DDIT (IT) -3(1), MUMBAI v. M/s. THE HONGKONG & SHANGHAI BANKING CORPORATION LTD., MUMBAI

ITA 12/MUM/2007 | 2005-2006
Pronouncement Date: 29-10-2010 | Result: Dismissed

Appeal Details

RSA Number 1219914 RSA 2007
Assessee PAN AAACT2786P
Bench Mumbai
Appeal Number ITA 12/MUM/2007
Duration Of Justice 3 year(s) 9 month(s) 26 day(s)
Appellant DDIT (IT) -3(1), MUMBAI
Respondent M/s. THE HONGKONG & SHANGHAI BANKING CORPORATION LTD., MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 29-10-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted L
Tribunal Order Date 29-10-2010
Date Of Final Hearing 28-09-2010
Next Hearing Date 28-09-2010
Assessment Year 2005-2006
Appeal Filed On 02-01-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L MUMBAI BEFORE SHRI R V EASWAR PRESIDENT AND SHRI J SUDHAKAR REDDY ACCOUNTANT MEMBER I T A NO: 12/MUM/2007 (ASSESSMENT YEAR: 2005-06) DEPUTY DIRECTOR OF INCOME TAX APPELLANT (INTERNATIONAL TAXATION) 3(1) MUMBAI VS THE HONGKONG & SHANGHAI BANKING RESPONDENT CORPORATION LIMITED MUMBAI (PAN: AAACT2786P) CROSS OBJECTION NO: 113/MUM/2007 (ARISING OUT OF I T A NO: 12/MUM/2007) (ASSESSMENT YEAR: 2005-06) THE HONGKONG & SHANGHAI BANKING CROSS OBJECTOR CORPORATION LIMITED MUMBAI VS DEPUTY DIRECTOR OF INCOME TAX RESPONDENT (INTERNATIONAL TAXATION) 3(1) MUMBAI ASSESSEE BY: SHRI ARVIND SONDE REVENUE BY: SHRI NARENDER SINGH O R D E R R V EASWAR PRESIDENT: THE APPEAL IS BY THE REVENUE AND THE CROSS OBJECTI ON IS BY THE ASSESSEE. BOTH PERTAIN TO THE ASSESSMENT YEAR 2005-06. THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE COMPAN IES ACT 1956 AND LICENSED TO CARRY ON THE BANKING BUSINESS UNDER THE ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 2 BANKING REGULATION ACT 1949. ITS INDIA AREA MANAG EMENT OFFICE AND REGISTERED OFFICE ARE LOCATED AT 52/60 MAHATMA GANDHI ROAD MUMBAI. 2. IN THE COURSE OF THE BANKING BUSINESS THE ASSES SEE UNDERTAKES PORTFOLIO INVESTMENT BUSINESS UNDER THE PORTFOLIO INVESTMENT SCHEME FOR ITS NRI CLIENTS. IN CARRYING ON THIS BUSINESS THE ASSESSEE MAKES REMITTANCES ABROAD IN ACCORDANCE WITH A CIRCULAR ISSUED BY THE RESERVE BANK OF INDIA ON 07. 12.2004 WHICH IS REFERRED TO IN PARAGRAPH 2 OF THE ORDER PASSED B Y THE ASSESSING OFFICER. THE ASSESSEE SUBMITTED THE DETAILS OF THE FOREIGN REMITTANCES MADE TO RESIDENTS OF UAE FROM WHICH TH E ASSESSING OFFICER NOTED THAT THESE REMITTANCES HAD BEEN MADE WITHOUT DEDUCTION OF TAX AT SOURCE AS PER THE CERTIFICATES ISSUED BY THE CHARTERED ACCOUNTANTS. IN THE CERTIFICATES THE CH ARTERED ACCOUNTANTS WOULD APPEAR TO HAVE STATED THAT THE RE MITTANCES REPRESENT CAPITAL GAINS ARISING TO THE NON-RESIDENT S BASED IN UAE ON SALE OF GOVERNMENT SECURITIES ISSUED BY THE GOVE RNMENT OF INDIA AND HELD BY THEM AND THAT THEY WERE EXEMPT FR OM CAPITAL GAINS TAX IN INDIA UNDER ARTICLE 13(3) OF THE AGREE MENT FOR THE AVOIDANCE OF DOUBLE TAXATION ENTERED INTO BETWEEN I NDIA AND UAE. IT WAS THEREFORE STATED BY THE ASSESSEE-BANK THAT N O TAX WAS LIABLE TO BE DEDUCTED AT SOURCE FROM THE REMITTANCES. 