TaxTMI 
TaxTMI 
2013 (9) TMI 126
X X X X Extracts X X X X
X X X X Extracts X X X X
....7, for the assessment year 2004-05, vide which, following grounds have been raised:- 1) 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 the expenditure of Rs. 1,48,71,588/- incurred by the assessee for exploration and production of oil and gases as revenue expenditure. 2) 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 exclude the profits from Oman Branch and Qatar Branch for tax purposes in India, holding that as the assessee has been carrying on business through a permanent Establishment in Oman and Qatar and as the income from the aforesaid Branch in Oman and Qatar ere derived there from, it was only the Oman and Qatar Government which was entitled to Levy the tax as per Article 7 of DTAA ignoring the fact that as the assessee is a Resident of India, it has to be taxed on its entire income in India as per section 5(1) of the I.T. Act 1961, which includes all the income: - i) Received or deemed to be received. ii) Accrues or arises or deemed to accrue and arise. iii) Accrues or arises outside India. 3) On the facts and in the circu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g, off-shore construction, exploration of mineral oil & gasses and trading of petro products. In the computation of income, the assessee has claimed deduction of Rs. 1,48,71,588, being expenditure incurred during the year for setting-up of the project of refining of crude oil and was treated as deferred revenue expenditure. The assessee, in response to the show cause notice issued by the Assessing Officer, submitted that it is engaged in the business of operation of rigs for extraction of oil, undertaking off-shore contracts for laying of pipeline set-up for refinery and marketing of petro products. During the year under appeal, the company was in the process of setting-up of project of refining crude oil and for this purpose, it has incurred expenditure on exploration sites and on bidding of tenders, traveling etc. These expenditures are revenue in nature, however, in the books of account, they have been treated as deffered revenue expenditure. Looking to the nature of expenses, which are 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 assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee claimed the full amount as revenue expenditure. The Assessing Officer did not allow the 'expenditure as claimed by the assessee on the ground that expenditure incurred on bidding for exploration was capital in nature. The CIT(A) also agreed with the finding of the assessing officer and confirmed the disallowance. 13.1 There is no doubt about the fact that the basic business operations of the assessee company are operation of rigs for extraction of oil and understanding other oil related activities. Therefore, in the interest of assessee's business and in continuation of the business carried on by it, the assessee company had to explore the chances of development in the field of oil exploration for which it had to submit itself for bidding and tenders. Submitting tenders and bids in the field of oil exploration is a highly sophisticated technical task for which the assessee company had to incur substantial amount of expenditure. The potential status of the 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 fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m of Rs. 1,60,04,350 as deduction in computing the taxable income of the assessee company." 7. The aforesaid findings of the Tribunal have been followed in the subsequent years also. Since there is no change in the facts and circumstances of the present issue, therefore, following the earlier year's precedence, we do not find any good reason to interfere with the order passed by the learned Commissioner (Appeals) on this issue and decline to interfere in this matter as such. We also find that this issue has also come up for consideration before the Jurisdictional High Court in an appeal preferred by the Revenue under section 260A, wherein the substantial question of law on this point has not been admitted and the Revenue's appeal has been dismissed. Accordingly, ground no.1, raised by the Revenue is treated as dismissed. 8. The issue involved in ground no.2 and 3, are by and large, same and, therefore, both the grounds are being discussed and adjudicated 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... taxable in India. In support, reliance was placed on the decision of Karnataka High Court in CIT v/s R.M. Muthaiah, [1993] 202 ITR 508 (Kar.), wherein in the context of Indo-Malaysian treaty, it was held that income specified in Articles-6 and 7, relating to the P.E. were outside the purview of taxation in India. Drawing the similarity between the Article-7 of Oman and Qatar and Article-7 of Malaysian treaty, it was submitted that if the income has been taxed in the contracting State, then the same cannot be taxed in India. Besides this, reliance was also placed on the judgment of Hon'ble Supreme Court in CIT v/s P.V.A.L. Kulandagan Chettiar, [2004] 267 ITR 654 (SC) wherein the view taken by the Karnataka High Court in R.M. Muthaiah (supra) and Madras High Court 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, a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s issued for interpreting similar clauses in Mauritius DTT. The CBDT circulars 333, 621,682 and 789 dealt with taxation of capital gains under Tax treaties, in particular with Mauritius. As the DTT entered by Indian Government with Oman and Qatar has mirror image clause with that Mauritius, the circular issued for interpreting Mauritius treaty squarely applies to interpretation of Oman and Qatar treaty. In Azadi Bacho Andolan's case, the circular no. 789 was held by Delhi High Court as void. The Central Government Challenged this decision and appealed to Supreme Court. 