BHAGWAN P. SHIVLANI, MUMBAI V. ITO (IT) 2(2), MUMBAI

ITA 1681/MUM/2009

• Counselvise Citation: 168119914 RSA 2009
• Duration Of Justice: 3 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-03-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 06-03-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 13-03-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JI TENDRA YADAV
• Assessee Lawyers: M SUBRAMANIAN
• Keywords: Residential status; Double taxation relief; Advance ruling
• Section: 80HHC; 90

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L BEFORE S/SHRI R.S.SYAL (AM) & N.V. VASUDEVAN (JM) I.T.A.NO.1681/MUM/09 : (ASSTT. YEAR : 2003-04) MR.BHAGWAN T.SHIVLANI A/2, MAY FAIR BLDGS, 26, S.V.RD., OPP.SIDDHARTH HOTEL, BANDRA (W), MUMBAI-400 050. PAN : AAQPS1835H VS. INCOME-TAX OFFICER (IT)-2(2), MUMBAI. APPELLANT RESPONDENT ASSESSEE BY : MR.M.SUBRAMANIAN DEPARTMENT BY : MR.JITENDRA YADAV. DATE OF HEARING : 12.03.2012 DATE OF PRONOUNCEMENT: 20.03.2012 ORDER PER N.V. VASUDEVAN, JM :- THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 15.01.2009 OF CIT(A)- XXXI, MUMBAI, RELATING TO A.Y. 2003-04. 2. GROUNDS OF APPEAL OF THE ASSESSEE READ AS FOLLOW S :- 1. THE COMMISSIONER OF INCOME TAX HAS ERRED IN DI SALLOWING THE CLAIM OF DEDUCTION OF RS.3,94,641/- U/S. 80HHC FOR THE PR OFITS FROM EXPORTS. 2 2. WITHOUT PREJUDICE, SINCE THE ASSESSEE IS A NON RESIDENT HE OUGHT TO HAVE BEEN GRANTED RELIEF UNDER EXPLANATION 1 (B) OF SEC.9(1)9I) OF THE INCOME TAX ACT, 1961 ON THE FACTS AND IN THE CIRCUM STANCES OF THE CASE. 3. YOUR APPELLANTS CRAVE LEAVE TO ADD, ALTER OR AM END OR WITHDRAW THE ABOVE GROUND OF APPEAL AND TO SUBMIT SUCH STATEMENT S, DOCUMENTS AND PAPERS AS MAY BE CONSIDERED NECESSARY EITHER AT OR BEFORE HEARING OF THE APPEAL. 3. THE ASSESSEE IS AN INDIVIDUAL. HE WAS A NON-R ESIDENT. THE ASSESSEE CARRIED ON BUSINESS IN INDIA UNDER THE NAME CENTRE POINT CO RPORATION. THE BUSINESS WAS THAT OF EXPORT OF ELECTRONIC GOODS AND PLASTIC MOUL D TO DUBAI AND NIGERIA. THE PROFITS DERIVED DURING THE PREVIOUS YEAR FROM SUCH BUSINESS WAS RS.7,91,512. THE ASSESSEE CLAIMED DEDUCTION U/S.80HHC OF THE INCOME TAX ACT, 1961(THE ACT), OF RS.3,94,641 BEING 50% OUT OF THE AFORESAID PROFITS DERIVED FROM THE BUSINESS OF EXPORT. 4. THE AO NOTICED THAT THE BENEFIT UNDER THE PROV ISIONS OF SEC.80HHC OF THE ACT WAS AVAILABLE ONLY TO RESIDENT INDIVIDUALS AND SINC E THE ASSESSEE WAS A NON-RESIDENT INDIVIDUAL, THE AO DENIED BENEFIT OF DEDUCTION U/S. 80-HHC OF THE ACT TO THE ASSESSEE. THE ASSESSEE ALSO SUBMITTED BEFORE THE AO THAT HE W AS A RESIDENT OF UAE AND THEREFORE WAS ENTITLED TO THE BENEFITS UNDER THE DT AA BETWEEN INDIA AND UAE. THE AO REJECTED THIS ARGUMENT OF THE ASSESSEE ALSO. THE A O IN THIS REGARD FOUND THAT UNDER ARTICLE 4 OF THE INDIA UAE DTAA A RESIDENT OF A CON TRACTING STATE MEANS ANY PERSON WHO UNDER THE LAWS OF THAT STATE IS LIABLE TO TAX T HEREIN. IN UAE INDIVIDUALS ARE NOT SUBJECT TO TAX. SINCE THE DEFINITION OF A RESIDENT OF A CONTRACTING STATE UNDER THE INDIA- UAE DTAA MEANS A PERSON LIABLE TO TAX UNDER THE L AWS OF THAT STATE BY REASON OF DOMICILE, RESIDENCE OR ANY OTHER CRITERION OF A SIM ILAR NATURE AND SINCE IN UAE THERE 3 WAS NO TAX ON INCOME OF INDIVIDUALS, THE AO HELD TH AT THE ASSESSEE WAS NOT ENTITLED TO THE BENEFIT OF INDIA UAE DTAA. THE AO HOWEVER REJE CTED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE. THE ASSESSING OFFICE R RELIED ON THE DECISION OF THE AAR IN THE CASE OF ABDUL RAZACK MENON 276 ITR 306 WHICH HAD