3. THE ASSESSING OFFICER HOWEVER TOOK THE VIEW TH AT THE CAPITAL GAINS ARISING TO THE RESIDENTS OF UAE DID N OT QUALIFY FOR EXEMPTION FROM INDIAN INCOME TAX UNDER THE DTAA AND THEREFORE THE ASSESSEE-BANK BECAME A DEFAULTER BY NOT DEDUCTI NG THE TAX ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 3 FROM THE REMITTANCES. A SHOW CAUSE NOTICE WAS ACCO RDINGLY ISSUED TO THE ASSESSEE UNDER SECTION 201 OF THE INCOME TAX ACT 1961 PROPOSING TO TREAT THE ASSESSEE AS A DEFAULTER AND ALSO PROPOSING TO LEVY INTEREST UNDER SUB-SECTION (1A) OF THE SECT ION. 4. A DETAILED REPLY WAS SUBMITTED BY THE ASSESSEE O N 06.03.2006 WHICH IS FULLY REPRODUCED IN THE ORDER PASSED BY THE ASSESSING OFFICER AND FOR THE SAKE OF BREVITY THE SAME IS NOT REPRODUCED HERE. THE GIST OF THE REPLY HOWEVER I S : - (A) THE CAPITAL GAINS AROSE TO THE NRIS BASED IN U AE ON THE SALE OF TREASURY BILLS ISSUED BY THE GOVERNMENT OF INDIA WHICH HAVE A MATURITY PERIOD NOT EXCEEDING 3 64 DAYS AND THEREFORE THE SALE GAVE RISE TO SHORT TER M CAPITAL GAINS WHICH WERE OUTSIDE THE PURVIEW OF SU B- SECTION (IIA) OF SECTION 204 AND THEREFORE THE ASSESSEE CANNOT BE HELD TO BE A PERSON RESPONSIBLE FOR PAYING ANY INCOME TO THE NRIS; (B) EVEN ASSUMING THAT THE ASSESSEE-BANK IS THE PE RSON RESPONSIBLE FOR PAYING THE INCOME TO THE NRIS AT UA E STILL THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX BEC AUSE THE CHARTERED ACCOUNTANTS HAVE CERTIFIED THAT THE U AE CUSTOMERS ARE NOT LIABLE TO TAX IN INDIA BY VIRTUE OF ARTICLE 13 OF THE TREATY BETWEEN INDIA AND UAE; (C) IN THE CASE OF MOHSINALLY ALIMOHAMMED RAFIK I N RE (1995) 213 ITR 317 THE AAR HAS HELD THAT THE PROVISIONS OF THE INDIA-UAE TAX TREATY APPLY TO INDIVIDUALS BASED IN UAE; ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 4 (D) THE DECISION OF THE AAR IN THE CASE OF ABDUL R AZAK A MEMAN IN RE (2005) 276 ITR 306 (AAR) RELIED UPON BY THE ASSESSING OFFICER WAS NOT APPLICABLE TO THE INDIVIDUALS BASED IN UAE; (E) IN ANY CASE ACCORDING TO THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF UNION OF INDIA VS. AZA DI BACHAO ANDOLAN (2003) 263 ITR 706 (SC) WHETHER OR NOT THE PERSON IS ACTUALLY PAYING INCOME TAX IN HIS HOME COUNTRY IS IRRELEVANT IN DETERMINING WHETHER SUCH PERSON IS ELIGIBLE TO ENJOY IN INDIA THE BENEF ITS OF THE TAX TREATY BETWEEN HIS HOME COUNTRY AND INDIA. THUS THE QUESTION WHETHER THE NRI CLIENTS OF THE ASSESSEE-BANK IN UAE ARE IN FACT LIABLE TO TAX IN T HE UAE IS NOT RELEVANT CONSIDERATION IN DETERMINING TH E QUESTION WHETHER ARTICLE 13 OF THE TREATY IS APPLIC ABLE; (F) IN THE CASE OF ASSISTANT DIRECTOR OF INCOME TA X (INTERNATIONAL TAXATION) VS. GREEN EMIRATE SHIPPING AND TRAVELS THE MUMBAI BENCH OF THE ITAT HAS HELD BY ORDER DATED 30.11.2005 IN ITA NO: 3784/MUM/2002 THAT WHETHER OR NOT THE UAE ACTUALLY LEVIES INCOME TAX ON INDIVIDUALS ONCE THE RIGHT TO TAX THE RESIDENTS OF UAE IN SPECIFIED CIRCUMSTANCES BECOMES VESTED ONLY WITH THE GOVERNMENT OF UAE THAT RIGHT CONTINUES TO REMAIN WITH THAT GOVERNMENT WHETHER EXERCISED OR NOT AND THE EXPRESSION LIABLE TO ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 