TMI Blog2017 (4) TMI 1035X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue, especially the Commissioner fell into error. As far as the submission of the revenue, that the assessee did not have a Permanent Establishment in Oman is concerned, this court is of opinion that admittedly, for about 5 years, i.e 2002 to 2006, a common order was made under Article 26 (2) (b) of the Income Tax Law of Oman. That order first included dividend income (in the total income determined) and thereafter granted deduction. For later years as well, assessments were made similarly. The ITAT also noticed as follows: "Up to the tax year 2011 dividend has been first included in the total income and thereafter deduction has been granted. The facts mentioned above clearly establish that the Assessee Society is entitled to getting credit for the deemed dividend tax by virtue of the provisions of DTAA read with Section 90 of the Income Tax Act, 1961 together with the clarifications issued by the Sultanate of Oman and the assessment made under the Omani Laws. In view of the above it is respectfully submitted that on merits also Assessee Society is entitled for the tax credit which has been rightly allowed by the Assessing Officer and, therefore, the Ld. PCIT has comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its return of income on 24.09.2010. The return was selected for scrutiny and notices were issued along with detailed questionnaires. During the course of assessment proceedings, detailed replies were filed on behalf of the assessee; its authorized representative also attended hearings before the Assessing Officer and furnished the necessary details. The assessment was completed under Section 143 (3) through order dated 27.02.2014. Whilst completing the assessment, the Assessing Officer allowed tax credit for a sum of `41.53 crores in respect of the dividend income of `134.41 crores received by the assessee from OMIFCO. That dividend income was simultaneously brought to the charge of tax in the assessment as per the Indian tax laws. Under the Omani Tax laws, exemption was granted to dividend income by virtue of the amendments made in the Omani Tax Laws with effect from the year 2000. The AO allowed credit for the said tax which would have been payable in Oman but for the exemption granted. After completion of assessment, the Principal Commissioner of Income Tax (hereinafter referred as PCIT ), issued a show cause notice dated 28.09.2015, under Section 263 of the Act. The basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to promote economic activity in certain sectors or in the economy as a whole. Any income which is not taxed at all as per the tax laws cannot be construed as an incentive. The Omani Companies Income Tax Law vide Article 8 (bis) exempts dividend income from taxation in Oman. this cannot be interpreted as an incentive as it exists across the board with no exceptions in Oman. It is simply a feature of Oman's Tax Law that does not tax dividend income. Hence, it cannot be construed as an incentive granted under Oman's tax laws. Consequently, reliance on Article 25 (4) of the India Oman DTAA was erroneous in this case and no tax credit was due to the Assessee under Section 90 of the IT Act. The Assessment Order passed, accepting the contentions of the Assessee and allowing tax credit is erroneous as well as prejudicial to the interest of the Revenue. You are, therefore, in terms of provisions of sub-section (1) of Section 263 hereby given an opportunity to furnish justification as to why the tax credit of ₹ 41,44,23,149 should not be withdrawn for A.Y. 2010-11. 4. The assessee resisted the notice contending that the specific issue relating to allowing tax credit f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to clearly show that the view taken by the AO was a possible view in law. However according to the CIT, that was not the case in the present instance. The CIT held that: This from the plain and simple reading of both the Oman Tax Law as applicable from 01-01-2010 (Royal Decree No. 28/2009) or the earlier law (Royal Decree 68/2000) effective from the tax year 2000, there is no tax payable on dividend in Oman and accordingly, no tax has been paid. Further, the exemption is not available because of any economic incentive for economic development as the case of the Assessee is not covered under the exemption. The Royal Decree 28/2009, which came into force w.e.f. 01-01-2010 makes the position very clear and reiterates the position of exemption of dividend income provided for in the Article 8 of old Royal Decree 68/2000. The Royal Decree of 2009 also provides for incentive only for a period of five years. In case of Assessee that period has elapsed long back. 6. The PCIT did not confine himself to the particular issue referred to in the show cause notice issued by him under Section 263 but also ordered in regard to a new issue (which was not referred to in the show cause noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buted dividend should be brought to charge of tax. (iii) The AO was also to frame a view with regard to the default of not furnishing complete and true income or particulars of income on the part of the Assessee. 8. The assessee appealed to the ITAT contending that the AO's order was neither erroneous nor prejudicial to the revenue and was in fact based on a consistent view taken for several previous years, with respect to the applicability of provisions of the DTAA. It was also contended that having regard to the law applicable to Section 263, the CIT could not have travelled beyond the show cause notice and the issues covered by it. To say so, the assessee relied on CIT Vs. Ashish Rajpal 320 ITR 674. 9. The ITAT decided the merits of the DTAA claim as follows: 18. With regard to allowing credit for deemed dividend tax which would have been payable in Oman, we have gone through the relevant provisions of the DTAA between the Republic of India and the Sultanate of Oman read with section 90 of the I.T. Act. Clause (4) of Article 25 of DTAA lays down that the tax payable shall be deemed to include the tax which would have been payable but for the tax incentive gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merits also the learned PCIT was not justified in directing the Assessing Officer to withdraw the aforesaid tax credit. Further such credit was allowed by the Assessing Officer during several preceding assessment years and, therefore, when there is no change in the facts and the relevant provisions of law, following the well settled principle of consistency of approach, as emerging from a chain of decisions referred to above, credit for deemed dividend tax is clearly allowable in respect of the assessment year under appeal. 