TMI Blog2013 (9) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... aving a permanent establishment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Commissioner (Appeals) that deposit in the escrow account was essentially a security to the bank in order to effect the financing the refinery project and is akin to margin money that banks ordinarily required for granting of loans is absolutely correct and, therefore, any interest earned thereon is also directly related to the business - Following decision of CIT v/s Bokaro Steels Ltd. [1998 (12) TMI 4 - SUPREME Court] - Decided in favour of assessee. Once the dispute has been settled between the parties and the balance has not been received by the assessee, it definitely has become bad in this year only. All the other conditions laid down in section 36(1)(vii) and 36(2) has been fulfilled and the claim of bad debt has to be allowed. There is no reason to deviate from the legal and factual findings given by the learned Commissioner (Appeals) and accordingly the same is affirmed. Nature of advance given to various employees is not clear. Once it has been accepted that the conditions laid down in section 36(2) are not fulfilled, then it has to be examined from the angle, whether it is a business expenditure or business loss. Once it is not in dispute that these ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be received. ii) Accrues or arises or deemed to accrue and arise. iii) Accrues or arises outside India. 3) On the facts and in the circumstances of the case and as per Law, the Ld.CIT(A) erred in holding that Long Term Capital Gains of ₹ 1,67,30,82,857/- and ₹ 17,81,27,873/- arising on sale of branches of energy division in Oman and Qatar respectively is not taxable in India, without appreciating the intent and the purpose of DTAA with both the countries. 4) On the facts and in the circumstances of the case and as per Law, the ld.CIT(A) erred in directing the A.O. to allow proportionate interest corresponding to the investment in jetty, calculated out of the total interest incurred on the ratio of own funds to borrowed funds as on 31.3.97. 5) On the facts and in the circumstances of the case and as per Law, the Ld.CIT(A) erred in holding that interest received from supplier M/s. Essar Steel Ltd amounting to ₹ 1,48,62,816/- and employees amounting to ₹ 33,906/- are directly related to setting up of the refinery, hence is to be capitalized and adjusted against the cost of the project and directing the A.O. not to treat the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re directly related to on-going business, the entire expenditure incurred during the financial year should be allowed in this year. Reliance was also placed on the decision of the Tribunal in assessee's own case for assessment year 1996-97. Further, reliance was also placed on the judgment of Hon'ble Supreme Court in Produce Exchange Corporation Ltd. v/s CIT, [1970] 77 ITR 739 (SC). The Assessing Officer rejected the assessee's contentions and observed that these are only preliminary expenses which cannot be held to be related to any business activity carried out by the assessee during the year and also these expenses are not even eligible for deduction under section 35D. Further, similar issue has come up for consideration in assessment year 2003-04 wherein the Assessing Officer disallowed such expenditure. The learned Commissioner (Appeals), however, relying upon the earlier decisions of the Tribunal in assessee's own case, directed the Assessing Officer to allow these expenses as revenue expenditure. 6. After carefully considering the rival contentions, relevant findings of the Assessing Officer as well as the learned Commissioner (Appeals) and the orders of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he site has to be studied, visits to the proposed sites have to be undertaken, technical consultancy has to be arranged for and feasibility has to be studied. As the matter is highly complex and technical, even for making a bid, the assessee company has to incur huge amount of expenditure, If the assessee was successful in obtaining the bid and contracts, no doubt, such expenditure would have been allowed as revenue expenditure even by the assessing authority on the ground that those expenses ere incurred by the assessee company for the business undertaken by it. But the said logic should not fail where the assessee could not win the bids and contracts. Even if the assessee could not obtain the contracts of oil exploration in such cases, the real activity carried on by the assessee company was doing business by way of further prospecting its activities. If the assessee company did not undertake such prospecting, it could not remain in business. The expenditure does not become capital only for the reason that the assessee was not successful in bidding the contracts. If the assessee company was doing business in an entirely different field, the case of he assessee would have been dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icated together. 9. Facts in brief:- The assessee, which is carrying out a contract work of drilling oil wells through its energy division, has shown following results in the Profit Loss account:- S. No. Name of the Branch Profit earned Remark (i) Oman (Muscat) 3,20,80,443 Not offered for tax (ii) Qatar (-) 90,38,012 (iii) Baroda (India). (-) 11,48,835/- 10. The net profit from Oman and Qatar was thus worked out at ₹ 2,30,42,431, after setting-off of the losses of Qatar. However, the said profit was not included in the total income of the company and no tax was offered in the return of income filed in India. The Assessing Officer, accordingly, issued a show cause notice to justify the exclusion of the profit earned from its foreign project in Oman and Qatar from the total income. In response, the assessee submitted that it has established a branch in Oman and Qatar from where it had entered into contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment in CIT v/s S.R.M. Firm and others, [1994] 208 ITR 400 (Mad.) wherein similar view was taken, has been affirmed. 11. The Assessing Officer did not accept the assessee's contentions on the ground that Article-7 deals with profits attributable to the P.E. which is treated as distinct and separate. However, the Indian resident is taxed on his global income in India in view of section 5(1) of the I.T. Act, and, therefore, the income earned by the assessee from foreign countries has to be included in the total income of the assessee to determine the liability for tax purposes. If the tax has been paid as per the taxation law of that country i.e., the contracting State, the relief for tax paid or tax credit is to be given in India. He further made reference to Article 25 of DTAA for Oman and observed that an income which is subject to tax in both the contracting State then relief from double taxation shall be given by giving credit of taxes paid in Oman. Accordingly, the tax paid in Oman to the tune of ₹ 50,40,215, the credit was given by the Assessing Officer while computing the tax liability from the income attributable to Oman. Thus, he held that the income in Oma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court upheld the said circular and while deciding the said case had also observed the decisions of certain High Court including RM Muthiah (supra) In Kulandagan Chettiar's case, Supreme Court held while interpreting Malaysian tax treaty regarding income from PEs. Including capital gains arising therein, that by entering into tax treaty, the Indian Government gave away its right to tax capital gains arising in other countries with whom it entered into tax treaties. It is to be noted that Malaysian Treaty never had a separate clause dealing with capital gains as that Malaysia does not tax capital gains. Where as, Qatar and Oman has separate clause in treaty like Mauritius to tax capital gains. In RM Muthiah, the High Court of Karnataka held that the stand taken for the Revenue that for rate purposes as well as for the determination of the total income, all such income derived from a source in Malaysia shall first be taken into consideration in computation does not merit acceptance and allowing the Department to do so would amount to permitting flagrant violation of law. This decision was not challenged by the Government and hence because final, as observed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular income lies in both the countries and where the word shall is used, then the taxability of that income is with one particular country. The taxability, in case of Indian resident, shall always be in India wherever the word may has been used in the DTAA and the credit will be given for the tax paid in other contracting State. Accordingly, he treated the entire long term capital gain including Oman and Qatar to be taxable in India and since no tax was paid in Oman, therefore, no credit was given. 