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TMI Blog2011 (8) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of: (a) Operation of rigs for extraction of oil. (b) Undertaking offshore contracts for laying of pipelines etc. (c) Setting up of Refinery etc. (d) Marketing of petroleum products. The Assessee submitted that activities at (a) & (b) had been going since inception of the company and were taken over as business in 1993 from Essar Gujarat Ltd. The Assessee submitted that as far as activity at (c) is concerned, during the previous year, the Assessee was in the process of setting up the project of refining, crude oil by setting up a 10.5 million ton refinery. The Assessee submitted that as part and parcel of activity (a) and (b) it has 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l amount as revenue expenditure. The Assessing Officer did not allow the expenditure as claimed by the assessee on the ground that expenditure incurred on bidding for exploration was capital in nature. The Assessing Officer did not allow the expenditure as claimed by the assessee on the ground that expenditure incurred on bidding for exploration was capital in nature. The CIT(A) also agreed with the finding of the Assessing Officer and confirmed the disallowance. 14. It is to be seen that the activities carried on by the assessee were not in the nature of an independent business, but it was part of the existing business carried on by it under the control and 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 Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of assets, the same should not be treated as income. 8. Ground No. 3 raised by the revenue reads as follows: "3. 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 exclude the profits from Oman Branch and Qatar Branch for tax purposes in India, holding that as the assessee has been carrying on business through a permanent establishment in Oman and Qatar and as the income from the aforesaid branch in Oman and Qatar are derived therefrom, it was only the Oman and Qatar Government which was entitled to levy the tax as per Article 7 of DTAA ignoring 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 Rs. 39,88,03,909 and loss of Rs. (36,53,785) respectively had not been included in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... results from the above Country for its tax purposes in India. After notification of applicability of DTAA, the Assessee has excluded the income earned at Oman for tax in India due to the application of the Article 7 of above said agreement. 13. Similarly the Government of India and Government of Qatar have entered into a Double Taxation Avoidance Agreement for avoidance of double taxation and prevention of fiscal evasion. This agreement was notified by GSR 96(E), dated 8-2-2000 and came into effect from 15-1-2000. Prior to notification, the company was including the operational results for its tax 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Sentence should not be read and interpreted in isolation. Article 7 of the DTAA with Oman and Qatar enables those countries to bring to tax the profit attributable to the permanent establishment of the Assessee in Oman and Qatar. However, the assessee is a resident of India and has to be taxed on its entire global income in India. In this regard, the Assessing Officer referred to the provisions of section 5(1) of the Income-tax Act, 1961 which defines the scope of total income of a resident, which includes all incomes (a) Received or deemed to be received, (b) 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 serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich are designated to promote economic development. 5. Income which, in accordance with the provisions of this Agreement, is not to be subjected to tax in a Contracting State, may be taken into account for calculating the rate of tax to be imposed in that Contracting State." 17. According to the Assessing Officer under Article 25(2) of the DTAA between India and Oman, when income is subject to tax, in both contracting States, relief from double taxation shall be given by giving credit for taxes paid in Oman shall be allowed 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 Rs. 39,88,03,909 was acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled to levy the tax as per Article 7 of DTAA, ignoring 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 incomes :- (i) received or deemed to be received (ii) accrues or arises or deemed to accrue and arise (iii) accrues or arises outside India. 12. The assessee company had undertaken project in Oman and Qatar. The profits from the Oman and Qatar projects amounting to Rs. 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 rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed there. 13. The Assessing Officer and CIT(A) did not accept the claim of the assessee and they held that the income from projects executed in Oman and Qatar is liable to taxation in India. 14. At the time of hearing, it was brought to our notice that in assessment years 1999-2000 and 2000-01, in ITA Nos. 5142 & 5143/Mum./03, this issue was considered by the Tribunal and the Tribunal on analysis the DTAA held as follows :- "We have carefully considered 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 outsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was therefore submitted that the decision in the case of Mr. Pooja Bhatt (supra) should be followed. It was also submitted that in case the Tribunal feels that there is a conflict between the decision in assessee's own case for assessment year 2002-03 and the decision in the case of Ms. Pooja Bhatt (supra), the Hon'ble Bench may kindly make a reference to the Hon'ble President for constitution of Special Bench to decide this issue. 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 Qata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in circumstances), article 16 (income from dependent personal services where employment is exercised in other Contracting State), article 17 (director's fees), article 18 (income of artistes and athletes), article 20 (Government Service) which provide that such income may be taxed in the other Contracting State, i.e. State of Income course. The third category includes article 11 (dividends), article 12 (interest), article 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 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 (supra) 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot used the borrowed funds for the purpose of purchase of jetty. It was submitted that the assessee was building a Refinery and this jetty was a part of the said refinery project. This jetty was used for its own marketing business and also it was given on hire against which the assessee company had earned income and offered for tax. It was also pointed out that the assessee company had 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the issue was decided by the Tribunal in ITA No. 5198/Mum./05 for assessment year 2002-03 in Assessee's own case. The Tribunal upheld order of CIT(A) observing as follows: "21. We have heard the learned counsel for the Assessee who reiterated the stand as taken before the CIT(A) as well as the learned D.R. who relied on the order of the Assessing Officer. After considering the rival submissions, we are of the view that the order of learned CIT(A) is just and proper and calls for no interference. The CIT(A) has found that there was no evidence of use of own funds for purchase of jetty. The revenue has itself allowed depreciation on jetty in the past. The funds for purchase of the jetty has come from hotchpotch of borrowed as well as own funds. Both the Assessing Officer and the assessee could not identify the source of purchase, the best course to be applied was to calculate the amount of interest in the ratio of borrowed funds to own funds and to allow proportionate interest so arrived as deduction under section 36(1)(iii) of the Act. Basis on which, interest was directed to be allowed by CIT(A), in the facts and circumstances of the case, in our opinion, is appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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