Per Pramod Kumar, Accountant Member. - The only grievance raised by the revenue in this appeal is as follows :
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the Assessing Officer to allow the benefit of DTAA merely on production of the Xerox copy of the tax residency certificate issued by the Ministry of Finance and Industry in UAE without appreciating the fact that the assessee-company failed to produce any evidence that it was liable to pay taxes or paying taxes in UAE and that the provisions of the Double Taxation Avoidance Agreement did not apply to any person where the income was not liable to be taxed twice by the existing laws of both the Contracting States".
2. The short factual matrix, in which this issue arises, is this. The assessee is a shipping line based in United Arab Emirates. In the relevant previous year, the assessee had a taxable income of Rs. 28,35,628 from shipping operations. The assessee’s claim was that in terms of article 8 of the Indo-UAE Double Taxation Avoidance Agreement (205 ITR St. 49), the assessee’s 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 assessee ‘is not paying taxes in UAE’. The Assessing Officer relied upon the decision of the AAR in the case of Cyril Eugene Pereria, In re [1999] 239 ITR 6501 in support of the proposition that the provisions of the DTAA do not apply to any case which the ‘same income is not liable to be taxed twice by the existing laws of both the Contracting States’. The Assessing Officer also noted that ‘the assessee has failed to furnish proof/evidences in support of claim of being eligible for benefit of India-UAE DTAA and, consequently, the assessee has failed to discharge the onus on it to prove that it is liable to pay tax in UAE’. It was in this backdrop that the assessee’s claim for non-taxability of shipping income in India was rejected by the Assessing Officer. Aggrieved, assessee carried the matter in appeal before the CIT(A). The CIT(A) reversed the action of the Assessing Officer by a rather brief operative order which is reproduced below for ready reference :
"I have considered submissions of the appellant counsel and pursued the order made by the Assessing Officer. The appellant has not been allowed the benefit of DTAA only because the appellant had not produced any evidence before the Assessing Officer that he is a tax resident of UAE. As appellant has submitted the Xerox copy of the tax residency certificate issued by the Ministry of Finance & Industry in UAE, the Assessing Officer is directed to allow the benefit of DTAA to the appellant for the assessment year 1998-99."
Aggrieved by the order of the CIT(A), revenue is in appeal before us.
3. We have heard the learned Departmental Representative but none appeared for the assessee. We have also perused the material on record and duly considered the applicable legal position and factual matrix of the case.
4. The impugned order passed by the CIT(A) takes a rather superficial view of the matter and has conveniently ducked the core issue really required to be adjudicated upon. It has simply brushed aside the real objection raised by the Assessing Officer which was that in order to avail benefits of the India-UAE DTAA, a person need not only be resident of one of the Contracting State but should also be ‘liable to tax’ therein. Then, there is next question about the connotations of the expression ‘liable to tax’. Does it mean liability at present or does it also cover a potential future liability ? A residency certificate, by itself, does not decide the matter one way or the other because what, according to the Assessing Officer, is important is whether the assessee was liable to tax in UAE or not. Therefore, whether the assessee was resident in UAE or not would not have really mattered from the point of view of the Assessing Officer. For this reason, we are unable to approve the reasoning and stand of the CIT(A). Having held so, the next question that we are required to address ourselves to is whether or not the Assessing Officer was justified in raising the objection that he did. Is it really the liability to pay tax in UAE which is sine qua non to avail the benefits of the India-UAE DTAA or a fiscal domicile or residency in UAE per se will be sufficient for an assessee to claim the benefits of the India-UAE DTAA ? Is it taxation liability at present which is material for this purpose or is it even prospect of future tax liability which is sought to be prevented by the said DTAA ?
5. As for the Assessing Officer’s reliance on ruling given by the Authority for Advance Ruling in Cyril Eugene Pereria’s case (supra), we deem it necessary to produce the following extracts from the judgment of Hon’ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 7061, at page 742 wherein Their Lordships of Hon’ble Supreme Court had an occasion to deal with the said AAR ruling:
"The respondents placed great reliance on the decision by the Authority for Advance Ruling constituted under section 245-O of the Income-tax Act, 1961, in Cyril Eugene Pereria’s case [1999] 239 ITR 650 (AAR). Section 245S of the Act provides that the Advance Ruling pronounced by the Authority under section 245R will be binding only :
‘(a) on the applicant who had sought it;
(b) in respect to the transaction in relation to which the ruling had been sought;
(c) on the Commissioner, and the income-tax authorities subordinate to him, in respect to the applicant and the said transaction.’
