TMI Blog2011 (8) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in Oman and is clearly liable to tax under the provisions of Income-tax law in Oman - the provisions of DTAA override the provisions of the Income-tax Act - In the light of the ratio of the decision laid down by Hon'ble Supreme Court in CIT v. P.V.A.L. Kulandagan Chettiar [2004 (5) TMI 8 - SUPREME Court], the income earned by the assessee from its Oman Branch cannot be added as income for computing the taxable income in India - Do not find any infirmity in the order of learned CIT(A) - Held that the income from business carried on at Oman and Qatar cannot be subjected to tax in India. Interpretation of provisions of DTAA - The expression used in Article 7 of the DTAA between India and Oman is "may be taxed", while the words used in Article 7 of India Qatar DTAA is "may also be taxed". Could there be different consequences because of the above difference in the language of the DTAA? - it cannot be said that the expression "may also be taxed" used in the DTAA gave option to the other Contracting States to tax such income. As laid down in the decision in the case of Pooja Bhatt [2008 (10) TMI 251 - ITAT BOMBAY-L] contextual meaning has to be given to such expression. - the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been bidding for various contracts, exploration sites and had incurred expenditure on travelling bidding for tenders, exploration activities at blocks etc. The expenditure so incurred were revenue expenditure in nature. In books of account these expenses have been shown as deferred revenue expenses. The Assessee submitted that since the expenses were in the nature of revenue and directly related with the ongoing business, entire expenses incurred during this financial year should be allowed. The Assessing Officer however was of the view that the expenses incurred were only in the nature of preliminary expenses which can not be related to any business activity carried on by the assessee during the year. The Assessing Officer held that these expenses are to be capitalized in the books as preoperative expenditure on successful completion of the bid and award of contract. The Assessing Officer held that in assessment years 1994-95 1995-96, the assessee's claim for similar deduction was disallowed and for the reasons given therein, the deduction claimed was disallowed. 3. On appeal by the assessee, the CIT(A) deleted the addition made by the Assessing Officer following orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supervision of the same management. The activities were inter-connected and there was no inter-lacing of funds and resources. The activities were carried out as inseparable from the existing line of business. Therefore, in the light of the decisions of the Supreme Court in the cases of Produce Exchange Corporation Ltd. v. CIT 77 ITR 739 and Veecumsees v. CIT 220 ITR 185, these expenses need to be allowed as revenue in nature. The very same principle has been followed in the decision of the Tata Chemicals Ltd. v. DCIT by the Bombay Tribunal in 72 ITS 1. Therefore, in the facts and circumstances of the case, we direct the assessing authority to allow the sum of ₹ 1,60,04,350 as deduction on computing the taxable income of the assessee company. The above reasoning of the ITAT would equally apply to the impugned expenditure incurred during the previous year for setting up refinery. We, therefore, confirm the order of the CIT(A) and dismiss Ground No. 1 5. Ground No. 2 raised by the revenue reads as under: On the facts and in the circumstances of the case and as per law, the ld. CIT(A) erred in directing the Assessing Officer not to tax the principal amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the fact that as the assessee is a Resident of India, it has to be taxed on its entire income in India as per section 5(1) of the Income-tax Act, 1961, which includes all the income: (i) Received or deemed to be received. (ii) Accrues or arises or deemed to accrue and arise (iii) Accrues or arises outside India. 9. The Assessee had undertaken projects in Sultanate of Oman State of Qatar. The profits from the Oman Qatar project amounting to ₹ 39,88,03,909 and loss of Rs. (36,53,785) respectively had not been included in the total income by the Assessee. The Assessing Officer called upon the assessee to explain why the income arising out of Oman Qatar projects should not be included in the total income of the company. According to the Assessing Officer, the assessee is a Resident of India and therefore it has to be taxed on its entire income in India as per section 5(1) of the I.T. Act, 1961, which includes all the income: (i) Received or deemed to be received. (ii) Accrues or arises or deemed to accrue and arise (iii) Accrues or arises outside India. 10. In reply to the query of the Assessing Officer, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes in India. After notification of applicability of DTAA, the appellant company has excluded the income earned at Qatar for tax in India due to the application of the Article 7 of the above said Agreement. 