5 TAX IN THE UAE DOES NOT IMPLY THAT THE PERSON SHOU LD ACTUALLY BE TAXED BY VIRTUE OF AN EXISTING LAW IN U AE. ON THE BASIS OF THE AFORESAID SUBMISSIONS THE ASSES SEE PLEADED THAT IT SHOULD NOT BE TREATED AS A DEFAULTER OR CHA RGE INTEREST UNDER SECTION 201 OF THE ACT. 5. THESE SUBMISSIONS DID NOT FIND FAVOUR WITH THE A SSESSING OFFICER WHO HELD THAT ARTICLE 4(1) OF THE TREATY W AS MORE RELEVANT AND SINCE THE INDIVIDUAL CUSTOMER OF THE BANK WHO WAS RESIDING IN UAE WAS NOT LIABLE TO PAY TAX IN UAE HE CANNOT BE CONSIDERED AS A RESIDENT OF UAE AND CONFERRED THE BENEFIT OF THE TREATY. ACCORDING TO HIM DUE TO THE ABSENCE OF ANY TAX ON THE INDIVI DUALS IN UAE THEY CANNOT TAKE THE BENEFIT OF THE DOUBLE TAXATION TREATY. UNDER ARTICLE 4(1) THE LIABILITY TO PAY TAX IS THE CONDI TION FOR DECIDING WHETHER A PERSON IS A RESIDENT OF A CONTRACTING STA TE OR NOT. UNLESS A PERSON IS LIABLE TO PAY TAX IN A CONTRACTING STAT E HE CANNOT BE CONSIDERED AS A RESIDENT OF THAT STATE. SINCE THER E IS NO INDIVIDUAL INCOME TAX IN UAE THE INDIVIDUALS RESIDING THERE C ANNOT BE CONSIDERED AS RESIDENTS FOR THE PURPOSE OF GIVING T HE BENEFIT OF THE TAX TREATY AND THEREFORE THEY ARE LIABLE TO PAY I NCOME TAX IN INDIA ON CAPITAL GAINS ARISING IN INDIA. THE ASSESSING O FFICER THEREFORE HELD THAT THE ASSESSEE-BANK OUGHT TO HAVE DEDUCTED TAX ON THE REMITTANCES. HE PASSED AN ORDER ON 08.03.2006 BEIN G A COMBINED ORDER UNDER SECTION 201(1) TREATING THE ASSESSEE AS A DEFAULTER AND CHARGING INTEREST UNDER SECTION 201(1A) OF THE ACT. THE TAX WORKED OUT TO ` 9 77 01 621/- AND THE INTEREST CALCULATED AT THE P RESCRIBED RATE AND THE PERIOD CAME TO ` 1 21 56 720/-. ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 6 6. ON APPEAL THE ASSESSEE TOOK UP A PRELIMINARY CO NTENTION TO THE EFFECT THAT IT WAS NOT A PERSON RESPONSIBLE FOR PAYING ANY INCOME TO THE NON-RESIDENT AND THEREFORE IT WAS U NDER NO OBLIGATION TO DEDUCT TAX. RELIANCE WAS PLACED ON S ECTION 204(IIA) WHICH WAS INSERTED BY THE FINANCE ACT 1986 WITH E FFECT FROM 01.06.1986. UNDER THIS PROVISION THE ASSESSEE WHIC H WAS AN AUTHORIZED DEALER RESPONSIBLE FOR REMITTING THE SUM TO THE NON- RESIDENT INDIAN OR FOR CREDITING THE ACCOUNT OF THE NON-RESIDENT WAS LIABLE TO DEDUCT TAX ON AMOUNTS WHICH REPRESENT LON G TERM CAPITAL GAINS. THE CONTENTION OF THE ASSESSEE WAS THAT IT SOLD THE SECURITIES ON BEHALF OF THE NRI CLIENT AND CREDITED THE CLIENTS ACCOUNT IN ITS BOOK BUT THE SALE PROCEEDS REPRESENT ED SHORT TERM CAPITAL GAINS AND THEREFORE THERE WAS NO QUESTION OF THE ASSESSEE BEING CONSIDERED AS PERSON RESPONSIBLE FOR PAYING A NY SUM TO THE NON-RESIDENT. THIS CONTENTION WAS REJECTED BY THE CIT(A) IN PARAGRAPH 2.4 OF THE IMPUGNED ORDER THOUGH HE HAS ERRONEOUSLY REFERRED TO CLAUSE (IV) OF SECTION 204 OF THE ACT. THE ACTUAL REFERENCE APPEARS TO BE TO CLAUSE (III) OF THE SECT ION WHICH SAYS THAT IN THE CASE OF CREDIT OR PAYMENT OF ANY OTHER SUM PAYABLE TO THE NON-RESIDENT THE PAYER HIMSELF OR IF THE PAYER IS A COMPANY THE COMPANY ITSELF INCLUDING THE PRINCIPAL OFFICER THER EOF WILL BE CONSIDERED AS THE PERSON RESPONSIBLE FOR PAYING. I T WOULD THUS APPEAR THAT THE CIT(A) INVOKED CLAUSE (III) OF SECT ION 204 FOR HOLDING THE ASSESSEE TO BE A PERSON RESPONSIBLE FOR PAYING THE SUN TO THE NON-RESIDENT. ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 7 7. ON THE MERITS OF THE ASSESSEES CLAIM NAMELY W HETHER THE CAPITAL GAINS WERE TAXABLE IN INDIA AND THEREFORE THE ASSESSEE WAS UNDER A LIABILITY TO DEDUCT TAX THEREFROM; THE CIT( A) HELD IN FAVOUR OF THE ASSESSEE FOLLOWING THE JUDGMENT OF THE SUPREME COURT IN UNION OF INDIA VS. AZADI BACHAO ANDOLAN (SUPRA) WH ERE IT WAS OBSERVED THAT THE RULINGS OF THE AAR HAVE NO BINDIN G AUTHORITY BUT HAVE ONLY PERSUASIVE VALUE. HE ALSO REFERRED TO TH E ORDER OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ADIT VS . GREEN EMIRATE SHIPPING AND TRAVELS (SUPRA) AND AFTER QUOT ING EXTENSIVELY THEREFROM HELD IN PARAGRAPH 3.12 THAT THE CAPITAL GAINS ARISING TO NRIS RESIDING IN UAE CANNOT BE TAXED IN INDIA AND H ENCE THE ASSESSEE WAS NOT OBLIGED TO DEDUCT TAX THEREFROM. IN THIS VIEW OF THE MATTER HE DELETED THE DEMAND RAISED UNDER SECT ION 201(1) AND LEVY OF INTEREST UNDER SECTION 201(1A) OF THE ACT. 8. IN ADDITION TO THE ABOVE FINDINGS THE CIT(A) AL SO GAVE CERTAIN OTHER REASONS IN SUPPORT THEREOF AND THESE ARE CONTAINED IN PARAGRAPH 3.13 OF HIS ORDER. HE TOOK THE VIEW THAT IF IT IS HELD THAT THE INDIVIDUALS RESIDING IN UAE ARE NOT ENTITLED TO THE BENEFIT OF THE TAX TREATY JUST BECAUSE THEY HAVE NOT BEEN ASSESSED OR ARE NOT ASSESSABLE ENTITIES THERE IT WILL THEN AMOUNT TO L EAVING THE ENTIRE CITIZENS LIVING IN UAE OUT OF THE TREATY WHICH WIL L BE CONTRARY TO THE INTENTION OF THE TREATY. HE ALSO REFERRED TO ARTIC LE 13 OF THE DTAA UNDER WHICH THE CAPITAL GAINS ON IMMOVABLE PROPERTY WAS TO BE TAXED IN THE COUNTRY IN WHICH THE PROPERTY WAS SITU ATED AND IN THE CASE OF CAPITAL GAINS ARISING ON SALE OF MOVABLE AS SETS FORMING PART OF BUSINESS ASSETS THE CAPITAL GAINS AROSE UNDER TH E AFORESAID ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 8 ARTICLE IN THE PLACE WHERE THE PERMANENT ESTABLISHM ENT OF THE TRANSFEROR WAS SITUATED. ACCORDING TO THE CIT(A) IN RESPECT OF ALL OTHER PROPERTIES THE INTENTION OF THE TREATY WAS TO KEEP THE FISCAL RESIDENCE OF THE PERSON IN MIND IN TAXING THE CAPIT AL GAINS AND SINCE ALL THE CLIENTS OF THE ASSESSEE-BANK WERE NOT RESID ENTS OF INDIA THE CAPITAL GAINS CANNOT BE ASSESSED IN INDIA. A FURTH ER REASON GIVEN BY THE CIT(A) WAS THAT IF IT IS HELD THAT A NON-RES IDENT INDIAN LIVING IN UAE CANNOT GET THE BENEFIT OF THE TREATY THEN HE W ILL ALSO BE NOT A RESIDENT OF INDIA AND THE CAPITAL GAINS ARISING FRO M THE SALE OF THE SECURITIES CANNOT BE TAXED IN ANY OF THE TWO COUNTR IES BECAUSE UNDER ARTICLE 13(3) IT IS THE RESIDENTIAL STATUS OF THE TRANSFEROR OF THE ASSET WHICH DETERMINES THE COUNTRY IN WHICH THE CAP ITAL GAINS WOULD BE TAXED. IF A PERSON IS NOT A RESIDENT OF EITHER INDIA OR UAE EVEN THE CAPITAL GAINS ARISING IN INDIA WILL ESCAPE TAXA TION AND SUCH A CONSEQUENCE SHOULD NOT BE ALLOWED TO FOLLOW ANY INT ERPRETATION OF THE TREATY. 