2005-VIL-381--DT

Equivalent Citation: 276 ITR 306 (AAR), 146 TAXMANN 115

AUTHORITY FOR ADVANCE RULINGS

637 638 640 OF 2004

Date: 09.05.2005

ABDUL RAZAK A. MEMAN, IN RE

Vs

Present for the Department 

BENCH

Hon'ble Mr. Justice Syed Shah Mohammed Quadri (Chairman), Mr. K.D. Singh (Member) and Mr. K.D. Gupta (Member)

JUDGMENT

"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 or business is connected with the United States, it does not constitute the basis for Norsk's tax liability in the first place. A factual proposition which merely informs domestic tax liability cannot constitute a residency criterion under the Canada-United States Income tax Convention (1980). The only way for Norsk to benefit from residency status under the Convention is if source taxation on a business effectively connected with the contracting party constitutes a criterion similar to the other enumerated criteria in Article IV (residence, place of management, place of incorporation, domicile). It is not similar, since all of the other criteria constitute grounds for taxation on world-wide income, not just source income. The parties to the Convention intended only that persons who were resident in one of the contracting states and liable to tax in one of the contracting states on their "world-wide income" be considered "residents" for purposes of the Convention. Norsk is therefore not a "resident" of the United States for the purposes of Article IV of the Convention".

This decision also makes it clear that for the purpose of availing the benefit of the treaty a person must be a resident of a contracting state under the treaty and that the taxable entity should be effectively connected to the enumerated criteria under article IV, namely, domicile, residence, place of management, place of incorporation or any other criterion of a similar nature. Mr. Dastur would contend that the phrase "by reason of domicile, residence, place of management, place of incorporation or any other criteria of a similar nature" is of great significance and indicates that if and when the tax liability would arise in future he should be taxable on the basis of any of the criteria. In other words, his contention is that it is immaterial if there is no law in UAE which taxes the income of an individual as on date but if the liability is imposed in future based on the connection of his domicile, residence, place of management or any other criteria of a similar nature, the requirement of para 4(1), will be satisfied. We are afraid, we cannot accede to the contention of the learned counsel. In our view para 4(1) postulates existence of tax liability in praesenti by reason of domicile, residence, place of management, place of incorporation or any other criteria of a similar nature on the 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 benefit-may nevertheless be 'resident' there (and thus entitled to treaty protection)" explains the point that by the words "not to be a person" i.e. a taxable subject Prof. Vogel meant a person not liable to tax in his State of residence because he has no income or capital or because he is exempt from tax. The said observation does not refer to a person who is not liable to tax because the person is not a taxable unit under the domestic tax law of the State.

14. It is worthwhile to clarify that the expression 'liable to tax in a state' simply means that the net of the law of taxation of that state covers that person and not that he must pay the tax in that state. The following observation of the Hon'ble Supreme Court of India in ABA (supra 3) elucidates the point:

"In our view, the contention of the respondents proceeds on the fallacious premise that liability to taxation is the same as payment of tax. Liability to taxation is a legal situation; payment of tax is a fiscal fact. For the purpose of application of article 4 of the DTAC, what is relevant is the legal situation, namely, liability to taxation, and not the fiscal fact of actual payment of tax. If this were not so, the DTAC would not have used the words, " "liable to taxation", but would have used some appropriate words like "pays tax".

The Hon'ble Supreme Court has also referred to the commentary of Philip Baker to bring out the import of the phrase "liable to tax" employed in article 4(1) which reads as under:

"It seems clear that a person does not have to be actually paying tax to be 'liable to tax' - otherwise a person who had deductible losses or allowances, which reduced his tax bill to zero would find himself unable to enjoy the benefits of the convention. It also seems clear that a person who would otherwise be subject to comprehensive taxing but who enjoys a specific exemption from tax is nevertheless liable to tax, if the exemption were repealed, or the person no longer qualified for the exemption, the person would be liable to comprehensive taxation". (emphasis supplied).

It is thus clear that 'liable to tax' connotes that a person is subject to one of the taxes mentioned in article 2 in a contracting State and it is immaterial whether the person actually pays the tax or not.

 

15. Having regard to the principle outlined in article 32 of the Vienna Convention on the Law 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 months. This explains as to why the definition of the expression 'resident of a contracting state' was adopted as in article 4(1) of the OECD Model without any modification unlike in the case of French Republic- UAE * ; Canada- UAE treaty ** ; Federal Republic of Germany-UAE *** which specifically cover individuals. They are as under:-

Convention between French Republic and UAE

Article 1 to 3 x x x x x x x x

Article 4 (Resident)

• For the purposes of this Convention, the term "resident of a State" means:

• x x x x x x

• in the case of the United Arab Emirates, any person domiciled, established or having its place of management in the United Arab Emirates, including the State of the United Arab Emirates, its political subdivisions and local authorities.

2 to 3 x x x x x x

 1 [239 ITR 650]

2 [ 213 ITR 317]

* Tenth Edition at page 478

* At pages 21 and 23 (Principles of International Tax Law)

** Tax Treaty Interpretation - The International Tax Treaties Service" at page 7

3 (263 ITR 706) at page 751.

* para 45d -page 27

** para 45c page 26

* Section 4(1) r.w.section 2(31) of the Act.

* [(Para 24a, page 229-Klaus Vogel on Double Taxation Conventions (Third Edition)]

* 3 rd Edition page 228-229 of Double Taxation Conventions

* Para 4B.06(Article 4)

4 [1995] 2 S.C.R. Crown Forest Industries Ltd. v. Canada 802 (Report of the Canada Supreme Court)

* Page 95, para 25a

* Article 32 Supplementary means of interpretation- Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:

• leaves the meaning ambiguous or obscure; or

• leads to a result which is manifestly absurd or unreasonable.

* Convention between the Government of the French Republic and the Government of the United Arab Emirates for the avoidance of double taxation signed on 19.7.1989.

** Convention between the Government of Canada and the Government of the United Arab Emirates for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital signed on 9.6.2002.

*** Agreement between the federal Republic of Germany and the United Arab Emirates for the avoidance of double taxation with respect to taxes on income and capital and for the fostering of economic relations signed on 9.4.1995.

 

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