15. Before the learned Commissioner (Appeals), with regard to the issue of business income from Oman and Qatar projects, it was submitted that this issue has come up for consideration in assessee's own case for the assessment year 1999-2000 to 2002-03 wherein this issue has been decided in favour of the assessee by holding that income from Oman project is not taxable in India in view of Article-7 and further in appeal for the assessment year 2002-03, similar view was taken in the case of business income from Qatar also. Since there is no change in facts or the legal position in terms of DTAA agreement between India and these countries, therefore, he held that income attributab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A with Qatar becomes devoid of any content. This also leads to the conclusion that the intention of using the phrase may was never to give an option. Tax treaties are considered to be mini legislations containing within themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries. Such variations are in some cases in addition to the existing local tax laws and in other cases in lieu thereof. Hence it should be give full impact and needs to be read in toto for arriving at a conclusion. The argument of redundancy of the residuary clause for taxing capital gains itself has to be given due weightage in interpretation of the nature involved here. I can not subscribe to the view that any portion of a taxing statute can be accepted as redundant while making an interpretation when an alternative and more logical interpretation gives to the same portion a specific and definite meaning. The argument that taxing statute cannot be interpreted to lead to a situation of uncertainty cannot be lost sight of while interpretation of any taxation provision. 6.7 I have perused the objection raised by the A.O. in the appeal proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed . The said decision was based on its own facts and the Court was besized with the issue of close economic relationship between the tax payer and Malaysia and whether the tax payer was deemed resident of Malaysia or not. The Hon'ble Supreme Court has specifically refrained itself from giving any interpretation for the phrase may be taxed and secondly, in any case, all the judgments which have been referred to by the learned Commissioner (Appeals), were rendered on the issues involved prior to the assessment year 2004-05 as, w.e.f. 1st April 2004, sub-section (3) of section 90 has been introduced which empowers the Government to issue notifications for clarifying various terms used in the DTAA as referred to in sub-section (1) of section 90. In pursuance thereof, the CBDT has issued, Notification no. 91 of 2008 dated 28th August 2008, which now categorically envisages that, wherein the DTAA provides that any income of a resident in India may be taxed in other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of Income Tax Act, 1961, and relief shall be granted in accordance with the methods for eliminat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnizance in view of this clarification by the Government. Under the treaty, which are entered into by the diplomats, intention of the parties has to be seen and in the wake of these notifications and amendments, the intention of the Government of India is absolutely clear. 20. Ld. D.R. further elaborating this point, submitted that even otherwise also, there are various other decisions which have been rendered independent of notification wherein it has been held that the phrase may be taxed in various Articles of the treaty is to be reckoned as right to tax by the resident State also. Wherever the phrase may be taxed has been used, it envisages that a right to tax the income has been given to other contracting State i.e., the foreign country and also reserving the right to tax in the resident country. This has been held so by the Tribunal, Delhi Bench, in Telecommunication Consultant India Ltd. v/s ACIT, ITA no.1293 1294/Del./2009, order dated 29th March 2012. In this case, the Tribunal has dealt with this issue in detail after referring to the OECD commentary, various international views and has also distinguished the decision of P.V.A.L. Kulandagan Chettiar (supra). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In any case, he submitted that the interpretation of the expression may be taxed has come up for consideration not only before the various High Courts but also before the Hon'ble Supreme Court. This issue, for the first time, has come up for consideration before the Karnataka High Court in R.M. Muthaiah (supra) which was in relation to Indo-Malaysian DTAA. Here also, the High Court had an occasion to deal with the phrase may be taxed as given in Article-6(1) which read as income from immovable property may be taxed in the contracting State in which such property is situated . The High Court held that the result of this clause is that where the income from immovable property in Malaysia has been expressed as may be taxed by the Government of Malaysia, then it operates as a bar on the power of the Indian Government to tax such income. This bar would operate in sections 4 5 of the Income Tax Act, 1961 also. He drew our attention to the relevant arguments placed by the contending parties and also the observations and the findings given by the High Court. The High Court has also drew its inference from the language of sub-sections (a) and (b) of section 90 wherein, the former ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Articles of model convention of 1997 on behalf of the Revenue is inappropriate and unjustified and; Thirdly, the income from immovable property can be taxed only by the contracting State in which such property is situated and there is no scope of taxing the same in other contracting state. 24. Mr. Dastur, pointed out that the decision of R.M. Muthaiah (supra) has been approved by the Hon'ble Supreme Court in Union of India v/s Azadi Bachao Andolan Anr., [2003] 263 ITR 706 (SC). He drew our specific attention to Pages-723 and 724 (of the ITR publication), wherein the Hon'ble Supreme Court has approved the reasoning of the said decision. In this case, the Hon'ble Supreme Court was dealing with the scope of total income specified in sections 4 and 5 vis-a-vis the scope of section 90 in relation to Indo-Mauritius DTAA. He referred to various Articles of Mauritius treaty which were identical to Article-7(1) of Malaysian treaty, Oman and Qatar treaty and also Articles-15(2) and 13(2) of Oman and Qatar treaty respectively, wherein the similar phrase may be taxed has been used. He pointed out that this was a case where the Union of India has come in appeal. Referring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to R.M. Muthaiah (supra) case. This, inter-alia, mean that the ratio and the decision of S.R.M. Firm Ors. (supra), wherein the High Court has categorically expressed its view on the issue of exclusion of tax where the enabling words may be taxed has been used, stands affirmed. Once the tax has been paid in foreign country on an income, then the same cannot be taxed in India. Apart from these decisions, the Madhya Pradesh High Court in DCIT v/s Turquoise Investments and Finance Ltd., [2008] 299 ITR 143 (M.P), has followed the decision of S.R.M. Firm Ors. (supra) and P.V.A.L. Kulandagan Chettiar (supra). In this case, the High Court while dealing with the issue of dividend income as given in Article-9 of Indo-Malaysian treaty has given a finding that the dividend income would be taxed only in the contracting State where such income has accrued. In this Article-XI, the phrase used is may be taxed and the High Court has solely relied upon the reasoning given in the decision of Madras High Court in S.R.M. Firm Ors. (supra) which is evident from Pages-147 to 150 (ITR publication) of the judgment and also acknowledge that the Hon'ble Supreme Court has upheld this deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) cannot be followed in this case. The Tribunal has again after considering the various phrases used in different Articles of the treaty, has held that insofar as the expression may be taxed in other contracting State has been used, then it means that the only the contracting State of the source has the authority to tax such an income and resident State is precluded from taxing such an income. In this present case also, the judgments of Hon'ble Supreme Court in P.V.A.L. Kulandagan Chettiar (supra), Turquoise Investments and Finance Ltd. (supra) and High Court decision in S.R.M. Firm Ors. (supra) and R.M. Muthaiah (supra) was referred and relied upon to arrive at this conclusion. He drew our specific attention to Paras-6 to 10 of the said order. Regarding the decision of the Tribunal, Chennai Bench, in Data Software Research Co. Pvt. Ltd. (supra) as relied upon by the learned Departmental Representative, he submitted that the Tribunal has failed to consider any of the judgments of High Court and the Supreme Court. Such a judgment is contrary to the view and law laid down by the High Court and the Supreme Court and, therefore, the same could not be followed. As regards relian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... di Bachao Andolan Anr 07.10.2003 Supreme Court Muthaiah approved Section 90(3) 01.04.2004 Repealed on 30.9.09 CIT v/s Kulandagan Chettair 26.05.2004 Supreme Court Affirms the conclusion of SRM Firm. Does not doubt High Court s reasoning. DCIT v/s Turquoise Investments Finance Ltd. 28.03.2006 M.P. High Court Holds