation of any property other than that mentioned in paragraphs 1 and 2 shall be taxable only in the contracting state of which the alienator is a resident.
- Judgment: The judgment asserts that since the applicant is not a resident of UAE under Article 4, he cannot claim the benefits of Article 13. Therefore, the capital gains arising from the sale/transfer of movable properties are taxable in India.

Conclusion:
The judgment concludes that the applicant cannot be considered a resident of UAE under Article 4 of the DTAA, and hence, is not entitled to the benefits of lower tax rates on dividend and interest income under Articles 10 and 11, nor the exemption from tax on capital gains under Article 13. The ruling emphasizes that the DTAA is intended to avoid double taxation, which is not applicable in this case as the applicant does not pay tax in UAE.