CONSIDERED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF AZADI BACH AO ANDOLAN 263 ITR 706 (SC) AND HELD THAT THE ASSESSEE HAS FAILED TO DISCHARGE THE ONUS ON IT TO PROVE THAT HE WAS LIABLE TO PAY TAX IN UAE. ACCORDING TO THE AO IT IS NOT S UFFICIENT FOR A PERSON TO CLAIM THE BENEFITS OF INDIA UAE DTAA TO BE JUST A RESIDENT O F THE OTHER CONTRACTING STATE, BUT HE MUST ALSO HAVE PAID TAX ON THE INCOME IN RESPECT OF WHICH THE BENEFIT U/S.80-HHC OF THE ACT WAS CLAIMED. THE AO ALSO HELD THAT THE ASSESSEE DID NOT PRODUCE TAX RESIDENCY CERTIFICATE TO PROVE THAT HE WAS A RESIDE NT OF UAE. 5. BEFORE CIT(A), THE ASSESSEE RELIED ON ARTICLE 26(2) OF THE DTAA BETWEEN INDIA AND UAE WHICH PROVIDED THAT THE TAXATION OF A PE OF AN ENTERPRISE OF A CONTRACTING STATE IN THE OTHER CONTRACTING STATE SHALL NOT BE L ESS FAVORABLY LEVIED IN THAT OTHER CONTRACTING STATE THAN THE TAX LEVIED ON ENTERPRISE S OF THAT OTHER CONTRACTING STATE CARRYING ON THE SAME ACTIVITIES IN THE SAME CIRCUMS TANCES OR UNDER THE SAME CONDITIONS AND SUBMITTED THAT AS AN ENTERPRISE OF T HE OTHER CONTRACTING STATE (UAE) HE WAS BEING SUBJECTED TO TAX WHICH IS MORE BURDENSOME THAN THOSE LEVIED ON THE ENTERPRISE OF THE CONTRACTING STATE (INDIA). ACCOR DING TO THE ASSESSEE IN VIEW OF THE PROVISIONS OF ARTICLE 26(2) OF THE INDIA-UAE DTAA, THE ASSESSEE SHOULD ALSO BE ALLOWED DEDUCTION U/S.80-HHC OF THE ACT. 6. THE CIT(A) REJECTED THE ARGUMENT OF THE ASSESS EE. IN THIS REGARD, HE HELD AS FOLLOWS: 4 2.3 I HAVE CONSIDERED THE FACTS. SINCE THIS WAS AN ADDITIONAL GROUND RAISED THEREFORE THE LEARNED AO W AS GIVEN AN OPPORTUNITY TO OFFER HIS COMMENTS. A REMAND REPO RT WAS SUBMITTED BY THE LEARNED AO WHICH IS PLACED ON RECO RD. THE APPELLANT WAS ALSO ASKED TO OFFER HIS COMMENTS ON T HE SAID REPORT. THE LEARNED AR HAS SUBMITTED HIS COMMENTS W HICH ARE ALSO PLACED ON RECORD. IN REMAND REPORT DTD 15 TH MAY 2008; THE LEARNED AO STATED THAT IT IS COMMON KNOWLEDGE THAT INDIVIDUALS ARE NOT SUBJECTED TO TAX ON THEIR INCOM E IN THE UAE. PAYMENTS OF CUSTOM DUTY ON IMPORT, IF ANY DO NOT MA KE AN ASSESSEE WHOSE INCOME IS LIABLE TO TAX IN UAE ON TH E PLAIN READING OF DTAA, IT IS APPARENT THAT THE TREATY HAS BEEN SIGNED TO ELIMINATE THE TAX PAYERS PROBLEMS OF BEING TAX ED ON THE SAME INCOME IN TWO COUNTRIES. SINCE THE ASSESSEE DO ES NOT PAID TAX ON THE INCOME IN UAE, THE QUESTION OF ALLO WANCE OF RELIEF UNDER THE AVOIDANCE OF DOUBLE TAXATION DOES NOT ARISE. I INCLINED TO AGREE WITH LEARNED AO. I ALSO PLACE REL IANCE ON CREDIT LYONNAIS VS. DCIT -94 ITD 401 (MUM) WHEREIN IT WAS HELD THAT NON AVAILABILITY OF DEDUCTION U/S.80M TO FOREIGN COMPANIES CANNOT BE CONSIDERED AS DISCRIMINATION ON GROUND OF NATIONALITY. SIMILARLY THE HONBLE ITAT PUNE IN AAUTOMATED SECURITIES CLERACNCE INC VS. ITO, PUNE, 2008-TIOIL- 443-PUNE- DTD 10 TH SEPTEMBER 2008 HAS HELD AS UNDER : NON DISCRIMINATION-INCENTIVE DEDUCTION UNDER SECTI ON 80HHE IN RESPECT OF PROFITS OF BUSINESS OF SOFTWARE EXPOR TS NOT ELIGIBLE FOR FOREIGN COMPANIES NO DISCRIMINATION: A CAREFUL ANALYSIS OF THE SCHEME OF SECTION 80HHE DOES SHOW T HAT THE DIFFERENTIATION IS ON THE BASIS OF RESIDENTIAL STAT US OF A TAXPAYER AND NOT ON THE BASIS OF PLACE OF INCORPORA TION OF THE COMPANY. SECTION IS QUITE SPECIFIC THAT SO FAR AS P ERSONS OTHER THAN COMPANIES, I.E. NON CORPORATE TAXPAYERS, ARE C ONCERNED ONLY RESIDENTS ARE ELIGIBLE FOR DEDUCTION UNDER SEC TION 80HHE. COMING TO THE QUESTION OF ELIGIBILITY OF THE COMPAN IES OR CORPORATE TAXPAYERS, IT IS TO BE NOTED THAT THE EXP RESSION INDIAN COMPANY IS ALSO NEARLY