that the Supreme Court in Chettair squarely upholds the decision of the Madras High Court in SRM Firm Assessee s case for A.Y. 99 00 to 00 01 31.01.2007 ITAT DCIT v/s Patni Computer Systems Revenue supported Azadi view 29.06.2007 ITAT Holds that Azadi approves Muthaiah and SRM Firm In re : S. Mohan 24.08.2007 AAR In Pooja Bhatt s case Tribunal holds that the AAR decision is given without considering the scheme of taxation under the treaty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental Representative with regard to the amendment in section 90, whereby sub- section (3) was inserted from the assessment year 2004-05 and the notification no.91 of 2008, dated 28th August 2008, issued in pursuance thereof which has the effect of negating the earlier decisions rendered by the High Court and also as affirmed by the Hon'ble Supreme Court, the learned Sr. Counsel, Mr. Dastur, has made manifold arguments before us. His first and foremost contentions are that sub-section (3) of section 90, uses the expression any term which is used in the agreement which undertakes to mean some kind of noun (proper or common) which points out to something defined. He gave various examples of various terms as defined in the treaties. He pointed out that even the High Court in S.R.M. Firm Ors. (supra), while using the phrase may be taxed has used the word enabling words and not term . He pointed out the relevant portion of the said decision specifically at Pages-414 and 422 (ITR publication) of the said judgment. Even in the decision of Turquoise Investments and Finance Ltd., the Madhya Pradesh High Court has used the said phrase may be taxed as words. Various dictionary m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court and High Court declares the law, then it would not be appropriate that the Court should follow any circular which is contrary to such law and it has no existence in the eyes of law. Further, reliance was placed on the decision of the Supreme Court in Hindustan Aeronautic v/s CIT, [2000] 243 ITR 808 (SC) and the decision of Jurisdictional High Court in Tata Iron Steel Ltd. v/s N.C. Upadhyaya, [1974] 96 ITR 001 (Bom.) in support of the same contention. 30. Mr. Dastur's third limb of argument was that the notification which is said to have been issued under section 90(3), imposes a tax liability and, hence, it has to be construed in a very strict manner and burden is on the Revenue that item is in question is within the ambit of the provisions imposing a tax. The notification cannot overrule the decision of the Supreme Court or any law approved by it as it is binding in all the Courts under Article 141 of the Constitution. Once prior to the notifications there were several decision of the High Court and also approved by the Supreme Court, then such a well settled law cannot be set at naught by the notification. In the present case, the Jurisdictional High Court in ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otification cannot be relied upon or can be brought into operation any more after the substitution of new section. This aspect of the argument was heavily relied upon by the learned Sr. Counsel. 32. Mr. Dastur further argued that, sub-section (3) was inserted in section 90 with effect from 1st April 2004 to empower the Central Government to issue a notification there under. The Central Government issued Notification No. 91/2008 dated 28th August 2008 after a period of 4 years. Even after its issue, the Notification has never been pressed into service till the present case and that too only in arguments by the DR before the Tribunal. Earlier in all the decisions, this notification has not been relied upon. The Notification, if at all, will apply from the period 28th August 2008 to 30th September 2009 ( i.e., the date when the old sub-section (3) was omitted) and definitely not in the assessment year 2004-05. 33. Lastly, with regard to the Explanation (3) to section 90, which has been brought by the Finance Act, 2012, with retrospective effect from 1st October 2009, Mr. Dastur, submitted that it will not alter the position in case of the assessee as Explanation 3 to section 90 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year prior to the assessment year 2008-09 and secondly, sub-section (3) of section 90, in pursuance of which the said notification was issued, has been substituted by the Finance Act, 2012, with retrospective effect from 1st October 2009 and, hence, this notification is no longer in existence and cannot be enforced. 36. The learned Departmental Representative, Mr. Mahesh Kumar in rejoinder, submitted that first of all, all these judgments relied upon by the learned Sr. Counsel do not lay down any law regarding the interpretation of the phrase may be taxed . No distinction has been made by the Court with regard to the various phrases used in the Articles like shall be taxed or may be taxed . Relying upon the decision of the Hon'ble Supreme Court in CIT v/s Sun Engineering Works P. Ltd., [1992] 198 ITR 297 (SC), he submitted that the judgment has to be read in the context in which it has been rendered and the questions on which the said decision was given, picking up of words and phrases from here and there do not lay down the correct proposition of law. The issue before the Karnataka High Court in R.M. Muthaiah (supra)'s case was whether the agreement enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Supreme Court in P.V.A.L. Kulandagan Chettiar (supra)'s case, wherein the Hon'ble Supreme Court has categorically expressed that they are not dealing or deciding the meaning of the expression may be taxed and has upheld the decision of the High Court on altogether different reason. Thus, the Hon'ble Supreme Court did not consider the issue as settled. In any case, if the term or expression given in the tax treaty has not been defined or in the domestic laws, then commentaries can be referred to and relied upon. This view has been expressed by the Jurisdictional High Court in DIT v/s Balaji Shipping U.K. Ltd. in Income Tax Appeal no.3024 of 2009, order dated 6th August 2012 and also by the Tribunal, Mumbai Bench, in ADIT v/s Federal Express Corporation, [2010] 125 ITD 001 (Mum.). The copies of these judgments were furnished before us. 37. The learned Departmental Representative further referred to the views of the Prof. Klaus Vogel on Double Taxation Convention wherein, he has expressed that wherever the model convention uses the words may be taxed then it refers to the state of source, however, the legal consequences in the State of residence remain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt had affirmed the said decision on different reasoning and not on the interpretation of the issue of the phrase may be taxed . In all these cases, the High Court and the Supreme Court has not taken into consideration the model convention or have considered any contemporaneous thinking and the international views. Similarly, he made distinction with regard to the decisions of the Tribunal in Patni Computer System Ltd. (supra) and Ms. Pooja Bhatt (supra). 39. Regarding the arguments of the learned Sr. Counsel on the issue of notification, he submitted that that the Supreme Court has not laid down any law about the interpretation of the phrase may be taxed because in Azadi Bachao Andolan's case, the Supreme Court has not laid down any law about the interpretation of the phrase may be taxed because in this case the Supreme Court has approved the decision in R.M. Muthaiah (supra) for a different reasoning and in P.V.A.L. Kulandagan Chettiar (supra)'s case, the Hon'ble Supreme Court has specifically refrained from giving any interpretation on this issue. Thus, there is no law laid down by the Supreme Court so as to have any binding effect as a judicial precedence. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act cannot hold the notification as ultra vires. Further, it cannot be held that the notification has been issued in violation of law as already submitted by him that the Hon'ble Supreme Court has not laid down any law on this score. The notification goes to show the legislative or the Government of India intent for interpreting the phrase used in the agreement and beyond that no other interpretation or meaning should be assigned to such notification. The notification does not impose any kind of tax liability because the liability to tax already exist in sections 4 and 5 and the notification only clarifies as to who has the rightful jurisdiction to tax the amount. 41. Further, he submitted that sub-section (3) of section 90, has not been omitted by the Finance Act, 2012, but it has been substituted. There is no change of any language or expression used in the earlier sections and new section. It is not a case of repeal or omission but a substitution. In support of his contention, he filed relevant extracts from the book Principle of Statutory Interpretation authored by Shri J.P. Singh, to canvass that these words have different meaning and for different purposes. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law that the phrase may be taxed gives exclusive right to the country of source and the Supreme Court in P.V.A.L. Kulandagan Chettiar (supra) has specifically refrained itself for giving any interpretation on the phrase may be taxed ; (ii) these decisions were dealing with the old treaties which have undergone substantial change after the model convention, based on which, Oman and Qatar treaties have been signed, therefore, the international commentaries including that of OECD on this issue has to be taken into consideration; (iii) the notification issued by the Central Government in pursuance of sub-section (3) of section 90 brought on statute from the assessment year 2004-05 has set the issue at rest and all the earlier decisions rendered for the earlier assessment years will not be applicable; (iv) the notification issued by the Central Government shows the intention of the Government of India as to what is meant by the phrase may be taxed which has to be kept in mind; and (v) lastly, the Explanation (3) to section 90, though brought in statute by the Finance Act, 2012, w.e.f. 1st October 2009, also goes to show that the intention of the legislature and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. In fact, this issue gets concluded by the judgment in Azadi Bachao Andolan's case. If the Supreme Court in one way or the other has upheld any reasoning, it is not open for the parties to argue contrary, for this, he referred to catena of case laws as to how any reasoning of any judgment approved by the Hon'ble Supreme Court becomes the law of the land and even to the extent of obiter dicta of the Hon'ble Supreme Court is also binding upon all the Courts. Once the Supreme Court in the subsequent decision in Turquoise Investments and Finance Ltd. (supra) has precisely approved and confirmed the decision in S.R.M. Firm Ors. (supra) and R.M. Muthaiah (supra), then there is no question that the Supreme Court has not laid down any such law. He specifically drew our attention to the decision of the Madhya Pradesh High Court, which has been affirmed by the Hon'ble Supreme Court. 46. Regarding reliance placed on the judgment of Sun Engineering's case supra, he submitted that it is not a question of few words and phrases here and there but there are paragraphs and paragraphs of finding given by the Hon'ble Supreme Court by which the decision of the High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d which represents the present and future and not the past. In support of this, he relied upon the judgment of Hon'ble Supreme Court in F.S. Gandhi v/s CWT, [1990] 184 ITR 34 (SC). Regarding the contention of the learned Departmental Representative that vires of the notification cannot be challenged before the Tribunal, he submitted that he is not challenging the vires of the notification, albeit such a notification cannot be implemented in assessee's case for the various reasons as stated earlier by him. What has been argued by him is the interpretation of the notification on the ground that it is inconsistent with the provisions of the Act as the Hon'ble Supreme Court has interpreted a particular word then context provides that it has to be interpreted in the manner as done by the Hon'ble Supreme Court and he has not said that notification is to be declared as vires. If there are two interpretations one by the Hon'ble Supreme Court and the other by the notification, the former has to be followed. Distinguishing the decision of Kanpur Vanaspati Stores (supra) and other decisions of the Hon'ble Supreme Court in K.S. Venkataraman Co. (supra), he submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted, the Hon'ble Supreme Court held that earlier provisions will not apply. He submitted that the words omission , deletion and substitution , conveys the same thing, therefore, the distinction made by the learned Departmental Representative is not correct. To prove his point he gave examples from various provisions of the Act and also referred to section 297(2)(k), wherein there is a specific saving clause provided under the Act if there is no saving clause, then it means that substituted section will only apply and not the earlier one. Thus, he submitted that the learned Departmental Representative's contentions cannot be upheld on any of the grounds which have been canvassed before this Court and Departmental appeal should be dismissed on this score. DECISION :- 49. We have given our anxious consideration to the entire gamut of arguments placed before us by both the sides. The genesis of the controversy in ground no.2 and 3, arises from the fact that the assessee has a P.E. in Oman and Qatar. From the Oman Branch, the assessee has derived business profit for sums aggregating to ₹ 3,20,80,443 and from Qatar Branch, the assessee has incurred losses of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Qatar also. The earlier decision of the learned Commissioner (Appeals) has been affirmed by the Tribunal in the appeal filed by the Department wherein relying upon the decision of the Hon'ble Supreme Court in P.V.A.L. Kulandagan Chettiar (supra), the Tribunal held that once the profits have been taxed in Oman, the same cannot be taxed in India. Against the said order, the Department has preferred appeal before the High Court under section 260A, wherein the High Court has affirmed the decision of the Tribunal after observing and holding as under:- As regards the third question is concerned, it is not in dispute that the assessee has a permanent establishment at Oman and the assessee has been taxed in respect of the income earned from the said establishment under the provisions of the Income Tax Law at Oman. Therefore, in the light of Article 7 of Double Taxation Avoidance Agreement (DTAA) entered into by and between India and Oman and in the light of the judgment of the Apex Court in the case CIT vs. P.V.A.L. Kulandagan Chettiar, 267 ITR 654 , the decision of the Tribunal in excluding the profit earned from the permanent establishment at Oman cannot be faulted. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle 6, and situated in the other Contracting State may be taxed in that other Contracting State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other Contracting State. Here also, the phraseology used is may be taxed in other contracting State . In case of Qatar DTAA, Article-13(1) and 13(2) uses the words may also be taxed , which, for the sake of ready reference, are reproduced below:- ARTICLE 13:- Capital gains 1. Gains derived by resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may also be taxed in that other State. 2. Gains from the alienation of movable property for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and second rule is to put the State of residence under an obligation to give either credit of taxes paid in the source State or to exempt the income taxed in source State. These two rules have been explained in Para-19 of OECD commentary under the title taxation of income and capital . 19. For the purpose of eliminating double taxation, the Convention establishes two categories of rules. First, Articles 6 to 21 determine, with regard to different classes of income, the respective rights to tax of the State of sources or situs and of the State of residence, and Article 22 does the same with regard to capital. In the case of a number of items of income and capital, an exclusive right to tax is conferred on one of the Contracting States. The other Contracting State is thereby prevented from taxing those items and double taxation is avoided. As a result, this exclusive right to tax is conferred on the State of residence. In the case of other items of income and capital, the right to tax is not an exclusive one. As regards tow classes of income (dividends and interest), although both States are given the right to tax, the amount of tax that may be imposed in the State of source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case specifically refers to tax allocation and not relief, with exemption granted by the other State. The relief principle is applicable in the second case, if the other State satisfies the required conditions and exercises its non-exclusive taxing rights. (ii) The third and fourth cases are similar and provide for an enabling, put non-exclusive, provision. Both States have the option to exercise the right, with or without limitation. Since the right of the other State is not denied, it would invariably lead to tax relief for juridical double taxation. Further, Prof. Klaus Vogel has elaborated usage of phrase shall be taxable only to mean that items of income or capital concerned must be exempted from tax in the other contracting State. This phrase is normally used in the tax payer's State of resident. The State of source thus has to grant exemption for these instances. The expression may be taxed refers to the State of source and the legal consequence in the State of resident remains open. Taxation is left to the State of source subject to limitation in amount. Whether the State of resident must grant exemption or allow credit for the tax paid to the State of so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and of the Department, opined as under:- When a power is specifically recognized as vesting in one, exercise of such a power by others is to be read as not available ; such a recognition of power with the Malaysian Government