A recent ruling has clarified the scope and objective of Double Taxation Avoidance Agreements between India and the UAE (DTAA). According to this ruling, if a taxpayer is liable to pay tax under the laws in force in one country alone, he cannot claim any relief under the DTAA.
This stance has been adopted in re: Cyril Pereira. The ruling pertains to the applicant who is a non-resident Indian, permanently residing in Abu Dhabi since 1977 and employed with Abu Dhabi Gas Industries Ltd. The questions on which advance ruling was sought were, whether the applicant could be regarded as a resident of the UAE in terms of Article 4 of DTAA, and whether he would be entitled to be taxed at lower rates in terms of Article 10 and 11 of DTAA. The matter assumes significance as individuals are not subjected to tax in the UAE.
The ruling was negative on both points for the following reasons:
In the UAE, as individuals are not subjected to tax, the benefits of DTAA cannot be made applicable to income which is subject to tax only in India.
DTAA applies only to the existing laws mentioned in the treaty. However, in this case, as there are no existing laws taxing income of individuals in the UAE, the treaty cannot be extended to cover such income.
Since tax payable in India is not over and above tax payable in the UAE, Articles 10 and 11 are not attracted and consequently the applicant is not entitled to lower or concessional rates of taxes in respect of dividend or interest income.
In this case, AAR has adopted a divergent view from its earlier decisions taken in re: MA Rafique and in re: Rajnikant Bhatt. Though the advance ruling is binding only in respect of the transaction concerned, they tend to have a persuasive effect on tax assessment of others falling in the same class. All in all, the ruling has opened up a Pandora's Box and is likely to affect the assessments of hundreds of UAE-based non-resident Indians.
Sapan Parekh