9. THE CIT(A) ALSO CONTRASTED THE PROVISIONS OF TH E TREATY WITH SWEDEN UKRAINE AND JORDAN WHICH PROVIDED SPECIFIC ALLY THAT THE CAPITAL GAINS ARE TAXABLE IN THE COUNTRY IN WHICH T HE TRANSFER OF THE PROPERTY TAKES PLACE AND NOT IN THE COUNTRY OF WHIC H THE TRANSFEROR IS A RESIDENT. ACCORDING TO THE CIT(A) WHEREAS THE T REATIES WITH THESE COUNTRIES MAKE THE LIABILITY FOR CAPITAL GAINS TAX DEPENDENT ON THE COUNTRY IN WHICH THE TRANSFER TAKES PLACE IN CONTR AST THE TREATY WITH UAE GIVES THE RIGHT TO TAX THE CAPITAL GAINS TO THA T COUNTRY OF WHICH THE TRANSFEROR IS A RESIDENT. THESE ADDITIONAL REA SONS WERE GIVEN BY THE CIT(A) IN SUPPORT OF HIS MAIN CONCLUSIONS. ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 9 10. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF T HE CIT(A) QUESTIONING HIS DECISION ON THE MERITS OF THE ASSES SEES CLAIM WHEREAS THE ASSESSEE IS IN CROSS OBJECTION TO CONTE ND THAT THE CIT(A) OUGHT TO HAVE HELD THAT THE ASSESSEE WAS NOT A PERSON RESPONSIBLE FOR PAYING THE SUM TO THE NON-RESIDENT AND THEREFORE NOT LIABLE TO DEDUCT TAX AT SOURCE UNDER SECTION 19 5 OF THE ACT. IT IS FURTHER CONTENDED THAT IF THE ASSESSEE IS NOT SO LI ABLE IT CANNOT BE TREATED AS AN ASSESSEE IN DEFAULT UNDER SUB-SECTION (1) OF SECTION 201 AND NO INTEREST CAN BE CHARGED UNDER SUB-SECTIO N (1A) OF THE SECTION. 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND TH E FACTS. TAKING THE CROSS OBJECTION FIRST SECTION 195(1) PR OVIDES THAT IF ANY PERSON RESPONSIBLE FOR PAYING ANY SUM CHARGEABLE UN DER THE ACT TO A NON-RESIDENT HE SHALL AT THE TIME OF CREDIT OF THE INCOME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF ACTUAL PAYME NT THEREOF WHICHEVER IS EARLIER DEDUCT INCOME TAX THEREON AT THE RATES IN FORCE. SECTION 204 DEFINES THE MEANING OF PERSON RESPONSI BLE FOR PAYING. ACCORDING TO CLAUSE (IIA) IN THE CASE OF ANY SUM P AYABLE TO A NON- RESIDENT INDIAN BEING ANY SUM REPRESENTING CONSIDE RATION FOR THE TRANSFER BY HIM OF ANY FOREIGN EXCHANGE ASSET WHIC H IS NOT A SHORT TERM CAPITAL ASSET THE AUTHORIZED DEALER RESPONSIB LE FOR REMITTING SUCH SUM TO THE NRI OR FOR CREDITING THE SUM TO THE NRE ACCOUNT MAINTAINED IN ACCORDANCE WITH THE FERA WILL BE CON SIDERED AS A PERSON RESPONSIBLE FOR PAYING ANY OTHER SUM CHARGEA BLE UNDER THE ACT. THE ASSESSEE HAS CLAIMED BEFORE THE ASSESSING OFFICER THAT ALL THE GOVERNMENT SECURITIES WHICH WERE SOLD ON BEHALF OF THE NON- ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 10 RESIDENTS WERE OF THE MATURITY PERIOD OF 364 DAYS O NLY AND THEREFORE THE SECURITIES WERE SHORT TERM CAPITAL A SSETS WITH THE RESULT THAT THE CAPITAL GAINS WERE ALSO SHORT TERM CAPITAL GAINS. IF THEY ARE SHORT TERM CAPITAL GAINS THERE WAS NO LIA BILITY ON THE ASSESSEE WHO IS ADMITTEDLY AN AUTHORIZED DEALER T O DEDUCT TAX BECAUSE EVEN THOUGH HE MAY BE A PERSON RESPONSIBLE FOR PAYING THE SUM TO THE NON-RESIDENT THE LIABILITY TO DEDUC T TAX ARISES ONLY IN THE CASE OF LONG TERM CAPITAL GAINS AS PER THE LANG UAGE OF CLAUSE (IIA) OF SECTION 204. THE CIT(A) OBVIOUSLY SAW FOR CE IN