The Hindu Business Line : Payment of tax is a fiscal fact

MORE the number of double taxation avoidance agreements, the more complicated interpreting the treaty provisions becomes. Despite a number of Supreme Court rulings on this, confusion still prevails. Tax jurists and courts are at loggerheads not knowing how to apply a treaty provision. The OECD and the UN tax models are often at variance. If interpretation of the phrase "liable to tax" is taken to mean "paying tax" it can lead to an absurd situation. The Gujarat High Court was concerned with interpretation of the Indo-Austrian treaty in Emmerich Jaegar vs CIT (274 ITR 125). The judgment is apparently innocuous but has given rise to controversy.

Emmerich Jaegar was a foreign technician employed by an Austrian company. He came on deputation to a company in Gujarat for rendering technical services. The assessee was to be paid "retention remuneration" during the period of his stay in India and such payment was to be made in foreign currency by the foreign employer.

The foreign technician was a non-resident and claimed that the retention remuneration received abroad would be outside the purview of the Indian Income-Tax Act. He relied on Article XIV (2) of the Convention for Avoidance of Double Taxation between India and Austria.

The Revenue took the stand that the assessee can get relief on production of the assessment order in Austria and proof of tax payment. Since no proof was produced, the claim was rejected. With the Tribunal confirming the assessment order, the matter reached the Gujarat High Court.

It was argued on behalf of the assessee that the DTAA provided for relief when the remuneration was subject to Austrian tax. This meant that all that has been looked into was whether the assessee was liable to tax under the Austrian income-tax legislation.

The provision did not require that the assessee must have actually paid the tax in Austria. The Revenue contended that an assessee claiming relief from tax on the ground of the same income being taxed again in his country would have to specifically show that the same income had been taxed in one country so as to exempt the same from the charge of tax in the other country. In the absence of proof of having paid tax in Austria, the assessee would have to suffer Indian income-tax.

The Gujarat High Court examined the treaty provision and Article XIV (2)(c), and observed that the condition does not stipulate actual payment of tax which has been insisted upon by the revenue authorities. All that the provision provides is that the individual should be liable to tax under the Austrian statute.

In other words, the Austrian statute must be shown to be levying tax on such remuneration. Being liable to tax and being actually taxed are two different things, and in a given situation it is always possible that a person may be liable to tax under a statute, but may not be actually taxed by virtue of, may be, some other provision under the same statute. Therefore, the approach of the authorities to treat the liability to tax as being actually taxed is not warranted by the language of the provision. A person does not have to be paying tax to be liable to tax. Liability to tax is a legal situation; payment of tax is a fiscal fact.

Having made this correct observation, the Gujarat High Court went on to direct that relief can be granted only on proof for payment of tax in Austria. It directed further that the Austrian income-tax law should be brought on record and the assessee must show that he was subject to Austrian tax. The matter was restored to the Tribunal.

A similar situation arose with regard to a resident of Dubai claiming exemption from Indian income-tax. There was a difference of opinion in the Authority for Advance Ruling (AAR). Overruling the earlier view, a later Bench had observed in the Cyril Eugeme Periera (1999 239 ITR 650) case that relief was not available if tax was not levied in the country of residence. In the earlier case, liability to Indian tax was spared though there was no tax in Dubai.

The Supreme Court had examined these cases in Union of India vs Azadi Bachao Andolan (2003 263 ITR 706) and rejected the contention that avoidance of double taxation can arise only when tax is paid in one of the contracting states. .

These rulings were cited before the Gujarat High Court. But the court chose to interpret the ruling to mean that for claiming exemption, the assessee must show that he is subject to Austrian tax.

Semantics? Only the future will tell.

(The author is a former Chief Commissioner of Income-Tax.)

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