Ruling on double taxation alters earlier positions

FORIEGN ENTERPRISES

The provisions of Section 90 of the Income Tax Act, which empower the central government to enter into agreement for avoidance of double taxation (AADT) with other countries, are intended to grant relief to taxpayers where the income has been subjected to tax both in India and another country.

This power can be exercised only for avoidance of double taxation of the same income under the Indian Income-Tax Act and the corresponding laws in force in the foreign country.

Thus, the liability to pay tax both in India and the foreign country entitles a taxpayer to claim relief under the provisions contained in the agreements for avoidance of double taxation.

It, therefore, follows that if a taxpayer pays tax or is liable to pay tax under the laws in force in one country alone, he cannot claim any relief from a non-existent burden of double taxation under the agreement for avoidance of double taxation.

Such agreements are intended for the benefit of only those taxpayers who are liable to pay tax twice on the same income.

In a recent case before the Authority for Advance Ruling (Cyril Eugene Pereira, (1999) 239 ITR 650 (AAR)),the applicant applied for ruling as to whether he was entitled to the benefit of the AADT between India and the UAE.

It was contended before the authority that there is no law in force in Dubai making the applicant's income liable to tax there. In other words, his income was not liable to tax in Dubai at all.

Therefore, the authority held that the applicant is not entitled for any relief in India. It was observed by the authority: "In the premises, we hold 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. 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 of both the Contracting States".

Similar view has been taken in P 34 and 35 (2000) 241 ITR 61 (AAR)). It may be pointed out here that in the decisions reported in 239 ITR 650 and 241 ITR 61, supra, the Authority for Advance Ruling had departed from its earlier decisions reported in 213 ITR 317 and 222 ITR 562. In both these cases, the benefit of tax relief was granted to the applicants in India despite the fact that their income was not liable to tax outside India.

While departing from its earlier decision, the authority observed that "we have carefully gone into various aspects of the matter. We are conscious of the fact that the decision taken by this authority should not ordinarily be disturbed."

In the above context, the authority took note the observations from Distributors (Baroda) P. Ltd. vs. Union of India (1985) 155 ITR 120, 124 (SC):

"To perpetuate an error is no heroism. To rectify it, is the compulsion of the judicial conscience. In this, we derive comfort and strength from the wise and inspiring words of Justice Bronson in Zpierce v. Delameter (A.M.Y page 18) 'a judge ought to be wise enough to know that he is fallible and, therefore, ever ready to learn: great and honest enough to discard all mere pride of opinion and follow truth wherever it may lead: and courageous enough to acknowledge his errors'."

agar@bol.net.in