THIS ARGUMENT OF THE ASSESSEE. HE HOWEVER BROUGHT THE CASE OF THE ASSESSEE UNDER CLAUSE (III) ERRONEOUSLY REFERRED T O AS CLAUSE (IV) WHICH SAYS THAT IN THE CASE OF CREDIT OR AS THE CAS E MAY BE PAYMENT OF ANY OTHER SUM CHARGEABLE UNDER THE PROVI SIONS OF THIS ACT THE PAYER HIMSELF OR IF THE PAYER IS A COMPAN Y THE COMPANY ITSELF INCLUDING THE PRINCIPAL OFFICER THEREOF WIL L BE CONSIDERED AS THE PERSON RESPONSIBLE FOR PAYING. IN COUNTERING THE A PPLICABILITY OF THIS CLAUSE TO THE ASSESSEE-BANK IT HAS BEEN CONTENDED BEFORE US ON BEHALF OF THE ASSESSEE THAT EVEN THOUGH THIS CLAUSE SEEMS TO COVER THE CASE OF LONG TERM GAINS ALSO A DEEPER EXAMINAT ION WOULD SHOW THAT LONG TERM CAPITAL GAINS ARE NO DOUBT COVERED B UT IN THAT CASE THE PAYER SHOULD BE A PERSON OTHER THAN AN AUTHORIZ ED DEALER. IT IS SUBMITTED THAT IF THE CLAUSE IS INTERPRETED TO MEAN THAT EVEN AN AUTHORIZED DEALER IS TAKEN IN BY THE SAID CLAUSE W E WOULD BE IGNORING THE LANGUAGE OF CLAUSE (IIA) OF THE SECTIO N WHICH IS THE ONLY CLAUSE WHICH REFERS TO AN AUTHORIZED DEALER AND FUR THER IF CLAUSE (III) IS TAKEN TO INCLUDE AN AUTHORIZED DEALER ALSO THEN THERE WAS NO ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 11 NEED TO SPECIFICALLY PROVIDE IN CLAUSE (IIA) FOR TH E LIABILITY OF AN AUTHORIZED DEALER IN THE CASE OF LONG TERM CAPITAL GAINS SINCE THE AUTHORIZED DEALER WOULD BE COVERED BY CLAUSE (III) ITSELF. IT IS THEREFORE CONTENDED THAT THE LIABILITY OF AN AUTHOR IZED DEALER TO DEDUCT TAX ARISES ONLY IN THE CASE OF REMITTANCE OR CREDIT OF LONG TERM CAPITAL GAINS. 12. WE FIND THAT CLAUSE (III) WAS PRESENT IN THE SE CTION RIGHT FROM THE INTRODUCTION OF THE 1961 ACT AND THE ONLY AMEND MENT MADE THERETO WAS BY THE FINANCE (NO.2) ACT 1967 WITH E FFECT FROM 01.04.1967 BY SUBSTITUTING THE OPENING WORDS IN TH E CASE OF PAYMENTS BY THE WORDS IN THE CASE OF CREDIT OR A S THE CASE MAY BE PAYMENT. CLAUSE (IIA) WAS INTRODUCED LATER BY THE FINANCE ACT 1986 WITH EFFECT FROM 01.06.1986. WHEREAS CLAUSE (III) WAS IN GENERAL TERMS CLAUSE (IIA) SPECIFICALLY PROVIDED F OR CASES OF AMOUNTS PAYABLE TO A NON-RESIDENT INDIAN OF CONSIDE RATION FOR THE TRANSFER BY HIM OF ANY FOREIGN EXCHANGE ASSET WHIC H IS NOT A SHORT TERM CAPITAL ASSET. THE SCOPE AND EFFECT OF INTROD UCING THIS CLAUSE WAS EXPLAINED BY CIRCULAR NO.461 DATED 9 TH JULY 1986 REPORTED IN (1986) 161 ITR (ST.) 17. PARAGRAPH 30.1 OF THE CIR CULAR STATES THAT THE CLAUSE HAS BEEN INSERTED WITH A VIEW TO SIMPLIF YING THE PROCEDURE FOR THE TAX DEDUCTION AT SOURCE AND TO AV OID DELAY AND INCONVENIENCE IN THE CASE OF NRIS WISHING TO REMIT THE SALE PROCEEDS OF FOREIGN EXCHANGE ASSETS. IT FURTHER ST ATES THAT THE EXPRESSION PERSON RESPONSIBLE FOR PAYING HAS BEEN AMENDED TO INCLUDE AN AUTHORIZED DEALER WHO IS RESPONSIBLE FOR REMITTING SUCH SUM TO THE NRI OR CREDITING THE SAME TO THE NRE ACC OUNT OF THE ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 12 NRI. THUS A SPECIAL PROVISION HAS BEEN MADE TO COV ER SALE PROCEEDS REPRESENTING LONG TERM CAPITAL GAINS ON SA LE OF FOREIGN EXCHANGE ASSETS EFFECTED BY