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 ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a resident of a contracting State from alienation of property referred to in Article-6 forming part of a business property of a P.E. situated in other contracting State may also be taxed in other contracting State. The phrase "may also be taxed" means that the India has also right to tax on the income of its resident and whatever tax has been paid in other contracting State the credit shall be given as per Article-25. He analysed various paragraphs of Article-15 of Oman Treaty and observed that wherever the word "may' has been used, the taxability of that particular 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 projec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lysis of these judgments has been dealt by him in Para-6.4 and 6.5 and finally, he came to the conclusion, vide Para-6.6 to 6.8 of his order which are reproduced below:- "6.6 The Circular of the CBDT referred to by the appellant is in an identical situation. Here also despite the use of the phrase "may" taxability in India has been clarified to be not the intention. The appellant has raised a very strong issue about the residuary clause. If the phrase "may" gives an option then the residuary clause Article 15(6) of DTAA with Oman and Article 13(6) of DTAA 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n Chettiar (supra). Even the High Court has also confirmed the said order of the Tribunal in appeal under section 260A, filed by the department. However, he submitted that such a view cannot be affirmed now in this year for the various reasons, firstly, the main issue involved is the interpretation of the phrase "may be taxed" as appearing in Article-7(1) and Article-15 of Oman DTAA and Article-7(1) and Article-13 of Qatar DTAA and the Hon'ble Supreme Court P.V.A.L. Kulandagan Chettiar (supra) has refrained from interpreting the phrase "may be taxed". 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Government of India should normally apply from the date when the agreement which has used such term came into force. In this manner, the Government of India which is one of the contracting States has strongly reflected its intention that the phrase "may be taxed" has to be understood in the manner that the Government of India has a right to tax its resident and whatever taxes has been paid by the resident in other contracting State the credit of such taxes would be given. The earlier interpretation given by the Courts should not be taken into cognizance 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 use....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in favour of the assessee by the decision of the Jurisdictional High Court in assessee's own case for the assessment year 2002-03, wherein the decision of the Tribunal has been affirmed. Thus, there is no point in going for detail interpretation and discussion about the issue of the phrase "may be taxed" as the Tribunal has held that once the assessee has paid the tax on the profits attributable to its P.E. in Oman and Qatar, the same income cannot be taxed in India. Similarly, on the issue of capital gain also, same reasoning has to be applied. 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....R publication). The sum and substance of the ratio laid down by the High Court is that firstly, whenever the enabling words such as "may be taxed" are used, the contention of the Revenue that there is no prohibition or embargo upon the authorities exercising the powers under Indian Income Tax Act from assessing the income concerned does not have any merit as once the assessee has paid taxes in relation to the income earned in other contracting States under their law, the same cannot be taxed in India. Secondly, the reliance placed on OECD commentary 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 th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....L. Kulandagan Chettiar (supra). In this judgment, he submitted, the Hon'ble Supreme Court has affirmed the decision of S.R.M. Firm & Ors. (supra) though for different reasons from those stated by the High Court. He also admitted that even though the Hon'ble Supreme Court has refrained itself for giving any kind of interpretation of the phrase "may be taxed" to mean any kind of allocation of power to tax by which contracting State, however, the Hon'ble Supreme Court has affirmed the entire judgment of the Madras High Court and has also referred 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 Hig....
X X X X Extracts X X X X
X X X X Extracts X X X X
....irst of all the said decision cannot be held to be applicable as in that case, the assessee was a resident of Norway who worked in Norway and therefore, there was no question of taxing his income in India. Insofar as the interpretation of the words "may be taxed" as given by the AAR is wholly contradictory to the law laid down by the High Court and as approved by the Hon'ble Supreme Court. The Tribunal, Mumbai Bench, in Ms. Pooja Bhatt v/s DCIT, [2008] 26 SOT 574 (Mum.) has given a very detail reasoning as to why the AAR ruling in S. Mohan (supra) 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 ref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....emarks CIT v/s R.M. Muthaiah 11.12.1992 Karnataka High Court a) Accepted by the Revenue as no appeal to the Supreme Court b) Specifically appro- ved in Azadi CIT v/s SRM Firm & Ors. 15.03.1994 Madras High Court a) Follows Muthaiah which is approved by Supreme Court b) Affirmed by Supreme Court in Chettair Union Of India & Anr. v/s Azadi 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xamples 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 meanings were provided before us for the meaning of the usage of the word "term". Thus, the notification no.91 issued by the CBDT, has used the phrase "may be taxed" as "term" which is not correct as it does not come within the ambit of the word "term". Section 90(3) makes it abundantly clear that the Government can issue notification only with regard to "any term" which has not been defined under the Income Tax Act, 1961, or in the agreement and not to any simple phrase or word. His second limb of argument on the notification no.91 issued by the CBDT on 28th August 2008 is that, it is beyond the scope of section 90(3) wherein the Government is empowered to issue notification to clari....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 assessee's own case has given a ruling in favour of the assessee by upholding the decision of the Tribunal, that the income which has been taxed in Oman cannot be taxed in India. Therefore, such a notification cannot overrule the binding precedence of the jurisdictional High Court in case of the assessee. 