20. We note that in his impugned order passed u/s. 263 of the I.T. Act, the Ld. PCIT has given directions to the AO on another issue which did not find any mention in the show cause notice issued. The Ld. PCIT has directed the AO to add the amount of undistributed dividend from Omani Company as reflected in the Profit and Loss Account of the PE of the assessee in Oman. We have already recorded a finding that the Ld. PCIT has no jurisdiction whatsoever to issue any directions with regard to any issue on which no show cause notice was issued and on that account even the order of the ld. PCIT gets vitiated. Coming to the merits, from the factual position disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project relating to the economic development of Oman. It was submitted that merely because the AO had previously in some other year considered or discussed the matter, did not mean that those views had to be considered plausible. Even otherwise, the principle of res judicata does not apply to Income-tax proceedings and an error in the preceding year need not be repeated or ignored in the subsequent years as held by this Court in Thomson Press (India) Ltd. v. CIT (2015) 379 ITR 222 (Del). 11. On the merits, it was urged that the ITAT fell into a fundamental error of law in proceeding on the assumption that the dividend income in this case was entitled to the benefit of the DTAA. It was submitted that the character of the income underwent a change at the stage of reporting it in the returns. Learned counsel pointedly argued that the exemption sought could not be said to have been validly given, because in terms of the Royal decree of 1994, only a ministerial committee could issue the certificate with respect to a project promoting economic development of Oman. Since the certificate relied on in the present case was not issued by the Ministerial office or authority, but by a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plies to them, is accepted, it has to either treat the dividend income as business profits under Article 7 and cannot claim dividend exemption under Article 8 (bis) of Omani Tax Law and should show the dividend income as business profits in Oman. If the assessee treats it as dividend under Article 8 (bis) of Omani Tax Law, dividend income under Article 11 (1) provides tax at the rate of 10%, subsequently tax credits only to the extent of 10%, i.e., approximately `14.4 crores and not `41.8 crores, as claimed by the assessee. In effect, the assessee is picking provisions between Omani Tax Law and the DTAA at its convenience to suit its expediency. It is therefore not entitled to the benefits of the DTAA as claimed. 15. It is contended by Mr. Arvind Datar, learned senior counsel for the assessee that only one issue arose, that the CIT issued notice under Section 263 and that reliance on and claim for benefit under Section 25 (4) of the DTAA was not justified. However he has passed the order on three issues and directed the Assessing Officer to tax the assumed profits on account of the undistributed dividends by OMIFCO as reflected in the Books of Account of the PE. He has also dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars to be justified. The credit for ₹ 6,00,49m,920 as deemed tax paid under DTAA in addition to the prepaid taxes as claimed in Return of income is allowed. 17. The assessee, by virtue of being a joint venture partner in OMIFCO received during the year, dividend US$30.2325 equivalent to Indian `143,83,99,800. The dividend was received by the Permanent Establishment (PE) namely the Branch Office of the assessee. The dividend was received in Oman and was deposited in the bank account maintained by the (PE) branch office, with Bank of Baroda, London, on 21.08.2009, 04.01.2010 and 16.03.2010. Later the dividend was remitted through banking channel into the State Bank of India, NOIDA, INDUSIND Bank, Nehru Place, and ICICI Bank, New Delhi, account of the assessee. It is submitted that dividend is 43.51% of the equity share capital held by the assessee in the JV. The Director's Report of OMIFCO, Oman, and the Minutes of 12th Annual General Meeting of OMIFCO, Oman, held on 10th March 2010 in support of the amount of dividend declared by OMIFCIO were shown to the AO and were part of the record. The dividend income of `143,83,99,800 was included in the profit taken as starting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the DTAA tax payable in a Contracting State (i.e. Oman) shall be deemed to include the tax which would have been payable but for the tax incentive granted under the laws of Oman and which are designed to promote economic development. Tax treaties provide for such deemed tax credit with respect to tax forgone by the developing countries so that the benefit is retained by the investor. Such credit is known as tax sparing. If the credit is given only to actual tax paid and not for the tax which would have been payable then the benefit which the developing country intended to offer to the concerned tax payer would be nullified. The country's sacrifice of the revenue would ultimately accrue to the state of residence. Mr. Datar argues that therefore, by virtue of Article 25 (4) of the DTAA and Article 8 (bis) off the Omani Tax Law and the Royal Decree 68/2000 and the letter dated 11 December, 2000 of the Secretary General of Taxation, Ministry of Finance, during the year, the assessee received a dividend income of `143,83,99,800 on its equity investment in Oman India Fertilizer Company SAOC (OMIFCO) which was entitled and correctly given tax credit. Analysis and Findings 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 16, as the case may be, shall apply. 5. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other Contracting State may not impose any tax on the dividends paid by the company except insofar as such dividends are paid to a resident of that other Contracting State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other Contracting State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other Contracting State. Article 25 deals with avoidance of double taxation and reads as follows: 25. Avoidance of Double Taxation (1) The law in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Omani company. 2. Profits and gains from the disposal of securities listed in the Muscat Capital market. Findings on the first question: Did the ITAT fall into error in holding that AO's order was not erroneous in law and prejudicial to the revenue 21. What impelled the CIT to hold that the AO had erred was inter alia, his interpretation of tax incentive under Article 25. The word tax incentive is undefined in the DTAA; the CIT stated that consequently the definition, in terms of Article 3 (2) of the DTAA was to be in accord with Indian law. It was therefore held that in domestic law, a tax incentive is a deduction from income which is otherwise taxable as per law. So, he reasoned that income which does not fall in the total income cannot be the subject matter of tax incentive for economic development. Furthermore, the CIT revisited the issue of PE and held that the assessee had no PE, but a small branch which carried out auxiliary and preparatory activities, not business. 22. The first question which this court addresses itself to is the order under Section 263 as to the issues which were not covered by the show cause notice issued to the assessee. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o accord an opportunity after setting aside the assessment order, would in our view not meet the mandate the Section 263 of the Act. If such an interpretation is accepted it would make light of the finality accorded to an assessment order which cannot be reopened unless due adherence is made to the conditionalities incorporated in the provisions of the Act in respect of such powers vested in the Revenue. 23. Besides, the assessee is also justified in complaining that the CIT could not have branded the AO's order as erroneous in the facts and circumstances of this case. As noticed previously, in the earlier years, the AO had finalized the scrutiny assessment, considered the impact of Articles 11 and 25 of the Indo Omani DTAA, and issued pointed queries on the issue of dividends earned. He had also considered whether a PE had earned dividend income. In such circumstances, the CIT could not have stated that another view rendered the AO's plausible view erroneous. In this regard, the decision in Commissioner of Income Tax v Gabriel India (1993) 203 ITR 108 (Bom) had stated this about Section 263: This section does not visualise a case of substitution of the judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idend income, the exemption etc and had also considered the explanation of the Omani authorities on the subject. Therefore, the CIT's view that the assessment orders were erroneous requiring revision was not sustainable in law. The second question: Did the ITAT err in deciding that dividend income was taxable but exempt under Omani law to entitle the assessee to the benefits of the Indo Oman DTAA 24. The rival contentions on this aspect are whether dividend income is at all taxable or if it taxable, but exempt. This is relevant in the context of the assessee's contention that under Article 25 (2) of the treaty, it is entitled to benefit of whatever was the tax treatment it received in Oman. The relevant part of the said provision states ..Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in the Sultanate of Oman, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the Sultanate of Oman, whether directly or by deduction. Article 25 (4) further clarifies one eventuality, i.e. if dividend is not tax as a result of incentive for economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut of the profits on which Omani income tax was paid by distributing companies. It meant that Omani income tax was payable by the recipients on any dividend income received out of the exempt profits from tax exempt companies. As a result, investors in tax exempt companies that undertake those activities considered essential for the country's economic development suffered a tax cost on their return on investments. the tax treatment under the above mentioned Article 5 had the negative impact on investments in tax exempt project. The Company Income Tax Law of 1981 was, therefore, recently amended by Royal Decree No. 68/2000 by the insertion of a new Article 8 (bis) which is effective as from the tax year 2000. As per the newly introduced Article 8 (bis) of the Company Income Tax Law, dividend distributed by all companies, including the tax exempt companies would be exempt from payment of income tax in the hands of the recipients. In his manner, the Government of Oman would achieve its aim objective of promoting economic development within Oman by attracting investments. We presume from our recent discussions with you that the Indian investors in the above Project wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o elevate them into findings, but rather addressed them to Omani authorities- if not directly, then through Indian diplomatic channels. In not doing so, but proceeding to interpret the laws and certificate of Omani authorities, the revenue, especially the Commissioner fell into error. 27. As far as the submission of the revenue, that the assessee did not have a Permanent Establishment in Oman is concerned, this court is of opinion that admittedly, for about 5 years, i.e 2002 to 2006, a common order was made under Article 26 (2) (b) of the Income Tax Law of Oman. The opening para of this order reads as under: We refer to the returns of income and determine the taxable income as under: Kribhco Muscat is a permanent establishment supported by M/s. Krishak Bharati Cooperative Limited, a multi- state cooperative society registered in India. As per the accounts, Kribhco-Muscat is in receipt of dividend income from Omifco, a joint stock company registered in Oman, and that dividend income is connected with the investment of Kribhco-Muscat. The dividend income is, however, exempt from tax in accordance with Article 8 (bis) (1) of the Company Income Tax Law. The tax exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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