TMI Blog2005 (5) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 2. The applicant says that he has been working with Abu Dhabi Islamic Bank from August, 1999 (assessment year 1998-99). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1 (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. 4. In somewhat similar backdrop the Authority in Mohsinally Alimohammed Rafik 2 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in so far as individuals are concerned. Mr. Pradip Mehrotra, Addl. DIT, Mumbai has appeared for the Commissioner and argued that the treaty is for an indefinite period therefore the possibility of the Govt. 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. 6. 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 Authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beyond the intention of the parties, it should not be adopted. x x x x x x x • Object and context of treaty. If particular words and phrases in a treaty are doubtful, their construction should be governed by the general object of the treaty, and by the context; article 31, paragraph 1 of the Vienna Convention lays down that a treaty should be interpreted by reference to its 'object' and 'purpose'. The context need not necessarily be the whole of the treaty, but the particular portion in which the doubtful word or phrase occurs. However, for the purposes of interpretation, it can include the preamble and annexes to the treaty, and related agreements or instruments made in connection with the conclusion of the treaty ( Vienna Convention, article 31, paragraph 2). • Reasonableness and consistency. Treaties should, it is held, be given an interpretation in which the reasonable meaning of words and phrases is preferred, and in which a consistent meaning is given to different portions of the instrument. In accordance with the principles of consistency, treaties should be interpreted in the light of existing international law. x x x x x x x x • The principle of effectiveness. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Hon'ble Supreme Court in Union of India and Another v. Azadi Bachao Andolan and Another 3 , (referred to in this ruling as ABA), which refers to several authorities on interpretation of treaties and is useful for the present discussion. "Interpretation of treaties The principles adopted in interpretation of treaties are not the same as those in interpretation of statutory legislation. While commenting on the interpretation of a treaty imported into a municipal law, Francis Bennion observes: "With indirect enactment, instead of the substantive legislation taking the well-known form of an Act of Parliament, it has the form of a treaty . In other words the form and language found suitable for embodying an international agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument . It is rather like saying that by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganized composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for very good reason. To get agreement, politic uncert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reaties can also help to resolve problems and can obtain benefits which cannot be achieved unilaterally." • After tracing the history of 'distributive rule' Vogel notes, "The experts appointed in the early twenties by the League of Nations … described this method as a classification of items of income and their assignment to the contracting States. In English, the treaty rules which perform this particular function might thus be called 'classification and assignment rules'. This expression may not be clear enough, though, to show that both contracting States are simultaneously 'assignees' of the 'assignment'. Further, the term cannot be translated adequately into other languages. Therefore, for discussion on an international level, at least, the term 'distributive rule' (Verteilungsnorm) may be suggested. The present commentary being destined for international use, the term 'distributive rule' was adopted by its authors." * The substance of the rule is explained thus: "DTCs establish an independent mechanism to avoid double taxation through restriction of tax claims in areas where overlapping tax claims are expected, or are at least theoretically possible. In other words, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y applies to 'persons' (as defined in article 3(e)) who are residents (as defined in article 4) of one or both of the Contracting States (defined in article 3(c)). A reference to article 2, clauses (c), (e) and (g) of article 3 and para 2 of article 3 and article 4 are apposite and are quoted here: - Article 2: Taxes covered 1 .There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on elements of income or of capital including taxes on gains from alienation of movable or immovable property as well as on capital appreciation. 2. The existing taxes to which the Agreement shall apply are: • in United Arab Emirates: • income-tax; • corporation tax; • wealth-tax (hereinafter referred to as "UAE tax"); • in India • the income-tax including any surcharge thereon; • the surtax; and • the wealth-tax (Hereinafter referred to as "Indian tax"). 