NRIS. IT IS A FUNDAMEN TAL RULE OF INTERPRETATION THAT WHEN A SPECIFIC PROVISION HAS B EEN MADE TO COVER A SPECIFIC SITUATION OR WHERE SOME SPECIAL FA CTS ARE PRESENT IT IS NOT POSSIBLE TO INVOKE THE GENERAL PROVISION BEC AUSE IF THE GENERAL PROVISION CAN COVER THE SPECIAL FACTS OR SP ECIAL SITUATION THEN THERE WAS NO NEED TO INTRODUCE THE SPECIAL PRO VISION. ONCE A SPECIAL PROVISION HAS BEEN INTRODUCED IT EXCLUDES THE GENERAL PROVISION AND IT IS NO LONGER POSSIBLE TO FALL BACK ON THE GENERAL PROVISION. THE GENERAL PROVISION IN THE PRESENT CA SE IS THE ONE RELIED ON BY THE CIT(A) NAMELY CLAUSE (III) OF SE CTION 204. THERE THE PAYER HIMSELF IS THE PERSON RESPONSIBLE FOR PAY ING AND IF THE PAYER IS A COMPANY THE COMPANY ITSELF INCLUDING IT S PRINCIPAL OFFICER WILL BE TREATED AS THE PERSON RESPONSIBLE FOR PAYIN G. HOWEVER WHERE NON-RESIDENT INDIANS SELL FOREIGN EXCHANGE AS SETS IN INDIA AND SUCH FOREIGN EXCHANGE ASSETS ARE LONG TERM CAPI TAL ASSETS THE AUTHORIZED DEALER WHICH ADMITTEDLY COVERS THE ASSE SSEE-BANK HAS BEEN MADE THE PERSON RESPONSIBLE FOR PAYING THE PRO CEEDS TO THE NRI AND LIABILITY HAS BEEN FASTENED UPON THE AUTHOR IZED DEALER TO DEDUCT TAX. HOWEVER THE AUTHORIZED DEALER IS LIAB LE TO DEDUCT TAX IN SUCH A CASE ONLY IF THE FOREIGN EXCHANGE ASSET SOLD IS A LONG TERM CAPITAL ASSET. THUS SPECIAL PROVISIONS HAVING BEEN MADE IN CLAUSE (IIA) OF SECTION 204 TO COVER A SPECIFIC FACT-SITUA TION IT WILL OVERRIDE THE GENERAL PROVISION MADE IN CLAUSE (III). THE AS SESSEES CLAIM THAT THE CAPITAL GAINS ARISING TO THE NRIS RESIDING IN UAE ARE SHORT ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 13 TERM CAPITAL GAINS HAS NOT BEEN CONTROVERTED BY THE ASSESSING OFFICER. THEREFORE THE ASSESSEE-BANK ACTING AS A UTHORIZED DEALER WITHIN THE MEANING OF CLAUSE (IIA) READ WITH EXPLAN ATION (B) BELOW THE SECTION WAS NOT UNDER ANY LIABILITY TO DEDUCT TAX FROM THE AMOUNT CREDITED TO THE NRE ACCOUNT OF THE NRI. THE REFORE ON THIS GROUND ALONE THE ORDER PASSED BY THE ASSESSING OFFI CER TREATING THE ASSESSEE AS A DEFAULTER AND ALSO CHARGING INTEREST UNDER SUB- SECTION (1) AND SUB-SECTION (1A) RESPECTIVELY OF SE CTION 201 REQUIRE TO BE SET ASIDE. WE DO SO AND THUS ALLOW THE ASSES SEES CROSS OBJECTION. 13. IN THE LIGHT OF THE DECISION RENDERED BY US ON THE ASSESSEES CROSS OBJECTION IT IS NOT NECESSARY TO EXAMINE THE DEPARTMENTS APPEAL IN ANY DETAIL. HOWEVER SINCE THE MATTER WA S ARGUED BEFORE US WE CONSIDER IT PROPER TO DECIDE THE SAME. THE MATTER STANDS COVERED IN FAVOUR OF THE ASSESSEE BY SEVERAL ORDERS OF THE MUMBAI BENCHES OF THE TRIBUNAL WHERE IT HAS BEEN HELD THA T EVEN THOUGH THE NRIS ARE NOT ACTUALLY ASSESSABLE TO TAX IN THE UAE THEY CANNOT BE DENIED THE BENEFIT OF THE INDO-UAE TREATY AND ON CE THEY ARE LIABLE TO TAX IN UAE THEY CANNOT BE TAXED IN INDIA IN RESPECT OF THE CAPITAL GAINS AND ON THIS GROUND THE ASSESSEE-BANK WAS UNDER NO LIABILITY TO DEDUCT TAX UNDER SECTION 195(1) OF THE ACT. 14. THE ORDER OF THE MUMBAI BENCH OF THE TRIBUNAL I N THE CASE OF ASSISTANT DIRECTOR OF INCOME TAX (INTERNATIONAL TAX