TMI Blog1994 (12) TMI 329X X X X Extracts X X X X X X X X Extracts X X X X ..... ) acquired prior to his becoming a non-resident ; (c) after his becoming a non-resident but from out of nonrepatriable funds in India. Whether in terms of article 10 of the tax treaty between India and the U. A. E., the income received/receivable by applicant in India by way of dividend is liable to tax in India at 15 per cent. ? Whether in terms of article 11 of the tax treaty between India and the U. A. E., the income received/receivable by the applicant in India by way of interest on debentures/bonds/balance in the capital account in partnership-firm is liable to tax in India at 12.5 per cent. ? - Authority for Advance Ruling No 206 of 1994. - - - Dated:- 23-12-1994 - S. RANGANATHAN, J. Dinesh Kanabar, for the applicant. None appeared for the Respondent ORDER S. RANGANADHAN J. (Chairman). This is an application filed under section 245Q(1) of the Income-tax Act, 1961. The applicant, Mr. Mohsinally Alimohammed Rafik, is an Indian national but a non-resident individual for Indian income-tax purposes. He has been away at Dubai for the past seventeen years where he has his residence and lives along with his wife and children and where he is workin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so charged shall not exceed : (a) five per cent. of the gross amount of the dividends if the beneficial owner is a company which owns at least ten per cent. of the shares of the company paying the dividend ; (b) 15 per cent. of the gross amount of the dividends in all other cases. Article 11 Interest : (1) Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. (2) However, such interest may be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed, (a) five per cent. of the gross amount of the interest if such interest is paid on a loan guaranteed by a bank carrying on bona fide banking business or by a similar institution ; and (b) 12.5 per cent. of the gross amount of the interest in all other cases. 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 situated in the other Contracting State may be taxed in that other State. (2) Gains fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds in India. (5) Whether in terms of article 10 of the tax treaty between India and the U. A. E., the income received/receivable by applicant in India by way of dividend is liable to tax in India at 15 per cent. ? (6) Whether in terms of article 11 of the tax treaty between India and the U. A. E., the income received/receivable by the applicant in India by way of interest on debentures/bonds/balance in the capital account in partnership-firm is liable to tax in India at 12.5 per cent. ? It will be seen that while the first question relates generally to the applicability of the treaty to the applicant the other questions are specific. Questions Nos. (2) to (4) pertain to the capital gains, question No. (5) to dividend income and question No. (6) to interest income. Article 1 of the DTAA is emphatic that the agreement shall apply to persons who are residents of one or both of the Contracting States. However, article 4 (which will be considered a little later) provides a mechanism by which a person who invokes the treaty is to be treated as a resident of only one of the two Contracting States and on this determination will depend the relief available to him on the ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t he is a resident only of the U. A. E. and not of India under paragraph 1 of article 4. Alternatively, it is contended that even if he is held to be a resident of both the Contracting States by reason of the provisions of paragraph 1 above, clause (a) and, if necessary, clause (b) of paragraph 2 would become operational and make him only a resident of the U. A. E. The opposite view put forward on behalf of the Commissioner of Income-tax is that the applicant's claim to be a resident of the U. A. E. by virtue of paragraph 1 above is not sustainable and that, even if he is taken to be a resident of both the States within the meaning of paragraph 1, he should be taken to be only a resident of India for the purposes of the agreement as it is clause (c) of paragraph 2 that will be attracted to the present case. Paragraph 1 of article 4 is so cumbrously worded that the applicant seeks to make use of its language to argue that he is not a resident of India though, admittedly, he is liable to tax in India and has also been so taxed. It is pointed out that the words domicile and residence used in the paragraph are appropriate to the case of an individual while the expressions p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim the benefit of the agreement as article 1 of the agreement clearly declares that it will apply where the person claiming benefits under it is a resident of one of the two Contracting States. Article 1, however, does not decide the extent of the benefit available to the claimant. That depends on the other terms of the Agreement. The applicant claims benefit under articles 10, 11 and 13 of the agreement and, as already pointed out, he will be entitled to it only if he is a resident of the U. A. E. within the meaning of article 4 of the agreement. It is this question that poses a real difficulty for the object, background and language of the DTAA is such as to lend itself open to two possible types of construction. The straightforward and literal interpretation of article 4(1) would seem to be that an applicant can claim to be a resident of the UAE only if he is actually subjected to income-tax in the U. A. E. under its tax laws. There is also good logic in this interpretation, for a question of any benefit under the DTAA can normally arise only if, but for the provisions of the agreement, the person seeking relief has income which would be taxed in both the countries. To t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ai ; (e) The production of petroleum and other hydrocarbon materials in Dubai. Except that this does not include the mere purchase of goods or related rights