31. The learned Sr. Counsel, Mr. Dastur, further raised an important contention that sub-section (3) of section 90, has been omitted by Finance (No.2) Act, 2009 with effect from 1st October 2009 and has been substituted by a new sub-section (3). The notification by the Government of India was issued on 28th August 2008, i.e., under the old sub-section (3). Now, on account of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 has been inserted in the statute with effect from 1st October 2009 and applies where a meaning is assigned to a term by a notification issued under sub-section (3) of section 90. As the Explanation has been added to the substituted or new sub-section (3), therefore, it will apply to a notification, if any, issued under the new sub-section (3). The present notification in question has not been issued under the new sub-section (3) and, therefore, the Explanation (3) has no application here in this case. Further, Explanation (3) requires that the Notification must be in force, whereas the present Notification is no longer in force. This is further supported by the fact that Explanation ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 entered into between the Government of India and Government of Malaysia takes away power of the Indian Government to levy tax in respect of the income received from various sources referred to in the said agreement. Therefore, the High Court was not adjudicating the issue of the phrase "may be taxed" as being used world over. Further, neither any of the commentaries nor any international view was considered by the High Court with regard to the interpretation nor the meaning of the phrase "may be taxed". The High Court has missed a very vital point that intention of the contracting parties has to be considered while assigning any meaning to any phrase used in the treaty. This aspect has no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 remains open. The taxation is left to the state of source in some cases subject to limitation in the amount. He also referred to the meaning of the phrase "shall be taxed" as expressed by the learned author. Thereafter, he also referred to the OECD commentary which has been referred to and relied upon by the Tribunal, Delhi Bench, in Telecommunication Consultant India Ltd. (supra). 38. Replying on the issue whether the Hon'ble Supreme Court in Azadi Bachao Andolan (supra)'s case has laid down a law on the phrase "may be taxed", he submitted that it is not so, because the Hon'ble Supreme Court was mainly dealing with the Article-13 of Mauritius DTAA wherein the words used wer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ao 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. He referred to the memorandum of the Finance Act, 2003, by which section 90(3) was introduced and the purpose for which the same was brought in statute w.e.f. 1st April 2004 i.e., the assessment year 2004-05. He submitted that by this amendment, the legislature has empowered the Central Government to issue notification for assigning any meaning to a term used in the agreement which has been neither defined in the Act nor in the agreement. The purpose of the notification was that a proper meaning should be given which, according to the Government of India, is the true intention for understanding the various terms used in the treaties. The memorandum explaining the said amendment provi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. While distinguishing the decision of Rayala Corporation Pvt. Ltd. & Ors. (supra), he submitted that the issue involved before the Supreme Court was whether the notification issued under the rule that has ceased to exist and the offence committed during that period in which the rule was enforced can be taken into cognizance for enforcing the punishable offence. There, it was a case of omission and not of substitution. Similarly, in case of W.N.S. Global Services (supra), the Tribunal was dealing with the omission of section and its operation in the succeeding years. Thus, none of these judgments are applicable on the issue of substitution of the provisions of the Act because in the pre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 the Government of India that meaning assigned by the Central Government in the notification has to be reckoned from the date of the agreement. 43. Thus, according to Ld. D.R. in the entire scenario, the issue of the phrase "may be taxed" has to be interpreted in a manner that the country of the source can levy taxes but the country of residence does not loose its right to tax the resident. Both the countries have a simultaneous jurisdiction except for the fact that either of the contracting States will give credit of such a tax paid in other contracting States. 44. Learned Sr. Counsel, Mr. Dastur, sought permission of the Bench to give rejoinder of some of the submissions made by the l....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Court have been upheld wherein precisely the issue of the phrase "may be taxed" has been dealt with. Regarding the view of Prof. Klaus Vogel, he submitted that such a view cannot override the decision of the High Court and the Hon'ble Supreme Court which are prevailing in India. He also filed relevant extract of another eminent author Philip Baker wherein he has taken a view that the Karnataka High Court decision in R.M. Muthaiah's case supra and the decision of Madras High Court in S.R.M. Firm & Ors. (supra) are wholly erroneous view and does not give correct interpretation of the phrase used in the treaty specifically "may be taxed". Such a view cannot be upheld by the Indian Courts b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eted 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 that they are not applicable as the assessee has not argued for striking off the notification. He relied upon various other case laws in support that the Tribunal has power to interpret the notification whether it was consistent with the provisions of the Act or not. The main such decisions relied upon by him are the decision of Andhra Pradesh High Court in CIT v/s Hyderabad Asbestos Cement Products Ltd. [1998] 172 ITR 762 (A.P) and the decision of Madras High Court in CIT v/s Elgi Equipments Ltd., [2000] 242 ITR 460 (Mad.). He submitted that section 90(3) provides that notification should not be inconsistent or contrary to the Act or agreement. The notification has been issued by the CBDT is d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore 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 Rs. 3,20,80,443 and from Qatar Branch, the assessee has incurred losses of Rs. (-) 90,38,012. After setting- off the losses of Qatar, the net income worked out to Rs. 2,30,42,431, which was not included in the total income of the company in the return of income filed in India. The reason for not including the same was that the assessee has also been filing the return of income in the respective countries i.e., Oman and Qatar and is being assessed on the profit as per the domestic law. In this regard, the assessee has taken shelter of Article-7(1) of the DTAA. The Assessing Officer held that the income from Oman and Qatar is also assessable in India and has to be added to the total income in India. Accordingly, he has also given credit of taxes paid at Rs. 50,40,215, in Oman. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....axed 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." 52. On the issue of the capital gain, the learned Commissioner (Appeals) again relying upon the phraseology used in Articles-13 and 15 of the respective DTAAs "may be taxed" held that once the capital gain is taxable in these countries, then by virtue of DTAA, the same cannot be taxed in India. Again reliance was also placed on the aforesaid three decisions and accordingly this issue was decided in favour of the assessee. PHRASES USED IN THE ARTICLES 53. The taxability of a business profit of a P.E. has been dealt with in Article-7(1) of Indo-Oman DTAA, the relevant portion of which is reproduced below:- "ARTICLE 7 : Business profits-1 The profits of an enterprise of a Contracting State shall be tax....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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 fix base available to 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 with the whole enterprise) or of such fixed base, may also be taxed in that other State." In this Article, the phraseology used is slightly different and instead of the phrase "may be taxed", the phrase "may also be taxed in other contracting State" has been used. Thus, these phraseologies "may be taxed", "may also....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntracting 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 is limited. Second, insofar as these provisions confer on the State of source or situs a full or limited right to tax, the State of residence must allow relief- as to avoid double taxation; this is the purpose of Articles 23A and 23 B. The Convention leaves it to be the Contracting State to choose between two methods of relief, i.e. the exemption method and the credit method." 56. The summary of the assignment principle of taxation under the OECD commentary on model convention has been succinctly put by the Prof. Klaus Vogel in his book "Double Taxation Convention" 3rd Edition, as filed by the learned Departmental Representative in the following manner:- "Assignment rules: The "assignment principle" applied in the OECD ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his 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 source depends on the distributive rules as provided in Article-23A or 23B. Similar view has been expressed by Philip Baker in his book "Double Taxation Convention And International Law.'' VIEW MOSTLY PREVALENT IN INDIA:- 57. The other school of thought predominantly followed in India flows from the various judicial pronouncements by some of the High Courts. This view has been strongly canvassed by the learned Sr. Counsel before us for the proposition that these judgments have found judicial acceptance by the Hon'ble Supreme Court also and, hence, it is a law of the land insofar as interpretation of the phrase "may be taxed" is concerned. The important judgments which have been relied upon by the learned Sr. Counsel are as under:- i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 respect of income on which income -tax has been paid both under the said Act and under the Income-tax Act of the other country. Similarly, clause (b) also refers to the avoidance of double taxation. We are not concerned with the other clauses of section 90 in the instant case. In other words, the parties to an agreement to avoid double taxation is to grant relief to the assessee in case the law of two countries operates on the same income and the assessee may have to pay tax in both countries. The Revenue's contention in the instant case is entirely based on sections 4 and 5. But these provisions shall have to be read subject to the provisions of the agreement in question. The agreement in question, by necessary implication, takes away the power of the Indian ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 more than one view possible, by identifying and fixing the position and placing it beyond doubt. The reliance sought to be placed on behalf of the Revenue on the commentaries on the articles of the model convention of 1977 presented by the Organization for Economic Co-operation and Development (OECD) is inappropriate and unjustified. Further, it is not really the format adopted that really matters when basically they differ in their content and approach. A perusal and comparison of the content and purport of the articles in the model convention and those actually found in the agreement with Malaysia under consideration would go to show the wide range of difference which would per se render the commentaries on the model convention wholly inapplicable and expose the unreasonabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ey 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 inconsistent with the provisions of the Income -tax Act. We approve of the reasoning in the decisions which we have noted. If it was not the intention of the Legislature to make a departure from the general Principal of chargeability to tax under section 4 and the general principal of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC." Thus,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f 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 Tribunal and the High Court in assessee's case have decided the issue in favour of the assessee. This was a case of Indo-Malaysian DTAA, wherein the issue revolved around whether a person who is resident in both the contracting States is deemed to be a resident of that contracting State with which his personal and economic relations are closer. The brief facts emanating from the said decision are that the assessee firm owned an immovable property at Malaysia and during the year under assessment, the