For the first time, the AAR in Mohsinally Alimohammed Rafik, In re (1995) 213ITR317 held a view that a UAE resident even though not liable to any tax in resident country can avail the benefit of lower taxes as per tax treaty.
The AAR in Cyril Eugene Pereira, in re (2000) 239ITR650 however opined that the liability to pay tax both in India and the foreign country only entitles a taxpayer to claim relief under the rules laid down in the Double Taxation Avoidance Agreement. 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 DTAA. This view is followed in the case of an Oman Resident in P. Nos. 34 and 35, In re v. (241ITR61) when the AAR held that the DTAA is meant only for the benefit of taxpayers who are liable to pay tax twice on the same income. An individual who is not liable to pay any income-tax in Oman cannot get the advantage of the Double Taxation Avoidance Agreement between Oman and India. The assessment of her income will have to be done in accordance with the provisions of the Income-tax Act, 1961.
The AAR in 276ITR306 complicated the subject even when it had an advantage to the Supreme Court ruling in 263ITR706.
Sh S E Dastur then in his the interpretation of the Treaty invoked upon the principle of contemporanea exposition relying on (1) Circular No. 734 dated January 24, 1996 (see  217 ITR (St.) 74), of the Central Board of Direct Taxes (CBDT), and (2) the press notes issued by the Central Board of Direct Taxes when India entered into treaty with UAE as well as the press note issued when a similar treaty was entered into with the Government of Qatar, to the point that notwithstanding the fact that an individual is not a taxable unit under the UAE Decree, the Treaty will none the less apply to the applicant. However the AAR held that once it was accepted that there was no provision in the UAE Tax Decree to tax the income of individuals, as a necessary corollary it followed that an individual could not be “resident” in the UAE within the meaning of paragraph (1) of article 4 hence it could not under the guise of liberal interpretation of Article 4(1) be enabled to avail of the benefit of articles 10, 11 and 13 of the Double Taxation Avoidance Agreement.
The Supreme Court in 263ITR706 while dealing with the subject of treaty shopping, TRC and efficacy of Circular No. 789 of April 13, 2000, showed regret and disagreement to the order of AAR in 239ITR650 and further held that the test of liability for taxation is not to be determined on the basis of an exemption granted in respect of any particular source of income, but by taking into consideration the totality of the provisions of the income-tax law that prevails in either of the Contracting States. Merely because, at a given time, there may be an exemption from income-tax in respect of any particular head of income, it is not correct to say that the taxable entity is not liable to taxation. Liability to taxation is not the same as the payment of tax. Liability to tax is a legal situation: payment of tax is a fiscal fact. It cannot be said that offshore companies incorporated in Mauritius and registered under the Mauritius Offshore Business Activities Act, 1992, are not “liable to taxation” under the Mauritius Income-tax Act; or that such companies would not be resident in Mauritius within the meaning of Article 3 read with article 4 of the Convention.
More particularly dissuading with the contradictory AAR rulings the Apex Court held as under (at page 742):
“There is substance in the contention of Mr. Salve learned counsel for one of the appellants, that the expression “resident” is employed in the DTAC as a term of limitation, for otherwise a person who may not be “liable to tax” in a Contracting State by reason of domicile, residence, place of management or any other criterion of a similar nature may also claim the benefit of the DTAC. Since the purpose of the DTAC is to eliminate double taxation, the treaty takes into account only persons who are “liable to taxation” in the Contracting States. Consequently, the benefits there under are not available to persons who are not liable to taxation and the words “liable to taxation” are intended to act as words of limitation.”
An amendment is also made by insertion of sub-clause (ii) in clause (a) of section 90(1) by the Finance Act, 2003 to have application of section 90 in either of the following situations:
- Income on which taxes are paid in both the states;
- Income tax that is chargeable to tax under both the states.
Thus the interpretation that because a non –resident is not paying any tax on foreign sources income per se in foreign country therefore he cannot claim the benefit of DTAA does not hold good after the SC ruling. At the same time the SC weighed with the argument that since the purpose of the DTAC is to eliminate double taxation, the treaty takes into account only persons who are “liable to taxation” in the Contracting States. Consequently, the benefits thereunder are not available to persons who are not liable to taxation and the words “liable to taxation” are intended to act as words of limitation.
Now beginning 2021 we have a deeming fiction in section 6 by which an individual as a person resident of a foreign country may be treated as resident in India in certain situations only because he is not liable to taxation in a foreign country. This may have a pouring effect on UAE resident individuals even after all the promises vide press note of February 2020 given the interpretations held in 263ITR706 earlier