thereof in Dubai. It will at once be seen that tax liability is not restricted merely to banking or oil exploration companies though there are some special provisions in the ordinance in regard to the latter. Under the ordinance, companies of all descriptions carrying on trade and business in Dubai will be liable to tax and hence will be resident in U. A. E. within the meaning of article 4(1) of the DTAA. (3) The applicant has also placed before the Authority the position regarding the income-tax law in the U.A.E. as explained in a publication of the International Bureau of Fiscal Documentation updated till October, 1993. This throws considerable light in the matter. It confirms the position that the only tax imposed in the U. A. E. is the tax on income of corporate bodies and that though each Emirate has its own income-tax decree, the decrees are similar. The provisions of the Dubai law are described in the terms already set out above. There is, however, a general reservation made which is of some interest. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present a very prosperous region in West Asia, and in that sense, can be considered to be developed countries. But they are really developing countries in the true sense of the term. They have no industries and there is not much prospect of joint ventures with other countries or of flow of technology either way. There is not much possibility of Indian companies carrying on trade or business in or of foreign companies carrying on trade in Dubai having income in India. The attraction of the U. A. E. lies in the vast surplus funds it has available for investment outside the country. It is common knowledge that there is a competition for its surplus funds from the U. S. S. R. as well as several European and Asian countries. India is also in the process of looking out for foreign countries interested in investing in India and must have considered the DTAA as providing an opportunity to improve the economic relations between the two countries and encourage the flow of funds from Dubai to India. There could be no better way of doing this than by the offer of some tax incentives to attract investment in India of Dubai capital. Any incentive offered in respect of Dubai would also attract in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 4, crucial to the application of the agreement, concerns itself with individuals in paragraphs 1 and 2 and deals with other categories of persons in paragraph 3 only as a residuary class. These are clear indications that the DTAA was an agreement intended to be applicable to individuals from the very date of its coming into force and was not intended to be a dead letter qua individuals until appropriate U. A. E. legislation brought them within the tax net in that country. It should also be noted that though there is no term of operation provided for in the agreement, it cannot be described as an agreement of permanent duration. On the other hand, article 31 makes the agreement liable to termination by either side at short notice. The argument suggested, therefore, though plausible, is not acceptable. If we now turn to interpret article 4(1) of the agreement in the above background, it will be seen that it takes on a different complexion altogether. The reference to a person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of incorporation or place of management or any other criterion of a similar nature will then connote n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed in one or the other State but not both (see articles 6, 7, 8, 13, 15, 18, 19, 22). It is only in regard to items like dividends, interest and royalty (articles 10, 11, 12) that, while the general practice of having them taxed in both countries is retained, the rate of tax in the source country is pegged at a low figure so as to attract more capital. In this view of the matter, the agreement clearly voices the intention that income of certain types should be taxed only at a concessional rate in its country of source. It will thus be seen that the language of paragraph 1 of article 4 lends itself to two equally plausible interpretations. One of them seems to give effect to the natural meaning of some of the words employed in the paragraph. However, it not only results in certain other words becoming an unnecessary surplusage but also renders the agreement practically devoid of all contemporary relevance. On that interpretation, only companies can take advantage of the agreement and all other categories of assessees would be excluded from its benefits for the present. The second interpretation perhaps places some strain on some of the words but gives a meaning to all the words emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts is Dubai, not India. On behalf of the Department an objection is taken that the figures mentioned above have been furnished only at the stage of hearing before the Authority and that these figures cannot be accepted at their face value without further investigation. But even assuming that there is some force in this contention and that it is not possible to determine the applicant's centre of vital interests, one has to turn to clause (b) of paragraph 2 of article 4. This clause defines a person as a resident of the State in which he has a habitual abode. There can be no doubt whatsoever that the country answering this description vis-a-vis the applicant is U. A. E. and not India. The applicant has left India, as already pointed out, as early as 1976 and has only retained a house in India which can be treated as a house available to him in the event of his return to this country and a place to stay in during his occasional visits to India. But his habitual abode is certainly in Dubai. He has a house there. He is based and settled there with his family. His children are studying there. He lives there year after year for several months in the year. It is, therefore, clear tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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