assessee earned income from the rubber estate. It also sold the property in Malaysia on which short term capital gain had arisen. The ITO assessed both the income as assessable in India and brought the same to tax in India. In the first appeal, the learned Commissioner (Appeals) held that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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" will mean allocation of power to tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid, no relief can be sought. Regarding the Treaty in question as a whole when it is intended that even though it is possible for a resident in India to be taxed in terms of ss. 4 and 5, if he is deemed to be a resident of a Contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant. The Treaty will have to be interpreted as such and prevails over ss. 4 and 5 of the Act. Therefore, we are of the view that the High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court." If we analyse this judgment then in this case the Hon'ble Su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 proposition that there cannot be any doubt about the interpretation of phrase used "may be taxed" in the DTAA and such an interpretation assumes the character of being law laid down by the Hon'ble Supreme Court which is binding on all the subordinate Courts. Not only this, he submitted that in assessee's case, the Hon'ble Jurisdictional High Court has affirmed the said proposition and the same is binding. 57. If we analyse all the judgments as have been referred to above, it is evident that:- * Firstly, in R.M. Muthaiah (supra), the expression "may be taxed" has not been expressly dealt with, however, in the context of Article-6(1), wherein similar phraseology has been used, the High Court has given its decision that once it has been taxed in the foreign country, the same cannot be taxed in India....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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:- (i) Telecommunication Consultant India Ltd. v/s ACIT, ITA no.1293 & 1294/Del./2009, order dated 29th March 2012 This decision has extensively been referred to and relied upon the OECD commentary and has distinguished the judgment in P.V.A.L. Kulandagan Chettiar (supra) on the ground that the phrase "may be taxed" has not been expressly dealt with. However, this decision does not distinguish the other three High Court decisions and the judgment of Hon'ble Supreme Court in Turquoise Investments and Finance Ltd. (supra). (ii) Authority of Advance Ruling in case of S. Mohan, Re: [2007] 294 ITR 117 (AAR) In this case again, the decision on P.V.A.L. Kulandagan Chettiar (supra) was distinguished. However, this case has been specifically not followed by the Tribunal in case of Ms. Pooja Bhatt (supra). iii)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct 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 interpretations of such terms, it is proposed to insert a new provision empowering the Central Government to define such terms by way of notification in the Official Gazette. The proposed amendment will take effect from 1st April, 2004, and will, accordingly, apply in relation to the assessment year 2004-2005 and subsequent years. 61. By virtue of sub-section (3) of section 90, the legislature empowered the Central Government to define such term used in the DTAA which has not been defined either in the Act or in the agreement, by issuing notification in the official gazette. Such notification defining the term should not be inconsistent with the provisions of this Act or the agreement. In pursuance of this sub-section, the Central Government has issued a notification number 91/2008, dated 28th August 2008, wherein it has been....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Government, while negotiating the treaty. 64. First of all, it has to be borne in mind that the statute is an edict of the legislature and one of the important ways of construing a statute is to seek the intention of the legislature. The duty of the Court, while interpreting the language of the words used in the statute is to see the true intention of the legislature i.e., sentential legis and the purpose for which such statute was enacted. The true purport of enacting section 90(3) thus gets clear as to what was the intention of the legislature, which is also evident from the memorandum clause as reproduced earlier. On the other hand the paramount goal in an interpretation of a treaty between the two sovereign States is also to look into the language used and the intention of the parties on plain reading of the provisions consistent w....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 notification issued contrary to such decision of the Hon'ble Supreme Court, the same is illegal or no effect can be given. But this is not so in the present case as one of the contracting party to the agreement i.e., Government of India has expressed its intention in very unequivocal terms as what it meant by the said phrase "may be taxed". There could not be too much reading on such clarification issued by the Government of India. Accordingly, the interpretation and the clarification given by the Central Government has to be given precedence over the interpretation given by the Courts, at least once the Government, in exercise of statutory power has issued a notification clarifying its intent. WHETHER THE PHRASE "MAY BE TAXED" IS A TERM? 66. One of the objections of the learned Sr. Counsel was that the section gives mandate t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 imposes a tax liability and, therefore, it cannot have a retrospective effect because notification has been issued on 29th August 2008 and at the most it would be applicable from the assessment year 2009-10. We find it difficult to accept this contention of the Ld. Counsel for the assessee. Prior to the assessment year 2004-05, there was no enabling provision by which the Central Government could have clarified any term which has been used in the treaty which has not been defined either in the Act or in the agreement. Various Courts have interpreted certain expressions used in the treaty specifically the phrase "may be taxed" in a different manner. Various international commentaries and views have also spoken of various terms in different manner. To clarify the correct meaning and interpretation, the legislature has empowered the Government....
