TaxTMI 
TaxTMI 
2017 (4) TMI 1035
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....at the assessee is a multi state co-operative society registered in India, under the administrative control of the Department of Fertilizers, Ministry of Agriculture and Co-operation, Central Government. Its main business is manufacturing fertilizers such as urea and ammonia. It entered into a joint venture with Oman Oil Company to form the Oman Fertilizer Company SAOC ("OMIFCO" or "the JV"), a registered company in Oman under the Omani Laws. The assessee is 25% shareholder in the JV, which manufactures fertilizers. The fertilizers manufactured by OMIFCO are purchased by the Central Government. The assessee established a branch office in Oman to oversee its investments in OMIFCO. The branch office is independently registered as company under the Omani laws. It claims Permanent Establishment (PE) status in Oman in terms of Article 25 of the Double Taxation Avoidance Agreement ("DTAA") between India and Oman. That branch office maintains its own books of account and files, returns of income under the local income tax law of Oman. 3. The assessee filed its return of income on 24.09.2010. The return was selected for scrutiny and notices were issued along with detailed questionnaires. ....
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....been payable but for the tax incentives granted under the laws of the Contracting State and which are designed to promote economic development." Article 25 (4) requires that in order to claim credit, tax should have been payable in Oman if not for the tax incentives granted in Oman,. since Article 8 (bis) exempts dividend income received in Oman in totality, no tax was payable in Oman at all at any stage and thus no tax was foregone on account of tax incentives by Oman. Article 3 (2)of the India-Oman DTAA provides that if a term used in the agreement is not defined then the term will have the meaning which it has under the Law of that Contracting State concerning the taxes to which this Agreement applies (i.e. India). The term 'tax incentive' has not been defined in the India Oman DTAA. The meaning must, therefore, be inferred from Indian Law. The term tax incentive is not defined in the Income Tax Act , 1961. The tax incentive refers to income which would otherwise be taxable but has not been taxed with a view 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 inc....
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....9; shall be deemed to include the tax which would have been payable but for the tax incentive granted under the Law of the Contracting State and which are designed to promote economic development. The CIT observed that Article 115 of the Omani Tax Laws exempts from tax dividends received by the establishment, Omani Oil Company or Permanent Establishment from shares, allotments or shareholding it owns in the capital of any Omani Company. It was also observed that Article 116 specifically exempts various business activities from the charge of Omani tax. It was held by the CIT that under the Omani Tax Laws dividend is absolutely exempt and is not includible in the total income and, therefore, it cannot be said that any specific exemption was granted for the purpose of tax incentives for economic development. Regarding the assessee's argument with respect to exercise of jurisdiction under Section 263 of the Act it was held that to fall within the benefit of the decision of the Supreme Court, the assessee had 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....
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....ided by the Royal Decree No. 28/2009 w.e.f. 01-01-2010 on any other notification,. The Assessee shall provide it to the A. O. if there is any such notification prior to this Royal Decree 28/2009 and still applicable for the current year. The income shall be computed in terms of notes to account of the financial statement of the branch office of the Assessee is Oman. the tax credit would be available for income earned after this date and tax credit shall be computed accordingly. However, the A.O. shall ensure that the Assessee has been granted exemption by the Oman Tax Authority as provided in Article 118 of Royal Decree No. 28/2009.] It is also seen that the Assessee has not furnished complete and true income or particulars of income and, therefore, the A.O. shall also frame a view thereon and take action as per laws." 7. Therefore, the CIT issued directions to the AO regarding the following issues: (i) Tax credit on dividend is not allowable. (ii) Profits pertaining to undistributed 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 ....
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....lief in India under Article 25 (4) of the Agreement for Avoidance of Double Taxation. 19. From the above clarifications there remains no doubt regarding the purpose of granting exemption to dividend income. The interpretation of Omani Tax Laws can be clarified only by the highest tax authorities of Oman and such interpretation given by them must be adopted in India. Further, in the tax assessments made in Oman in respect of the PE of the assessee-society it is clearly mentioned that the dividend income which is included in the gross total income is, however, exempt in accordance with Article 8 (bis) and such exemption is granted with the objective of promoting economic developments within Oman by attracting investments. In view of the facts stated above, we are of the considered view that on merits also the assessee-society is entitled to tax credit in respect of deemed dividend tax which would have been payable in Oman. Therefore, we hold that on 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, wh....
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....the said income by assuming undistributed profit cannot be taxed under the I.T. Act. Therefore, on merits also the directions issued by the learned PCIT on this issue are not justified and the same are hereby vacated. 21. In view of the above, we hold that the impugned order passed by the learned PCIT u/s.263 of the I.T. Act is without jurisdiction and not sustainable in law. Accordingly, the said order is hereby quashed and as a result, the Assessee's Appeal No. 6785/Del/2015 (AY 2010-11) stands allowed." 10. The revenue argues that the ITAT fell into error in holding that the CIT's order and approach was incorrect. It is urged that the exercise of jurisdiction under Section 263 was warranted and justified. Elaborating on this, learned counsel, Mr. Ashok Manchanda argued that the ITAT overlooked material terms of the treaty as well as the fact that without proper authorization, the income could not be treated as arising from a 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, th....
