Tuesday, May 21, 2013

Actual payment of tax isn’t a precondition to be a resident of partner country, as per India-UAE DTAA

As per Article 4(1) of India-UAE DTAA, to be a resident of contracting State, it isn’t necessary to pay tax there; mere right of contracting State to tax such person by reason of domicile, place of management or incorporation is sufficient

In the instant case, the assessee had challenged the section 40(a)(i) disallowance in respect of professional fee paid  to ‘V’, sole proprietor of KPMG, Dubai. Assessee, contended that these payments were made in pursuance of professional services carried out by KPMG, Dubai as understood in Article 14 of the India-UAE treaty dealing with independent personal services. It was stated that the income was not chargeable to tax in India since ‘V’ was not in India for more than 183 days during the previous year and, therefore, the question of deduction of tax at source didn’t not arise. The AO, on the other hand,  made disallowance on the footing that 'V' couldn’t take benefit of India-UAE treaty, as it couldn’t be treated as a resident of U.A.E. as per Article 4(1) of India-UAE DTAA, as he was not paying tax in U.A.E., which was confirmed by CIT(A). Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) Article 4(1) of India-UAE treaty provides that the term 'Resident' of a 'Contracting State' means any person, who, under the laws of that State (i.e. U.A.E.), is liable to tax therein by reason of his domicile, resident, place of management, place of incorporation, or any other criterion of similar nature. The term ‘liable to tax in the contracting State’ doesn’t necessarily imply that the person should actually pay the tax in that contracting State. Right to tax on such person is sufficient;

2) If a fiscal domicile of a person is in the contracting State, which in the present case has not been doubted was in U.A.E., then he was to be treated as resident of that contracting State irrespective of whether or not that person is actually liable to pay taxes in that country;

3) Liability to tax in the contracting State doesn’t imply that the person was actually liable to tax but would also cover the cases where the other contracting State has the right to tax such person. It is immaterial whether or not such right has been exercised. The basis for deducting the TDS under section 195 by the assessee for making the payment to 'V' was rejected. – KPMG v. JCIT [2013] 33 taxmann.com 23 (Mumbai - Trib.)

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