DEFINED UNDER THE A CT, UNDER SECTION 2(26) OF THE ACT, AS A COMPANY FORMED AND R EGISTERED UNDER THE COMPANIES ACT AND INCLUDES CERTAIN OTHER CATEGORIES OF OTHER ENTITIES FORMED OR INCORPORATED IN INDIA. SO FAR AS THE COMPANIES, I.E. CORPORATE TAXPAYERS, ARE CONCERNED, THIS SECTION PROVIDES THAT ONLY INDIAN COMPANIES AR E ELIGIBLE FOR DEDUCTION. BY IMPLICATION, IT WOULD APPEAR THAT WHILE INDIAN COMPANIES ARE NOT ELIGIBLE FOR THIS DEDUCTIO N. IN THE LIGHT OF ABOVE DECISION IT IS SEEN THAT CLAI M OF DEDUCTION U/S.80HHC IS DENIED DUE TO STATUS OF ASSESSEE BEING NON- RESIDENT AND NOT BECAUSE OF NATIONALITY. THEREFORE THE LEARNED AO WAS RIGHT IN DISALLOWANCE THE CLAIM OF APPELLANT . THEREFORE, IT IS HELD THAT THERE IS NO DISCRIMINATION AS PER A RTICLE 26 AS 5 CLAIMED BY THE APPELLANT. THEREFORE, IT IS HELD THA T THERE IS NO DISCRIMINATION AS PER ARTICLE 26 AS CLAIMED BY THE APPELLANT; HENCE THIS GROUND OF APPEAL IS REJECTED. 7. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSE SSEE IS IN APPEAL BEFORE THE TRIBUNAL. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LEARNED A.R. RELIED REITERATED SUBMISSIONS MADE BEFORE THE CIT(A) AND FURTHER RELI ED ON THE DECISION OF THE SPECIAL BENCH OF ITAT, AHMEDABAD, IN THE CASE OF RAJEEV SU RESHBHAI GAJWANI VS. ACIT 129 ITD 145 (AHD.) AND SUBMITTED THAT AS LAID DOWN THER EIN THE BENEFIT OF DEDUCTION AVAILABLE TO A RESIDENT OF INDIA CANNOT BE DENIED T O A RESIDENT OF UAE IN VIEW OF ARTICLE 26(2) OF THE DTAA BETWEEN INDIA AND UAE. HE ALSO F ILED BEFORE US COPY OF CERTIFICATE OF RESIDENCE ISSUED BY UAE FOR THE PERIOD RELEVANT T O THE PREVIOUS YEAR RELEVANT TO AY 03-04. THE LEARNED DR RELIED ON THE ORDER OF THE A O/CIT(A AND IN PARTICULAR SUBMITTED THAT THE QUESTION WHETHER ASSESSEE WAS A RESIDENT OF UAE NEEDS TO BE EXAMINED BY THE AO AND FOR THIS PURPOSE THE CASE MA Y BE REMANDED TO THE AO. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. TH E FIRST ASPECT TO BE SEEN IS AS TO WHETHER THE ASSESSEE CAN BE CONSIDERED AS RESIDENT OF UAE. THERE IS NO DISPUTE THAT THE ASSESSEE WOULD BE LIABLE TO TAX IN UAE THOUGH H E MAY NOT HAVE ACTUALLY BE TAXED IN THAT COUNTRY BECAUSE INCOME OF INDIVIDUALS ARE N OT LIABLE TO TAXATION IN UAE. THE QUESTION THEREFORE IS AS TO WHETHER THE EXPRESSION LIABLE TO TAX IN THE CONTRACTING STATE AS USED IN ARTICLE 4(1)OF INDO-UAE-DTAA DOES NECESSARILY IMPLY THAT THE PERSON SHOULD ACTUALLY BE LIABLE TO TAX IN THAT CONTRACTIN G STATE AND WHETHER IT IS ENOUGH IF OTHER CONTRACTING STATE HAS RIGHT TO TAX SUCH PERSO N, WHETHER OR NOT SUCH A RIGHT IS ACTUALLY EXERCISED. THIS QUESTION HAS ALREADY BEEN CONSIDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ASSISTANT DIRECTOR O F INCOME-TAX (INTERNATIONAL TAXATION), 6 RANGE 1(2) VS. GREEN EMIRATE SHIPPING & TRAVELS 100 ITD 203 (MUM) ITAT. IN THE CASE OF ASSISTANT DIRECTOR OF INCOME-TAX (INTERNATI ONAL TAXATION), RANGE 1(2) VS. GREEN EMIRATE SHIPPING & TRAVELS 100 ITD 203 (MUM) ITAT, THE MUMBAI TRIBUNAL. THE FACTS OF THE CASE WERE THAT THE ASSESSEE WAS A SHIP PING LINE BASED IN UNITED ARAB EMIRATES. IN THE RELEVANT PREVIOUS YEAR, THE ASSESS EE HAD A TAXABLE INCOME OF RS. 28,35,628 FROM SHIPPING OPERATIONS. THE ASSESSEES CLAIM WAS THAT IN TERMS OF ARTICLE 8 OF THE INDO-UAE DOUBLE TAXATION AVOIDANCE AGREEME NT , THE ASSESSEES INCOME WAS LIABLE TO TAX ONLY IN THE COUNTRY OF DOMICILE I.E., UAE, BUT THIS CONTENTION WAS REJECTED BY THE ASSESSING OFFICER ON THE GROUND THAT THE ASS ESSEE IS NOT PAYING TAXES IN UAE. THE ASSESSING OFFICER RELIED UPON THE DECISION