It is, therefore, obvious that, apart from whatever its persuasive value, it would be of no help to us. Having perused the order of the Advance Ruling Authority, we are not persuaded." [Emphasis supplied]
The judgments of Hon’ble Supreme Court are binding on us under article 141 of the Constitution of India; the rulings of Authority for Advance Ruling, whatever be their persuasive value, are not. The words of Hon’ble Supreme Court are clear, categorical and unambiguous. Once Hon’ble Supreme Court declines to be persuaded by the ruling given by the Authority for Advance Ruling in Cyril Eugene Pereria’s case (supra), it cannot be open to us to follow the said ruling. In the case of Asstt. Collector of Central Excise v. Dunlop India Ltd. [1985] 154 ITR 172 at page 180, Hon’ble Supreme Court has, inter alia, observed as follows :
"We desire to add and as was said in the Cassell & Co. Limited v. Broome [1972] AC 1027 (HL), we hope it will never be necessary to say so again that "in the hierarchical system of courts" which exists in our country, "it is necessary for each lower tier" . . . . . "to accept loyally the decisions of the higher tiers". "It is inevitable in a hierarchical system of courts that there are decisions of the supreme appellate Tribunal which do not attract unanimous approval of all the members of the judiciary . . . . But judicial system works only if someone is allowed to have the last word and that last word, once spoken, is loyally accepted" (See Observations of Lord Hailsham and Lord Diplock in Broome v. Cassell). The wisdom of the Court below has to yield to the higher wisdom of the Court above."
We respectfully follow the higher wisdom of the Courts above, and decline to approve Assessing Officer’s reliance upon the ruling given by the Authority for Advance Ruling in Cyril Eugene Pereria’s case (supra).
6. Undoubtedly, in Cyril Eugene Pereria’s case (supra), Hon’ble Authority for Advance Ruling, deviating from the stand taken by it in the earlier rulings including ruling in Mohsinally Alimohammed Rafik, In re [1995] 213 ITR 3171, concluded that "an individual who is not liable to pay tax under the UAE law cannot claim any relief from the only tax on income which is payable in India under the agreement" and that "the provisions of the Double Taxation Avoidance Agreement do not apply to any case where the same income is not liable to be taxed twice by the existing laws on both the Contracting States". However, in Azadi Bachao Andolan’s case (supra), Their Lordships of Hon’ble Supreme Court, after referring to the said ruling and after elaborate discussions on the various aspects of this issue, concluded that "it is . . . . not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States". The reasoning given by Their Lordships included the following :
"According to Klaus Vogel "Double Taxation Conventions establishes an independent mechanism to avoid double taxation through restriction of tax claims in areas where overlapping tax claims are expected, or at least theoretically possible. In other words, Contracting States mutually bind themselves not to levy taxes or to tax only to a limited extent in cases when the treaty reserves taxation for the other Contracting State either entirely or in part. Contracting States are said to waive ‘tax claims’ or more illustratively to divide ‘tax sources’, ‘taxable objects’, amongst themselves". 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 the Contracting States. While the English lawyers called it ‘classification and assignment rule’, the German jurists called it ‘the distributive rule’ (Verteilungsnorm). To the extent that an exemption is agreed 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 prevents not only ‘current’ but also merely ‘potential’ double taxation". 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 income 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 avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States."
Clearly, therefore, there is no meeting ground between the ruling given by the Authority for Advance Ruling in Cyril Eugene Pereria’s case (supra) and the judgment delivered by the Hon’ble Supreme Court in Azadi Bachao Andolan’s case (supra). The choice, however, poses no difficulty in the light of the elementary legal position that the judgments of Hon’ble Supreme Court have binding force on all of us. Much as we respect the Hon’ble Authority for Advance Ruling, we regret our inability to follow the ruling which, in our humble understanding, has been clearly disapproved by the Hon’ble Supreme Court. It is not even open to us, even in a case in which our understanding of the issue on merits concurs with that of the Hon’ble Authority for Advance Ruling in Cyril Eugene Pereria’s case (supra), to follow that school of thought.