X X X X Extracts X X X X
X X X X Extracts X X X X
....noperative. 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 various judgments of the Hon'ble Supreme Court in support of their respective contentions. 70. The learned Sr. Counsel has primarily relied upon the judgment of the Hon'ble Supreme Court in Rayala Corporation Pvt. Ltd. & Ors. (supra) and Kolhapur Cane Sugar Works Ltd. (supra). 71. By Finance Act, 2009, the entire section 90 has been substituted and in place new section 90 has been introduced. However, on a perusal of the language used in the entire new section, it is seen that there is no change in the language of the sections, specifically sub-section (3), barring one phrase in sub-section (1) which is "or specified territory outside India". The memorandum explaining the said amendment for which the said section was substituted was that:- "36. Empowering Central Government to enter into agreement with specified non-sovere....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 rule ceased to exist. The Hon'ble Supreme Court agreed with the arguments of petitioner's counsel that even if there was a contravention of section 132A(2) by the accused when the rule was in force, the act of contravention cannot be held to be "thing done or omitted under that rule", so that after the rule has been omitted, no prosecution can be instituted. Once the rule was omitted all together, no new proceedings by way of prosecution could be initiated. It might be in respect of an offence committed earlier during the period that rule was in force. The Hon'ble Supreme Court agreeing with the said submission, observed that the language contained in the provisions of Defence of India Amendment Rules, 1965, can only afford protection to action already taken while the rule was in force but cannot justify the initiation of a new proceeding....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Section 6(1). If a provision of a statute is unconditionally omitted without a saving clause in favour of pending proceedings, all actins must stop where the omission finds them, and if final relief has not been granted before the omission goes into effect, it cannot be granted afterwards. Savings of the nature contained in Section 6 or in special Acts may modify the position. Thus the operation of repeal or deletion as to the future and the past largely depends on the savings applicable. In a case where a particular provision in a statute is omitted and in its place another provision dealing with the same contingency is introduced without a saving clause in favour of pending proceedings then it can be reasonably inferred that the intention of the Legislature is that the pending proceeding shall not continue but a fresh proceeding for the same purpose may b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r 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 hand, has relied upon sections 20 and 24 of The General Clauses Act, 1897, and also commentary of Mr. Justice G.P. Singh, in his book "Principles of Statutory Interpretation". He has specifically drawn our attention to the passage of the Hon'ble Supreme Court in CIT v/s Venkateshwara Hatchies, [1999], 3 SCC 632, as stated in the commentary. The relevant observations of the Hon'ble Supreme Court were as under:- "12. As noticed earlier, the omission of Section 2(27) and re- enactment of Section 80-JJ was done simultaneously. It is very well- recognized rule of interpretation of status that where a provision of an Act is omitted by an Act and the said Act simultaneously re-enacts a new provision which substantially covers the filed occupied by the repealed provision with certain modification, in that event such re- enactment is regarded having force c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as, 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 Hatcheries (supra) also clearly opined that where a provision of the Act is omitted by an Act and the said Act simultaneously re-enacted. a new provision which substantially covers the field occupied by repealed provision with certain modification (which in the present case there is no modification), in that event, such re-enactment is regarded having force continuously and the modification or changes are treated as amendment coming into force with effect from the date of enforcement of the enacted provisions. We are, therefore, of the considered opinion that substitution of section 90 w.e.f. 1st October 2009, will not obliterate the earlier section 90 and specifically sub- section (3) of section 90 which has come into effect from 1st April 2004, and notification issued therein shall continue to hold at least up to 1st October 2009. 77. The learned Sr. Counsel ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 same reads as under:- "(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf." The memorandum explaining the objects of the said Explanation along with the provisions of section 90, was given as under:- "Meaning assigned to a term used in Double Taxation Avoidance Agreement (DTAA). Section 90 of the Act, empowers the Central Government to enter into an agreement with foreign countries or specified territories for the purpose of granting reliefs particularly in respect of double taxation. Under this power, the Central Government has entered into various treatie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 been brought in statute w.e.f. 1st October 2009, will have retrospective effect or not. Since the issue before us pertains to the assessment year 2004-05, wherein sub-section (3) of section 90, was already there and in pursuance of such section, the Central Government has issued a notification clarifying its intent and object of the terms used in the treaty, therefore, we are not entering into this debate. The language of the said Explanation along with the memorandum of the object has to be seen from the context of the actual legislative intent and the intention of the Central Government which is one of the contracting parties. Thus, we cannot make ourselves oblivious of such an intent which has been reiterated in the Explanation (3). This only reinforces our conclusion. Beyond this, we are not entering into the semantics of retrospective effect of the said Explanation. All the o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. Generally