Facts of the Case

India had entered into a Double Taxation Avoidance Agreement with the United Arab Emirates. Under Article 13(3) of the treaty, certain capital gains earned by a UAE resident were not taxable in India.

The assessee, a resident of UAE, filed its return for Assessment Year 2004-05 declaring NIL income after claiming exemption in respect of short-term capital gains amounting to ₹77,10,248 earned in India. The exemption was claimed under Article 13(3) of the India-UAE DTAA.

The Assessing Officer denied the benefit of the treaty on the ground that there was no effective tax regime in UAE concerning such income and the assessee was not liable to tax there. According to the Assessing Officer, since no tax was payable in UAE, the provisions relating to avoidance of double taxation could not be invoked.

The assessee succeeded before the Commissioner of Income Tax (Appeals), who relied upon the Supreme Court decision in Union of India v. Azadi Bachao Andolan. The Income Tax Appellate Tribunal affirmed the order of the CIT(A). Aggrieved by the decision, the Revenue filed appeals before the Delhi High Court.

Issues Involved

  1. Whether a UAE resident assessee is entitled to claim benefits under the India-UAE DTAA in respect of short-term capital gains earned in India.
  2. Whether treaty benefits can be denied merely because the assessee is not actually liable to pay tax in the UAE.
  3. Whether actual payment of tax in both contracting States is a mandatory condition for claiming relief under a Double Taxation Avoidance Agreement.
  4. Whether the Revenue was justified in denying the exemption under Article 13(3) of the India-UAE DTAA.

Petitioner’s (Revenue’s) Arguments

  • The Revenue argued that the assessee was not entitled to DTAA benefits because there was no tax payable on the relevant income in the UAE.
  • It was contended that where an assessee is not liable to tax in the other contracting State, the concept of avoiding double taxation does not arise.
  • Since no tax burden existed in UAE, the Revenue maintained that the assessee could not seek protection under the India-UAE DTAA.
  • The Revenue therefore submitted that the exemption claimed under Article 13(3) should be denied.

Respondent’s (Assessee’s) Arguments

  • The assessee contended that Article 13(3) of the India-UAE DTAA expressly granted exemption from Indian taxation on the relevant short-term capital gains.
  • The assessee relied upon the Supreme Court judgment in Union of India v. Azadi Bachao Andolan, which had already rejected the argument that treaty benefits are available only when tax is actually paid in both countries.
  • It was submitted that entitlement to treaty benefits depends upon the terms of the treaty and not upon actual payment of tax in the other jurisdiction.
  • Therefore, the assessee argued that denial of DTAA relief merely because no tax was payable in UAE was contrary to settled law.

Court Findings

The Delhi High Court observed that the sole contention of the Revenue was that in the absence of tax liability in UAE, the provisions of the DTAA could not be invoked.

The Court held that this very contention had already been considered and rejected by the Supreme Court in Union of India v. Azadi Bachao Andolan. The Supreme Court had recognized that Section 90 of the Income-tax Act distinguishes between relief from double taxation and avoidance of double taxation, and actual payment of tax in both countries is not a prerequisite for claiming treaty benefits.

The High Court noted that the decision of the Supreme Court was binding and directly applicable to the controversy before it.

Consequently, the Court agreed with the findings of the CIT(A) and the Income Tax Appellate Tribunal that the assessee was entitled to claim the benefit of Article 13(3) of the India-UAE DTAA.

Court Order

The Delhi High Court dismissed both appeals filed by the Revenue.

The Court held that no question of law, much less any substantial question of law, arose for consideration. The benefit of the India-UAE DTAA could not be denied merely because the assessee was not liable to pay tax in the UAE. Accordingly, the orders of the CIT(A) and the ITAT were upheld.

Important Clarification

  • Actual payment of tax in the foreign contracting State is not a mandatory requirement for availing benefits under a Double Taxation Avoidance Agreement.
  • Treaty benefits cannot be denied merely because the other contracting State does not impose tax on the concerned income.
  • Section 90 of the Income-tax Act recognizes both relief from double taxation and avoidance of double taxation as separate concepts.
  • The Supreme Court's ruling in Union of India v. Azadi Bachao Andolan continues to govern interpretation of DTAA benefits in such situations.
  • A UAE resident may claim treaty protection under the India-UAE DTAA if the treaty conditions are satisfied, even where no corresponding tax is payable in UAE.

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2011:DHC:14582-DB/AKS23082011ITA10002011_150751.pdf

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