14. The Assessee submitted that as far as tax returns in India were concerned, the profits of the Oman Branch and the loss from Qatar branch were separately calculated and the profits/loss so calculated were excluded while calculating the Indian Tax liability on the basis of article 7 of India-Oman DTAA and India-Qatar treaty respectively. INDIA - OMAN DTAA ARTICLE 7 The profits of an enterprise of Contracting States shall be taxable only in that Contracting State unless the enterprise carries on business in other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profit of the enterprise may be taxed in that other Contracting State but only so much so that income or profit as is attributable directly or indirectly to that permanent establishment. INDIA - QATAR DTTA ARTICLE 7 The profits of an enterprise of Contracting States shall be taxable only in that Contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accrues or arises or deemed to accrue or arise, and (c) Accrues or arise to him outside India. The fact that the same income suffers tax in Oman and Qatar respectively will not be a bar for India to bring to tax the entire global income of the resident. The authority of Oman and Qatar to tax income earned by the Assessee in their country is because of the fact that the source of income earned by the Assessee is from those countries. The right of the Indian Government to tax the Assessee on the very same income is because the Assessee as a resident of the country has the benefit of the Government's public goods and services to facilitate the economic activity that produces income in India as well abroad. It is only in recognition of the right of both countries to tax the same income double taxation avoidance agreements are entered into between countries. If such relief from double taxation is not given international business arrangements would never come into being. The Assessing Officer further held that there can be no doubt that the income earned on the project at Oman and Qatar has to be included in the total income of the assessee to determine the liability for tax purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a credit. According to the Assessing Officer, article 7 of India-Oman DTAA should not be read in isolation and must be read along with article 25 thereof. According to the Assessing Officer, the very purpose of the DTAA is not to give tax exemption but to allow relief from taxing the same income twice by allowing credit to the assessee for taxes paid in Sultanate of Oman so that the assessee is not made to pay more tax than what he is required to pay in India at the prevailing rates. In the light of the above discussion, the Assessing Officer held that income from Oman and Qatar are held to be assessable in India and Oman income of ₹ 39,88,03,909 was accordingly added to the total income and Qatar loss of ₹ 36,53,785 was reduced from the total income. In line with his reasoning the Assessing Officer gave tax credit for ₹ 4,38,10,563 being tax paid by assessee in Oman. 18. On appeal by the assessee, the CIT(A) directed the Assessing Officer to accept the claim of the assessee by following the order of CIT(A) on identical issue in assessee's case for assessment years 1999-2000 to 2002-03 wherein it was held that income-taxed in Oman Qatar cannot be ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man and Qatar projects amounting to ₹ 32,99,08,359 had not been included in the total income of the company. The Assessing Officer called upon the assessee to explain why the income arising out of Oman and Qatar project should not be included in the total income of the company. Vide letter dated 31-1-2005, the assessee submitted it has established a Branch in both Oman and Qatar, which has entered into contracts with the Government agencies to undertake drilling of oil wells. For executing the said contracts, the company has full-fledged office and project set up in Oman and Qatar. The operations are looked after by a CEO designated assisted by technical, administrative and finance team. The relevant accounting records are kept in respective countries only, even though the result of all activities are consolidated in India. The company has also obtained, as per local requirement, a license for operating a branch in respective countries. Both Oman and Qatar have Income-tax laws. As a result, the income earned by the assessee in these countries are taxable in the said countries. As required under the local Income-tax law in Oman Qatar, the assessee has been filing tax returns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered the rival contentions and have also gone through the materials placed on record. There is no dispute that the assessee is having a permanent establishment in Oman and is clearly liable to tax under the provisions of Income-tax law in Oman. In all the cases extracted above, the profits of Indian tax resident from a foreign permanent establishment cannot be included in computing taxable income of the Indian tax residents and moreover, under the provisions of article 7 of the DTAA; it is only the Oman Government which is entitled to levy tax on the profits of assessee's Oman business, particularly when it is established that the entire income is attributable to the aforesaid permanent establishment and, therefore, it would outside the taxable ambit in India. It is now the accepted position that the provisions of DTAA override the provisions of the Income-tax Act. In the light of the ratio of the decision laid down by Hon'ble Supreme Court in CIT v. PVAL Kulandagan Chettiar 267 ITR 654, the income earned by the assessee from its Oman Branch cannot be added as income for computing the taxable income in India. We do not find any infirmity in the order of learned CIT(A). Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue. 23. The ld. Counsel for the assessee however, submitted that the decision of the Tribunal is based on the principle that income which has suffered tax abroad should not be taxed again in India even if the assessee is resident under the Act and consequently the entire global income of such assessee is taxable in India. According to him the wordings of the treaty would not make any difference as contended by the ld. D.R. 24. We have considered the rival submission. At the outset we accept the contention of the ld. D.R that the Tribunal while deciding the appeal of assessee for assessment year 2002-03 has proceeded on the assumption that the wordings of Article 7 of DTAA between India and Oman on the one hand and that between India and Qatar are similar. The expression used in Article 7 of the DTAA between India and Oman is may be taxed , while the words used in Article 7 of India Qatar DTAA is may also be taxed . Could there be different consequences because of the above difference in the language of the DTAA? This aspect was considered by the ITAT Mumbai in the case of Ms. Pooja Bhatt (supra). The facts of the case were the Assessee in that case was a film ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 13 (royalty and fee for technical services), article 14 (capital gains on other properties) and article 22 (other income) which provide that such income may be taxed in both the Contracting States. For example, para 1 of article 11 proves that dividend income may be taxed in other Contracting State while para 2 provides that dividend income may also be taxed in the State of residence. Similarly, article 14(2) and article 22 provide that income may be taxed in both the countries. The above analysis clearly shows that intention of parties to the DTAA is very clear. Wherever the parties intended that income is to be taxed in both the countries, they have specifically provided in clear terms. Consequently, it cannot be said that the expression may be taxed used by the contracting parties gave option to the other Contracting States to tax such income. In our view, the contextual meaning has to be given to such expression. If the contention of the Revenue is to be accepted then the specific provisions permitting both the Contracting States to levy the tax would become meaningless. The conjoint reading of all the provisions of articles in Chapter III of Indo-Canada treaty, in our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accepted then the specific provisions permitting both the Contracting States to levy the tax would become meaningless. In our view, by using the expression may also be taxed in the other State , the contracting parties permitted only the other State, i.e. State of income source and by implication, the State of residence was precluded from taxing such income. Wherever the contracting parties intended that income may be taxed in both the countries, they have specifically provided. Hence, the contention of the revenue that the expression may also be taxed in other State giving the option to the other State and the State of residence is not precluded from taxing such income cannot be accepted. 26. For the reasons given above, we find no grounds to take a different view even in respect of income derived by the Assessee from Qatar as was taken in assessment year 2002-03. We therefore confirm the order of the CIT(A) and dismiss Ground No. 3 of the Revenue. 27. Ground No. 4 raised by the revenue reads as follows: 4. On the facts and in the circumstances of the case and as per law, the ld. CIT(A) erred in directing the Assessing Officer to allow the assessee's clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d already been allowed depreciation on such jetty which clearly makes it evident that the assessee company has used the jetty for the purpose of its marketing business and therefore, interest relating to borrowed funds applied in purchase of such jetty should be allowed as deduction under section 36(1)(iii) of the Act. In this regard, it was further submitted that the assessee company had its own funds as well as borrowed funds, which were intermingled and had become part of the common pool and that it was not practicable to identify the source of purchase of jetty as entire Refinery project was undertaken as a whole. Hence, assessee had claimed proportionate interest as deduction instead of interest on entire cost of the aforesaid jetty. The assessee has also submitted that the details of own funds and borrowed funds in its paper book. According to the assessee, the Assessing Officer has also not brought on record any material to show that purchase was made from the assessee's own funds and therefore, according to the assessee, the Assessing Officer's action in disallowing the interest was arbitrary and hence, disallowance made on such arbitrary action should be deleted. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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