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....t cannot be 'effectively connected' with the KRIBHCO-Muscat, as is contended by it. It is highlighted that the branch office carries no effective work and in fact functions as a mail receiving and forwarding unit which also remits the dividends received. The learned counsel urged that ITAT was wrong in law in holding the revenue had accepted the position that the branch office of the assessee constituted Permanent Establishment (PE) in Oman in terms of Article 25 of the Indo-Omani DTAA. The CIT had not observed this and clearly stated that the income is not connected to it as the role of a PE is only preparatory and auxiliary as is evident from the final accounts of the assessee as there are no tangible expenses which could indicate activities of any kind so as to justify the role of an income earning unit; it had only one employee working. 14. It is argued that even if the assessee's contention that Article 7 applies 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 assesse....
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....ome under Schedule 7 - 'Other Revenue'. The Assessee has referred to Section 90 of the Income Tax Act and claimed benefit of deemed tax paid in Oman by its PE in Oman. a reference has further been made to Article 25 of DTAA, Article 7,11 and 25 of the DTAA between India and Oman. The Assessee has submitted that it has filed its return for the year ended 31-3-2006 under Oman's Income Tax Law for its branch namely KRIBHCO Musket Branch PE. Reference has further been made to Article 8 (bis) under Oman's Income Tax Law. A copy of the Assessment Order as made in Oman for its PE has been filed to support its contention that the dividend income has been exempted in Oman in accordance with Article 8 (bis) of Income 'fax Law of Oman. The Assessee's claim of tax sparing @ 30 as per the Royal Decree No. 68/2000 read with Royal Decree No. 48/81 under Company's Income Tax Law, appears to be justified. The credit for Rs. 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 t....
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....i Income Tax Law included the said dividend income as part of its total income. The dividend thus received in Oman by the assessee's PE, therefore, could be taxed only by the Omani Tax Law. However, Royal Decree 68/2000 issued by the Omani Authorities, provides that no tax is leviable on dividends, which a company earns from its ownership of shares. This tax exemption is, therefore, granted by the Omani Tax Authorities as an incentive for promoting economic development. The letter dated 11th December, 2000 by the Secretary General of Taxation, Ministry of Finance, Oman, addressed to the joint venture partner, clarified that Article 8 (bis) under the Omani Income Tax Law was for achieving the main objective of promoting economic development with Oman by attracting investment. The CIT could not have doubted the effect of such certificate. 19. It was argued that under Article 25 (4) of 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 t....
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....ds are paid. 3. The term "dividends" as used in this Article means income from shares or other rights, not being debt-claims, participating in profits as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the Contracting State of which the company making the distribution is a resident. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected 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 t....
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.... relied on by the assessee, of the Omani Tax law, reads as follows: "Article 8 (bis) In exception to the provisions of Article 8 of this Law, tax shall not apply on the following: 1. Dividends received by the company against equity shares, portions or stocks in the capital of any other company. 2. Profits or gains realized by the Company from the sale of securities listed in Muscat Securities Market or from their disposal." The CIT had relied on the following provision: "SECTION ONE: EXEMPTION FOR CERTAIN CATEGORIES OF INCOME: Article 115: In determining the taxable income for any tax year, the following shall be exempted from tax: 1. Dividend received by the establishment, Omani company or permanent establishment from shares, allotments or shareholding it owns in the capital of any 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....
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....ment being carried out without adequate investigation. In the instant case the Order-in-Revision refers to issues and discrepancies which did not find mention in the initial notice dated 11.05.2006 and not to additional or supporting material as in the case of Rampyari Devi (supra). Therefore, to suggest that it would be sufficient compliance of the provisions of Section 263of the Act, if an opportunity to respond to the discrepancies mentioned in the Orderin-Revision is given to the assessee in reassessment proceedings before the Assessing Officer, is according to us is completely untenable. It is the requirement of Section 263 of the Act that the assessee must have an opportunity of being heard in respect of those errors which the Commissioner proposes to revise. To 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, ....
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....eous" simply because in his order he did not make an elaborate discussion in that regard." This court has ruled in Gee Vee Enterprises v ACIT, Delhi-I & Ors (1975) 99 ITR 375 that an order is erroneous when it is contrary to law or proceeds on an incorrect assumption of facts or is in breach of principles of natural justice or is passed without application of mind, that is, is stereo-typed, in as much as, the Assessing Officer, accepts what is stated in the return of the assessee without making any enquiry called for in the circumstances of the case, that is, proceeds with undue haste. In the facts of this case, neither did the AO overlook the relevant facts; nor did he not make inquiries. In fact the queries were specifically with respect to dividend 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 asp....
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....il Company SAOC stated as follows: "We refer to your letter dated 2 December, 2000 and our previous letter dated 6 August, 2000 on the above subject. Under Article 8 of the Company Income Tax Law of Oman, dividend forms part of the gross income chargeable to tax. The tax law of Oman provides income tax exemption to companies undertaking certain identified economic activities considered essential for the country's economic development with a view to encouraging investments in such sectors. Before the recent amendments to the Profit Tax Law on Commercial and Industrial Establishments, Article 5 of this law provided for exemption of dividend income in the hands of the recipients if such dividends were received out 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 ....
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....come Tax Law of Companies No.47 /1981, which spells out functions of the Secretariat General Article 3 (3) states that: "3 - Any form or notification of document issued or published or delivered by the Secretary General in accordance with this Law shall be considered an official document if it carries the name or description of the Secretary General or the responsible officer who is designated by virtue of Paragraph (2) of Article (3) and this shall be whether the name or description is printed, stamped or written." In view of the above, it is held that the clarification has to be regarded as conclusive; if the tax authorities had any doubts, they could not have proceeded to 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 un....