— [2005] 272 ITR 84 (AAR) ]
By this Advance Ruling, the Authority has, effectively,
ruled that the terms of a Double Taxation Avoidance Agreement
(“Tax Treaty”) have to be given effect to, even if the result of such an exercise is double non-taxation.
Facts
2. Emirates Fertilizer Trading Co, WLL (“Applicant”),
a partnership firm which was a tax resident of Dubai, United Arab Emirates (“UAE”), held shares in two Indian companies, viz., Indo-Gulf Fertilizers Limited and Hindalco Industries Limited. The Applicant was desirous of selling these shares and their disposal would have resulted in capital gains to the Applicant. Article 13 of the Tax Treaty entered into between India and the UAE ran as follows :
“
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 and situated in the other Contracting State may be taxed in that other State.
2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base may be taxed in that other State.
3. 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.
”
(emphasis supplied)
Since the property sought to be disposed of by the Applicant was neither immovable property nor movable property forming part of the business property of any permanent establishment in Indian of the Applicant, the proposed sale fell to be considered under Paragraph 3 of Article 13.
Issue(s)
3. The Applicant applied to the Authority for an advance ruling on the following effective question (inasmuch as the other two questions would have been required to be answered only if the said effective question was answered against the Applicant) :
“(1) India has a Double Taxation Avoidance Agreement with the UAE. As per article 13(3) of the Double Taxation Avoidance Agreement between India and the UAE, signed in 1993 gains from alienation of shares in an Indian company held by a resident of the UAE will be taxable only in the UAE. So as our client is a resident of the UAE for which necessary tax residency certificate is enclosed. Hence under this tax treaty the assessee would not be liable to capital gain tax in India.
(2) * * * * * * * * * * * * * *
(3) * * * * * * * * * * * * * *
”
Revenue’s Submission(s)
4. The Revenue’s only submission was that, inasmuch as the capital gains were not taxable in the UAE, application of Paragraph 3 of Article 13 of the Tax Treaty would lead to a situation of double
non-taxation. The Revenue, therefore, pleaded that the Applicant ought to be taxed in India under the domestic tax law of India laid down in the Income-tax Act, 1961 (“Act”).
Determination(s) Culminating in Advance Ruling
5. The Authority made the following determinations in arriving at its ruling :
(i) Under the India-UAE Tax Treaty, capital gains arising from alienation of shares in Indian companies to a tax resident of the UAE are taxable in the UAE.
(ii) However, under the Act, “capital gains arising to a non-resident in India, are taxable in India”.
(iii) “Having regard to section 90(2) of the Act, the terms of the treaty have overriding effect over the provisions of the Act in the event of there being conflict between the treaty and the Act. (Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) and CIT v. P. V. A. L. Kulandagan Chettiar [2004] 267 ITR 654 (SC)).”.
(iv) Accordingly, in view of the provisions of Paragraph 3 of Article 13 of the India-UAE Tax Treaty, the capital gains are taxable only in the UAE and not in India, “….. and ….. their taxability under the Act in India does not depend upon whether they are as a fact taxable in the UAE.”. (emphasis supplied)
Advance Ruling
6. Consequent to its determinations aforesaid, the Authority delivered the following Advance Ruling :
“(I)t is ruled that gains from the alienation of shares in Indian companies held by the applicant, a resident of UAE, will not be taxable in India.”