would take away the said power from the Indian Government ; the agreement thus operates as a bar on the power of the Indian Government in the instant case. This bar would operate on sections 4 and 5 of the Income -tax Act, 1961, also Clause 2 of article 22 is attracted only when tax is levied by both countries. In a case where one of the Governments is precluded from levying a tax on the income in view of the specific provision in the agreement, the said clause- 2 cannot be attracted at all. The very language of clause 2 indicates that the tax shall have to be paid under the law of both the countries. The words in clause 2(a) to the effect in respect of income from source within Malaysia, which has to be subjected to tax both in India and Malaysia. ..... clearly indicates that there should be a levy by both the countries before the said clause could be attracted. Section 90(a) of the Income-tax Act also refers to the granting of relief in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing from sale of property in Malaysia, whether can be assessed in India or not. In this case, the High Court though held that the Malaysian income could not be subjected to tax in India in accordance with the provisions of DTAA and here also the issue related to interpretation of Articles-6 and 7. In this case, the High Court specifically, dealt with the expression may be taxed . The relevant observations given at Page-420 (of ITR publication), are as under:- The contention on behalf of the Revenue that wherever the enabling words such as may be taxed are used there is no prohibition or embargo upon the authorities exercising powers under the Income-tax Act, 1961, from assessing the category or class of income concerned cannot be countenanced as of substance or merit. As rightly pointed out on behalf of the assessees, when referring to an obvious position such enabling form of language has been liberally used and the same cannot be taken advantage of by the Revenue to claim for it a right to bring to assessment the income covered by such clauses in the agreement, and that the mandatory form of language has been used only where there is room or scope for doubts or mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein it has been categorically held that in the context of Article-6(1) of Indo-Malaysia treaty that, once the income is taxable in Malaysia, then the same cannot be taxed in India. On a perusal of the judgment of the Hon'ble Supreme Court, it is seen that the Hon'ble Supreme Court has affirmed the judgment of R.M. Muthaiah (supra) on the issue, whether provisions of sections 4 and 5 are subject to the provisions of section 90 and in case of any conflict between these provisions, section 90 will prevail. In this context, the Hon'ble Supreme Court has referred to series of decisions and one of them being the decision of R.M. Muthaiah (supra), which has been dealt with at Pages-723 to 725 of ITR publication), wherein it has been observed and held as follows:- A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsisten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or taking a clue as external aid for interpretation of various phrases used in the tax treaties. These commentaries though may not have binding precedence but certainly have a persuasive value in understanding the expression used in the agreement which also reflects the intention of the parties who are party to the agreement as most of the treaties are based on model convention. When the model convention of the treaty or OECD model has been made the basis of the agreement then the commentaries given under these conventions act as an external aid and a guiding factor for interpreting certain words and expression used and it is assumed that the parties to the agreement understood the same in the manner provided by the commentaries. Accordingly, we do not feel persuaded by the argument of the learned Sr. Counsel that the OECD commentaries and international views cannot be relied upon at all in view of the decision in S.R.M. Firms Ors. (supra). iv) CIT v/s P.V.A.L. Kulandagan Chettiar, [2004] 267 ITR 654 (SC) This judgment has been relied upon by the learned Counsel for the assessee as well as by the learned Departmental Representative. In fact, based on this judgment, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from that property. Further, it has also been held as a matter of fact that there is no permanent establishment in India in regard to carrying on the business of rubber plantations in Malayasia put of which income is derived and that finding of fact has been recorded by all the authorities and affirmed by the High Court. We, therefore, do not propose to re-examine the question whether the finding is correct or not. Proceeding on that basis, we hold that business income out of rubber plantations cannot be taxed in India because of closer economic relations between the assessee and Malaysia in which the property is located and where the permanent establishment has been set up will determine the fiscal domicile. On the first issue, the view taken by the High Court is correct. Further, on the issue of interpretation of the expression may be taxed , the Hon'ble Supreme Court has refrained from expressing any opinion. The relevant observations of the Hon'ble Supreme Court are reproduced hereunder as this has been heavily relied upon by the learned Departmental Representative. 16. We need not enter into an exercise in semantics as to whether the expression may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted as 300 ITR 001. The Hon'ble Supreme Court affirmed the decision of High Court after observing and holding as under:- 10. We have gone through the judgment of the Madras High Court in CIT v. Vr. S.R. M Firm [1994] 208 ITR 400 and the judgment of this court in CIT v. P.V. A. L. Kulanadagan Chettiar [2004] 267 ITR 654 and we are satisfied that the point involved in these appeals stands concluded in favour of the assessee and against the Revenue by the decision of the Madras High Court in CIT v. Vr. S.R.M. Firm[1994] 208 ITR 400 which was duly affirmed by this court in the case of CIT v. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR 654. Incidentally, it may be mentioned that the review petition filed against the decision of this Court in CIT v. P.V. A. L. Kulandagan Chettiar [2004] 267 ITR 654 was also dismissed on November 1, 2007. Thus, the Hon'ble Supreme Court reiterated and affirmed the decision of S.R.M. Firm Ors. (supra) on the ground that the same has been affirmed by the Hon'ble Supreme Court in P.V.A.L. Kulandagan Chettiar (supra). The aforesaid decision have been extensively referred to and relied upon by the learned Sr. Counsel for the propositi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment of the Hon'ble Supreme Court in P.V.A.L. Kulandagan Chettiar (supra) to the extent that the phrase may be taxed was not expressly dealt with by the Hon'ble Supreme Court as the reasoning of the High Court was affirmed on different ground. Thus, the later decision of the Hon'ble Supreme Court in Turquoise Investments and Finance Ltd. (supra) r can be said to be the view expressed by the decision in S.R.M. Firms Ors. (supra) by the Madras High Court. In this background, that the three High Courts have expressed their views and which have been affirmed by the Hon'ble Supreme Court in some context or the other, specially the decision of Turquoise Investments and Finance Ltd. (supra), wherein the Apex Court has approved these decisions completely, then as a judicial precedence, one has to accept that the phrase may be taxed has to be inferred as allocating the taxing right to the source country only on the income earned in such country and the country of resident is completely precluded from taxing the same income. 58. At this juncture, it would be necessary to briefly refer to contrary decisions to the aforesaid proposition. These judgments are:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following manner:- Double Taxation Avoidance Agreements- Extending the scope to include agreements for developing mutual trade and investment Under the existing section 90, the Central Government may enter into an agreement with the Government of any country outside India for granting of relief in respect of income on which have been paid both income-tax under the Income-tax Act and Income-tax in that country, or for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, etc. In order to encourage international trade and commerce, it is proposed to insert new clause in sub-section (1) of the section 90 so as to provide that the Central Government may also enter into an agreement with the Government of any country outside India for granting relief in respect of income-tax chargeable under this Act or under the corresponding law in that country to promote mutual economic relations, trade and investment. Certain terms used in the Double Taxation Avoidance Agreements (DTAAS) have not been defined either in the agreements or in the Income-tax Act. In order to address the problems arising due to conflicting i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention of the learned Sr. Counsel is that this notification is contrary to the law laid down by the High Court and affirmed by the Hon'ble Supreme Court. Thus notification cannot be held to be applicable. His other contentions have been that this notification in any manner cannot be given any retrospective effect so as to be made applicable in the assessment year 2004-05. 