OF T HE AAR IN THE CASE OF CYRIL EUGENE PERERIA, IN RE [1999] 239 ITR 6501 IN SUPPORT OF TH E PROPOSITION THAT THE PROVISIONS OF THE DTAA DO NOT APPLY TO ANY CASE WHICH THE SAME I NCOME IS NOT LIABLE TO BE TAXED TWICE BY THE EXISTING LAWS OF BOTH THE CONTRACTING STATES. ON FURTHER APPEAL BY THE ASSESSEE, THE TRIBUNAL FIRSTLY DISAGREED WITH THE V IEW EXPRESSED BY THE AAR IN THE CASE OF CYRIL EUGENE PERERIA (SUPRA) ON THE GROUND THAT THE SAID DECISION WAS HELD TO BE NOT LAYING DOWN THE CORRECT LAW BY THE HONBLE SUPR EME COURT IN THE CASE OF UNION OF INDIA V. AZADI BACHAO ANDOLAN [2003] 263 ITR 706, A T PAGE 742. THE TRIBUAN IN THIS REGARD OBSERVED THUS: 6. UNDOUBTEDLY, IN CYRIL EUGENE PERERIAS CASE (SU PRA), HONBLE AUTHORITY FOR ADVANCE RULING, DEVIATING FROM THE ST AND TAKEN BY IT IN THE EARLIER RULINGS INCLUDING RULING IN MOHSINALLY ALIMOHAMMED RAFIK, IN RE [1995] 213 ITR 3171, CONCLUDED THAT AN INDIV IDUAL WHO IS NOT LIABLE TO PAY TAX UNDER THE UAE LAW CANNOT CLAIM AN Y RELIEF FROM THE ONLY TAX ON INCOME WHICH IS PAYABLE IN INDIA UNDER THE AGREEMENT AND THAT THE PROVISIONS OF THE DOUBLE TAXATION AVO IDANCE AGREEMENT DO NOT APPLY TO ANY CASE WHERE THE SAME INCOME IS N OT LIABLE TO BE TAXED TWICE BY THE EXISTING LAWS ON BOTH THE CONTRA CTING STATES. HOWEVER, IN AZADI BACHAO ANDOLANS CASE (SUPRA), TH EIR LORDSHIPS OF HONBLE SUPREME COURT, AFTER REFERRING TO THE SAID RULING AND AFTER ELABORATE DISCUSSIONS ON THE VARIOUS ASPECTS OF THI S ISSUE, CONCLUDED THAT IT IS . . . . NOT POSSIBLE FOR US TO ACCEPT T HE CONTENTIONS SO 7 STRENUOUSLY URGED BY THE RESPONDENTS THAT THE AVOID ANCE OF DOUBLE TAXATION CAN ARISE ONLY WHEN TAX IS ACTUALLY PAID I N ONE OF THE CONTRACTING STATES. THE REASONING GIVEN BY THEIR L ORDSHIPS INCLUDED THE FOLLOWING : ACCORDING TO KLAUS VOGEL DOUBLE TAXATION CONVENTI ONS ESTABLISHES AN INDEPENDENT MECHANISM TO AVOID DOUBL E TAXATION THROUGH RESTRICTION OF TAX CLAIMS IN AREAS WHERE OVERLAPPING TAX CLAIMS ARE EXPECTED, OR AT LEAST TH EORETICALLY POSSIBLE. IN OTHER WORDS, CONTRACTING STATES MUTUAL LY BIND THEMSELVES NOT TO LEVY TAXES OR TO TAX ONLY TO A LI MITED EXTENT IN CASES WHEN THE TREATY RESERVES TAXATION FOR THE OTH ER CONTRACTING STATE EITHER ENTIRELY OR IN PART. CONTR ACTING STATES ARE SAID TO WAIVE TAX CLAIMS OR MORE ILLUSTRATIVE LY TO DIVIDE TAX SOURCES, TAXABLE OBJECTS, AMONGST THEMSELVE S. DOUBLE TAXATION AVOIDANCE TREATIES WERE IN VOGUE EVEN FROM THE TIME OF THE LEAGUE OF NATIONS. THE EXPERTS APPOINTED IN THE EARLY 1920S BY THE LEAGUE OF NATIONS DESCRIBE THIS METHOD OF CLASSIFICATION OF ITEMS AND THEIR ASSIGNMENTS TO TH E CONTRACTING STATES. WHILE THE ENGLISH LAWYERS CALLED IT CLASSI FICATION AND ASSIGNMENT RULE, THE GERMAN JURISTS CALLED IT THE DISTRIBUTIVE RULE (VERTEILUNGSNORM). TO THE EXTENT THAT AN EXEM PTION IS AGREED TO, ITS EFFECT IS IN PRINCIPLE INDEPENDENT O F BOTH WHETHER THE CONTRACTING STATE IMPOSES A TAX IN THE SITUATIO N TO WHICH THE EXEMPTION APPLIES, AND IRRESPECTIVE OF WHETHER THE STATE ACTUALLY LEVIES THE TAX. COMMENTING PARTICULARLY ON THE GERMAN DOUBLE TAXATION CONVENTION WITH THE UNITED STATES, VOGEL COMMENTS : THUS, IT IS SAID THAT THE TREATY PREVEN TS NOT ONLY CURRENT BUT ALSO MERELY POTENTIAL DOUBLE TAXATI ON. FURTHER, ACCORDING TO VOGEL, ONLY IN EXCEPTIONAL CASES, AND ONLY WHEN EXPRESSLY AGREED TO BY THE PARTIES, IS EXEMPTION IN ONE OF THE CONTRACTING STATES DEPENDENT UPON WHETHER THE INCOM E OR CAPITAL IS TAXABLE IN THE OTHER CONTRACTING STATE, OR UPON WHETHER IT IS ACTUALLY TAXED THERE. IT IS, THEREFORE, NOT