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Cyril Pereira Ruling by the Authority for Advance Rulings

Cyril Pareira Ruling

Summary

Mr. Cyril Pareira is a resident of Dubai, which is a part of United Arab Emirates (UAE). India has executed a DTC with UAE. In UAE, there is no Income-tax on any individuals irrespective of whether the individuals are residents/ citizens or non-residents/ foreign citizens. When doubts were raised about the availability of DTC relief by the Dubai NRIs, the chairman of Central Board of Direct Taxes issued specific circulars clarifying that the DTC relief will be available to all the residents of UAE.

Mr. Pareira applied for an advance ruling & claimed relief under Indo-UAE DTC. The AAR ruled that the relief is not available.

The ratio of the decision runs as under :

1. India has a written constitution. The constitution empowers the parliament to collect taxes by enacting appropriate laws. Indian parliament has enacted Indian Income-tax act 1961. This Act empowers the government to collect Income-tax.

2. (Government of India is subordinate to the parliament).

3. Government of India cannot do anything which it is not empowered under the law to do.

4. Section 90 of the Indian Income-tax Act empowers government of India to enter into DTCs with other countries for avoidance of double taxation. If the other country has no income-tax, there is no double tax and government cannot sign a DTC with such a country.

5. In UAE, some companies (oil companies and banking companies) are liable to Income-tax. Hence the treaty shall apply only if these companies have any income in India. The individuals residing in UAE have no tax liability in UAE and hence are not entitled to any relief under Indo-UAE DTC.

6. Even the treaty itself provides relief only for people liable to tax. The definition of “resident” in article 4 provides that a person may be treated as a resident only if he is “liable to tax” in that country. If he has no liability to tax, he is not a resident. (For counter points see paragraph 5 below)

7. Article 3 (1) (e) defines a “person” as a “taxable unit”. If someone is not taxable, he or it is not even a “person” under the treaty.

8. Article 10 providing relief against Double Taxation on dividends pre-supposes that there is a tax on dividend in the country of residence (UAE). If there is no tax in Dubai, article 10 does not apply and hence the DTC relief will not be available.

9. Similarly other articles covering different incomes also pre-suppose a tax liability in the country of residence.

10. Article 2 listing the taxes covered prescribes “the existing taxes”. Thus only the taxes imposed in the current year are to be considered. The chance that in future the government may impose some tax on the individual cannot be considered.

11. Central Board of Direct Taxes (CBDT) had no jurisdiction to sign any treaty where there is no double tax. It must be considered that the CBDT knew its powers and restrictions. Hence it must be presumed that CBDT has considered only the companies liable to tax in UAE and not the individuals.

12. It has been argued that the government of India wants to attract foreign investments and hence it has signed a treaty with a country like UAE which does not levy any Income-tax on individuals. The Authority has ruled that the CBDT can only act in line with the objective laid down by the law. In this case, Section 90 of the Income-tax Act. This section does not provide for the objective of attracting foreign investments. It only provides for avoidance of double taxation.

Hence CBDT cannot sign a DTC with the objective of attracting investments.

Conclusion : UAE resident individuals are not “liable to income-tax” in U.A.E. Hence they cannot claim DTC relief.


Issues

1. All rulings by the AAR are in personem and not in rem. Thus M.A. Rafik’s case is applicable to Mr. Rafik. That ruling is still valid. When Mr. Rafik files his own returns, he can still claim the DTC relief. Cyril Pareira’s case is applicable only to Mr. Cyril Pareira.

An advance ruling does not amount to “change in law”. Hence all the people who have already obtained advance rulings in their favour, are entitled to continue to claim their relief.

2. CBDT has issued three specific circulars assuring and clarifying that the individual residents of UAE shall we entitled to claim Indo-UAE DTC relief. Is a commissioner, subordinate to the CBDT within his legal rights to challenge the circulars ? When the CBDT has laid down that the relief should be available, can any officer subordinate to the CBDT challenge it ?

It has been held in (K & P page 1053 note 3) that beneficial circulars of CBDT are binding on the Income-tax department.

3. What about all the investors who have invested in India based on the clear promise given by the Chairman of the CBDT at the conferences held in UAE ? What about the fact that these promises were followed up by circulars ?

It is alright to say that the CBDT had no powers to go beyond section 90. However, does the Income-tax department have powers to go beyond CBDT ‘s instructions ?

How shall India inspire confidence in the minds of NRIs and other investors ?

The least that can be done is to grant the treaty relief to all the people who have already invested in India. Government may take a view for people investing after the decision is officially reported. People who have acted in faith must be protected.

4. It is an amusing experience for the last six years. Wherever, assessees were filing applications to the assessing officers for NOC, they were being granted. In other words, the department had accepted that Indo-UAE DTC relief must be granted. However, when the same assessee approached the AAR for a ruling in the same matter, immediately the department took a confrontation approach. In all cases department opposes the applicant.

Why ? The AAR is not a court. This is not a place where two parties are quarreling or necessarily opposing each other. There is a foreigner. He does not understand our laws. In any case, before making substantial investments in India, he wants clarity and assurance about the law and its interpretation. He may even ask whether section 10 exemption is available on PPF investments or not. Would the department oppose the exemption ? Why can’t the department take a stand that if it gives relief, it gives with open heart and without hesitation ?

5. Earlier, there was a clarity. Government of India and particularly the Income-tax department wanted to collect tax. The finance ministry and the Income-tax department had one voice. The Indo-Mauritian treaty for the first time created a difference of opinion between the two. Dr. Manmohan Singh gave more importance to investments than Income-tax. At the highest level, government wanted to attract more and more investments. After some reluctance, even the CBDT agreed with the finance ministry. However, the department continued to resist. Cyril Pareira’s case is a classic result of this situation.

6. An Industrialised country like India signing DTCs with tax havens has created a hypocritical situation. A genuine investor from abroad investing directing in India suffers. If he comes in via Mauritius etc., he benefits. Government of India itself is actively and knowingly encouraging treaty shopping. Is it advisable to continue a hypocritical situation?


The ratio of the decision

To claim relief of double tax avoidance agreements (DTC), there should actually be double tax. If there is no "double" tax, there can be no DTC relief.

Will this ratio apply to the following offshore centres ?

Cyprus :

There is a 4.25 % flat tax on all offshore companies.

The Cyril Pareira ruling requiries that there should be income-tax. Whether the tax is low or high is not the issue.

Hence Cyprus companies will still be entitled to DTC relief.

Mauritius :

There are different kinds of companies.

1. International Companies - They bear no tax. Hence no DTC relief.

2. Old offshore Companies - Incorporated in Mauritius before 30th June, 1998.

They have an option to pay tax @ 0% to 35%. If a company has opted to pay tax - at any rate - between 0% to 35%. - it is liable to tax in Mauritius & hence entitled to DTC relief.

It may get credit for taxes paid in India & then the tax payable at Mauritius may be zero.

Still, it should get DTC relief.

3. New companies formed after 30th June, 1998 are liable to tax @ 15%. They should get DTC relief.

Malta :

It imposes 35% tax on all offshore companies.

This tax is then refunded to the shareholders.
Can these companies get DTC relief ?

Middle-East :

Like U.A.E., several countries do not impose tax on their residents.

Should or shouldn't they get DTC relief ?