63. In our opinion, as a result of the amendment w.e.f. 1st April 2004, by which sub-section (3) to section 90 has been brought in the statute from the assessment year 2004-05, there would be a clear departure from the earlier position, wherein various Courts have interpreted the expression may be taxed , inasmuch as now the Central Government which is one of the contracting parties to the agreement with the other sovereign States has been empowered to assign meaning to the various terms and expressions used in the agreement. The Central Government has exercised this power by way of issuing a notification in the official gazette wherein the phraseology may be taxed has been specifically interpreted, explaining the effect of the use of this phrase and what has been the intention of the Central Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the words and phrase used in the statute, it takes the shape of the law, which has a binding precedence on all the Courts subordinate to it. However, whether it can be said that the same dicta are applicable on the words used in the agreement entered between the parties in the present case, two sovereign States. In our humble opinion, once the contracting parties have expressed their intention in clear terms as to what they meant by a particular term or a phrase at the time of negotiation, no contrary interpretation should be inferred. Thus, we are unable to persuade ourselves with the contention put forth by the learned Sr. Counsel that the interpretation of the word may be taxed used in the agreement has to be only understood as has been interpreted by the High Court or by the Hon'ble Supreme Court, because this term is not appearing in the statute but it is appearing in the agreement between two parties. If the said words were part of the statute and the High Court and the Hon'ble Supreme Court would have given any interpretation, then definitely it could have been said that the law has been laid down by the High Court and the Hon'ble Supreme Court and if any no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eans to express something and may be taxed is a phrase and expression used in the treaty to connote the allocation of tax jurisdiction between the two contracting States. We find force in the argument of the learned Departmental Representative that the phrase may be taxed has a definite connotation and a meaning. It conveys the allocation of taxes between the contracting States. It has a very vital significance in the language of the treaty. The phrases may be taxed , shall be taxed only and may also be taxed have a definite purpose and a definite meaning which is conveyed. Whether it is a term, phrase or expression does not make any significant difference because the contracting parties have given a definite meaning to such a phrase and once the Government of India have clarified such an expression, then it cannot be held that it does not fall within the realm of the word term as given in section 90(3). Thus, we do not feel persuaded by the argument taken by the learned Sr. Counsel. WHETHER NOTIFICATION CAN HAVE RETROSPECTIVE EFFECT? 67. Another contention which has been raised before us by the learned Sr. Counsel is that notification issued by the Government im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal or not as we have already held that the notification issued is not contrary to the provisions of law or the agreement and it has been issued by the Central Government in exercise of power conferred by sub-section (3) of section 90. EFFECT OF SUBSTITUTION OF SECTION 90(3) W.E.F. 1ST OCTOBER 2009:- 69. One very important plea which has been taken by the learned Sr. Counsel before us is that the entire section 90 including sub-section (3) has been substituted by the Finance Act, 2009, w.e.f. 1st October 2009. Thus, any notification which was issued under the old sub-section (3), no longer remains in existence as the enabling old sub-section itself is no longer in existence. Once the earlier section has been omitted and new section has been substituted, then the effect of such a substitution is that earlier section becomes wholly inoperative. On the other hand, the learned Departmental Representative's submission has been that there is no difference in the earlier sub-section (3) and substituted sub-section (3) and, therefore, the earlier provisions will continue to hold the law till 31st October 2009 when the same was substituted. Both the parties have relied upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not provide that earlier provisions will cease to operate. Even the memorandum has not specified that the earlier provision will become inoperative. The amendment was purely for enlarging the scope and not to delimit or make it inoperative. Such an amendment or substitution cannot be reckoned as omission of the section itself. In case of an omission of the entire section, without any new enactment or saving clause, then such an omission has to be read as that omitted provision is obliterated from the statute. In the judgment of Rayala Corporation Pvt. Ltd. Ors. (supra), the Hon'ble Supreme Court was dealing with the rule 132A of the Defence of India Rule, 1962, which related to prohibition in dealing in foreign exchange which was amended by way of Amendment Rules, 1965. The question before the Hon'ble Supreme Court was whether the prosecution in respect of contravention of erstwhile rule 132A, can be commenced after the rule was omitted. The Hon'ble Supreme Court answered the question in negative, holding that the initiation of new proceedings will not be a thing done or omitted to be done under the rule, but a new Act of initiating the proceedings after the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Cane Sugar Works Ltd. (supra), the issue which came for the determination of the constitutional bench was whether after omission of old rules 10 and 10A of Central Excise Rules and its substitution by new rule 10 by notification no.267/1977, dated 6th August 1977, the proceeding initiated by notice dated 24th July 1977, could be continued in law. The Hon'ble Constitution Bench answering the question in negative, reiterated a very important proposition after observing and holding as under:- 37. In the case in hand Rule 10 or Rule 10-A is neither a Central Act nor a Regulation as defined in the Act. It may be a Rule under Section 3(51) of the Act. Section 6 is applicable where any Central Act or Regulation made after commencement of the General Clauses Act repeals any enactment. It is not applicable in the case of omission of a Rule . 38. The position is well-known that at common law, the normal effect of repealing a statute or deleting a provision is to obliterate it from the statute book as completely as, if it had never been passed, and the statute must be considered as a law that never existed. To this Rule, an exception is engrafted by the provisions of Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed into. If a matter relates to after 1st October 2009, then probably it can be held that the earlier notification issued under sub-section (3) may not be applicable. However, we are refraining from giving any opinion as to whether after 1st October 2009, the said notification issued by the Central Government would be applicable or not. As already observed several times in forging paragraphs that no proceedings have been initiated in the wake of notification dated 28th August 2008, it merely clarifies the intention of the Central Government in the interpretation of the term used in the agreement. A distinction has to be made where any notification through which proceeding is initiated that is prejudicial to the tax payer or it warrants any action and between the notification which has been issued for the purpose of clarifying the provision of a statute or the intention of the legislature or the Government. The only condition is that such a notification should not be contrary to the provisions of the Act. In our opinion, the ratio laid down by the Hon'ble Supreme Court in the aforesaid cases will not be applicable here. The learned Departmental Representative, on the other han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - enacted.- Where any 2[ Central Act] or Regulation is, after the commencement of this Act, repealed and re- enacted with or without modification, then, unless it is otherwise expressly provided, any 3[ appointment, notification,] order, scheme, rule, form or bye- law, 3[ made or] issued under the repealed Act or Regulation, shall, so far as it is not inconsistent with the provisions re- enacted, continue in force, and be deemed to have been 3[ made or] issued under the provisions so re- enacted, unless and until it is superseded by any 3[ appointment, notification,] order, scheme, rule, form or bye- law 3[ made or] issued under the provisions so re- enacted 4[ and when any 2[ Central Act] or Regulation, which, by a notification under section 5 or 5A of the Scheduled Districts Act, 1874 , 5 (14 of 1874 ) or any like law, has been extended to any local area, has, by a subsequent notification, been withdrawn from and re- extended to such area or any part thereof, the provisions of such Act or Regulation shall be deemed to have been repealed and re- enacted in such area or part within the meaning of this section]. 