POSSIBLE FOR US TO ACCEPT THE CONTENTIONS SO STRENUOUSLY URGED BY THE RESPONDENTS THAT THE AVOID ANCE OF DOUBLE TAXATION CAN ARISE ONLY WHEN TAX IS ACTUALLY PAID I N ONE OF THE CONTRACTING STATES. THE TRIBUNAL ALSO HELD THAT THE DECISION OF THE AUT HORITY FOR ADVANCE RULING IN THE CASE OF ABDUL RAZAK A. MENON, IN RE [2005] 276 ITR 306 WAS ALSO NOT GOOD LAW. THE TRIBUNAL DEALT WITH THE ARGUMENT OF THE LEARNED DEP ARTMENTAL REPRESENTATIVE THAT AS NON-CORPORATE ENTITIES ARE NOT TAXABLE ENTITIES UND ER THE UAE TAX TREATY SUCH NON- 8 CORPORATE ENTITIES, EVEN THOUGH BASED IN UAE, CANNO T BE TREATED AS RESIDENT FOR THE PURPOSES OF THE INDIA-UAE DTAA AS FOLLOWS: OUR ATTENTION IS ALSO INVITED TO THE LEARNED ASSES SING OFFICERS OBSERVATIONS TO THE EFFECT THAT THE PROVISIONS OF THE DTAA DO NOT APPLY TO ANY CASE WHICH THE SAME INCOME IS NOT LIAB LE TO BE TAXED TWICE BY THE EXISTING LAWS OF BOTH THE CONTRACTING STATES AND THAT SINCE THE ASSESSEE HAS FAILED TO PROVE THAT IT IS PAYING TAXES IN UAE, THE DIT RELIEF SOUGHT BY THE ASSESSEE IS REJECTED BUT IT IS THE VERY PROPOSITION UNDERLYING THESE OBSERVATIONS WHICH WAS REJECTED BY THE HONBLE SUPREME COURT HOLDING THAT IT IS . . . . N OT POSSIBLE FOR US TO ACCEPT THE CONTENTIONS SO STRENUOUSLY URGED BY THE RESPONDENTS THAT THE AVOIDANCE OF DOUBLE TAXATION CAN ARISE ONLY WHE N TAX IS ACTUALLY PAID IN ONE OF THE CONTRACTING STATES. AS WE HAVE NOTED EARLIER ALSO, THE REVENUE IS ON RECORD TO HAVE OPPOSED THE VERY A RGUMENT THAT THE REVENUE HAS TAKEN IN THE PRESENT CASE, AS EVIDENT F ROM THE HONBLE SUPREME COURTS FOLLOWING OBSERVATION : THE APPELLANTS (I.E., UNION OF INDIA) CONTEND THAT , ACCEPTANCE OF THE RESPONDENTS SUBMISSION THAT DOUBLE TAXATION AVOIDANCE IS NOT PERMISSIBLE UNLESS THE TAX IS PAID IN BOTH C OUNTRIES IS CONTRARY TO THE INTENDMENT OF SECTION 90. IT IS URG ED THAT CLAUSE (B) OF SUB-SECTION (1) OF SECTION 90 APPLIES TO A S ITUATION WHERE INCOME-TAX HAS BEEN PAID IN BOTH THE COUNTRIES, BUT CLAUSE (B) DEALS WITH THE SITUATION OF AVOIDANCE OF DOUBLE TAX ATION OF INCOME. INASMUCH AS PARLIAMENT HAS DISTINGUISHED BE TWEEN THE TWO SITUATIONS, IT IS NOT OPEN TO A COURT OF LA W TO INTERPRET CLAUSE (B) OF SECTION 90 - SUB-SECTION (1) AS IF IT WERE THE SAME AS SITUATIONS CONTEMPLATED UNDER CLAUSE (A). THE VERY CONTENTION WHICH HAS BEEN RAISED BY THE RE VENUE IN THIS CASE WAS SUCCESSFULLY CHALLENGED BY THE UNION OF IN DIA BEFORE THE HONBLE SUPREME COURT. IT CANNOT BE OPEN TO US TO T AKE ANY OTHER VIEW OF THE MATTER THAN THE VIEW SO TAKEN BY THE HO NBLE SUPREME COURT. THE TRIBUNAL THEN DEALT WITH THE QUESTION AS TO WHE THER EXISTING LIABILITY TO PAY TAXES IN UAE IS A SINE QUA NON TO AVAIL THE BENEFIT OF IN DIA-UAE TAX TREATY IN INDIA AS FOLLOWS: 8. ALTHOUGH THE ASSESSING OFFICERS OBJECTION TO A PPLICABILITY OF INDIA- UAE TAX TREATY WAS ONLY ON THE GROUND THAT THE PROV ISIONS OF DOUBLE TAXATION AVOIDANCE AGREEMENTS DO NOT COME INTO PLAY UNLESS IT IS ESTABLISHED THAT THE ASSESSEE IS PAYING TAX IN BOTH THE COUNTRIES IN 9 RESPECT OF THE SAME INCOME, IN THE GROUNDS OF APPEA L BEFORE US IT IS ALSO CONTENDED THAT THE ASSESSEE-COMPANY FAILED TO PRODUCE ANY EVIDENCE TO THE EFFECT THAT IT WAS LIABLE TO PAY T AXES IN UAE. THE QUESTION THEN ARISES WHETHER AN EXISTING LIABILITY TO PAY TAXES IN UAE IS A SINE QUA NON TO AVAIL THE BENEFIT OF INDIA-UAE TAX TREATY IN INDIA. ON THIS ISSUE ALSO, WE FIND GUIDANCE FROM THE JUDGM ENT OF HONBLE SUPREME COURT IN THE CASE OF AZADI BACHAO ANDOLAN ( SUPRA). REFERRING TO THE KLAUS VOGELS COMMENTARY ON