3. x x x x x Article 3: General definitions 1. In this Agreement, unless the context otherwise requires: • - - - - - - - - - - - - - • - - - - - - - - -- - - - • the terms " a Contracting State " and "the other Contracting State " mean UAE or India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt.3) should be a taxable entity under the law of the State concerned; he relied on the following passage from Vogel's Double Taxation Conventions. "The question whether a person (within the meaning of Art. 3(1)(a) may be a taxable entity under the law of the State concerned, is not a condition for treaty entitlement." * In our view, reliance on the above quotation is misconceived. From a perusal of the context in which the quote occurs, it is evident that Vogel was referring to a person defined in article 3(1)(a) of OECD which reads as under: " The term "'person"' includes an individual, a company and any other body of persons " . It may immediately be noticed that the definition of the term 'person' in the treaty is differently worded. The words " which is treated as taxable unit under the taxation laws in force in the Contracting States " are not part of the definition of 'person' in OECD. It would be a distortion of article 1 read with clause (e) of article 3 of the treaty to assert that irrespective of whether any individual is a taxable unit or not, he would be a treaty subject and would be entitled to the protection of the treaty. An individual can be a treaty subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a resident of the State in which its place of effective management is situated. Article 4 of the Treaty is the germane provision whose true interpretation would set at rest the controversy in these applications. Para 1 of article 4 says that for the purpose of this Treaty the expression ' resident of a contracting state ' means any person who under the law of that state is liable to tax therein by reason of domicile, residence, 'place of management', 'place of incorporation' or 'any other criterion of similar nature'. A plain reading of the second part of the para 1 suggests that the tax liability of a person in a contracting State may arise by reason of either his domicile or residence or place of management or place of incorporation or any other criterion of similar nature in that State. The words 'any other criterion of similar nature' have to be construed ejusdem generis . In so far as an individual is concerned, the nexus for the tax liability in the concerned state may appropriately be either domicile or residence. The other criterion viz., place of management, place of incorporation, or any other criterion of similar nature are more relevant for a person other than an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of the treaty, provides that a "resident of contracting state" is any person or entity who, under the laws of that state is liable to tax therein by reason of domicile, residence, place of management, place of incorporation or any other criterion of a similar nature. The claim of Norsk under article XII of the convention was disallowed by the Minister who ordered fresh assessment applying the rate 25% for the withholding tax. The order of the Minister was challenged before the Federal Court (Trial Division). It was held that Norsk was the resident of the United States - a contracting state. That decision was upheld by the Federal Court of Appeal. Further appeal by the Her Majesty the Queen to the Supreme Court of Canada was allowed. The court observed as follows:- "The basis of Norsk's liability for taxation in the United States emanates from the fact that it conducts a trade or business which is effectively connected with the United States and has income arising from that business which is also effectively connected with the United States . Although the fact that its "place of management" is located in the United States is one factor contributing to the finding that its trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e date of making the claim under the law of the State, of which a person is claiming to be the resident. Where, however, the tax liability of a person in the concerned State is to arise in future, the person would become resident as and when the tax net of the State is so spread as to cover such person. In support of his contention that treaty protection cannot be denied even when a person is not a taxable subject for the purposes of domestic law, Mr. Dastur relied on the following observation of Prof. Vogel: "It is not the purpose of Art.4, however, to deny treaty protection 'through the back door', if a 'person', within the meaning of the treaty happens not to be a 'person', i.e. a taxable subject for the purposes of domestic tax law." * We do not think that it is a correct reading of the said observation. The first thing to note is that Prof. Vogel was referring to a 'person' within the meaning of the treaty and secondly it would not be apt to make use of an observation out of context. The very next sentence " Anyone not liable to tax in his State of residence because he has no income or capital or because he is exempt from tax- e.g. on account of his activities for public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of Treaties * and in view of the fact that the applicability of the treaty to individuals has been the centre of controversy for over a decade, we called for and perused the records relating to the discussions between the parties to the treaty held in February, 1992, which led to the signing of the treaty. They are adumbrated in the notes of the discussions. They indicate that on behalf of the Federal Government of UAE it was pointed out that article 124 of the UAE Constitution conferred a right on the Federal Government to tax income and it also empowered the local Governments to tax income. The notes further disclose that the UAE Government was in the process of codifying tax laws for both individuals and corporations on the recommendation of the International Monetary Fund and it was estimated that the process would take 2 to 3 months. For reasons best known to the Government of UAE, the intended codified tax law covering individuals and corporations is not enacted till date. It is evident that the parties proceeded on the assumption that a new codified law bringing individual within the income tax net of UAE was in the pipeline and the same would be enacted within about three ..... X X X X Extracts X X X X X X X X Extracts X X X X
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