76. Further, the Hon'ble Supreme Court in Venkateshwara Hatche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (3) for assigning any meaning to the terms used in the agreement which has not been defined either in the Act or in the agreement, then such a meaning assigned shall be deemed to have effect from the date on which the said agreement came into force. This new Explanation (3) now again reiterates the intention of the Central Government and in fact, ratifies the notification issued by the Central Government. Thus, the notification in question dated 28th August 2008, has to be read as being into force from the date of agreement itself. 79. Per contra, the learned Sr. Counsel, has submitted that first of all the legislature in the year 2012, has introduced this Explanation (3) with retrospective effect from 1st October 2009 and not from 1st April 2004, or earlier period. This means that the legislature purposely intended that such an Explanation should not be read prior to 1st October 2009. Thus, any notification which has been issued after 1st October 2009, then only such a notification can be said to be come into force and not prior to it. 80. Explanation (3) has been added by the Finance Act, 2012, and has been brought with retrospective effect from 1st October 2009. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used in an agreement but not defined in the Act or agreement, shall be effective from the date of coming into force of the agreement. It is also proposed to make similar amendment in Section 90A of the Act. The amendment in section 90 will take effect retrospective from 1st October, 2009 and the amendment in section 90A shall take effect retrospectively from 1st June, 2006. [Emphasis added] 81. Here again, the legislature has reiterated that the meaning assigned in a treaty entered into by the Government has a particular intent and object which is to be understood from the course of negotiations leading to the formalization of the treaty. The notifications which are issued under section 90(3), gives a legal framework for clarifying such intent. This clarification given in the memorandum provides that notifications will apply from the date when the agreement has come into force even though the Explanation (3) itself has been brought in statute w.e.f. 1st October 2009. However, the insertion of the said Explanation can only be relied for the purpose of showing the legislative intent. We are not entering into the debate as to whether or not the said Explanation (3) which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sovereign right upon its residents. The tax sovereignty emanates form the connection between resident tax payer and the State. Under the domestic tax laws, a tax liability arises in a country only if there is a connection between the tax jurisdiction and the tax payers or the taxable event. The connecting factors include tax residency of the tax payer, source of the income, the place where the income is earned or derived, or the location of the asset. All these factors emanate from the domestic tax laws. The country of source also levies tax from the income earned or derived in their tax jurisdiction under their domestic tax laws. This is how the conflict arises on taxing the same income under both the jurisdictions which leads to the double taxation. To avoid such conflicts and eliminate double taxation, DTAAs / tax treaties are negotiated between the two States. They determine as to what extent each State may levy tax and commit themselves to relinquishing completely or partially the imposition of taxes in specific situations. The tax treaties only allocate taxing rights and do not make any tax rules. The treaties cannot impose or levy tax which is solely based on domestic laws. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation by following credit method which is evident from various treaties entered into by the Indian Government. 84. Now, let us analyse the important phrases / expressions used in the various Articles, which is the subject matter of dispute before us viz. may be taxed , may also be taxed and shall be taxed only . Under the model convention, wherever the phrase shall be taxed only is used, it connotes that one contracting State has the right to tax to the exclusion of the other contracting State. This expression is used in an Article where income is to be taxed only by the State of resident and the same income has to be exempt from taxation by the country of source. Some of the examples which can be cited here are Articles (of model convention) 8(1), 8(2), 12(1), 13(3), 13(5), 15(2), 18, 19(1), 19(2), 21(1), 22(3), 22(4), etc. In some situation, a secondary right is given to a State of source generally to tax the income at a lower tax rate but on a gross basis, here the expression used generally is may also be taxed , for e.g., Article 10(2), 11(2), etc. There are certain incomes which are shall be taxable only in the contracting State unless . This expression provides tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eiterate here that these international conventions or views do not have a binding precedence but have a great persuasive value in understanding the various concepts which are based on understanding the international law and the negotiation of the treaty. When the model convention of the treaty or the OECD model has been made the basis of agreement ( which here in this case both the treaties, Oman and Qatar are based on OECD model), then the commentaries given under these conventions acts as an external aid and a guiding factor. It is assumed that negotiating parties have understood the various expressions used in the treaty in the manner provided by these commentaries and international conventions. In the present case, both the treaties, Oman DTAA and Qatar DTAA are based on model convention, hence the views expressed has a great persuasive value. That is why the Hon'ble Supreme Court in Azadi Bachao Andolan (supra) has referred to and placed reliance on various international commentaries and views expressed by OECD, Klaus Vogel, Philip Baker, Lord Mc'nair and other foreign Court decisions. The Hon'ble Supreme Court had no inhibition on relying on these views because th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Article 31, or to determine the meaning when the interpretation according to Article 31: (a) leave the meaning ambiguous or obscure; or (b) leads to a result that is manifestly absurd or unreasonable. 87. Thus, huge emphasis has been laid down as to what is the intention of the parties and the interpretation given by them. Once we are aware as to what is the intention of the Government of India, we cannot over look such an intention and take recourse to some independent interpretation. Thus, the phrase may be taxed has to be understood in a way to mean that the country of source has a right to tax without denuding the right of tax to the country of resident. CONCLUSION :- 88. We summarise our conclusion as under:- i) The ratio of all the judgments rendered by the Hon'ble High Courts, as discussed herein above and confirmed by the Hon'ble Supreme Court specifically in the case of Turquoise Investment (supra), on the interpretation of the expression may be taxed , that once the tax is payable or paid in the country of source, then coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement through notification will prevail at least from the assessment year 2004-05. Because, while interpreting the treaty, the intention of the parties to the agreement has to be given primacy and has to be understood in that manner only. Therefore, the notification is not contrary to the provisions of the Act. Consequently, the earlier judgments rendered in assessee's case prior to assessment year 2004-05, will not have binding precedence in this year or subsequent years; and iv) Thus, the business income from P.E. in Oman and Qatar and also the capital gain from sale of assets in these countries will be included in the total income of the assessee in India and Credit of taxes paid there will be given as per the relevant Article of the DTAA. 89. Before parting, we may clarify that all the judicial pronouncements cited by the learned representatives of both the sides and the relevant portion of commentaries referred to in support of their respective stand have been considered and deliberated upon by us while arriving at our conclusions. Some of them, however, are not specifically mentioned or discussed in the order as the same hav ebeen found to be not directly releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of the jetty particularly when own funds were available for the payment. There is no nexus between the funds borrowed and payments made for acquiring the asset. He further observed that similar disallowances were made by the Assessing Officer in the assessment years 2003-04 and 2003-04 and the matter is subjudice before the Tribunal as the Revenue has not accepted the learned Commissioner (Appeals)'s order. 