in the scheme of double tax avoidance treaty wherever the right of taxation is given to the source country, the country of resident relieve the double tax as it asserts the right of taxation on the same income of its resident. If the incomes were to be taxed only by the source country, probably, there would arise no conflict of incidence of double taxation. In that scenario, clear cut demarcation would have been there, one which is taxable in source country and other which is taxable in resident country. There would not be any issue of giving credit of taxes. But this is not so, as the world wide scheme followed by most of the countries is residency based taxation, irrespective of where the income is earned. Therefore, the State of resident has an obligation under the double taxation conventions to provide relief from double taxation of income either by following "exemption ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tate 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 that exclusive taxing rights are given to the first State, however, if certain conditions are fulfilled, the same income may be taxed in the second State. Here the classical example is Article-7(1), 14(1) and 15(1). Likewise, the phrase "may be taxed" gives non-exclusive taxing right which enables both the States to have option to exercise the right with or without limitations. The phrase "may also be taxed" also gives both the States the option to right to tax. Under both the situations, the credit of taxes is given under the treaty. If the phrase "may be taxed" is to be interpreted in the manner that country of source has the exclusive right to tax to the exclusion of the country of resident then probably phrase used in such a situation would have been "shall be taxable only in the other contracting State" i.e., the country of source. This can be viewed from another angle also that wher....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urt 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 they reflect the concept prevailing under the international law. 85. Independent of the international views, in the context of India, now the position as to what is meant by the phrase "may be taxed" has been explained and clarified by the Government of India in a very clear terms in the notification issued in exercise of statutory power authorised by the Act and this view expressed by the Government of India which is one of the contracting parties in the treaty, clinches the entire controversy. 86. The fundamental principle of interpretation in international law has been codified in Articles-31 to 34 of the Vienna Convention on the Law on Treaties (VCLT). Article-31 provides that a treaty must be interpreted in good faith with the ordinary meaning to be given to the terms of the treaty in the context and in the light of its object and purpose. Article 31(4) provides that a special....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndered 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 country of residence is denied of the right to levy tax on such income or the said income cannot be included in return of income filed in India, would no longer apply after the insertion of provision of sub-section (3) of section 90 w.e.f. 1st April, 2004, i.e. assessment Year 2004-05. The said provision has conferred upon the Central Government a power to issue notification, assigning meaning to the terms used in the DTAA, which has neither been defined under the Act nor in the agreement provided that such a meaning should not be inconsistent with the provisions of the Act or agreement. In pursuance of such a statutory empowerment, Central Govt. has issued a notification on 28th August, 2008, clearly specifying that where the DTAA entered into by the Central Govt. with the Govt. of any other country provides that any income of a resident of India "may be taxed" in the other country, such inco....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 relevant to the issue or the proposition therein is found to be respective in nature which has already been considered by us. We take this opportunity to place on record our appreciation for the assistance provided by the learned representatives of both the sides by making elaborate submissions which has helped us to analyse the legal position emanating from the interpretation of the relevant provisions of the domestic law as well as the relevant tax treaties and apply the same on the facts of the cases before us. Finally, in view of our aforesaid findings, ground no.2 and 4, as raised by the Revenue, are treated as allowed and finding of learned Commissioner (Appeals) is, accordingly, reversed. 90. In ground no.4, the Revenue has challenged allowance of proportionate interest on the investment made in jetty in the ratio of surplus funds to the borrowed funds as on 31st March 1997. 91. Fac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 be worked out, the interest claimed on proportionate basis cannot be allowed because there being no direct nexus between the loan funds and the utilization. He relied upon the decision of the Bombay High Court in CIT v/s Reliance Utilities and Power Ltd. [2009] 331 ITR 340 (Bom.) for the proposition that if the interest free funds are available for the purpose of investment, then presumption is that the same has been made from the interest free funds and not from the loan amount. Similar logic should be applied here also. 94. Before us, the learned Sr. Counsel, Mr. Dastur, submitted that, first of all, this issue has come up for consideration before the Tribunal in the assessment year 2002-03, wherein the proportionate allowance of expenditure has been upheld. He drew our attention to para-18 and 21 of the said order and submitted that identical issue has been dealt with by the Tribunal. R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ries 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 the interest from supplier and interest from employee under the head "Income from Other Sources" as they are inextricably linked with the refinery project. The facts which were placed before the Assessing Officer and the learned Commissioner (Appeals), were that the assessee, for the purpose of setting-up of its refinery, required steel and other equipment. In order to purchase the steel, it had given advance to Essar Steels Ltd. against which they were received supplies of steels. The assessee has also placed order for the equipment from Man Industries and for this purpose, required Essar Steels Ltd. to supply steel to Man Industries and adjust the payments for the advance made by the assessee to them. Subsequently, it was noticed that Essar Steels Ltd. had supplied steel to Man Industries far more than what was required by them for making available the equipment for the assessee. Essar Steels Ltd. ad....