DOUBLE TAXATION CONVENTIONS, THEIR LORDSHIPS, INTER ALIA, OBSERVED AS FOLLOWS : IN OTHER WORDS, CONTRACTING STATES MUTUALLY BIND T HEMSELVES NOT TO LEVY TAXES OR TO TAX ONLY TO A LIMITED EXTEN T IN CASES WHEN THE TREATY RESERVES TAXATION FOR THE OTHER CON TRACTING STATE EITHER ENTIRELY OR IN PART. CONTRACTING STATE S ARE SAID TO WAIVE TAX CLAIMS OR MORE ILLUSTRATIVELY TO DIVIDE TAX SOURCES, TAXABLE OBJECTS, AMONGST THEMSELVES. DOUBLE TAXAT ION AVOIDANCE TREATIES WERE IN VOGUE EVEN FROM THE TIME OF THE LEAGUE OF NATIONS. THE EXPERTS APPOINTED IN THE EAR LY 1920S BY THE LEAGUE OF NATIONS DESCRIBE THIS METHOD OF CL ASSIFICATION OF ITEMS AND THEIR ASSIGNMENTS TO THE CONTRACTING S TATES. WHILE THE ENGLISH LAWYERS CALLED IT CLASSIFICATION AND A SSIGNMENT RULE, THE GERMAN JURISTS CALLED IT THE DISTRIBUTI VE RULE (VERTEI- LUNGSNORM). TO THE EXTENT THAT AN EXEMPTION IS AGRE ED TO, ITS EFFECT IS IN PRINCIPLE INDEPENDENT OF BOTH WHETHER THE CONTRACTING STATE IMPOSES A TAX IN THE SITUATION TO WHICH THE EXEMPTION APPLIES, AND IRRESPECTIVE OF WHETHER THE STATE ACTUALLY LEVIES THE TAX. COMMENTING PARTICULARLY ON THE GERMAN DOUBLE TAXATION CONVENTION WITH THE UNITED STATES, VOGEL COMMENTS : THUS, IT IS SAID THAT THE TREATY PREVEN TS NOT ONLY CURRENT BUT ALSO MERELY POTENTIAL DOUBLE TAXATI ON. [EMPHASIS SUPPLIED] IT IS THUS CLEAR THAT A TAX TREATY NOT ONLY PREVENT S CURRENT BUT ALSO POTENTIAL DOUBLE TAXATION. THEREFORE, IRRESPECTIV E OF WHETHER OR NOT THE UAE ACTUALLY LEVIES TAXES ON NON-CORPORATE ENTI TIES, ONCE THE RIGHT TO TAX UAE RESIDENTS IN SPECIFIED CIRCUMSTANCES VES TS ONLY WITH THE GOVERNMENT OF UAE, THAT RIGHT, WHETHER EXERCISED OR NOT, CONTINUES TO REMAIN EXCLUSIVE RIGHT OF THE GOVERNMENT OF UAE. AS NOTED ABOVE, THE EXEMPTION AGREED TO UNDER THE ASSIGNMENT OR DIST RIBUTIVE RULE, IS INDEPENDENT OF WHETHER THE CONTRACTING STATE IMPOS ES A TAX IN THE SITUATION TO WHICH EXEMPTION IMPLIES. IN THE CASE OF JOHN N. GLADDEN V. HER MAJESTY THE QUEEN 85 TC 5188, WHICH WAS QUOT ED WITH APPROVAL BY THE HONBLE SUPREME COURT IN AZADI BACH AO ANDOLANS CASE (SUPRA), FEDERAL COURT OF CANADA WAS OBSERVED THAT THE NON- RESIDENT CAN BENEFIT FROM THE EXEMPTION (UNDER THE TREATY) REGARDLESS OF WHETHER OR NOT HE IS TAXABLE ON THAT CAPITAL GAI N IN HIS OWN COUNTRY. IF CANADA OR THE US WERE TO ABOLISH THE CA PITAL GAINS TAX COMPLETELY, WHILE THE OTHER COUNTRY DID NOT, A RESI DENT OF THE COUNTRY 10 WHICH HAS ABOLISHED THE CAPITAL GAINS WOULD STILL B E EXEMPT FROM CAPITAL GAINS IN THAT OTHER COUNTRY. IT IS THUS CL EAR THAT TAXABILITY IN ONE COUNTRY IS NOT SINE QUA NON FOR AVAILING RELIEF UNDER THE TREATY FROM TAXABILITY IN THE OTHER COUNTRY. ALL THAT IS N ECESSARY FOR THIS PURPOSE IS THAT THE PERSON SHOULD BE LIABLE TO TAX IN THE CONTRACTING STATE BY REASON OF DOMICILE, RESIDENCE, PLACE OF MA NAGEMENT, PLACE OF INCORPORATION OR ANY OTHER CRITERION OF SIMILAR NAT URE WHICH ESSENTIALLY REFERS TO THE FISCAL DOMICILE OF SUCH A PERSON. IN OTHER WORDS, IF FISCAL DOMICILE OF A PERSON IS IN A CONTR ACTING STATE, IRRESPECTIVE OF WHETHER OR NOT THAT PERSON IS ACTUA LLY LIABLE TO PAY TAX IN THAT COUNTRY, HE IS TO BE TREATED AS RESIDENT OF THAT CONTRACTING STATE. THE EXPRESSION LIABLE TO TAX IS NOT TO REA D IN ISOLATION BUT IN CONJUNCTION WITH THE WORDS IMMEDIATELY FOLLOWING IT I.E., BY REASON OF DOMICILE, RESIDENCE, PLACE OF MANAGEMENT, PLACE OF INCORPORATION OR ANY OTHER CRITERION OF SIMILAR NATURE. THAT WOULD MEAN THAT MERELY A PERSON LIVING IN A CONTRACTING STATE SHOULD NOT BE SUFFICIENT, THAT