Foreigners and non-residents want to take advantage of provisions of the Double Taxation Avoidance Agreements India has entered into with several countries. However, the provisions of these agreements have to be applied strictly if exemption from Indian tax liability is to be claimed under the DTAA.

H. P. Ranina

WITH INCREASING interest in foreign direct investment, foreigners and non-resident Indians keen on business opportunities in India have to be clear about their tax liability. Several foreigners and non-residents want to take advantage of provisions of the Double Taxation Avoidance Agreements India has entered into with several countries. However, the provisions of these agreements have to be applied strictly if exemption from Indian tax liability is to be claimed under the DTAA.

Some light has been thrown on certain treaties in recent court decisions and Rulings of the Authority for Advance Rulings. In the case of foreign employees a recent judgment of the High Court of Uttaranchal needs to be considered. This was a case where non-resident foreign citizens were employed by foreign companies incorporated in Panama. The foreign companies entered into contracts with Oil and Natural Gas Corporation for offshore drilling operations the exclusive economic zone of the country.

The assessees received remuneration in connection with their employment in India on foreign ships. Their claim for exemption from double taxation under the respective treaty was rejected by the Tribunal on the ground that the assessees had failed to satisfy the condition that `the remuneration was not deductible in computing the profits of an enterprise chargeable to tax in that other State' in terms of Article 16 of the Agreement for Avoidance of Double Taxation with the UK, and Article 14 of the Agreement with France.

The High Court in Sedco Forex International Inc. v. C.I.T. ([2005] 147 Taxman 389) held that the relevant Article in the Agreements relating to `dependent personal services' is common in both Agreements (in the Agreement with the UK, it is Article 16, in with France, Article 14). From a perusal of Clause 2 of Agreement for Avoidance of Double Taxation, it is clear that the benefit of the clause can only be available when all the conditions contained in sub-clauses (a), (b) and (c) are fulfilled as all the conditions are mutually inclusive of and in conformity with Section 90.

To get the benefit of the clause, it has to be shown by the assessee that in the corresponding country with which India has entered into a treaty, there is a corresponding provision of income-tax. Further, it needs to be shown that the assessee is liable to tax under the corresponding law of that country and he has actually paid the tax there. On fulfilment of all these conditions, the benefit of Article 14(2) is available.

Under sub-clause (c), the assessee has to show in India that the remuneration received by him is chargeable to tax in other Contracting State of which he is resident.

The assessing authorities and the appellate authorities had found that the assessees failed to prove that the remuneration received by them for services rendered in India was chargeable to tax in their State, that is, the Contracting State of which they were resident.

Even before the High Court, it could not be shown that the amount received by them was chargeable to tax in their State, that is, the other Contracting State in the Agreement. Therefore, no error of law could be seen in the assessment orders and the orders passed by the appellate authorities that the assessees did not fulfil the third condition as required under sub-clause (c) of the Article.

The Authority for Advance Rulings has for the past few years been grappling with the question whether a non-resident Indian would be liable to tax in India if he is working in a country where there is no income-tax, as it is so in the Gulf States. The Authority for Advance Rulings had first taken a view that such a non-resident Indian is not taxable in India because he is considered to be resident of that Gulf country.

In a subsequent decision a contrary ruling was given. This contrary ruling has been affirmed this year in the case of Abdul Razak A. Meman (27 I.T.R. 306). In this case the applicant, a citizen of India, was a non-resident individual for the purposes of Indian income-tax. He had settled in the UAE. He received dividends and interest from investments made in shares, debentures, etc., of Indian companies. He was regularly trading in shares, debentures, etc., on the Indian stock market which would yield short/long-term capital gains. He proposed to invest moneys out of his Non-resident (Ordinary)/Non-resident (External)/FCNR accounts in shares, debentures and other securities in India with the intention of holding them as short/long-term investments.

On these facts, the Authority ruled that under the UAE Tax Decree of 1969, a "person" was defined in Article 2(4) to mean a body corporate wherever established and the expression "person liable" was defined in Article 2(3) to mean a body corporate wherever established. It was clear, therefore, that an "individual" was excluded from the definition of "person" and was not liable to tax in the UAE.

According to the Authority for Advance Rulings, "liable to tax" connoted that a person was subject to one of the taxes mentioned in Article 2 of the Double Taxation Avoidance Agreement in a Contracting State and it was immaterial whether the person actually paid the tax or not. Article 4(1) postulated the existence of tax liability in praesenti by reason of domicile, residence, place of management, place of incorporation or other criteria of a similar nature on the date of making that claim under the law of the State of which the person is claiming to be a resident. Where, however, the tax liability of a person in the concerned State was to arise in the future, the person would become resident as and when the net of tax of the State was so spread as to cover such person.

The Authority for Advance Rulings ruled there was no provision in the UAE Tax Decree to tax the income of individuals.

Therefore, it followed that an individual could not be "resident" in the UAE within the meaning of Article 4(1). The applicant was not a tax entity under the UAE Tax Decree and could not under the guise of liberal interpretation of Article 4(1) be enabled to avail of the benefit of Articles 10, 11 and 13 of the Double Taxation Avoidance Agreement.

The Authority for Advance Rulings further held that there was no provision in the Double Taxation Avoidance Agreement providing for issuance of a certificate of residence. Therefore, the certificate issued by the UAE authorities to the applicant had no legal effect and could not be taken as proof of residence of the applicant in the UAE for the purpose of the Double Taxation Avoidance Agreement. As the UAE Tax Decree of 1969 stood, for the time being it followed that the applicant who had settled in the U.A.E. did not satisfy the requirement of the expression "resident of a Contracting State".

He could not, therefore, be treated as resident of the U.A.E. within the meaning of Article 4 of the Agreement for Avoidance of Double Taxation between India and the U.A.E.

The Authority for Advance Rulings concluded that individuals falling under clauses (a), (b), (c) and (d) of paragraph 2 of Article 4 of the Double Taxation Avoidance Agreement must at present be liable to pay tax in both Contracting States.

There are no criteria laid down for determination of residence other than liability to pay tax under Article 4. If an individual does not have to pay tax on his income in the UAE because there is no local tax leviable on the income of individuals, no question of granting relief under the treaty in respect of such income can arise in the course of assessment of his income in India. As individuals are not a taxable entity under the UAE Tax Decree, individuals actually residing in the UAE will not be "resident" in the UAE.

Another point which has been controversial is on the issue whether payment of salary to a non-resident for "off-period" when he is not physically present in India would be liable to Indian taxation.

The High Court of Uttaranchal in Reading & Bates Drilling Co. v. C.I.T. ([2005] 147 Taxman 499) held that the payment of salary for off-period was income earned in India, that is, for services rendered in India under Section 9(1)(ii). Further, the assessment records showed that from the income of the Indian operations, the salary in its entirety (including salary for the off-period) had been paid by the employer. That conduct showed the intention of the contracting parties.

Hence, the entire salary for both the periods was taxable in India under section 9(1)(ii).

In conclusion, it needs to be pointed out that with effect from assessment year 2000-01, section 9(1)(ii) clearly stipulates under clause (b) of the Explanation thereto that salary would be taxable in India even if it pertains to the rest period or leave period which is preceded and succeeded by services rendered in India, if this forms part of the service contract of employment.

(This article was published in the Business Line print edition dated November 12, 2005)
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