7. Learned Departmental Representative has invited our attention to the ruling given by the Authority for Advance Ruling in the case of Abdul Razak A. Menon, In re [2005] 276 ITR 3061 which supports the case of the revenue and is said to be on exactly the same material facts. We are, however, unable to accept this plea and we decline to treat this as a sort of, to use the phraseology employed in legal parlance, a covered matter. As Hon’ble Supreme Court has duly taken of in Azadi Bachao Andolan’s case (supra), a ruling given by the Authority for Advance Ruling is not even binding on the Commissioner of Income-tax, and authorities subordinate thereto, in any case except in the case of the very assessee in which the such a ruling is given and even in such a case it is binding in respect of transaction in respect of which the ruling is given. Whatever be the respect and deference judicial authorities indeed have for the rulings given by the Authority, the Authority for Advance Ruling, not being a part of the judicial hierarchy, cannot lay down a binding precedence for anyone - the revenue, the assessees or the appellate authorities. By no stretch of logic, therefore, a ruling given by the Hon’ble Authority of Advance Ruling has any precedence value in general. Therefore, learned Departmental Representative’s reliance on the ruling given in Abdul Razak A. Menon’s case (supra) by itself is not sufficient to decide the matter one way or the other. Learned Departmental Representative’s contention is that as non-corporate entities are not taxable entities under the UAE Tax Decree, 1969, such non-corporate entities, even though based in UAE, cannot be treated as ‘resident’ for the purposes of the India-UAE DTAA. Our attention is also invited to the learned Assessing Officer’s observations to the effect that "the provisions of the DTAA do not apply to any case which the same income is not liable 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 Hon’ble Supreme Court holding that "it is . . . . not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when 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 argument that the revenue has taken in the present case, as evident from the Hon’ble Supreme Court’s following observation :
"The appellants (i.e., Union of India) contend that, acceptance of the respondent’s submission that double taxation avoidance is not permissible unless the tax is paid in both countries is contrary to the intendment of section 90. It is urged that clause (b) of sub-section (1) of section 90 applies to a situation where income-tax has been paid in both the countries, but clause (b) deals with the situation of avoidance of double taxation of income. Inasmuch as Parliament has distinguished between the two situations, it is not open to a Court of law 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 revenue in this case was successfully challenged by the Union of India before the Hon’ble Supreme Court. It cannot be open to us to take any other view of the matter than the view so taken by the Hon’ble Supreme Court.
8. Although the Assessing Officer’s objection to applicability of India-UAE tax treaty was only on the ground that the provisions 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 respect of the same income, in the grounds of appeal before us it is also contended that the assessee-company failed to produce any evidence to the effect that it was ‘liable to pay taxes’ 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 judgment of Hon’ble Supreme Court in the case of Azadi Bachao Andolan (supra). Referring to the Klaus Vogel’s Commentary on Double Taxation Conventions, Their Lordships, inter alia, observed as follows :
"In other words, Contracting States mutually bind themselves not to levy taxes or to tax only to a limited extent in cases when the treaty reserves taxation for the other Contracting State either entirely or in part. Contracting States are said to waive ‘tax claims’ or more illustratively to divide ‘tax sources’, ‘taxable objects’, amongst themselves. 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 the Contracting States. While the English lawyers called it ‘classification and assignment rule’, the German jurists called it ‘the distributive rule’ (Vertei-lungsnorm). To the extent that an exemption is agreed 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 prevents not only ‘current’ but also merely ‘potential’ double taxation’." [Emphasis supplied]
It is thus clear that a tax treaty not only prevents ‘current’ but also ‘potential’ double taxation. Therefore, irrespective of whether or not the UAE actually levies taxes on non-corporate entities, once the right to tax UAE residents in specified circumstances vests 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 ‘distributive’ rule, is independent of ‘whether the Contracting State imposes 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 quoted with approval by the Hon’ble Supreme Court in Azadi Bachao Andolan’s 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 gain in his own country. If Canada or the US were to abolish the capital gains tax completely, while the other country did not, a resident of the country which has abolished the capital gains would still be exempt from capital gains in that other country". It is thus clear 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 necessary for this purpose is that the person should be ‘liable to tax in the Contracting State by reason of domicile, residence, place of management, place of incorporation or any other criterion of similar nature’ which essentially refers to the fiscal domicile of such a person. In other words, if fiscal domicile of a person is in a Contracting State, irrespective of whether or not that person is actually 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 read 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 country. These tests of fiscal domicile which are given by way of examples following the expression ‘liable to tax by reason of’ i.e., domicile, 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 related attachments which attract residence type taxation, that ‘person’ is to be treated as resident and this status of being a ‘resident’ of the Contracting State is independent of the actual levy of tax on that person. 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 Contracting 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 such persons - irrespective of whether or not such a right is exercised by the Contracting State. In our humble understanding, this is the legal position emerging out of Hon’ble Supreme Court’s judgment in Azadi Bachao Andolan’s case (supra). The plea taken by the revenue that the assessee was not ‘liabile to tax’, which was anyway not taken by the Assessing Officer or before the CIT(A), is also not sustainable in law either.
9. For the reasons set out above, and even though we do not approve the reasoning adopted by the CIT(A), we approve the conclusion arrived at by the CIT(A). His having arrived at right conclusion may have been fortuitous but what is material is that he reached the right conclusion. We approve his conclusion and decline to interfere in the matter.
10. Before parting with the matter, we may add that instead of allowing such matters, as is the dispute before us, to be subjected to confusing signals resulting in uncertainty and prolonged litigation, it is certainly more desirable for the Government to take a clear cut stand on the issue or let the matter be resolved at the level of Governments of the Contracting States. That perhaps is a better solution for quickly resolving disputes on such a fundamental aspect of a tax treaty as to who will be eligible for the benefits of that tax treaty. We hope that the Government will resolve this matter once for all and would not allow this uncertainty to last for long. We leave it at that.
11. In the result, the appeal is dismissed.
70/45
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