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 received from employees has to be capitalized against refinery expenses. The addition made is, therefore, deleted. 99. The learned Departmental Representative, relying upon the observations and the findings given by the Assessing Officer, submitted that the entire transactions of the assessee on which it has received interest, it cannot be said that it is directly related to the setting up of refinery and is not inextricably linked to the project. He relied upon the decision of the Hon'ble Supreme Court in Bongaigaon Refinery and Petrochemicals Ltd. v/s CIT, [2001] 251 ITR 0329 (SC), wherein the interest income of pre- commencement period was held to be taxable. 100. On the other hand, the learned Sr. Counsel submitted that the assessee has not given any kind of a loan on which interest has been received in excess but advance was given to the Essar Steels Ltd. for supply of material on which the assessee h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inery 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 funding the project and the banks agreed to grant funds but with a condition that the assessee will open an escrow account wherein the sale proceeds of its energy division should be deposited. The funds required from the banks were to be utilized only after these amounts were deposited. The funds required from the banks were to be utilized only after these amounts are deposited in the escrow account. The amount so deposited in the escrow account can be utilized by the assessee only after prior approval of the lender banks. It was in this process, the assessee which had deposited the sale proceeds in the escrow account, has earned interest. It was claimed that the escrow account was opened n order to get the funds from the bank for which there was a condition that it has to deposit the sale receipts from the energy division and, therefore, it has a direct nexus with the setting-up of the refinery project. Though, in the book....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f 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 margin money is inextricably linked with the setting- up of the refinery business. 105. Per contra, the learned Sr. Counsel, Mr. Dastur, submitted that the basic condition for granting of loan by the bank was that it had to open an escrow account in which sale proceeds of energy division was to be deposited. Based on these deposits, funds were released for setting up of refinery project. The interest earned on escrow deposit, thus, has a direct nexus with the refinery project and, therefore, it has rightly been capitalized. Further, once the claim has been legally made in the return of income, the treatment given in the books of account will not make a difference. Thus, the learned Commissioner (Appeals) has rightly allowed this ground in favour of the assessee. 106. After carefully considering the rival submissions and also the nature of transactions which is not in dispute, we find that the reasons and findings given b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. After carefully considering the relevant findings of the learned Commissioner (Appeals), we are of the opinion that 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. Ground no.7, is thus, raised by the Revenue is dismissed. 113. In the result, Revenue's appeal for the assessment year 2004-05 is treated as partly allowed. We now take up assessee's appeal in ITA no.2428/Mum./2007, for the assessment year 2004-05. 114. The only ground raised by the assessee relates to disallowance of bad debt of Rs. 19,60,441 and Rs. 1,03,962, on account of advance ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iness 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 required to be probed into. 10.4 First, we need to be clear about the 'nature' of the "expenditure" incurred by the appellant. In the facts of the appellant's case, as I understand, the claim is for a bad debt which cannot be allowed to appellant u/s 36(1)(vii) since Section 36(2) prohibits the allowance in the facts of appellant's case. Yet, the nature of expenditure under consideration does not change by virtue of the fact that it cannot be allowed as deduction. It continues to remain a bad debt. The express condition contained in Section 36(2) cannot be bypassed by allowing deduction u/s.37(1) where this condition shall get automatically waived. That would amount to violation of the will of the legislature when the statute specifically grants allowance under any of the sections 30 to 36 subject to certain express or implied conditions, such conditions cannot be nullified by claiming a deduction u/s 37(1), which is only a residuary section. Relian....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., 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 appeal in ITA no.1000/Mum./2009, for the assessment year 2005-06. 121. At the outset, both the parties have admitted that ground no.1 is similar to ground no.1 raised by the Revenue in the appeal for the assessment year 2004-05 and ground no.3, is similar to ground no.6, raised by the Revenue in the appeal for the assessment year 2004-05. 122. After carefully considering the entire facts, we find that ground no.1, is covered in favour of the assessee by the decision of the Tribunal in assessee's own case for the earlier assessment years, as have been held by us in Revenue's appeal for the assessment year 2004-05. 123. Accordingly, we hold that in view of our findings given in the assessment year 2004-05, ground no.1, raised by the Revenue is dismissed. 124. Ground no.3, is similar to ground no.6 raised in the assessment year 2004-05 and in view of the findings given therein. Ground no.3, is treated as dismissed. 125. In ground no.2, the Revenue has chal....