ATION) VS. GREEN EMIRATE SHIPPING AND TRAVELS (SUPRA) DIRECTLY COVER S THE ISSUE IN FAVOUR OF THE ASSESSEE. IN THIS ORDER IT WAS HELD THAT TAXABILITY IN ONE COUNTRY IS NOT A SINE QUA NON FOR AVAILING RELI EF UNDER THE TREATY ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 14 FROM TAXABILITY IN THE OTHER COUNTRY AND THAT ALL T HAT IS NECESSARY IS THAT THE PERSON SHOULD BE LIABLE TO TAX IN UAE BY R EASON OF DOMICILE RESIDENCE ETC. WHICH ESSENTIALLY REFERS TO FISCAL DOMICILE AND FURTHER THAT THE EXPRESSION LIABLE TO TAX IN A CONTRACTIN G STATE DOES NOT NECESSARILY IMPLY THAT THE PERSON SHOULD ACTUALLY B E LIABLE TO TAX IN UAE BY VIRTUE OF ANY EXISTING LEGAL PROVISION AND T HE EXPRESSION WOULD ALSO COVER CASES WHERE UAE HAS THE RIGHT AS A SOVEREIGN COUNTRY TO TAX SUCH PERSON IRRESPECTIVE OF WHETHER OR NOT THE RIGHT HAS BEEN EXERCISED BY UAE. THIS ORDER OF THE TRIBU NAL HAS BEEN FOLLOWED BY THE MUMBAI BENCH IN HINDUSTAN PETROLEUM CORPORATION LTD. VS. ASSISTANT DIRECTOR OF INCOME TAX (INTERNAT IONAL TAXATION) (2010) 36 SOT 120 (MUM). TO THE SAME EFFECT ARE TH E FOLLOWING ORDERS OF THE MUMBAI BENCH OF THE TRIBUNAL: - (A) MEERA BHATIA VS. ITO (2010) 38 SOT 95 (MUM) (B) ITO VS. RAMESHKUMAR GOENKA (2010) 39 SOT 132 (MUM) THE LEARNED ACCOUNTANT MEMBER IS A PARTY TO THE LAS T OF THE AFORESAID ORDERS. IN ALL THESE ORDERS OF THE MUMBA I BENCHES THE CASES INVOLVED INDO-UAE TREATY AND ARTICLES 4 AND 1 3 OF THE TREATY WERE THE SUBJECT MATTER OF DISCUSSION. IT HAS BEEN SPECIFICALLY NOTICED IN THESE ORDERS AS TO WHAT IS THE MEANING A ND PURPORT OF THE EXPRESSION LIABLE TO TAX IN A CONTRACTING STATE U SED IN ARTICLE 4(1) OF THE TREATY. IN ALL THE ORDERS THE ENTIRE CASE L AW ON THE SUBJECT HAS BEEN CONSIDERED WHICH INCLUDED THE FOLLOWING: - (1) ABDUL RAZAK A MEMAN IN RE (2005) 276 ITR 306 (AAR) (2) CYRIL EUGENE PEREIRA IN RE (1999) 239 ITR 650 (AAR) (3) UNION OF INDIA VS. AZADI BACHAO ANDOLAN (2003) 26 3 ITR 706 (SC) THUS THE ISSUE WHICH ARISES BEFORE US HAS BEEN CO NSIDERED IN ALL ITS ASPECTS BY THE EARLIER ORDERS OF THE MUMBAI BEN CHES OF THE ITA NO: 12/MUM/2007 CO NO: 113/MUM/2007 15 TRIBUNAL. THEREFORE RESPECTFULLY FOLLOWING THE SA ID ORDERS WE UPHOLD THE DECISION OF THE CIT(A) ON MERITS NAMELY THAT THE ASSESSEE-BANK WAS NOT LIABLE TO DEDUCT TAX FROM THE AMOUNTS CREDITED TO THE NRE ACCOUNTS OF THE NRIS OF UAE EVE N THOUGH THERE WAS NO EXISTING LAW IN UAE MAKING THE NRIS RE SIDING THERE LIABLE TO PAY INCOME TAX ON CAPITAL GAINS. THE APP EAL OF THE DEPARTMENT IS ACCORDINGLY DISMISSED. 15. IN THE RESULT WHILE THE CROSS OBJECTION OF THE ASSESSEE IS ALLOWED THE APPEAL OF THE DEPARTMENT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH OCTOBER 2010. SD/- SD/- (J SUDHAKAR REDDY) (R V EASWAR) ACCOUNTANT MEMBER PRESIDENT MUMBAI DATED 29 TH OCTOBER 2010 SALDANHA COPY TO: 1. THE HONGKONG & SHANGHAI BANKING CORPORATION LTD. 52/60 MAHATMA GANDHI ROAD MUMBAI 400 001 2. DDIT (INTERNATIONAL TAXATION) 3(1) 3. DIT-INTERNATIONAL TAXATION 4. CIT(A)-XXXIII 5. DR L BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR ITAT MUMBAI