92. The learned Commissioner (Appeals), following the order of his predecessor in the assessment year 2002-03, held that where both the Assessing Officer and the assessee cannot identify the source of purchase, the best course is to calculate the amount of interest in the ratio of borrowed funds to own funds and only the proportionate interest so arrived is to be allowed as deduction under section 36(1)(iii). Accordingly, the Assessing Officer was directed to allow the claim on proportionate basis in the ratio of own funds to borrowed funds as on 31st March 1997. 93. Before us, the learned Departmental Representative submitted that where the interest expenditure has been capitalized in the books of account and the direct nexus of own funds and loan found could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viate from such findings. Accordingly, the order of the learned Commissioner (Appeals) on this score is affirmed and the ground raised by the Revenue is dismissed. 96. Ground no.5, raised by the Revenue relates to allowance of assessee's contention by the learned Commissioner (Appeals) that interest received from supplier M/s. Essar Steels Ltd. of ₹ 1,48,62,816, and from employees amounting to ₹ 33,906, is directly linked with setting up of refinery and, hence, the same is capitalised and adjusted against the cost of the project instead of treating it under the head Income From Other Sources as done by the Assessing Officer. 97. Facts in brief:- During the previous year, the assessee has earned interest of ₹ 3,87,01,230, on account of margin deposits, excess advance to supplier and loan to the employees. The assessee has claimed that these interests income is a part of recoveries made against the expenditure during the construction of the refinery project and, therefore, the same has not been considered in the Profit Loss account. The assessee has reduced the cost of the refinery project by this amount. The Assessing Officer, however, has treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to supply equipment to appellant for setting up of refinery. Therefore the entire chain of transaction is directly related to setting up of refinery. The ratio laid down by Hon'ble Supreme Court in the case of Bokaro Steel Ltd. is therefore applicable to the facts of the case. The interest income even though included in the profit and loss account is required to be capitalized and adjusted against the cost of the project. The assessing officer is directly accordingly. 8.3 The second part of this ground is taxability of interest of ₹ 33,9061- received from employees. The assessing officer has not given any reasons for treating this interest as income under the head income from other sources. In contrast the appellant has claimed that advances were made to employees engaged in setting up of refinery project. Any interest earned on this advance is inextricably linked to the setting up of the project and needs to be capitalised. I agree with the argument of the appellant that the interest is related to the setting up of refinery. I also notice that the assessing officer has not given any specific reason for taxing the same as income. It is therefore held that interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the interest on advance are directly connected with or the incidental to the commencement of the project, the same is to be held as capital receipts and can be adjusted against the cost of the project. Accordingly, we do not find any reason to deviate from the findings given by the learned Commissioner (Appeals) and the same is affirmed. Similarly, deposit of interest of ₹ 33,906, received from employees, the same is also related to setting up of the refinery and the decision of the Bokaro Steels Ltd. (supra) is also applicable on the facts of the present issue. Consequently, on this score also, the findings of the learned Commissioner (Appeals) are affirmed. Ground no.5 raised by the Revenue is thus treated as dismissed. 102. Ground no.6 relates to deletion of addition of ₹ 6,13,97,726, in respect of interest received by the assessee from escrow account and allowing of capitalization of interest in the refinery project. 103. Brief facts of the case, as recorded by the learned Commissioner (Appeals), are that the assessee was in the process of setting-up of a refinery at Jamnagar for which they require funds. It had approached the ICICI Bank and other banks for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istence or absence of entries iii the books of account are not essential for taxability of income. Therefore the action of the assessing officer is not in accordance with law. The assessing officer has not given any reason other than above as to why interest is not to be capitalized. In my opinion the Escrow account was opened by the appellant for getting finance frorn banks for setting up the refinery project. Therefore interest resulting from the Escrow account has got to be adjusted against expenses on setting up of refinery project i.e., needs to be capitalized. The claim of the appellant is correct. The assessing officer is directed to delete the addition and allow capitalization of interest in the refinery project. 104. The learned Departmental Representative, relying upon the findings of the Assessing Officer, submitted that the Assessing Officer has gone by the treatment given by the assessee itself in the books of account. The money which was received from the energy division to the escrow account had yielded interest and the same cannot be held to have direct nexus with the setting-up of a refinery project. Therefore, it cannot be held that the security provided has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals), the assessee submitted that there was a dispute between the assessee and Niko Resources on the total amount of ₹ 1.80 crores and both the parties have agreed to settle the amount at ₹ 61 lakhs. The balance amount was written off. It was, therefore, contended that this was a case where there have been actual settlement and the amount not received has actual became bad and the same was written off in the books of account. 110. The Learned Commissioner (Appeals) accepted the assessee's contentions after appreciating the fact that there has been settlement between the two parties and the amount written off had actually become bad. The same has to be allowed under section 36(1)(vii) r/w section 36(2). 111. The learned Departmental Representative relied upon the order of the Assessing Officer whereas the learned Sr. Counsel submitted that not only all the conditions of the bad debts stand fulfilled, but also the factual position recorded by the learned Commissioner (Appeals) that there has been actual settlement of the amount and the balance amount has become bad debt by the Department. Once that is so, the amount has to be allowed as bad debt. 112. Aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction under section 37(1). Accordingly, he confirmed the disallowance both under section 37(1)(vii) and 37(1). The relevant observations of the learned Commissioner (Appeals) are reproduced herein below:- 10.3 I have perused the facts of the case. I find that the assessing officer has rightly invoked Section 36(2). However the A.O. has not considered allowability of expenses u/s.37(1) which the appellant is claiming as an alternative. I am satisfied that expenditure in question is incurred wholly and exclusively for business warranting consideration uls.37(1) of the Act.. However, analysis of section 37(1) for allowability of this expenditure is necessary. The section reads as. under:- Section 37(1): Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession The phrase not being expenditure of the nature described in section 30 to 36 is require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er (Appeals), we find that the nature of advance given to various employees is not clear. Once it has been accepted that the conditions laid down in section 36(2) are not fulfilled, then it has to be examined from the angle, whether it is a business expenditure or business loss. Once it is not in dispute that these advances were made during the course of carrying on the business, the non-recoverability of such amounts have to be allowed as business loss. Since the facts are not clear before us, therefore, we are of the considered opinion that this issue needs to be restored to the file of the Assessing Officer for examination afresh. Consequently, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the issue back to the file of the Assessing Officer and direct him to examine the nature of advance and whether such irrecoverable amounts were advanced during the course of business and whether it can be allowed as business loss. This ground is, thus, treated as allowed for statistical purposes. 120. In the result, assessee's appeal for the assessment year 2004-05 is treated as allowed for statistical purposes. We now take up Revenue's ..... X X X X Extracts X X X X X X X X Extracts X X X X
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