PERSON SHOULD ALSO HAVE FISCAL DOMICILE IN THAT COU NTRY. THESE TESTS OF FISCAL DOMICILE WHICH ARE GIVEN BY WAY OF EXAMPLES FOLLOWING THE EXPRESSION LIABLE TO TAX BY REASON OF I.E., DOMIC ILE, RESIDENCE, PLACE OF MANAGEMENT, PLACE OF INCORPORATION ETC. ARE NO MORE THAN EXAMPLES OF LOCALITY RELATED ATTACHMENTS THAT ATTRACT RESIDENCE TYPE TAXATION. THEREFORE, AS LONG AS A PERSON HAS SUCH LOCALITY RE LATED ATTACHMENTS WHICH ATTRACT RESIDENCE TYPE TAXATION, THAT PERSON IS TO BE TREATED AS RESIDENT AND THIS STATUS OF BEING A RESIDENT OF T HE CONTRACTING STATE IS INDEPENDENT OF THE ACTUAL LEVY OF TAX ON THAT PE RSON. VIEWED IN THIS PERSPECTIVE, WE ARE OF THE CONSIDERED OPINION THAT BEING LIABLE TO TAX IN THE CONTRACTING STATE DOES NOT NECESSARILY IMPLY THAT THE PERSON SHOULD ACTUALLY BE LIABLE TO TAX IN THAT CONTRACTIN G STATE BY THE VIRTUE OF AN EXISTING LEGAL PROVISION BUT WOULD ALSO COVER THE CASES WHERE THAT OTHER CONTRACTING STATE HAS THE RIGHT TO TAX S UCH PERSONS - IRRESPECTIVE OF WHETHER OR NOT SUCH A RIGHT IS EXER CISED BY THE CONTRACTING STATE. IN OUR HUMBLE UNDERSTANDING, THI S IS THE LEGAL POSITION EMERGING OUT OF HONBLE SUPREME COURTS JU DGMENT IN AZADI BACHAO ANDOLANS CASE (SUPRA). THE PLEA TAKEN BY TH E REVENUE THAT THE ASSESSEE WAS NOT LIABLE TO TAX, WHICH WAS ANY WAY NOT TAKEN BY THE ASSESSING OFFICER OR BEFORE THE CIT(A), IS ALSO NOT SUSTAINABLE IN LAW EITHER. 9. IN OUR VIEW, DECISION IN THE CASE OF GREEN EMI RATE SHIPPING & TRAVELS (SUPRA) IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CAS E. AS HELD IN THE AFORESAID CASE, EXPRESSION LIABLE TO TAX IN THE CONTRACTING STATE AS USED IN ARTICLE 4(1)OF INDO-UAE- DTAA DOES NOT NECESSARILY IMPLY THAT THE PERSON SHO ULD ACTUALLY BE LIABLE TO TAX IN THAT CONTRACTING STATE AND THAT IT IS ENOUGH IF OTH ER CONTRACTING STATE HAS RIGHT TO TAX 11 SUCH PERSON, WHETHER OR NOT SUCH A RIGHT IS EXERCIS ED. THUS THE ASSESSEE HAS TO BE TREATED AS RESIDENT OF UAE AND THE PROVISIONS OF THE DTAA BETWEEN INDIA-UAE HAVE TO BE EXAMINED BY TREATING HIM AS A RESIDENT OF UAE . 10. THE NEXT QUESTION IS WHETHER BY VIRTUE OF ART ICLE 26(2) OF THE DTAA BETWEEN INDIA AND UAE, THE ASSESSEE SHOULD BE ALLOWED DEDUC TION U/S.80-HHC OF THE ACT. THIS ISSUE WAS CONSIDERED BY THE SPECIAL BENCH AHME DABAD IN THE CONTEXT OF INDO-US DTAA. THE AHMEDABAD, SPECIAL BENCH IN THE CASE OF RAJEEV SURESHBHAI GAJWANI, VS. ASSTT. CIT, CIRCLE-6, BARODA IN ITA NOS. 1808& 1978 /AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 BY OR DER DT. 4.3.2011, SINCE REPORTED IN 129 ITD 145 (AHD.) HAD TO DEAL WITH AN IDENTICAL CASE AS THAT OF THE ASSESSEE IN THE PRESENT APPEAL. THE ASSESSEE BEFOR E THE SPECIAL BENCH WAS A CITIZEN OF AMERICA, WAS AN EXPORTER OF SOFTWARE, HAVING PE IN INDIA. HE CLAIMED DEDUCTION UNDER SECTION 80 HHE, IN RESPECT OF PROFITS EARNED FROM E XPORT OF COMPUTER SOFTWARE. SECTION 80 HHE PROVIDED THAT IN THE CASE OF AN ASSE SSEE, BEING AN INDIAN COMPANY OR A PERSON OTHER THAN A COMPANY (RESIDENT IN INDIA), WHO IS ENGAGED INTER ALIA IN THE BUSINESS OF EXPORT OF COMPUTER SOFTWARE OUT OF INDI A OR ITS TRANSMISSION FROM INDIA TO A PLACE OUTSIDE INDIA BY ANY MEANS, THE PROFITS ARE NOT TO BE INCLUDED IN THE TOTAL INCOME. THE PROVISIONS THUS GRANTED DEDUCTION ONLY TO AN INDIAN COMPANY OR A PERSON WHO IS A RESIDENT IN INDIA. SINCE THE ASSESS EE WAS A NON-RESIDENT THE CLAIM FOR DEDUCTION WAS NOT ALLOWED. THE ASSESSEE ARGUED THA T SECTION 90(2) OF THE ACT PROVIDES THAT WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO AN AGREEMENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA OR SPECIFIE D TERRITORY OUTSIDE INDIA FOR GRANT OF RELIEF OF TAX OR AVOIDANCE OF DOUBLE TAXATION, T HEN IN RELATION TO THE PERSON TO WHOM SUCH AGREEMENT APPLIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE 12 MORE BENEFICIAL TO THE PERSON. THE ASSESSEE SUBMITT ED THAT THE PROVISIONS OF THE ACT WERE NOT MORE BENEFICIAL TO THE ASSESSEE, THE ASSES SEE OUGHT TO BE ASSESSED UNDER THE DTAA. THE ASSESSEE RELIED ON ARTICLE 26(2) OF THE D TAA BETWEEN INDIA AND USA WHICH PROVIDED THAT EXCEPT WHERE THE PROVISIONS OF PARAGR APH (3) OF ARTICLE 7 (BUSINESS PROFITS) APPLY, THE TAXATION OF A PE OF AN ENTERPRI SE OF A CONTRACTING STATE IN THE OTHER CONTRACTING STATE SHALL NOT BE LESS FAVORABLY LEVIE D IN THAT OTHER STATE CONTRACTING THAN THE TAX LEVIED ON ENTERPRISES OF THAT OTHER CONTRAC TING STATE CARRYING ON THE SAME ACTIVITIES. THUS THE ASSESSEE CLAIMED THAT FOR THE PURPOSE OF DEDUCTION U/S.80-HHE OF THE ACT, HE SHOULD NOT BE TREATED LESS FAVOURABLY THAN A RESIDENT PERSON IN VIEW OF THE AFORESAID PROVISION. THE SPECIAL BENCH HELD THAT A RTICLE 26(2) OF THE INDIA-USA DTAA PROVIDES THAT THE TAXATION OF A PE OF AN ENTERPRISE OF A CONTRACTING STATE IN THE OTHER CONTRACTING STATE SHALL NOT BE LESS FAVORABLY LEVIE D IN THAT OTHER STATE THAN THE TAX LEVIED ON ENTERPRISES OF THAT OTHER CONTRACTING STA TE CARRYING ON THE SAME ACTIVITIES. IN SIMPLE LANGUAGE, ARTICLE 26(2) MEANS THAT TAXATION OF A PE OF A USA RESIDENT SHALL NOT BE LESS FAVORABLE THAN THE TAXATION OF A RESIDENT E NTERPRISE CARRYING ON THE SAME ACTIVITIES IN THE SAME CIRCUMSTANCES OR UNDER THE S AME CONDITIONS . THE RESULT IS THAT THE EXEMPTIONS AND DEDUCTIONS AVAILABLE TO INDIAN E NTERPRISES WOULD ALSO BE GRANTED TO THE US ENTERPRISES IF THEY ARE CARRYING ON THE S AME ACTIVITIES. AS THE ASSESSEE WAS CARRYING ON THE SAME ACTIVITIES OF EXPORT OF SOFT WARE AS DONE BY RESIDENTS, IT WAS ENTITLED TO S. 80HHE DEDUCTION AS ADMISSIBLE TO A R ESIDENT ASSESSEE. THE SPECIAL BENCH OVERRULED THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF AUTOMATED SECURITIES CLEARANCE INC. VS. ITO 118 TTJ (PUNE) 61 9. 11. THE PROVISIONS OF SEC.80-HHE AND 80-HHC ARE I DENTICAL AND SO ARE THE RELEVANT CLAUSES OF THE DTAA BETWEEN INDIA AND UAE REGARDING NON-DISCRIMINATION. 13 RESPECTFULLY FOLLOWING THE RATIO LAID DOWN BY THE S PECIAL BENCH, WE HOLD THAT THE ASSESSEE CANNOT BE DENIED THE BENEFIT OF DEDUCTION U/S.80-HHC OF THE ACT ON THE SOLE GROUND THAT HE WAS NOT A RESIDENT. WE THEREFORE DI RECT THE AO TO ALLOW THE DEDUCTION CLAIMED BY THE ASSESSEE. 12. IN THE RESULT, APPEAL BY THE ASSESSEE IS ALLO WED. ORDER PRONOUNCED IN OPEN COURT ON 20TH DAY OF MARC H, 2012. SD/- SD/- (R.S.SYAL) ACCOUNTANT MEMBER (N.V. VASUDEVAN) JUDICIAL MEMBER DATED : 20TH MARCH, 2012. NG: COPY TO : 1. THE ASSESSEE 2. THE RESPONDENT 3. THE CIT(A)-CONCERNED. 4. THE CIT, CONCERNED. 5. THE DR CONCERNED, MUMBAI 6. GUARD FILE (TRUE COPY) BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI 14 DATE INITIALS 1. DRAFT DICTATED ON: 15.3.2012 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 16.3.2012 SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER : 16.3.2012 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: 16.3. 2012 JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: 16.3.2012 SR. PS/PS 6. ORDER PRONOUNCED ON: 20.3.2012 SR. PS/PS 7. ORDER COME BACK TO SR.PS/PS 20.3.2012 8. FILE SENT TO THE BENCH CLERK: SR. PS/PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK: 10. DATE OF DISPATCH OF ORDER: