M/s. Telecommunications Consultants India Ltd, New Delhi v. ACIT, New Delhi

ITA 1293/DEL/2009 | 2001-2002
Pronouncement Date: 29-03-2012 | Result: Dismissed

Appeal Details

RSA Number 129320114 RSA 2009
Assessee PAN AAACT0061H
Bench Delhi
Appeal Number ITA 1293/DEL/2009
Duration Of Justice 2 year(s) 11 month(s) 23 day(s)
Appellant M/s. Telecommunications Consultants India Ltd, New Delhi
Respondent ACIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 29-03-2012
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted E
Tribunal Order Date 29-03-2012
Assessment Year 2001-2002
Appeal Filed On 06-04-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E : NEW DELHI) SHRI R.P. TOLANI JUDICIAL MEMBER AND BEFORE SHRI B.C. MEENA ACCOUNTANT MEMBER ITA NOS.1293 & 1294/DEL./2009 (ASSESSMENT YEARS : 2000-01 & 2005-06) ITA NO.72/DEL./2010 (ASSESSMENT YEAR : 2006-07) M/S. TELECOMMUNICATIONS CONSULTANTS INDIA LTD. VS. ADDL.CIT RANGE 16 TCIL BHAWAN GREATER KAILASH I NEW DELHI. NEW DELHI 110 048. (PAN : AAACT0061H) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ASEEM CHAWLA & MS. SURABHI SING H ADVOCATES REVENUE BY : SHRI ASHWANI MAHAJAN CIT DR ORDER PER B.C. MEENA ACCOUNTANT MEMBER : ITA NO.1293/DEL/2009 PERTAINING TO ASSESSMENT YEAR 2000-01 EMANATES FROM THE ORDER OF CIT (APPEALS)-XIX NEW D ELHI DATED 06.02.2009. ITA NO.1294/DEL/2009 FILED BY THE ASSESSEE EMANATES FROM THE ORDER OF CIT (APPEALS)-XIX DATED 05.02.2009 FOR ASSESSMENT YEAR 2005-06. ITA NO.72/DEL/2010 EMANATES FROM THE ORDER OF CIT (APPE ALS)-XIX NEW DELHI DATED 26.10.2009 FOR ASSESSMENT YEAR 2006-07. SOME OF THE ISSUES ARE COMMON IN ALL THESE THREE APPEALS HENCE HEARD AND BEING DISPOSED OFF BY THIS ORDER. ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 2 2. THE ASSESSEE IS A PUBLIC SECTOR UNDERTAKING OWNE D BY THE GOVERNMENT OF INDIA UNDER THE ADMINISTRATIVE CONTROL OF MINIST RY OF COMMUNICATION. THE COMPANY IS DOING BUSINESS OF PROVIDING FULL RANGE O F CONSULTANCY DESIGN AND ENGINEERING SERVICES IN ALL THE FIELDS OF TELECOMMU NICATION IN INDIA AS WELL AS ABROAD. THE MAJOR CLIENTS OF THE ASSESSEE COMPANY IN INDIA ARE GOVERNMENT OF INDIA BSNL MTNL RAILWAYS GAIL AND POWER GRID ETC. ON THE GLOBAL FRONT THE ASSESSEE HAS EXECUTING TURNKEY / CONSULT ANCY PROJECTS IN MANY COUNTRIES IN AFRICA AND MIDDLE EAST BESIDES SOUTH A ND SOUTH EAST ASIAN AND CIS COUNTRIES. 3. THE MAIN ISSUE INVOLVED IN ALL THESE APPEALS IS REGARDING THE TAXABILITY IN INDIA OF INCOME EARNED IN A FOREIGN COUNTRY BY T HE ASSESSEE WHO IS A RESIDENT OF INDIA. IN THE ASSESSMENT YEAR 2000-01 THE ASSESSEE HAS ALSO CHALLENGED THE REOPENING OF ASSESSMENT U/S 147 /148 OF THE INCOME-TAX ACT. THE GROUNDS OF APPEAL IN ITA NO.1293/DEL/2009 FOR A SSESSMENT YEAR 2000 01 READ AS UNDER :- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - XIX ('CIT (APPEALS)') HAS ERRED IN CONFIRMING THE ACTIO N OF THE ADDITIONAL COMMISSIONER OF INCOME TAX RANGE- 16 N EW DELHI ('ASSESSING OFFICER') 148 OF THE INCOME TAX ACT 19 61 ('ACT') THAT THE REOPENING OF ASSESSMENT WAS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 147 /148 OF THE INCOME-TAX AC T 1961 (ACT). 1.1 THAT ON THE FACTS OF THE CASE AND IN LAW THE LEARNED CIT (APPEALS) HAS ERRED IN REJECTING THE PLEA OF THE AP PELLANT THAT ALL THE PRIMARY FACTS NECESSARY FOR ASSESSMENT WERE FUL LY AND TRULY ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 3 DISCLOSED DURING THE COURSE OF THE ORIGINAL ASSESSM ENT PROCEEDINGS. 1.2 THAT ON THE FACTS OF THE CASE AND IN LAW THE LEARNED CIT (APPEALS) HAS ERRED IN UPHOLDING THE INITIATION OF REOPENING OF THE ASSESSMENT PROCEEDINGS WHICH WAS DONE MERELY ON THE BASIS OF CHANGE OF OPINION. 1.3 THAT ON THE FACTS OF THE CASE AND IN LAW THE LEARNED CLT (APPEALS) HAS ERRED IN STATING: 'THERE IS NO MERIT IN THE ARGUMENTS A/THE AR AND CA SE LAWS CITED ARE NOT APPLICABLE TO THE FACTS OF THE C ASE. THERE WERE WRONG CLAIMS AND ACCORDINGLY THERE WAS ESCAPEMENT OF INCOME. AFTER RECORDING PROPER REASON S THE ASSESSMENT WAS REOPENED' 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT (APPEALS) HAS ERRED IN CONFIRMING T HE ACTION OF THE ASSESSING OFFICER IN EXTENDING THE SCOPE OF INQ UIRY DURING THE COURSE OF RE-ASSESSMENT PROCEEDINGS BY INCLUDIN G THE GROUNDS NOT COVERED IN THE REASSESSMENT NOTICE ISSU ED UNDER SECTION 148 OF THE ACT WHICH HAD ATTAINED FINALITY DURING THE REGULAR ASSESSMENT. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT (APPEALS) HAS ERRED IN CONFIRMING T HE DISALLOWANCE OF THE CLAIM OF DEDUCTION MADE BY THE APPELLATE UNDER SECTION 80 HHB OF THE ACT AMOUNTING TO RS.8 0 2 147. 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW THE LEARNED CIT (APPEALS) HAS ERRED IN CONF IRMING THE DISALLOWANCE OF THE CLAIM OF DEDUCTION MADE BY THE APPELLATE UNDER SECTION 80 HHC OF THE ACT AMOUNTING TO RS.31 28 849. 5. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT (APPEAL) HAS ERRED IN CONFIRMING TH E ACTION OF THE ASSESSING OFFICER THAT THE BUSINESS INCOME AMOU NTING TO RS.10 68 26 533 ATTRIBUTABLE TO THE PERMANENT ESTAB LISHMENT(S) OF THE APPELLATE LOCATED IN OMAN MAURITIUS NETHER LANDS AND TANZANIA IS EXIGIBLE TO INCOME TAX IN INDIA UNDER THE SCHEME OF THE ACT. ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 4 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT (APPEAL) HAS ERRED IN IGNORING THAT THE BUSINESS INCOME AMOUNTING TO RS.10 68 26 533 IS ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT(S) OF THE APPELLATE LOCATED IN OMAN MAURITIUS NETHERLANDS AND TANZANIA ARE COUNTRIES WITH WHICH INDIA HAS COMPREHENSIVE AGREEMENT FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASIO N WITH RESPECT TO TAXES ON INCOME. 7. THAT ON THE FACTS OF THE CASE AND IN LAW THE O RDERS PASSED BY THE LEARNED CIT (APPEALS) AND THE ASSESSING OFFI CER ARE BAD IN LAW AND VOID-AB-INITIO. 4. THE RETURN OF INCOME FOR THE YEAR 2000-01 WAS FI LED ON 29.11.2000 DECLARING INCOME AT RS.17 86 33 080/- UNDER THE NOR MAL PROVISIONS OF THE INCOME-TAX ACT AND RS.19 11 37 820/- COMPUTED AS 30 % OF THE BOOK PROFITS UNDER THE PROVISIONS OF SECTION 115JA. SUBSEQUENTL Y THE RETURN WAS REVISED ON 05.03.2002. THE CASE WAS SELECTED FOR SCRUTINY AND THE ORDER U/S 143(3) PASSED ON 12.03.2003 DETERMINING THE INCOME AT RS.2 1 28 33 925/- UNDER NORMAL PROVISIONS OF THE ACT WHICH WAS HIGHER THAN THE 30% OF THE BOOK PROFIT AS PER THE PROVISIONS OF SECTION 115JA WHICH WORKED OUT AT RS.20 44 03 265/-. AGAINST THAT ORDER THE ASSESSE E HAD PREFERRED THE APPEAL. CIT (A) PASSED THE ORDER U/S 250 ON 23.07.2003 AND DELETED CERTAIN ADDITIONS AND INCOME WAS ASSESSED AT RS.17 51 57 580/- UNDER NORMAL PROVISIONS AND RS.19 31 00 360/- UNDER SECTION 115JA OF THE ACT AF TER APPEAL EFFECT. SUBSEQUENTLY A NOTICE U/S 148 WAS ISSUED FOR REASS ESSMENT. IN RESPONSE TO THAT NOTICE ASSESSEE FILED THE RETURN ON 30.04.200 7. ASSESSEE ALSO REQUESTED ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 5 THE ASSESSING OFFICER TO COMMUNICATE THE REASONS FO R REOPENING. ASSESSING OFFICER FURNISHED THE REASONS FOR REOPENING. THESE REASONS FOR REOPENING WERE (I) INCORRECT ALLOWANCE OF DEDUCTION IN RESPEC T OF EXPORT PROFIT RS.12 04 607/-; AND (II) INCORRECT CLAIM OF DEDUCTI ON RS.3 08 026/-. IN THE ORIGINAL RETURN FILED THE ASSESSEE ALSO CLAIMED SE CTION 80HHC DEDUCTION OF RS.31 28 849/- AND A PRESCRIBED FORM 10CCAC WAS ALS O ATTACHED. THE INDIRECT EXPENSES ATTRIBUTABLE TO THE TRADING GOODS DECLARED WERE OF RS.22 27 037/-. THE ASSESSING OFFICER ALLOWED THE CLAIM MADE BY THE ASSESSEE U/S 80HHC WHILE MAKING THE ORDER U/S 143(3 ). WHILE PLEADING ON BEHALF OF THE ASSESSEE THE LEARNED AR SUBMITTED TH AT THE CIT (A) IS NOT JUSTIFIED IN SUSTAINING THE REOPENING OF THE ASSESS MENT U/S 147 / 148 OF THE INCOME-TAX ACT. ON THIS ISSUE LD. AR PLEADED THAT THE ASSESSEE HAS DECLARED ALL THE PRIMARY FACTS NECESSARY FOR THE ASSESSMENT FULLY AND TRULY DURING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS ITSELF. LD. AR ALSO PLEADED THAT THE INITIATION OF THE REOPENING OF THE ASSESSMENT PROCE EDINGS WAS BASED MERELY ON THE BASIS OF CHANGE OF OPINION. THE CIT (A) WAS NO T JUSTIFIED IN HOLDING THAT THE CASE LAWS CITED BY THE ASSESSEE WERE NOT APPLIC ABLE TO THE FACTS OF THE CASE. HE FURTHER PLEADED THAT THE CIT (A) WAS ALSO NOT JU STIFIED IN HOLDING THAT THE ASSESSEE HAD MADE A WRONG CLAIM AND ACCORDINGLY TH ERE WAS ESCAPEMENT OF INCOME. THE LEARNED AR FURTHER PLEADED THAT THE RE OPENING OF THE ASSESSMENT WAS MADE AFTER FOUR YEARS AND ALL THE CONDITIONS AS LAID OUT IN THE PROVISO TO ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 6 SECTION 147 FOR REOPENING OF THE ASSESSMENT WERE NO T APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE ASSESSEES CASE. THE REOP ENING WAS BASED ONLY ON CHANGE OF OPINION. THE REASONS FOR ISSUE OF NOTICE U/S 148 BASED ON THE FACT THAT THE ASSESSEE HAS MADE TWO INCORRECT CLAIMS AGA INST THE TAXABLE INCOME WHICH WERE ALSO NOT BASED ON THE CORRECT FACTS. LD . AR FURTHER PLEADED THAT THE AMOUNT OF DEDUCTION ALLOWABLE AS PER THE PROVIS IONS OF SECTION 80HHB WILL BE LESSER OF 50% OF THE PROFIT OF THE FOREIGN PROJECTS OR THE AMOUNT CREDITED BY THE ASSESSEE TO THE FOREIGN PROJECT RES ERVE ACCOUNT OR AMOUNT BROUGHT INTO INDIA IN CONVERTIBLE FOREIGN EXCHANGE. IN THIS CASE THE ASSESSEE HAS MADE DEDUCTION OF RS.32 08 02 147/- AND THE RES ERVE WAS MADE OF RS.32 CRORES ONLY. THUS THERE WAS A MINOR DIFFERENCE IN THE PROVISION MADE AND DEDUCTION CLAIMED. THE SHORTAGE HAD BEEN MADE GOOD IN SUBSEQUENT YEARS. FURTHER THE LEARNED AR ALSO PLEADED THAT THE RETUR N OF INCOME WAS ACCOMPANIED WITH THE SUPPORTING DOCUMENTS. ALL THE MATERIAL FACTS REQUIRED WERE DISCLOSED FULLY AND TRULY. THE REOPENING IS A FTER FOUR YEARS THEREFORE THE ASSESSMENT WAS NOT LIABLE TO BE REOPENED UNLESS THERE WAS A FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE THE PRIMARY FACTS AND LD. AR ALSO RELIED ON THE FOLLOWING CASE LAWS :- (I) ICICI BANK LTD. VS. RAO & ANR. 268 ITR 203 ( BOM.); (II) AJAY OXYCHOLORIDE FLOORINGS VS. IYER ACIT & ORS. 155 TAXMAN 306 (BOM.); ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 7 (III) HINDUSTAN LEVER LTD. VS. ACIT & ORS. 268 I TR 332 (BOM.); (IV) ACIT VS. VINDHYA TELELINKS LTD. 107 TTJ 149 (JAB.)(TM); AND (V) CIT VS. SHRI TIRATH RAM AHUJA (HUF) 306 ITR 173 (DELHI). LD. AR ALSO RELIED ON THE FOLLOWING DECISIONS WHERE REOPENING WAS HELD TO BE INVALID ON THE BASIS OF CHANGE OF OPINION :- (I) IDEA CELLULAR LTD. VS. DCIT & ORS. - 215 CTR 2 88 (BOM); (II) GARDEN SILK MILLS PVT. LTD. VS. DCIT - 237 IT R 668 (GUJ.); (III) CIT VS. KELVINATOR OF INDIA LTD. - 256 ITR 1 (DEL)( FB); (IV) CIT VS. BHANJI LAVJI - 79 ITR 582 (SC); (V) BALLARPUR PAPER AND STRAW BOARD MILLS LTD. VS. CIT - 101 ITR 55 (CAL) (VI) SITA WORLD TRAVEL (INDIA) LTD. VS. CIT & ANR. 140 TAXMAN 381 (DEL) (VII) PHOOL CHAND BAJRANG LAL & AM VS. ITO & ANR. - 203 I TR 456 (SC) (VIII) UOI VS. KAMALAKSHI FINANCE CORPORATION LTD. - 55 ELT 433 (SC) (IX) SESA GOA LTD. VS. JCIT - 294 ITR 101 (BOM.) FINALLY THE LEARNED AR ALSO RELIED ON THE FOLLOWIN G DECISIONS :- (I) BHAVESH DEVELOPERS VS. ASSESSING OFFICER (2010) 3 29 ITR 249 (BOM.) WHEREIN THE HON'BLE HIGH COURT HAS HELD RE COURSE TO THE POWER UNDER SECTION 147 CANNOT BE SUSTAINED ON A MERE CHANGE OF OPINION THERE BEING NO FAILURE OF THE AS SESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESS ARY FOR ASSESSMENT. THE BASIC CONTENTION PRESCRIBED BY THE STATUTE FOR ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 8 THE EXERCISE OF THE POWER HAS NOT BEEN FULFILLED. THE PETITION HAS TO BE ALLOWED. (II) CARLTON OVERSEAS (P) LTD. VS. ITO (2010) 188 TAXM AN 11 (DEL.) WHEREIN THE HON'BLE HIGH COURT HAS HELD AS U NDER :- THE AUDIT REPORT (OBJECTION) MERELY GIVES AN OPIN ION WITH REGARD TO THE NON-AVAILABILITY OF THE DEDUCTIO N BOTH UNDER SECTION 80-IA AND UNDER SECTION 80-HHC AND THAT THE DEDUCTION UNDER SECTION 80-IA WAS NOT DEDUCTED FROM THE PROFI TS OF THE BUSINESS WHILE COMPUTING DEDUCTION UNDER SECTION 80 -HHC. CLEARLY THEREFORE THERE WAS NO NEW OR FRESH MATER IAL BEFORE THE ASSESSING OFFICER EXCEPT THE OPINION OF THE REVENUE AUDIT PARTY. THERE IS A WELL KNOWN DIFFERENCE BETWEEN A WRONG C LAIM MADE BY AN ASSESSEE AFTER DISCLOSING ALL THE TRUE AND MA TERIAL FACTS AND A WRONG CLAIM MADE BY THE ASSESSEE BY WITHHOLDING T HE MATERIAL FACTS FULLY AND TRULY. IT IS ONLY IN THE LATTER CAS E THAT THE ASSESSING OFFICER WOULD BE ENTITLED TO INITIATE RE- ASSESSMENT PROCEEDINGS UNDER SECTION 147 OF THE ACT. (III) TITANOR COMPONENTS VS. ACIT WRIT PETITION NO.71 O F 2005 (BOM.) WHEREIN THE HON'BLE HIGH COURT HAS HELD AS U NDER :- ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 9 THE PROCEEDINGS INITIATED BY THE ASSESSING OFFICE R UNDER SECTION 147 OF THE ACT TO TAX A PARTICULAR ITEM OF INCOME WERE BAD IN LAW BECAUSE PROCEEDINGS UNDER SECTION 154 OF THE ACT TO TAX THE SAME INCOME WERE PENDING ADJUDICATION. THE ASSESSEE CANNOT BE SUBJECTED TO TWO TYPES OF PROCEEDINGS AT THE SAME TIME REGARDING THE SAME INCOME. FURTHER EVEN AFTER THE PROCEEDINGS UNDER SECTION 154 OF THE ACT WERE CONCLUDED ISSUAN CE OF A NOTICE UNDER SECTION 148 OF THE ACT WOULD BE BASED ON A CHANGE OF OPINION AND WOULD THEREFORE BE BAD IN LAW. 5. ON THE OTHER HAND THE LEARNED DR SUBMITTED THAT THE ASSESSEE IS A PUBLIC SECTOR UNDERTAKING ENGAGED IN THE BUSINESS O F FULL RANGE OF CONSULTANCY DESIGN AND ENGINEERING SERVICES IN ALL FIELDS OF TELECOMMUNICATION IN INDIA AS WELL AS ABROAD. THE ORIGINAL RETURN OF INCOME WAS FILED ON 29.11.2000 DECLARING INCOME AT RS.17 8 6 33 080/- UNDER NORMAL PROVISIONS OF IT ACT AND RS.19 11 37 820 U/S 115J. IN REVISED RETURN FILED ON 05-03-2002 INCOME DECLARED WAS RS.17 51 57 580 UND ER NORMAL PROVISIONS AND RS.19 00 95 167 U/S 115J. IN ORDER U/S 143(3) D ATED 12-03-2003 TOTAL INCOME WAS DETERMINED AT RS.21 28 33 925 UNDER NORM AL PROVISIONS AND RS.20 44 03 265 U/S 115J. CIT(A) VIDE HIS ORDER DAT ED 23-07-2003 DELETED CERTAIN DISALLOWANCES MADE BY AO AND IN APPEAL EFFE CT ORDER INCOME WAS COMPUTED AT RS.17 51 57 580 UNDER NORMAL PROVISIONS AND RS.19 31 00 360 ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 10 U/S 115J. VIDE NOTICE U/S 148 DATED 30-03-2007 REA SSESSMENT PROCEEDINGS WERE INITIATED. IN RESPONSE ASSESSEE FILED RETURN ON 30-04-2007. REASONS FOR RE-OPENING WERE COMMUNICATED TO ASSESSEE ON 06-07-2 007. THESE HAVE BEEN REPRODUCED BY CIT(A) ON PAGE 4 PARA 13 OF HIS ORDER AND IN BRIEF ARE AS BELOW:- (I) INCORRECT ALLOWANCE OF DEDUCTION U/S 80 HHC RS.31 28 849 (II) INCORRECT CLAIM OF DEDUCTION U/S 80 HHB RS.8 02 147 5.1 LD. DR SUBMITTED THAT THE ASSESSEE HAS CHALLENG ED RE-OPENING PROCEEDINGS ON GROUND THAT ALL PRIMARY FACTS NECESS ARY FOR ASSESSMENT WERE FULLY AND TRULY DISCLOSED DURING THE COURSE OF ORIG INAL ASSESSMENT PROCEEDINGS AND INITIATION OF RE-OPENING PROCEEDINGS WAS DONE M ERELY ON BASIS OF CHANGE OF OPINION. LD. DR PLEADED THAT AS PER EXPLANATION 2(C)(IV) TO SECTION 147 IF EXCESSIVE LOSS DEPRECIATION ALLOWANCE OR ANY OTHER ALLOWANCE UNDER THE ACT HAS BEEN COMPUTED IT WILL BE DEEMED AS CASE OF ESC APEMENT OF INCOME. THE AO HAS FOUND THAT THE ASSESSEE HAS INFLATED ITS CLA IM U/S 80HHC BY ALLOCATING LESS INDIRECT EXPENSES ATTRIBUTABLE TO EXPORT OF TR ADING GOODS. RELEVANT FIGURES HAVE GIVEN IN PAGE 3 OF CIT(A) ORDER. BY APPLYING R ATIO OF EXPORT TURNOVER TO TOTAL TURNOVER THE AO FOUND THAT INDIRECT EXPENSES ATTRIBUTABLE TO EXPORT OF TRADING GOODS SHOULD BE RS.1 32 67 095 AND NOT RS.2 2 27 037 AS CLAIMED BY THE ASSESSEE. THUS THE CLAIM OF DEDUCTION U/S 80HH C WAS NOT ALLOWABLE. FURTHER AO ALSO FOUND THAT THE ASSESSEE HAS CREDIT ED RS.32 00 00 000 TO FOREIGN PROJECT RESERVE ACCOUNT BUT HAS CLAIMED DED UCTION U/S 80HHB FOR ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 11 RS.3 08 02 147 THEREFORE THE CLAIM WAS EXCESS TO THE TUNE OF RS.8 02 147. THE CONTENTION OF THE ASSESSEE THAT ALL MATERIAL FA CTS HAVE FULLY AND TRULY DISCLOSED AND THERE IS NO FAILURE ON ITS PART IS NO T CORRECT. IN ASSESSMENT ORDER U/S 143(3) ISSUES OF DEDUCTION U/S 80HHC AND 80HHB HAS NOT BE DISCUSSED AT ALL. FOR CLAIM OF DEDUCTION U/S 80HHC THOUGH 10 CCAC CERTIFICATE HAS BEEN FILED BUT IT DOES NOT CONTAIN WORKING OF INDI RECT EXPENSES ATTRIBUTABLE TO EXPORTED TRADING GOODS WHICH IS VITAL ELEMENT FOR C OMPUTATION OF DEDUCTION AVAILABLE. ASSESSEE HAS NOT FURNISHED ALL SUCH DET AILS. THIS FACT HAS ALSO BEEN MENTIONED ON PAGE 9 OF ASSESSMENT ORDER U/S 147. AC CORDING TO PROVISION CONTAINED IN EXPLANATION 1 TO SECTION 147 PRODUCTI ON OF BOOKS OF ACCOUNTS DOES NOT EXONERATE THE ASSESSEE EVEN IF AO COULD HA VE FOUND THE RELEVANT FACTS BY EXERCISING DUE DILIGENCE. THIS HAS BEEN CO NSISTENTLY HELD IN MANY DECISIONS INCLUDING FOLLOWING :- (I) INDO-ADEN SALT MANUFACTURING AND TRADING CO. V S CIT 159 ITR 624 (SC) (II) ITO VS LAKHMANI MEWAL DAS 103 ITR 437 (SC) (III) MALEGAON ELECTRICITY CO. P. LTD. VS CIT 78 I TR 466 (SC) 5.2 LD. DR FURTHER PLEADED THAT AS PER EXPLANATION (E) GIVEN BELOW 80HHC(3) INDIRECT COST MEANS COSTS NOT BEING DIRE CT COSTS ALLOCATED IN THE RATIO OF THE EXPORT TURNOVER IN RESPECT OF TRADING GOODS TO THE TOTAL TURNOVER. IT WAS SEEN THAT THE ASSESSEE HAS NOT WORKED OUT INDIR ECT COST IN THIS MANNER. 5.3 FOR CLAIM OF DEDUCTION U/S 80HHB THE CONTENTIO N OF ASSESSEE IS THAT SHORTFALL IN CREDIT OF FOREIGN PROJECT RESERVE ACCO UNT HAS BEEN MADE GOOD IN ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 12 THE SUBSEQUENT YEAR. THIS ARGUMENT IS OF NO HELP BE CAUSE ASSESSEE HAS TO MEET WITH PRESCRIBED REQUIREMENTS DURING THE PERIOD UNDE R CONSIDERATION. CLEARLY AO HAS WRONGLY ALLOWED CLAIM U/S 80HHB DURING ASSES SMENT U/S 143(3). 5.4 ON BOTH THE GROUNDS OF 80HHC AND 80HHB THE AO HAS ALLOWED DEDUCTIONS IN ORIGINAL ASSESSMENT U/S 143(3) BY WRO NGLY APPLYING THE PROVISIONS OF RELEVANT LAW. IN SUCH A SITUATION IT CAN NOT BE SAID THAT THE AO HAS SUBSEQUENTLY INITIATED RE-OPENING PROCEEDING ON THE BASIS OF CHANGE OF OPINION. CHANGE OF OPINION COMES TO RESCUE OF ASSES SEE ONLY WHEN AO HAS TAKEN ONE OF THE PERMISSIBLE VIEWS DURING ORIGINAL ASSESSMENT. A WRONG APPLICATION OF LAW--CAN NOT BE HELD AS PERMISSIBLE VIEW AND THAT CAN ALWAYS BE CHANGED FOR CORRECT APPRECIATION OF LAW. IT HAS BEEN HELD SO IN CASE OF SOM DUTT BUILDERS (P) LTD. VS DCIT 98 ITD 78 (KOL). INC IDENTALLY THIS CASE LAW IS ALSO ON CLAIM OF DEDUCTION U/S 80HHB. 5.5 LD. DR FURTHER SUBMITTED THAT COURTS HAVE CONSI STENTLY HELD THAT AT INITIATION STAGE THERE SHOULD BE A PRIMA FACIE CAS E FOR MAKING A REASONED BELIEF THAT INCOME HAS ESCAPED ASSESSMENT. COURTS C AN NOT EXAMINE SUFFICIENCY OF REASONS AND AO NEED NOT MAKE EXACT C OMPUTATION OF ESCAPED INCOME. FOR THIS LD. DR PLACED RELIANCE ON THE FOL LOWING CASE LAWS :- (I) RAYMONDS WOOLEN MILLS VS ITO 236 ITR 34 (SC) (II) S. NARAYANAPPA VS CIT 63 ITR 219 (SC) 5.6 LD. DR FINALLY PRAYED THAT THIS GROUND OF APPEA L OF ASSESSEE SHOULD BE DISMISSED AND RE-OPENING OF ASSESSMENT MAY BE UPHEL D. ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 13 6. WE HAVE HEARD BOTH THE SIDES IN DETAIL. THE N OTICE HAS BEEN ISSUED AFTER FOUR YEARS PERIOD WHEREIN THE REOPENING ON TH E BASIS OF CHANGE OF OPINION IS NOT PERMITTED HOWEVER AS PER EXPLANATI ON (2)(C)(IV) TO SECTION 147 IF EXCESSIVE LOSS DEPRECIATION ALLOWANCE OR A NY OTHER ALLOWANCE UNDER THE ACT HAS BEEN COMPUTED IT SHALL BE DEEMED TO BE AN ESCAPEMENT OF INCOME. IN THE ASSESSEES CASE DEDUCTION U/S 80HHC CLAIMED . THE INDIRECT EXPENSES CONSIDERED ATTRIBUTABLE TO THE EXPORT OF TRADING OF GOODS TAKEN BY THE ASSESSING OFFICER AS PER ASSESSEES INFORMATION WHI LE ALLOWING 80HHC IN ORIGINAL ORDER WERE TAKEN ONLY RS.22 27 037/- WHILE THE INDIRECT EXPENSES ATTRIBUTABLE TO THE TRADING GOODS MUST HAVE BEEN CO NSIDERED AT RS.1 32 67 095/-. THUS THERE WAS EXCESS CLAIM OF 80HHC WAS ALLOWED IN ORIGINAL ASSESSMENT. THEREFORE THE CONTENTION OF THE ASSESSEE THAT ALL MATERIAL FACTS HAVE BEEN FULLY AND TRULY DISCLOSED AND THERE IS NO FAILURE ON THE PART OF THE ASSESSEE IS NOT CORRECT. IN ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER U/S 143(3) OF THE INCOME-TAX ACT THE ISSUE S RELATING TO DEDUCTION U/S 80HHC AND 80HHB HAVE NOT BEEN DISCUSSED AT ALL. A LTHOUGH FOR CLAIMING DEDUCTION U/S 80HHC CERTIFICATE IN FORM NO.10CCAC HAS BEEN FILED BUT IT DOES NOT CONTAIN WORKING OF INDIRECT EXPENSES ATTRI BUTABLE TO EXPORTED TRADING GOODS. THIS FACT IS VITAL ELEMENT FOR COMPUTATION OF DEDUCTION AVAILABLE TO THE ASSESSEE WHICH HAS NOT BEEN FURNISHED BY THE ASSESS EE. THEREFORE THE PROVISIONS CONTAINED IN EXPLANATION 1 TO SECTION 14 7 THE PRODUCTION OF BOOKS ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 14 OF ACCOUNTS DOES NOT EXONERATE THE ASSESSEE EVEN IF AO COULD HAVE FOUND THE RELEVANT FACTS BY EXERCISING DUE DILIGENCE. THIS PR OPOSITION HAS BEEN HELD BY VARIOUS COURTS INCLUDING THE FOLLOWING :- (I) INDO-ADEN SALT MANUFACTURING AND TRADING CO. V S CIT 159 ITR 624 (SC) (II) ITO VS LAKHMANI MEWAL DAS 103 ITR 437 (SC) (III) MALEGAON ELECTRICITY CO. P. LTD. VS CIT 78 I TR 466 (SC) THE EXPLANATION (E) FOR THE PURPOSES OF SUB-SECTION 80HHC(3) DEFINES THE INDIRECT COST AS FOLLOWS :- INDIRECT COSTS MEANS COSTS NOT BEING DIRECT COSTS ALLOCATED IN THE RATIO OF THE EXPORT TURNOVER IN RESPECT OF TRAD ING GOODS TO THE TOTAL TURNOVER THE ASSESSEE HAD NOT WORKED OUT INTEREST COST IN TH IS MANNER. FURTHER THE ASSESSEE HAS CLAIMED DEDUCTION U/S 80HHB FOR RS.32 08 02 147/-. THE ASSESSEE HAS CREDITED TO FOREIGN PROJECT RESERVE AC COUNT OF RS.32 CRORES ONLY. THE PROVISIONS OF SECTION 80HHB (3) PROVIDES SUCH C ONDITIONS WHICH ARE TO BE FULFILLED FOR CLAIMING THE DEDUCTION UNDER THIS SECTION. THE FIRST CONDITION IS MAINTAINING SEPARATE BOOKS OF ACCOUNT IN RESPECT OF PROFITS AND GAINS DERIVED FROM THE BUSINESS OF THE EXECUTION OF THE F OREIGN PROJECTS OR AS THE CASE MAY BE OR OF THE WORK FORMING PART OF THE FORE IGN PROJECT UNDERTAKEN BY THE ASSESSEE. THE OTHER CONDITION IS FURNISHING A CERTIFICATE IN A PRESCRIBED FORM NO.CCCAC FROM AN ACCOUNTANT AS DEFINED IN THE EXPLANATION BELOW SUB- SECTION (2) OF SECTION 288 DULY SIGNED AND VERIFIE D BY SUCH ACCOUNTANT ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 15 CERTIFYING THAT DEDUCTION HAS BEEN CORRECTLY CLAIME D IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION. THE OTHER CONDITION WH ICH IS NECESSARY TO BE FULFILLED ARE THAT DEDUCTION CLAIMED MUST BE LESSER OF AMOUNT EQUAL TO 50% OF PROFIT FROM SUCH PROFIT OR AMOUNT CREDITED TO FOREI GN PROJECT RESERVE ACCOUNT BY DEBITING THE PROFIT AND LOSS ACCOUNT OF THE PREV IOUS YEAR IN RESPECT OF WHICH THE DEDUCTION UNDER THIS SECTION IS TO BE ALL OWED AND CREDITED TO A RESERVE ACCOUNT (TO BE CALLED THE FOREIGN PROJECTS RESERVE ACCOUNT) TO BE UTILIZED BY THE ASSESSEE DURING A PERIOD OF FIVE YE ARS NEXT FOLLOWING FOR THE PURPOSES OF HIS BUSINESS OTHER THAN FOR DISTRIBUTIO N BY WAY OF DIVIDENDS OR PROFITS OR AMOUNT BROUGHT INTO INDIA IN FOREIGN EXC HANGE. THE FOREIGN PROJECT RESERVE ACCOUNT WAS CREDITED OF RS.30 CRORES ONLY W HILE CLAIM WAS MADE OF RS.32 08 02 147/-. THUS PRIMA FACIE THERE WAS EX CESS DEDUCTION CLAIMED U/S 80HHB BY THE ASSESSEE OF RS.8 02 147/-. THE DEDUCT ION CLAIMED U/S 80HHB THE ASSESSEE HAS MADE A SHORT FALL CREDIT IN THE FO REIGN PROJECT RESERVE ACCOUNT. IT IS CLAIMED THAT THE SHORT FALL HAS BEEN MADE GO OD IN THE SUBSEQUENT YEAR BUT THIS WILL NOT BE HELPFUL TO THE ASSESSEE TO EXPLAIN OR TO JUSTIFY THE EXCESS CLAIM MADE DURING THE YEAR UNDER CONSIDERATION. THUS THE ASSESSING OFFICER HAS ALLOWED EXCESSIVE DEDUCTION U/S 80HHB AND 80HHC WHI LE MAKING THE ORIGINAL ASSESSMENT BY WRONGLY APPLYING THE PROVISI ONS OF LAW. IN VIEW OF THE FACTS THE INITIATION OF THE REOPENING PROCEEDINGS SUBSEQUENTLY DOES NOT AMOUNT TO CHANGE OF OPINION. SIMILAR VIEW HAS ALS O BEEN UPHELD IN THE CASE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 16 OF SOM DUTT BUILDERS (P) LTD. VS. DCIT REPORTED IN 98 ITD 78 (KOL.). IT IS ALSO A TRITE LAW THAT WHILE REOPENING THE ASSESSMEN T THERE SHOULD BE A PRIMA FACIE CASE FOR MAKING A REASONED BELIEF THAT INCOME HAS ESCAPED ASSESSMENT. THE COURTS CANNOT CONSIDER SUFFICIENCY OF REASONS A ND CORRECTNESS OF MATERIAL AT THAT STAGE. EXISTENCE OF BELIEF CAN BE CHALLENG ED BY ASSESSEE BUT NOT THE SUFFICIENCY OF THE REASONS TO BELIEF. THIS VIEW HA D BEEN UPHELD IN THE VARIOUS DECISION OF HON'BLE SUPREME COURT INCLUDING IN THE CASES OF RAYMONDS WOOLEN MILLS VS ITO 236 ITR 34 (SC) AND S. NARAYANA PPA VS CIT 63 ITR 219 (SC). CONSIDERING TO THE TOTALITY OF FACTS AND CIRCUMSTANCES OF THE CASE WE SUSTAIN THE ORDER OF THE CIT (A) ON THE ISSUE OF REOPENING OF THE ASSESSMENT. 7. IN THE GROUND NO.2 THE ISSUE RAISED BY THE ASSE SSEE IS REGARDING CONFIRMING THE ACTION OF ASSESSING OFFICER AND EXTE NDING THE SCOPE OF ENQUIRY DURING THE COURSE OF REASSESSMENT PROCEEDINGS BY IN CLUDING THE GROUNDS NOT COVERED IN THE REASSESSMENT NOTICE ISSUED U/S 148 O F THE INCOME-TAX ACT WHICH THE ASSESSEE CLAIMED HAS ATTAINED FINALITY DU RING THE REGULAR ASSESSMENT. 8. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE AND AF TER HEARING BOTH THE SIDES WE FIND THAT THE HON'BLE BOMBAY HIGH COURT I N THE CASE OF CIT VS. JET AIRWAYS (I) LTD. IN ITA NO.1714 OF 2009 AND 1526 OF 2008 HAS HELD THAT ASSESSING OFFICER CAN ALSO ASSESS OTHER ITEMS OF IN COME WHICH COME TO HIS ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 17 NOTICE DURING THE REASSESSMENT PROCEEDINGS. THE EX PLANATION 3 TO SECTION 147 INSERTED BY THE FINANCE (NO.2) ACT 2009 W.E.F. 1. 4.1989 PROVIDES THAT FOR THE PURPOSE OF ASSESSMENT OR REASSESSMENT UNDER THIS SE CTION THE ASSESSING OFFICER MAY ASSESS OR REASSESS THE INCOME IN RESPEC T OF ANY ISSUE WHICH HAS ESCAPED ASSESSMENT AND SUCH ISSUE COMES TO HIS NOT ICE SUBSEQUENTLY IN THE COURSE OF THE PROCEEDINGS UNDER THIS SECTION NOTWI THSTANDING THAT THE REASONS FOR SUCH ISSUE HAVE NOT BEEN INCLUDED IN THE REASON S RECORDED UNDER SUB- SECTION (2) OF SECTION 148. THE LANGUAGE OF EXPLAN ATION IS CLEAR AND UNAMBIGUOUS. IT EXPLAINS THE ISSUE IN CLEAR TERMS. IN VIEW OF THIS EXPLANATION 3 TO SECTION 147 WE FIND NO MERITS IN THIS GROUND OF ASSESSEES APPEAL AND THE SAME IS DISMISSED. 9. IN GROUND NO.3 THE ASSESSEE HAS RAISED THE ISSU E REGARDING CONFIRMING THE DISALLOWANCE OF CLAIM OF DEDUCTION MADE U/S 80H HB OF THE ACT AMOUNTING TO RS.8 02 147/-. 10. THE ASSESSEE HAS MADE TOTAL CLAIM OF RS.32 08 0 2 147/- WHILE THE RESERVE HAS BEEN MADE UPTO RS.32 CRORES ONLY. THER E WAS A SHORT FALL WHICH WAS MADE GOOD IN THE SUBSEQUENT YEAR (REFER TO PAGE 15 OF PAPER BOOK). LD. AR SUBMITTED THAT REVENUE AUTHORITIES HAVE TO EVALU ATE REASONABILITY OF CIRCUMSTANCES AND THEY CAN POSITIVELY TAKE INTO ACC OUNT THE SUBSEQUENT DEVELOPMENTS. RELIANCE WAS PLACED ON M/S. MARG CON STRUCTIONS VS. JCIT 2003 TTJ 440 AND ASSAM ROLLER FLOUR MILLS VS. CIT (1996) 227 ITR 43 ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 18 (RAJ.). IN THE CASE OF ASSAM ROLLER FLOUR MILLS C ITED SUPRA THE HON'BLE RAJASTHAN HIGH COURT HAS OBSERVED AS UNDER :- THE GENERAL RULE IS THAT DEDUCTION CAN BE PERMITTED IN RESPECT OF ONLY THOSE EXPENSES OR LOSSES WHICH ARE ACCRUED IN THE RELEVANT ACCOUNTING YEAR. THIS GENERAL RULE HOWEVE R IS REQUIRED TO BE APPLIED AFTER TAKING INTO ACCOUNT SUCH SUBSEQ UENT EVENTS WHICH HAVE A BEARING ON THE ISSUE BEING DECIDED BY THE AUTHORITY CONCERNED. IT IS THEREFORE PERMISSIBLE IN LAW TO TAKE INTO CONSIDERATION AT THE TIME OF DECIDING AN ISSUE SU CH SUBSEQUENT EVENTS LEGAL OR FACTUAL WHICH MAY HAVE AN EFFECT ON THE DECISION OF THE ISSUE. IT IS NECESSARY TO DO SO FOR THE OBVIOUS REASON THAT THE AIM OF LAW IS TO DO SUBSTANTIAL JUS TICE BETWEEN THE PARTIES AND TO IMPART TO THEM NOT MERELY LEGAL OR T ECHNICAL JUSTICE BUT AS FAR AS POSSIBLE REAL AND SUBSTANTI AL JUSTICE. JUSTICE IS TO BE IMPARTED IN ACCORDANCE WITH LAW AND NOT SI MPLY IN SUBORDINATION TO LAW. THE FORMER EXPRESSION PROMOTE S AND ADVANCES EXPANSION AND DEVELOPMENT OF LAW; THE LATT ER MAKES LAW RATHER STAGNANT AND STOIC. A DEVELOPING SOCIE TY NEEDS DEVELOPING LEGAL NOTIONS. CIRCULAR NO.189 DATED JANUARY 30 1976 STATES THAT TAX OFFICER MAY CONDONE THE GENUINE DEFICIENCIES SUBJECT TO THE SAME BEING MADE GOOD BY THE ASSESSEE THROUGH CREATION OF ADDITIONAL RESERVES IN THE CURR ENT YEARS BOOK IN WHICH ASSESSMENT IS FRAMED. RELIANCE IS PLACED UPON SUPR EME COURT DECISION IN THE CASE OF CIT VS. MODI SPINNING & WEAVING MILLS CO. L TD. WITH THE CIRCULAR NO.189 DATED 30 TH JANUARY 1976 TO SUBSTANTIATE THAT UNDER THE ACT WHERE GENUINE DEFICIENCIES HAVE BEEN MADE GOOD DEDUCTION IS TO BE ALLOWED. FURTHER IT IS AN INCENTIVE PROVISION AND SUCH PROV ISIONS SHOULD BE INTERPRETED LIBERALLY. IT IS ALSO SUBMITTED THAT THE ASSESSING OFFICER WHILE PASSING THE ASSESSMENT ORDER UNDER SECTION 147 READ WITH SECTIO N 143(3) SHOULD HAVE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 19 TAKEN INTO ACCOUNT THE SUBSEQUENT DEVELOPMENT OF MA KING GOOD THE DEFICIENCY IN THE NEXT YEAR. THE SAME WAS INTIMATE D TO HIM VIDE LETTER DATED OCTOBER 17 2007. ON THAT BASIS THE ASSESSEE PRAY ED FOR ALLOWING THE CLAIM OF THE ASSESSEE IN TOTO. FOR THIS LEARNED AR ALSO RELIED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CONTINENTAL CONSTRUCTION CO. LTD. VS. UOI (1990) 185 ITR 230 (DEL.) AND IN WRITTEN SUBM ISSIONS IT WAS SUBMITTED THAT THE HON'BLE HIGH COURT HAS HELD AS UNDER :- 'IN OUR OPINION IT WILL BE EXTREMELY UNFAIR NOT TO GIVE THE BENEFIT TO THE PETITIONER UNDER SECTION 80HHB. THE PETITIONER ADMITTEDLY HAS EXECUTED PROJECTS WHICH WOULD ENTIT LE IT TO THE BENEFIT OF SECTION 80HHB.THIS BEING SO THE INC OME- TAX DEPARTMENT SHOULD NOT STAND ON MERE TECHNICALIT IES AND MUST GIVE AN OPPORTUNITY TO THE PETITIONER TO FULFILL TH E REQUIREMENTS OF SECTION 80HHB(3) AND ON SUCH COMPLIANCE WITHIN A R EASONABLE TIME IT SHOULD GRANT THE BENEFIT TO THE PETITIONER UNDER THAT PROVISION.' 11. ON THE OTHER HAND THE LEARNED DR SUBMITTED THA T IT IS A FACT THAT THERE WAS A SHORT FALL IN THE FOREIGN PROJECTS RESERVE AC COUNT OF RS.8 02 147/-. AS PER THE REQUIREMENT OF SECTION 80HHB THE ASSESSEE WAS TO CREATE A FOREIGN PROJECT RESERVE ACCOUNT OF EQUAL AMOUNT. THE PROVI SIONS OF SECTION 80HHB(3)(II) CLEARLY LAID DOWN THE CONDITIONS WHICH ARE NECESSARY TO BE FULFILLED FOR CLAIMING DEDUCTION UNDER THIS SECTION WHICH READ AS UNDER :- (II) AN AMOUNT EQUAL TO [SUCH PERCENTAGE OF THE PRO FITS AND GAINS AS IS REFERRED TO IN SUB-SECTION (1) IN RELAT ION TO THE RELEVANT ASSESSMENT YEAR] IS DEBITED TO THE PROFIT AND LOSS ACCOUNT OF THE PREVIOUS YEAR IN RESPECT OF WHICH TH E DEDUCTION UNDER THIS SECTION IS TO BE ALLOWED AND CREDITED TO A RESERVE ACCOUNT (TO BE CALLED THE FOREIGN PROJECTS RESERVE ACCOUNT) ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 20 TO BE UTILIZED BY THE ASSESSEE DURING A PERIOD OF F IVE YEARS NEXT FOLLOWING FOR THE PURPOSES OF HIS BUSINESS OTHER TH AN FOR DISTRIBUTION BY WAY OF DIVIDENDS OR PROFITS. IT IS ALSO PRAYED THAT EACH ASSESSMENT YEAR IS AN I NDEPENDENT ASSESSMENT YEAR AND THE PROVISIONS OF SECTION HAS TO BE APPLIED ACC ORDINGLY. THE PROVISIONS OF SECTION 80HHB CLEARLY PROVIDES THAT DEDUCTIONS WILL BE ALLOWED TO THE EXTENT OF LEAST OF THE FOLLOWING AMOUNT :- (A) 50% OF PROFIT FROM SUCH PROJECT; (B) AMOUNT CREDITED BY THE ASSESSEE TO FOREIGN PROJECT RESERVE ACCOUNT; (C) AMOUNT BROUGHT IN INDIA IN CONVERTIBLE FOREIGN EXCH ANGE. IN THE ASSESSEES CASE THE AMOUNT CREDITED TO FORE IGN PROJECT RESERVE ACCOUNT IS LEAST. THEREFORE THE DEDUCTION HAS BEEN RIGHTL Y LIMITED TO THE EXTENT OF RS.32 CRORES. LD. DR ALSO PLACED THE FACTS OF CONT INENTAL CONSTRUCTION LTD. CITED BY LD. DR ARE NOT APPLICABLE TO THE ASSESSEE S CASE. THE ASSESSEES RELIANCE ON THE CBDT CIRCULAR NO.189 DATED 30.01.19 76 IS ALSO OF NO HELP AS THE SAME WAS ISSUED IN RESPECT OF THE DEVELOPMENT R EBATE. SIMILARLY THE CASE LAWS RELIED UPON BY THE ASSESSEE IS ALSO NOT APPLIC ABLE TO THE FACTS OF ASSESSEES CASE AS THE CASE OF CIT VS. MODI SPINNIN G WEAVING MILLS LTD. CITED SUPRA IS ALSO RELATED TO THE DEVELOPMENT REB ATE. THE CIRCULAR ISSUED BY THE BOARD CANNOT BE EXTRAPOLATED AND APPLIED TO THE PROVISIONS OF DEDUCTION U/S 80HHB. THE FACTS OF MARG CONSTRUCTION AND ASSA M ROLLER FLOUR MILLS ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 21 CITED SUPRA ARE ALSO AT VARIANCE TO THE FACTS OF A SSESSEES CASE HENCE NOT APPLICABLE TO THE ASSESSEES CASE. 12. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. THE PROVISIONS OF SECTION 80HHB CATEGORICALLY PROVIDES THAT DEDUCTION UNDER T HIS SECTION SHALL BE ALLOWED TO THE EXTENT OF LEAST OF THE FOLLOWING AMO UNTS :- (A) 50% OF PROFIT FROM SUCH PROJECT; (B) AMOUNT CREDITED BY THE ASSESSEE TO FOREIGN PROJECT RESERVE ACCOUNT; (C) AMOUNT BROUGHT IN INDIA IN CONVERTIBLE FOREIGN EXCH ANGE. IT IS ALSO A TRITE LAW THAT EACH ASSESSMENT YEAR IS A SEPARATE INDEPENDENT ASSESSMENT YEAR AND ALL THE PROVISIONS OF SECTION H AVE TO BE APPLIED ACCORDINGLY. THE CASE LAW RELIED UPON IN THE CASE OF CONTINENTAL CONSTRUCTION LTD. VS. UOI AND ORS. CITED SUPRA WAS HAVING A CO MPLETELY DIFFERENT SET OF FACTS. IN THAT CASE THE ASSESSEE HAD ADJUDICATED CERTAIN FOREIGN PROJECTS UNDER THE AGREEMENTS WHICH WERE APPROVED BY THE CENTRAL B OARD OF DIRECT TAXES UNDER SECTION 80-O OF THE ACT. THE DEPARTMENT HOW EVER CONTENDED THAT IN THOSE FOREIGN PROJECTS ONLY SECTION 80HHB COULD AP PLY AND HONBLE HIGH COURT TOOK A VIEW THAT THE ASSESSEE WAS HAVING THE BONAFIDE BELIEF THAT RELIEF WOULD BE GRANTED UNDER SECTION 80-O AND UNDER THAT BONAFIDE BELIEF THE COURT ALLOWED THE ASSESSEE TO TAKE STEPS TO COMPLY WITH T HE SECTION OF 80HHB. IN THOSE CIRCUMSTANCES THE HONBLE HIGH COURT HAS TAK EN A VIEW THAT THE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 22 DEPARTMENT OUGHT NOT TO STAND ON MERE TECHNICALITIE S BUT OUGHT TO GIVE THE PETITIONER AN OPPORTUNITY TO FULFILL THE REQUIREMEN TS OF SECTION 80HHB(3) AND ON SUCH COMPLIANCE WITHIN A REASONABLE TIME OUGHT TO GRANT THE BENEFIT OF THAT SECTION TO THAT PETITIONER. BUT IN ASSESSEE S CASE THE FACTS ARE COMPLETELY DIFFERENT. HERE THE CLAIM OF THE ASSESSEE SINCE INCEPTION WAS UNDER SECTION 80HHB ONLY THEREFORE IT CANNOT BE SAID THAT THE A SSESSEE WAS UNDER THE BONAFIDE BELIEF IN NOT COMPLYING WITH THE PROVISION S OF SECTION 80HHB. SIMILARLY THE FACTS OF ASSAM ROLLER FLOUR MILLS C ITED SUPRA ALSO AT VARIANCE TO THE FACTS OF ASSESSEES CASE. THEREFORE RELIAN CE ON THAT ALSO IS NOT OF ANY HELP TO THE ASSESSEE. IN THAT CASE THE HONBLE HI GH COURT HAS HELD THAT GENERAL RULE IS THAT DEDUCTION CAN BE PERMITTED IN RESPECT OF ONLY THOSE EXPENSES OR LOSSES WHICH HAVE OCCURRED DURING THE R ELEVANT ACCOUNTING YEAR AND THE GENERAL RULE HOWEVER IS REQUIRED TO BE AP PLIED AFTER TAKING INTO ACCOUNT SUCH SUBSEQUENT EVENTS WHICH HAVE A BEARING ON THE ISSUE BEING DECIDED BY THE AUTHORITIES CONCERNED. IN THAT CASE THE ASSESSEE WAS MAINTAINING BOOKS OF ACCOUNT IN MERCANTILE SYSTEM A ND A BRANCH OFFICE OF THE ASSESSEE ENTERED INTO A CONTRACT WITH THE FOREIGN C OMPANY TO IMPORT CRUDE PALM OIL AND ACCORDINGLY OBTAINED AN IMPORT LICENCE FROM THE CONCERNED AUTHORITIES ON 30 TH DECEMBER 1977. ASSESSEE ALSO OBTAINED LETTER OF CREDIT FROM THE BANK ON 06.01.1978. AS PER THIS LETTER OF CREDIT THE EXPIRY DATE OF SHIPMENT WAS FEBRUARY 8 1978. THIS LETTER OF CRED IT WAS HOWEVER LATER ON ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 23 CANCELED BY THE BANK. ON JANUARY 13 1978 THE GOV ERNMENT OF INDIA BY ISSUING A PUBLIC NOTICE BANNED THE IMPORT OF CRUDE OIL. THE RIGOURS PUT BY THIS PUBLIC NOTICE WERE HOWEVER PARTIALLY RELAXED BY I SSUING ANOTHER PUBLIC NOTICE ON FEBRUARY 22 1978 TO THE EFFECT THAT LIC ENSES ISSUED PRIOR TO JANUARY 13 1978 WERE TO BE TREATED AS VALID EVEN THOUGH T HE IMPORTS WERE NOT COVERED BY AN IRREVOCABLE LETTER OF CREDIT BUT CERT AIN RESTRICTIONS LIKE SELLING THE IMPORTED GOODS ONLY TO THE GOVERNMENT OR ITS AG ENCIES ON SPECIFIED RATES OR SELLING TO NON-GOVERNMENT PARTIES ONLY AFTER OBT AINING REQUISITE PERMISSION FROM THE GOVERNMENT WERE ALSO PLACED BY THE SECOND PUBLIC NOTICE DATED 22.02.1978. WHEN THE GOODS REACHED INDIA THEY WERE CONFISCATED BY THE CUSTOMS AUTHORITIES UNDER THE CUSTOMS ACT AND ASSES SEE WAS GIVEN AN OPTION EITHER TO PAY RESHIPMENT EXPENSES AND FINE OR TO PA Y FOR CLEARANCE OF THE GOODS. A PERSONAL PENALTY WAS IMPOSED ON THE ASSES SEE. THE ASSESSEE OUGHT TO PAY THE CLEARING CHARGES AS WELL AS THE PENALTY. THE AO DISALLOWED THE DEDUCTION OF PENALTY AND INTEREST THEREON. THE CIT (A) ALLOWED THE DEDUCTION OF RS.4 LACS PLUS INTEREST ON THE GROUND THAT EXPEN DITURE INCURRED BY THE ASSESSEE NOT CARRYING ON ITS BUSINESS AND THE SAME WAS NOT EXPANDED IN RESPECT OF ANY INFRINGEMENT OF THE LAW AND IT WAS D IRECTED THAT ITO SHALL CHARGE THE TAX ON THIS AMOUNT WHEN THE SAME WAS REF UNDED BY THE CUSTOMS DEPARTMENT. THE TRIBUNAL DISALLOWED THE CLAIM OF T HE ASSESSEE AND HELD THAT THE PENALTY WAS IMPOSED FOR THE FABRICATION OF THE PROVISIONS OF CUSTOMS ACT. ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 24 IN THAT VIEW OF THE MATTER THE HONBLE HIGH COURT HELD THAT TAKING INTO ACCOUNT THE SUBSEQUENT ORDER OF GOVERNMENT OF INDI A KNOCKING OFF THE PENALTY IN 1982 AND ON TAKING THE EFFECT OF SUCH O RDER OF THE GOVERNMENT OF INDIA TO THE YEAR OF ACCOUNT WITH THE HELP OF DOCTR INE OF RELATING BACK THE RESULTING POSITION WAS THAT IN THE YEAR OF ACCOUNT THE LIABILITY STOOD WIPED OUT AND DID NOT SURVIVE FOR DEDUCTIBILITY OF BUSINESS E XPENDITURE. THEREFORE THE FACTS OF THE CASE WERE COMPLETELY DIFFERENT THAN TH E FACTS OF THE ASSESSEES CASE. IN THE CASE OF CIT VS. MODI SPINNING & WEAVI NG MILLS LTD. CITED SUPRA THE FACTS ARE AT VARIANCE TO THE FACTS OF AS SESSEES CASE. IN THAT CASE ISSUE WAS RELATED TO DEVELOPMENT REBATE THEREFORE HAD NO APPLICATION TO ASSESSEES CASE. 12.1 IN THESE FACTS AND CIRCUMSTANCES IN OUR CONSI DERED VIEW THE ASSESSEES RELIANCE ON THE ABOVE CASE LAWS CITED AND BOARDS C IRCULAR IS OF NO HELP. THE EXPRESS PROVISIONS OF SECTION 80HHB (3)(II) LAID DO WN CONDITIONS WHICH ARE NECESSARY TO BE FULFILLED FOR CLAIMING DEDUCTION. ASSESSEE HAD FAILED TO FULFILL ALL THE CONDITIONS. IN VIEW OF THESE FACTS WE DIS MISS THIS GROUND OF ASSESSEES APPEAL. 13. GROUND NO.4 IS RELATED TO CONFIRMING THE DISALL OWANCE MADE IN RESPECT OF THE DEDUCTION U/S 80HHC AMOUNTING TO RS.31 28 84 9/-. 14. LD. AR SUBMITTED THAT THE ASSESSEE IS MAINTAINI NG SEPARATE BOOKS OF ACCOUNT FOR EXPORT BUSINESS THEREFORE INDIRECT EX PENSES RELATABLE TO THE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 25 EXPORT GOODS NEED NOT TO BE WORKED OUT AS PER PROVI SIONS OF SECTION 80HHC(3). FOR THIS PROPOSITION THE LEARNED AR REL IED ON THE FOLLOWING CASE LAWS :- (I) CIT VS. GENERAL SALES LTD. 288 ITR 486 (DEL.) ; AND (II) GLAXO SMITHKLINE ASIA P. LTD. VS. ACIT 97 T TJ 108 (DEL.). 15. ON THE OTHER HAND THE LEARNED DR SUBMITTED THA T THE CONTENTION OF THE ASSESSEE IS NOT AT ALL TANGIBLE IN VIEW OF THE EXPL ANATION (E) AS PROVIDED IN SECTION 80HHC(3). EVEN IN THE CASE OF CIT VS. GENE RAL SALES LIMITED CITED SUPRA THE HON'BLE DELHI HIGH COURT HAS HELD AS UND ER :- 'WE ARE OF VIEW THAT THIS DIRECTION GIVEN BY ITAT I S UNEXCEPTIONABLE. THE AO HAS TO FIRST DETERMINE WHET HER THE ASSESSEE IS MAINTAINING SEPARATE BOOKS OF A/C OR NO T AND THEN DEPENDING UPON HIS CONCLUSION THE AO WOULD HAVE TO APPLY THE LAW LAID DOWN U/S 80HHCOF THE ACT. OBVIOUSLY THE A O WILL EVALUATE THE BOOKS OF A/C AND DETERMINE HOW MUCH OF EXPENDITURE DIRECT AND INDIRECT IS ATTRIBUTABLE T O EXPORT ACTIVITIES OF THE ASSESSEE. IN THE ASSESSEES CASE THERE IS NO MENTION OF MAIN TENANCE OF SEPARATE BOOKS OF ACCOUNT IN ASSESSMENT ORDER AND ASSESSING OFFICE R HAS NOT SEIZED WITH SUCH SITUATION. IN THE CASE OF GLAXO SMITHKLINE ASIA P. LTD. VS. ACIT CITED SUPRA ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 26 THE ITAT HAS HELD THAT ONLY THOSE ADMINISTRATIVE EX PENSES WILL BE APPORTIONED IN RATIO OF EXPORT TURNOVER TO TOTAL TURNOVER WHIC H HAVE RELATION WITH EXPORT BUSINESS. THUS IN THAT CASE ALSO THE ITAT HAS AD VOCATED THE METHOD OF APPORTIONMENT IN RATIO OF EXPORT TURNOVER TO TOTAL TURNOVER. IN VIEW OF THESE FACTS THE ASSESSING OFFICER HAS CORRECTLY WORKED O UT INDIRECT EXPENSES AS PER EXPLANATION (E) TO SECTION 80HHC (3) AND RIGHTLY DE NIED THE DEDUCTION U/S 80HHC. 16. WE HAVE HEARD BOTH THE SIDES AND AFTER HEARING WE FIND NO MERITS IN THE CLAIM OF THE ASSESSEE. IT HAS BEEN HELD THAT ASSES SING OFFICER HAS TO APPLY THE LAW AS LAID DOWN U/S 80HHC ON THE BASIS OF EVALUATI ON OF BOOKS OF ACCOUNT AND BY DETERMINING REGARDING THE EXPENDITURE DIREC T OR INDIRECT ATTRIBUTABLE TO THE EXPORT ACTIVITIES OF THE ASSESSEE. EVEN IN THE CASE LAWS RELIED UPON BY THE ASSESSEE WE FIND THAT THE ADMINISTRATIVE EXPEN SES WILL HAVE TO BE APPORTIONED IN THE RATIO OF EXPORT TURNOVER TO TOTA L TURNOVER WHICH HAVE RELATIONS WITH THE EXPORT BUSINESS. THUS THE APPOR TIONMENT OF THE EXPENDITURE IN THE RATIO OF EXPORT TURNOVER TO TOTAL TURNOVER H AS BEEN UPHELD. IN VIEW OF THESE FACTS WE FIND NO MERITS IN THE GROUND OF ASS ESSEES APPEAL. WE UPHOLD THAT THE ASSESSING OFFICER HAS CORRECTLY WORKED OUT INDIRECT EXPENSES AS PER THE EXPLANATION (E) TO SECTION 80HHC(3). KEEPING T HESE FACTS IN VIEW THIS GROUND OF ASSESSEES APPEAL ALSO STANDS DISMISSED. ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 27 17. IN GROUND NOS.5 & 6 THE ISSUE RAISED IS REGARD ING TAXABILITY IN INDIA OF INCOME EARNED IN THE FOREIGN COUNTRIES COVERED UNDE R DTAA. THE ASSESSEE IS RESIDENT OF INDIA. WE WOULD ALSO LIKE TO STATE THA T IN THE APPEAL FOR ASSESSMENT YEAR 2005-06 ITA NO.1294/DEL/2009 AND AP PEAL FOR ASSESSMENT YEAR 2006-07 ITA NO.72/DEL/2010 THIS IS THE ONLY I SSUE WHICH IS THE SUBJECT MATTER OF APPEAL BEFORE US. 18. DURING THE YEAR UNDER CONSIDERATION THE ASSESS EE HAS EARNED INCOME FROM FOREIGN PROJECTS IN OMAN MAURITIUS NETHERLAN DS AND TANZANIA. INCOME PERTAINING TO THESE PROJECTS HAS NOT BEEN IN CLUDED IN THE TAXABLE INCOME IN INDIA BY THE ASSESSEE ON THE GROUND THAT THESE INCOMES ARE EXEMPTED FROM THE TAX IN INDIA UNDER THE PROVISIONS OF RESPECTIVE DTAAS. THE TOTAL INCOME FROM THESE PROJECTS IS AS UNDER :- OMAN RS.19 109 894 MAURITIUS RS.84 123 160 NETHERLANDS RS. 2 639 799 TANZANIA RS. 953 680 RS.106 826 533 THE ASSESSEE CLAIMED THAT SUCH INCOME IS TAXABLE ON LY IN RESPECTIVE COUNTRIES AS PER THE DTAA AND NOT TAXABLE IN INDIA. 19. WHILE PLEADING ON BEHALF OF THE ASSESSEE THE L EARNED AR SUBMITTED THAT INCOME ATTRIBUTABLE TO PERMANENT ESTABLISHMENT IN F OREIGN COUNTRY WITH WHOM DTAA ARE IN EXISTENCE SHOULD BE CONSIDERED IN TAKIN G THE FOLLOWING ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 28 CONTENTIONS IN VIEW. FOR THE PURPOSES OF INTERPRET ATION OF AN INTERNATIONAL TREATY AN IMPORTANT ASPECT THAT NEEDS TO BE CONSID ERED IS THAT TREATIES ARE NEGOTIABLE AND ENTERED INTO AT A POLITICAL LEVEL AN D HAVE SEVERAL CONSIDERATIONS AS THEIR BASIS. THE MAIN FUNCTION OF A DOUBLE TAXA TION AVOIDANCE AGREEMENT (DTAA) IS ESSENTIAL FOR PROVIDING A BARGAIN BETWEEN TWO TREATY COUNTRIES AS TO THE DIVISION OF TAX REVENUES BETWEEN THEM IN RES PECT OF INCOME FALLING TO BE TAXED IN BOTH JURISDICTIONS. FOR THIS LD. AR R ELIED ON THE DECISION OF UNION OF INDIA VS. AZADI BACHAO ANDOLAN 263 ITR 7 06 (SC). LD. AR FURTHER PLEADED THAT PRIMARY OBJECTIVE OF THE DTAA S ENTERED INTO BY INDIA IS AVOIDANCE OF DOUBLE TAXATION AND NOT RELIEF FROM DO UBLE TAXATION. IN THIS REGARD THE LEARNED AR MADE A REFERENCE TO THE DECI SION OF ITAT IN THE CASE OF SIVAGAMI HOLDINGS P. LTD. VS. ACIT (2011) 10 ITR (TRIB) 48 (CHENNAI) WHEREIN THE ITAT HAS HELD THAT THE DTAA IS ENTERED INTO BETWEEN THE COUNTRIES ONLY FOR THE LIMITED PURPOSE OF AVOIDING THE HARDSHIP OF DOUBLE TAXATION AND IF THE INCOME IS NOT TAXED IN THE CONT RACTING STATE THE SAME SHOULD BE TAXED IN INDIA IS AN OVERSIMPLIFIED STATE MENT ON THE WHOLE REGIME OF DOUBLE TAXATION AVOIDANCE AGREEMENT. IT IS TRUE THAT THE PRIME MOTIVATING FACTOR IN DEVELOPING THE CONCEPT OF DOUB LE TAXATION AVOIDANCE AGREEMENT IS THE GENUINE HARDSHIP OF THE INTERNATIO NAL ASSESSEE THAT THE SAME AMOUNT OF INCOME BECAME THE SUBJECT OF TAXATION BOT H IN THE HOME STATE AND IN THE CONTRACTING STATE. IT IS TO ALLEVIATE THIS BURDEN OF DOUBLE TAXATION THAT ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 29 THE INSTRUMENT OF DOUBLE TAXATION AVOIDACNE AGREEME NT HAS EVOLVED THROUGH THE PROCESS OF LAW. LD. AR FURTHER PLEADED THAT MECHANISM OF PROVIDING RELIEF IN THE FORM OF CREDIT IS ONLY WHEN IN ACCORDANCE WITH THE PROVISIONS OF THE DTAA DOUBLE TAXATION COULD NOT B E AVOIDED. LD. AR PLEADED THAT ARTICLE 23 OF OECD MODEL COUNTRIES WOU LD BE APPLICABLE ONLY WHERE INCOME MAY BE TAXED IN BOTH COUNTRIES. IN TH E INSTANT CASE SINCE THE INCOME ARISING FROM THE PERMANENT ESTABLISHMENT (PE ) SHALL BE TAXABLE ONLY IN THE COUNTRY OF SOURCE IN ACCORDANCE WITH ARTICLE 7 OF THE APPLICABLE DTAA THEREFORE APPLICATION OF ARTICLE 23 DOES NOT ARISE . FOR THIS PROPOSITION THE LEARNED AR PLACED RELIANCE ON CIT VS. S.R.M. FIRMS REPORTED IN 208 ITR 400 (MAD.). LD. AR FURTHER PLEADED THAT THE ARTICLE 4 OF THE OECD MODEL COUNTRIES DEFINES THE RESIDENCE. IN THIS CASE DET ERMINATION OF RESIDENCY IS NOT IN QUESTION. THE ASSESSEE IS A TAX RESIDENT OF INDIA WHICH IS AN UNCONTROVERTED FACT. THEREFORE ANY ANALYSIS OR RELIANCE ON ARTIC LE 4 OF OECD MODEL CONVENTION (RESIDENCE) IN RESPECT OF RESIDENCY IS N OT PROPER AND IT IS MISPLACED. 19.1 ARTICLE 7 OF THE APPLICABLE DTAA PROVIDES THAT THE PROFITS OF AN ENTERPRISE OF THE CONTRACTING STATE SHALL BE TAXABL E ONLY IN THE STATE UNLESS THE ENTERPRISE CARRIES ON BUSINESS IN THE OTHER CONTRAC TING STATE THROUGH A PE SITUATED THEREIN. THEREFORE ONCE THE REVENUE ACCEP TS THAT THERE IS PE OUTSIDE INDIA THE SAME SHALL BE TAXABLE ONLY IN THE COUNTR Y OF SOURCE ACCORDING TO ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 30 ARTICLE 7 AND RESIDENCE WOULD NOT BE DETERMINATIVE CRITERIA. FOR THIS PROPOSITION LD. AR PLACED RELIANCE ON CIT V. LAKSH MI TEXTILE EXPORTERS LTD. (2001) 245 ITR 521 (MAD)). FURTHER LD. AR SUBMIT TED THAT THE CLASSIFICATION OF THE ARTICLES UNDER THE DOUBLE TAX ATION AVOIDANCE AGREEMENT FROM THE OECD COMMENTARY MERITS CONSIDERA TION IN VIEW OF THE DISCUSSION IN MS. POOJA BHATT V. DCIT (2008) 26 SOT 574 (ITAT) WHICH CLEARLY STIPULATES THAT THE LANGUAGE OF ARTICLE 7 W HICH INCLUDES THE PHRASE 'MAY BE TAXED' MEANS THE CONTRACTING STATES PERMITT ED ONLY THE OTHER CONTRACTING STATE I.E. STATE OF SOURCE OF INCOME TO TAX SUCH INCOME. IT WAS ALSO SUBMITTED THAT FROM A PERUSAL OF THE JUDGMENT OF THE HON'BLE APEX COURT IN CIT V. P.V.A.L. KULANGANDAN CHETTIAR (2004) 267 ITR 654 (SC) IT CANNOT BE INFERRED THAT THE REASONS GIVEN BY THE SPECIAL B ENCH OF HON'BLE ITAT WERE INCORRECT MERELY BECAUSE THE DECISION OF THE HON'BL E TRIBUNAL WAS UPHELD BY THE HON'BLE SUPREME COURT FOR DIFFERENT REASONS. IN THIS REGARD REFERENCE WAS MADE TO THE JUDGMENT IN THE CASE OF DCIT V. MID EAST INDIA LTD. (2009) 28 SOT 395 (ITAT) WHEREIN IT HAS BEEN OBSERVED AS B ELOW :- 'THE LEARNED DR HAS ALSO CONTENDED THAT ALTHOUGH TH E FINAL OPERATIVE DECISION OF THE SPECIAL BENCH OF ITAT HAS BEEN UPHELD BY THE HON'BLE SUPREME COURT THE REASONING GIVEN BY THE HON'BLE SUPREME COURT WHILE AFFIRMING THE SAID DECISION IS ENTIRELY DIFFERENT FROM THE REASONING GIVEN BY THE SPECIAL BENCH OF THE TRIBUNAL. HOWEVER AS RIGHTLY SUBMITTED BY T HE LEARNED COUNSEL FOR THE ASSESSEE A PERUSAL OF THE JUDGMENT OF THE HON'BLE APEX COURT SHOWS THAT THERE IS NOTHING CONT AINED THEREIN TO INDICATE THAT THE REASONS GIVEN BY THE S PECIAL BENCH OF ITAT TO COME TO A CONCLUSION AS IT DID WERE DISAPPR OVED BY THE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 31 HON'BLE SUPREME COURT OR THE SAME WERE FOUND TO BE INAPPROPRIATE OR INCORRECT ... .IN OUR OPINION THE DECISION OF SPECIAL BENCH OF IT AT IN THE CASE OF P.V.A.L. KULA NDAGAN CHETTIAR (SUPRA) THUS STILL HOLDS THE FIELD AND THE SAME BEING SQUARELY ON THE POINT IN ISSUE INVOLVED IN THE PRES ENT CASE AND IS BINDING ON US WE RESPECTFULLY FOLLOW THE SAME AND UPHOLD THE IMPUGNED ORDER OF THE LEARNED CIT(A) DELETING THE A DDITION MADE BY THE ASSESSING OFFICER TO THE TOTAL INCOME O F THE ASSESSEE ON ACCOUNT OF INCOME EARNED BY IT IN THE F ORM OF PROFITS OF BUSINESS EARNED IN USSR WHICH WAS ENTIRELY ATTRI BUTABLE TO THE PERMANENT ESTABLISHMENT IN THAT COUNTRY.' IT WAS FURTHER PLEADED THAT THE ITAT IN THIS JUDGME NT ON APPRECIATING ARTICLE 7 OF THE RELEVANT DTAA ALSO HELD THAT THE PROFITS D ERIVED FROM THE BUSINESS CARRIED ON THROUGH A PE IN A CONTRACTING STATE BY A RESIDENT OR AN ENTERPRISE OF THE OTHER CONTRACTING STATE IS LIABLE TO BE TAXED I N THE FIRST MENTIONED STATE TO THE EXTENT THE SAME IS DIRECTLY OR INDIRECTLY ATTRI BUTABLE TO THE PE AND THE SAME THUS SHALL NOT BE TAXABLE IN OTHER CONTRACTING STAT E. LD. AR ALSO PLEADED THAT IN THE ABOVE CITED CASE THE PROFIT IN QUESTION WAS EARNED BY THE ASSESSEE COMPANY IN USSR THROUGH ITS PE IN THAT COUNTRY AND SINCE IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE COMPANY HAD NO PE IN USSR OR THAT ANY PORTION OF THE PROFIT EARNED BY IT IN USSR WAS NOT ATTRIBUT ABLE TO THAT PE IT FOLLOWS THAT THE ENTIRE INCOME EARNED BY THE ASSESSEE COMPA NY IN USSR THROUGH ITS PE WAS CHARGEABLE TO TAX IN THAT COUNTRY AS PER ART ICLE 7(1) OF THE DTAA BETWEEN INDIA AND USSR. LD. AR SUBMITTED THAT THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. ESSAR OIL (ITA NO. 135 OF 2008) (PLACED AT PAGES ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 32 146-147 OF THE CASE LAW PAPER BOOK) IN THE CONTEXT OF INDIA-OMAN DTAA HAS OBSERVED THAT SINCE THE TAXPAYER HAS A PE IN OM AN IN VIEW OF ARTICLE 7 OF THE DTAA THE PROFITS EARNED IN OMAN WERE RIGHTLY E XCLUDED IN INDIA. IT IS ALSO SUBMITTED THAT THE CASE OF ITO V. DATA SOFTWAR E RESEARCH CO. (P) LTD. ITA NO. 2072/MAD/2006 CAN BE REGARDED AS 'PER INCUR IAM' I.E. IS RENDERED WITHOUT HAVING BEEN INFORMED ABOUT BINDING PRECEDEN TS THAT ARE DIRECTLY RELEVANT RENDERED IN THE MATTER OF CIT V. S.R.M. FI RMS (1994) 208 ITR 400 (MAD) BY THE JURISDICTION HIGH COURT. ACCORDING TO THE DOCTRINE OF 'PER INCURIAM' ANY JUDGMENT WHICH HAS BEEN PASSED IN IG NORANCE OF OR WITHOUT CONSIDERING A STATUTORY PROVISION OR A BINDING PREC EDENT IS NOT GOOD LAW AND THE SAME OUGHT TO BE IGNORED. FOR THIS PROPOSITION RELIANCE IS PLACED ON SIDDHARAM SATLINGAPPA MHETRE V. STATE OF MAHARASHTR A AND ORS. AIR 2011 SC 312. IT IS ALSO SUBMITTED THAT RELIANCE ON ORGA NISATION FOR ECONOMIC CO- OPERATION AND DEVELOPMENT'S ('OECD') COMMENTARY ON MODEL TAX CONVENTION HAS NOT BEEN ACCEPTED BY THE COURTS OF I NDIA AS HAVING A PRECEDENT VALUE. REFERRED TO MS. POOJA BHATT V. DCI T (2008) 26 SOT 574 (LTAT) (PAGES 143-144 OF CASE LAW PAPER BOOK AT PAR A 8 AND 9) AND CIT V. P. V.A.L. KULANGANDAN CHETTIAR (2004) 267 ITR 654 ( SC) (REFER TO PAGE 672 OF THE JUDGMENT). THE RULING OF THE AUTHORITY FOR ADVANCE RULING IN THE MATTER OF S. MOHAN V. DIT (2007) 294 ITR 177 (AAR) AS ADVERTED DURING THE COURSE OF THE HEARING DOES NOT IN ANY WAY SUPPORT T HE CONTENTION OF THE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 33 DEPARTMENT SINCE IT HAS BEEN OBSERVED IN THE RULING THAT THE LANGUAGE OF TREATY PROVISION IN WHICH THE EXPRESSION 'MAY BE TAXED' WA S USED IN INDO-MALAYSIA DTAA WHICH WAS UNDER CONSIDERATION IN THE CIT V. P. V.A.L. KULANGANDAN CHETTIAR (2004) 2671TR 654 (SC) IS NOT COMPARABLE T O THE LANGUAGE EMPLOYED IN ARTICLE 16(1) OF INDO-NORWAY DTAA WHIC H WAS THE SUBJECT MATTER OF THE S. MOHAN'S RULING. IT IS FURTHER SU BMITTED THAT ACCORDING TO THE PROVISIONS OF SECTION 255 OF THE ACT WHERE AN EARL IER CO-ORDINATE BENCH HAS TAKEN A DECISION SUBSEQUENT BENCH CANNOT DIFFER FR OM SUCH A DECISION OF SIMILAR SET OF FACTS. IN SUCH CASES THE MATTER HAS TO BE REFERRED TO THE PRESIDENT TO REFER THE CASE TO A LARGER BENCH. FOR THIS PROP OSITION RELIANCE IS PLACED ON SAYAJI IRON & ENGG CO V. CIT (2002) 121 TAXMAN 43 ( GUJ.)). 20. IN RESPONSE TO THAT LEARNED DR SUBMITTED THAT THE GROUND NOS. 5 AND 6 ARE REGARDING ISSUE OF TAXABILITY IN INDIA OF INCOM E EARNED IN FOREIGN COUNTRY UNDER DTAA. IN THE APPEALS FOR ASSESSMENT YEARS 2 005-06 AND 2006-07 THIS ISSUE IS ALSO THE SUBJECT MATTER OF APPEAL. L D. DR MADE SUBMISSION TO ALL THE APPEALS UNDER CONSIDERATION. LD. DR SUBMITTED THAT BEFORE DEALING WITH THIS ISSUE HE WOULD LIKE TO TOUCH UPON SOME FUNDAM ENTAL PRINCIPLES OF INTERNATIONAL TAXATION. LD. DR SUBMITTED THAT THERE ARE TWO SYSTEMS OF INTERNATIONAL TAXATION. ONE IS RESIDENCE BASED TAXA TION AND ANOTHER IS SOURCE BASED TAXATION. EXCEPT VERY FEW COUNTRIES ALMOST A LL THE COUNTRIES FOLLOW RESIDENCE BASED TAXATION SYSTEM. ACCORDING TO THIS SYSTEM OF TAXATION A ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 34 COUNTRY CAN TAX ITS RESIDENTS ON THEIR GLOBAL INCOM E WHEREVER IT IS EARNED WHILE NON-RESIDENTS ARE TAXED ONLY ON INCOME SOURCE D INSIDE THE COUNTRY. SUCH POWERS OF TAXATION ARE DERIVED FROM CONSTITUTI ON OF THE COUNTRY AND ARE ENSHRINED IN ITS DOMESTIC TAX LAWS. INDIA FOLLOWS R ESIDENCE BASED TAXATION SYSTEM AND UNDER INDIAN INCOME TAX ACT 1961 SUCH PROVISION IS CONTAINED IN SECTION 5 OF INCOME-TAX ACT 1961. UNDER SOURCE BASED SYSTEM A COUNTRY CAN TAX A PERSON WHETHER RESIDENT OR NON-RESIDENT ONLY ON INCOME SOURCED INSIDE THE COUNTRY. HAD ALL THE COUNTRIES IN THE WO RLD BEEN FOLLOWING SOURCE BASED TAXATION THEN IT WOULD HAVE BEEN AN IDEAL SI TUATION WHERE THERE IS NO DOUBLE TAXATION. BUT UNDER RESIDENCE BASE SYSTEM T HERE ARISES SITUATION OF DOUBLE TAXATION BECAUSE THE COUNTRY WHERE THE PERSO N IS RESIDENT WILL TAX HIS GLOBAL INCOME WHILE THE COUNTRY WHERE THE INCOME IS SOURCED WILL TAX THE SAME PERSON ON SAME INCOME. IN ORDER TO REMOVE THIS DOUBLE TAXATION COUNTRIES ENTER INTO DTAA. TWO RULES ARE DEVISED IN DTAA TO AVOID DOUBLE TAXATION. ONE IS BY PROVIDING FOR 'DISTRIBUTIVE RUL ES' WHICH ALLOCATE TAXING RIGHTS BETWEEN CONTRACTING STATES WITH RESPECT TO V ARIOUS KINDS OF INCOMES. SECOND RULE IS TO PUT STATE OF RESIDENCE UNDER AN O BLIGATION TO GIVE EITHER CREDIT FOR TAXES PAID IN SOURCE STATE OR TO EXEMPT THE INCOME TAXED IN SOURCE STATE. THESE TWO RULES HAVE BEEN EXPLAINED IN PARA 19 OF OECD COMMENTARY UNDER THE TITLE TAXATION OF INCOME AND CAPITAL READ AS UNDER :- 19. FOR THE PURPOSE OF ELIMINATING DOUBLE TAXATION THE CONVENTION ESTABLISHES TWO CATEGORIES OF RULES. FIR ST ARTICLES 6 ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 35 TO 21 DETERMINE WITH REGARD TO DIFFERENT CLASSES O F INCOME THE RESPECTIVE RIGHTS TO TAX OF THE STATE OF SOURCE OR SITUS AND OF THE STATE OF RESIDENCE AND ARTICLE 22 DOES THE SAME WI TH REGARD TO CAPITAL. IN THE CASE OF A NUMBER OF ITEMS OF INCOME AND CAPITAL AN EXCLUSIVE RIGHT TO TAX IS CONFERRED ON ONE OF TH E CONTRACTING STATES. THE OTHER CONTRACTING STATE IS THEREBY PREV ENTED FROM TAXING THOSE ITEMS AND DOUBLE TAXATION IS AVOIDED. AS A RULE 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 TWO CLASSES OF INC OME (DIVIDENDS AND INTEREST) ALTHOUGH BOTH STATES ARE GIVEN THE RIGHT TO TAX THE AMOUNT OF TAX THAT MAY BE IMPOSED IN TH E STATE OF SOURCE IS LIMITED. SECOND INSOFAR AS THESE PROVISI ONS CONFER ON THE STATE OF SOURCE OR SITUS A FULL OR LIMITED RIGH T TO TAX THE STATE OF RESIDENCE MUST ALLOW RELIEF ~ AS TO AVOID DOUBLE TAXATION; THIS IS THE PURPOSE OF ARTICLES 23 A AND 23 B. THE CONVE NTION LEAVES IT TO THE CONTRACTING STATES TO CHOOSE BETWEEN TWO METHODS OF RELIEF I.E. THE EXEMPTION METHOD AND THE CREDIT ME THOD. INDIA FOLLOWS CREDIT METHOD FOR RELIEVING DOUBLE TA XATION. 20.1 UNDER DISTRIBUTIVE RULES TAXING RIGHTS ARE DI STRIBUTED BETWEEN CONTRACTING STATES. EXCLUSIVE RIGHTS TO TAXATION I N RESPECT OF CERTAIN INCOMES ARE GIVEN TO ONE STATE AND THUS OTHER STATE IS PREC LUDED FROM TAXING THOSE INCOMES AND THEREFORE DOUBLE TAXATION IS AVOIDED. A S A RULE SUCH EXCLUSIVE RIGHTS ARE GIVEN TO STATE OF RESIDENCE. IN RESPECT OF OTHER TYPES OF INCOME RIGHT TO TAX IS NOT EXCLUSIVE ONE. THE OTHER STATE MAY AL SO TAX THAT INCOME AND DEPENDING UPON TAXING RIGHTS OF SOURCE STATE INCOM ES ARE CLASSIFIED INTO THREE CATEGORIES. THESE ARE DISCUSSED IN DETAIL IN PARA 2 0 TO 23 OF OECD COMMENTARY WHICH READ AS UNDER :- 20. INCOME AND CAPITAL MAY BE CLASSIFIED INTO THREE CLASSES DEPENDING ON THE TREATMENT APPLICABLE TO EACH CLAS S IN THE STATE OF SOURCE OR SITUS: ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 36 - INCOME AND CAPITAL THAT MAY BE TAXED WITHOUT ANY LIMITATION IN THE STATE OF SOURCE OR SITUS - INCOME THAT MAY BE SUBJECTED TO LIMITED TAXATION IN THE STATE OF SOURCE AND - INCOME AND CAPITAL THAT MAY NOT BE TAXED IN THE S TATE OF SOURCE OR SITUS. 21. THE FOLLOWING ARE THE CASES OF INCOME AND CAPIT AL THAT MAY BE TAXED WITHOUT ANY LIMITATION IN THE STATE OF SOURCE OR SITUS: - INCOME FROM IMMOVABLE PROPERTY SITUATED IN THAT S TATE (INCLUDING INCOME FROM AGRICULTURE OR FORESTRY) GA INS FROM THE ALIENATION OF SUCH PROPERTY AND CAPITAL REPRESENTING IT (ARTICLE 6 AND PARAGRAPH 1 OF ARTIC LES 13 AND 22); - PROFITS OF A PERMANENT ESTABLISHMENT SITUATED IN THAT STATE GAINS FROM THE ALIENATION OF SUCH A PERMANEN T ESTABLISHMENT AND CAPITAL REPRESENTING MOVABLE PRO PERTY FORMING PART OF THE BUSINESS PROPERTY OF SUCH A PER MANENT ESTABLISHMENT (ARTICLE 7 AND PARAGRAPH 2 OF ARTICLE S 13 AND 22); AN EXCEPTION IS MADE HOWEVER IF THE PERM ANENT ESTABLISHMENT IS MAINTAINED FOR THE PURPOSES OF INTERNATIONAL SHIPPING INLAND WATERWAYS TRANSPORT AND INTERNATIONAL AIR TRANSPORT (CF. PARAGRAPH 23 BELOW ); - INCOME FROM THE ACTIVITIES OF ARTISTES AND SPORTS MEN EXERCISED IN THAT STATE IRRESPECTIVE OF WHETHER SU CH INCOME ACCRUES TO THE ARTISTE OR SPORTSMAN HIMSELF OR TO ANOTHER PERSON (ARTICLE 17); - DIRECTORS' FEES PAID BY A COMPANY THAT IS A RESID ENT OF THAT STATE (ARTICLE 16); - REMUNERATION IN RESPECT OF AN EMPLOYMENT IN THE P RIVATE SECTOR EXERCISED IN THAT STATE UNLESS THE EMPLOYE E IS PRESENT THEREIN FOR A PERIOD NOT EXCEEDING 183 DAYS IN ANY TWELVE MONTH PERIOD COMMENCING OR ENDING IN THE FIS CAL ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 37 YEAR CONCERNED AND CERTAIN CONDITIONS ARE MET; AND REMUNERATION IN RESPECT OF AN EMPLOYMENT EXERCISED ABOARD A SHIP OR AIRCRAFT OPERATED INTERNATIONALLY OR ABOARD A BOAT IF THE PLACE OF EFFECTIVE MANAGEMENT OF THE ENTERPRISE IS SITUATED IN THAT STATE (ARTICLE 15); - SUBJECT TO CERTAIN CONDITIONS REMUNERATION AND P ENSIONS PAID IN RESPECT OF GOVERNMENT SERVICE (ARTICLE 19). 22. THE FOLLOWING ARE THE CLASSES OF INCOME THAT MA Y BE SUBJECTED TO LIMITED TAXATION IN THE STATE OF SOURC E: - DIVIDENDS: PROVIDED THE HOLDING IN RESPECT OF WHI CH THE DIVIDENDS ARE PAID IS NOT EFFECTIVELY CONNECTED WIT H A PERMANENT ESTABLISHMENT IN THE STATE OF SOURCE THA T STATE MUST LIMIT ITS TAX TO 5 PER CENT OF THE GROSS AMOUN T OF THE DIVIDENDS WHERE THE BENEFICIAL OWNER IS A COMPANY THAT HOLDS DIRECTLY AT LEAST 25 PER CENT OF THE CAPITAL OF THE COMPANY PAYING THE DIVIDENDS AND TO 15 PER CENT OF THEIR GROSS AMOUNT IN OTHER CASES (ARTICLE 10); - INTEREST: SUBJECT TO THE SAME PROVISO AS IN THE C ASE OF DIVIDENDS THE STATE OF SOURCE MUST LIMIT ITS TAX T O 10 PER CENT OF THE GROSS AMOUNT OF THE INTEREST EXCEPT FO R ANY INTEREST IN EXCESS OF A NORMAL AMOUNT (ARTICLE 11). 23. OTHER ITEMS OF INCOME OR CAPITAL MAY NOT BE TAX ED IN THE STATE OF SOURCE OR SITUS; AS A RULE THEY ARE TAXABL E ONLY IN THE STATE OF RESIDENCE OF THE TAXPAYER. THIS APPLIES F OR EXAMPLE TO ROYALTIES (ARTICLE 12) GAINS FROM THE ALIENATION O F SHARES OR SECURITIES (PARAGRAPH 5 OF ARTICLE B) PRIVATE SECT OR PENSIONS (ARTICLE 18) PAYMENTS RECEIVED BY A STUDENT FOR TH E PURPOSES OF HIS EDUCATION OR TRAINING (ARTICLE20) AND CAPITAL REPRESENTED BY SHARES OR SECURITIES (PARAGRAPH 4 OF ARTICLE 22). P ROFITS FROM THE OPERATION OF SHIPS OR AIRCRAFT IN INTERNATIONAL TRA FFIC OR OF BOATS ENGAGED IN INLAND WATERWAYS TRANSPORT GAINS FROM T HE ALIENATION OF SUCH SHIPS BOATS OR AIRCRAFT AND CAPITAL REPR ESENTED BY THEM ARE TAXABLE ONLY IN THE STATE IN WHICH THE PLACE OF EFFECTIVE MANAGEMENT OF THE ENTERPRISE IS SITUATED (ARTICLE 8 AND PARAGRAPH 3 OF ARTICLES 13 AND 22). BUSINESS PROFIT S THAT ARE NOT ATTRIBUTABLE TO A PERMANENT ESTABLISHMENT IN THE ST ATE OF SOURCE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 38 ARE TAXABLE ONLY IN THE STATE OF RESIDENCE (PARAGRA PH 1 OF ARTICLE 7). THE DISTRIBUTIVE RULES USE THE WORDS 'SHALL BE TAX ABLE ONLY' 'MAY BE TAXED' AND 'MAY ALSO BE TAXED'. INTERPRETATION OF THESE PHRASE S HAS BEEN PROVIDED IN PARA 6 AND 7 OF OECD COMMENTARY WHICH READ AS UNDER :- 6. FOR SOME OF ITEMS OF INCOME OR CAPITAL AN EXCL USIVE RIGHT TO TAX IS GIVEN TO ONE OF THE CONTRACTING STATES; A ND THE RELEVANT ARTICLE STATES THAT THE INCOME OR CAPITAL IN QUESTI ON SHALL BE TAXABLE ONLY IN A CONTRACTING STATE. THE WORDS S HALL BE TAXABLE ONLY IN A CONTRACTING STATE PRECLUDE THE O THER CONTRACTING STATE FROM TAXING THUS DOUBLE TAXATION IS AVOIDED. THE STATE TO WHICH THE EXCLUSIVE RIGHT TO TAX IS GI VEN IS NORMALLY THE STATE OF WHICH THE TAXPAYER IS A RESIDENT WITHI N THE MEANING OF ARTICLE 4 THAT IS STATE R BUT IN FOUR ARTICLES THE EXCLUSIVE RIGHT MAY BE GIVEN TO THE OTHER CONTRACTING STATE ( S) OF WHICH THE TAXPAYER IS NOT A RESIDENT WITHIN THE MEANING O F ARTICLE 4. 7. FOR OTHER ITEMS OF INCOME OR CAPITAL THE ATTRIB UTION OF THE RIGHT TO TAX IS NOT EXCLUSIVE AND THE RELEVANT ARTI CLE THEN STATES THAT THE INCOME OR CAPITAL IN QUESTION MAY BE TAXE D IN THE CONTRACTING STATE (S OR E) OF WHICH THE TAXPAYER IS NOT A RESIDENT WITHIN THE MEANING OF ARTICLE 4. IN SUCH CASE THE STATE OF RESIDENCE (R) MUST GIVE RELIEF SO AS TO AVOID THE D OUBLE TAXATION. PARAGRAPHS 1 AND 2 OF ARTICLE 23A AND PARAGRAPH 1 O F ARTICLE 23 B ARE DESIGNED TO GIVE THE NECESSARY RELIEF. IF A CONTRACTING STATE IS TO GIVEN EXCLUSIVE RIGHT TO TAX A PARTICULAR KIND OF INCOME THEN RELEVANT ARTICLE OF CONVENTION USES TH E PHRASE 'SHALL BE TAXABLE ONLY'. AS A RULE SUCH EXCLUSIVE RIGHT IS GIVEN TO STATE OF RESIDENCE THOUGH THERE ARE A FEW ARTICLES WHERE EXCLUSIVE RIGHT TO T AX IS GIVEN TO STATE OF SOURCE ALSO. THIS PHRASE PRECLUDES OTHER CONTRACTING STATE FROM TAXING THAT INCOME. FOR ITEM OF INCOME WHERE ATTRIBUTION OF RIGHT TO T AX IS NOT EXCLUSIVE THE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 39 CONVENTION USES THE PHRASE 'MAY BE TAXED'. REGARDIN G 'DIVIDEND' AND 'INTEREST' INCOME' PRIMARY RIGHT OF TAXATION IS GIVEN TO STAT E OF RESIDENCE THOUGH THIS IS NOT EXCLUSIVE RIGHT AS PARAGRAPH 1 OF RELEVANT ARTI CLES 10 AND 11 OF MODEL OECD CONVENTION USES THE PHRASE 'MAY BE TAXED'. AT THE SAME TIME PARAGRAPH 2 OF SAID ARTICLES USES PHRASE 'MAY ALSO BE TAXED' AND GIVES SIMULTANEOUS TAXING RIGHTS TO STATE OF SOURCE. THUS FOR THESE TWO ITEMS OF INCOME NO STATE IS GIVEN EXCLUSIVE RIGHT TO TAX. T HEREFORE IF AN ITEM OF INCOME IS 'MAY BE TAXED' IN STATE OF SOURCE AND NOT HING IS MENTIONED ABOUT TAXING RIGHT OF STATE OF RESIDENCE IN CONVENTION IT SELF THEN STATE OF RESIDENCE IS NOT PRECLUDED FROM TAXING SUCH INCOME AND CAN TAX I T USING INHERENT RIGHT OF STATE OF RESIDENCE TO TAX GLOBAL INCOME OF ITS RESI DENT. IF STATE OF SOURCE IS GIVEN EXCLUSIVE RIGHT TO TAX AN ITEM OF INCOME BY U SING THE PHRASE 'SHALL BE TAXABLE ONLY' THEN STATE OF RESIDENCE IS PRECLUDED FROM TAXING IT AND IT MEANS STATE OF RESIDENCE HAS VOLUNTARILY GIVEN UP ITS INH ERENT RIGHT TO TAX. 20.2 LD. DR FURTHER SUBMITTED THAT WITH THIS BACKGR OUND OF BASICS OF DT AA PRESENT CONTROVERSY IS TO BE EXAMINED. THE ASS ESSEE IS RESIDENT OF INDIA AND THUS BEING STATE OF RESIDENCE INDIA HAS INHERE NT RIGHT TO TAX GLOBAL INCOME OF ASSESSEE AS PER SECTION 5 OF IT ACT 1961. THE A SSESSEE HAS PE IN FOREIGN COUNTRIES WITH WHOM INDIA HAS ENTERED INTO DTAA. TH E ASSESSEE HAS OPTED FOR APPLICATION OF DTAA U/S 90(2) OF IT ACT. THE CH ARACTER OF INCOME OF ASSESSEE UNDER ISSUE IS BUSINESS INCOME AND THEREFO RE ARTICLE 7 OF RELEVANT ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 40 DTAAS IS APPLICABLE. IN ALL THESE DTAAS ARTICLE 7 IS SIMILARLY WORDED WHICH READS AS UNDER :- 'THE PROFITS OF AN ENTERPRISE OF A CONTRACTING STAT E SHALL BE TAXABLE ONLY IN THAT STATE UNLESS THE ENTERPRISE CA RRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE CARRIES ON BUSI NESS AFORESAID THE PROFITS OF THE ENTERPRISE MAY BE TAXED IN THE O THER STATE BUT ONLY SO MUCH OF THEM AS IS ATTRIBUTABLE TO THAT PER MANENT ESTABLISHMENT'. THE FIRST SENTENCE OF THIS ARTICLE CONSISTS OF TWO PARTS. ONE PART IS BEFORE 'UNLESS' AND SECOND IS AFTER THAT. FIRST PART GIVES EXCLUSIVE RIGHT TO TAXATION OF BUSINESS INCOME TO STATE OF RESIDENCE AS IT USES PH RASE 'SHALL BE TAXABLE ONLY'. SECOND PART SAYS THAT IF THERE IS PE IN ANOTHER CON TRACTING STATE I.E. STATE OF SOURCE THEN RIGHT TO TAXATION OF STATE OF RESIDENC E IS NOT EXCLUSIVE BUT INHERENT RIGHT TO TAX OF STATE OF RESIDENCE IS NOT LOST. SEC OND SENTENCE OF ARTICLE SAYS THAT STATE OF SOURCE HAS NON-EXCLUSIVE RIGHT TO TAX BUSINESS INCOME SOURCED FROM PE AS IT USES PHRASE 'MAY BE TAXED'. COMBINED READING OF THESE SENTENCES OF ARTICLE 7 MEANS THAT STATE OF SOURCE H AS NON-EXCLUSIVE RIGHT TO TAX BUSINESS INCOME ATTRIBUTABLE TO PE AND THEREFORE IT MAY TAX IT AS PER ITS DOMESTIC LAWS. HOWEVER THIS NON-EXCLUSIVE RIGHT OF STATE OF SOURCE DOES NOT EXTINGUISH INHERENT RIGHT OF STATE OF RESIDENCE TO TAX GLOBAL INCOME OF ITS RESIDENT. IN A SITUATION WHERE STATE OF RESIDENCE H AD GIVEN UP ITS SUCH INHERENT RIGHT THE SECOND SENTENCE OF ARTICLE 7 WOULD HAVE USED PHRASE 'SHALL BE TAXABLE ONLY'. NOW IN ALL DTAAS APPLICABLE IN CASE OF ASSESSEE SECOND ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 41 SENTENCE USES PHRASE 'MAY BE TAXED' THEREFORE INHE RENT RIGHT OF INDIA TO TAX GLOBAL INCOME OF ITS RESIDENT IS NOT LOST. 20.3 THE CONTENTION OF THE ASSESSEE IS THAT SINCE I TS FOREIGN INCOME IS TAXABLE IN FOREIGN COUNTRIES IT CAN NOT BE TAXED IN INDIA. THIS CONTENTION OF THE ASSESSEE IS FALLACIOUS IN VIEW OF DISCUSSION ABOVE. RATHER THE PROPER COURSE ON PART OF ASSESSEE WOULD HAVE BEEN TO CLAIM CREDIT OF TAXED PAID IN FOREIGN COUNTRIES BECAUSE ALL RELEVANT DTAA SAY THAT INDIA SHALL RELIEVE DOUBLE TAXATION BY GIVING CREDIT OF TAXES PAID IN STATE OF SOURCE. 20.4 LD. DR SUBMITTED THAT THE ASSESSEE HAS RELIED ON VARIOUS CASE LAWS AS MENTIONED IN ITS PAPER BOOK WHICH ARE AS UNDER :- CIT V ESSAR OIL (ITA. NO. 135 OF2008) BORN. MS POOJA BHATT V DCIT 26 SOT 574 (MUM) DCIT V MIDEAST INDIA LTD. 28 SOT 395 (DE) CIT V TORQOUISE INVESTMENT AND FINANCE LTD. 300 IT R 1 (SC) CIT V PVAL KULANDAGAN CHETTIAR 267 ITR 654 (SC) CIT V SRM FIRM & ORS 208 ITR 400 (MAD) MANPREET SINGH GAMBHIR V DCIT 26 SOT 208 (DEL) LG CABLE LTD. VS. DDIT 314 ITR 301 IT IS TO BE NOTICED THAT MOTHER OF ALL THESE CASE L AWS IS A DECISION IN CASE OF CIT VS. PVAL KULANDAGAN CHETTIAR 267 ITR 654 (SC). ALL SUBSEQUENT CASE LAWS HAVE FOLLOWED THIS DECISION. IT IS THEREFORE I MPORTANT TO EXAMINE WHAT HON'BLE SUPREME COURT HAS HELD IN PVAL KULANDAGAN C HETTIARS CASE. IN THAT CASE THE TAX PAYER WAS RESIDENT OF INDIA AND HAD R UBBER PLANTATION BUSINESS IN MALAYSIA. ITO SOUGHT TO BRING TO TAX INCOME EARNED IN MALAYSIA. THE ASSESSEE CONTENDED THAT UNDER DTAA INCOME HAS BEEN TAXED IN MALAYSIA THEREFORE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 42 INDIA IS PRECLUDED FROM TAXING THE SAME. THE MATTER WAS DECIDED IN FAVOUR OF ASSESSEE BY LOWER AUTHORITIES BY INTERPRETING PHRAS E 'MAY BE TAXED' HAVING MEANING OF EXCLUSIVE RIGHT TO TAX. HON'BLE SUPREME COURT HAS HELD THAT IN THIS CASE INTERPRETATION OF PHRASE 'MAY BE TAXED' IS NO T REQUIRED. THE ASSESSEE IS RESIDENT OF BOTH INDIA AND MALAYSIA AS PER THEIR RE SPECTIVE DOMESTIC TAX LAWS. THIS IS A SITUATION OF DUAL RESIDENCE WHICH HAS TO BE REDUCED TO SITUATION OF SINGLE RESIDENCE. THIS IS TO BE DONE BY APPLYING TI E BREAKING RULES AS CONTAINED IN ARTICLE 4(2) OF TREATY. BY APPLYING TI E BREAKING RULES HON'BLE SUPREME COURT CAME TO CONCLUSION THAT THE ASSESSEE IS HAVING CLOSER PERSONAL AND ECONOMIC RELATIONS WITH MALAYSIA AND THEREFORE THE ASSESSEE BECOMES RESIDENT OF MALAYSIA. IN SUCH SITUATION INDIA LOSE S STATUS OF STATE OF RESIDENCE AND MALAYSIA BECOMES STATE OF RESIDENCE. NOW MALAY SIA BEING STATE OF RESIDENCE FOR THE ASSESSEE HAS INHERENT RIGHT TO T AX GLOBAL INCOME OF THE ASSESSEE. THE INCOME WILL BE TAXABLE IN INDIA ONLY IF THE ASSESSEE HAS PE IN INDIA WHICH UNDISPUTEDLY ASSESSEE DID NOT HAVE IN T HAT CASE. THUS INCOME OF ASSESSEE WAS HELD NOT TO BE TAXABLE IN INDIA. THESE OBSERVATIONS OF HON'BLE SUPREME COURT ARE CONTAINED AT PAGES 671 & 672 OF I TR 267. CLOSER EXAMINATION OF AFORESAID DECISION OF HON'BLE SUPREM E COURT SHOWS THAT IT HAS CLEARLY UPHELD THE BASIC PRINCIPLE THAT STATE OF RE SIDENCE HAS RIGHT TO TAX GLOBAL INCOME OF ITS RESIDENT. MALAYSIA BECOMES THE STATE OF RESIDENCE FOR ASSESSEE AFTER APPLYING TIE BREAKING RULES. ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 43 20.5 IN SUBSEQUENT CASES RELIED UPON BY THE ASSESSE E IT HAS BEEN HELD THAT INCOME ARISING IN STATE WHERE PERMANENT ESTABLISHME NT IS SITUATED CAN BE TAXED IN THAT STATE ONLY AND STATE OF RESIDENCE IS PRECLUDED FROM TAXING SUCH INCOME. THIS VIEW IT IS HUMBLY SUBMITTED MILITATE S AGAINST THE BASICS OF DTAA AND ALSO NOT CONSISTENT WITH RATIO OF HON'BLE SUPREME COURT DECISION IN CIT VS. P.V.A.L. KULANDAGAN CHETTIAR CASE. IN A LL CASES RELIED UPON BY THE ASSESSEE THE TAX PAYERS WERE RESIDENT OF INDIA AND THERE WAS NO SITUATION OF DUAL RESIDENCE. INDIA REMAINED STATE OF RESIDENCE A ND THEREFORE INDIA HAD INHERENT RIGHT TO TAX GLOBAL INCOME OF ITS RESIDENT S. THEREFORE IT IS MOST RESPECTFULLY SUBMITTED THAT RATIO OF CIT VS. P.V.A. L. KULANDAGAN CHETTIAR DECISION HAS NOT BEEN CORRECTLY APPLIED IN THESE CA SES. 20.6 LD. DR ALSO RELIED UPON ITO V DATA SOFTWARE RE SEARCH CO. P LTD. 2008- TIOL-09-ITAT-MAD (A COPY OF WHICH HAS BEEN FU RNISHED). IT IS SUBMITTED THAT IN THAT CASE FACTS WERE EXACTLY THE SAME AS ARE IN PRESENT CASE. HON'BLE ITA T HAS GIVEN ITS DECISION IN PARA 4 PAGE 3 OF THE ORDER. RELIANCE IS ALSO PLACED IN CASE OF S. MOHAN V DIT 294 ITR 177 ( AAR) IN WHICH INTERPRETATION OF PHRASE 'MAY BE TAXED' WHICH IS CO NSISTENT WITH OECD COMMENTARY HAS BEEN TAKEN. IN THAT CASE ISSUE INVO LVED WAS TAXABILITY OF SALARY INCOME UNDER ARTICLE 16(1) WHICH USES THE PH RASE 'MAY BE TAXABLE' FOR THE SOURCE STATE. RELIANCE IS ALSO PLACED ON MANPRE ET SINGH GAMBHIR VS. PCIT 26 SOT 208 (DEL) WHICH HAS ALSO BEEN RELIED UPON BY THE ASSESSEE AND PLACED ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 44 ON PAGES 170-75 OF PAPER BOOK. IN THIS CASE HON'BL E ITA T HAS HELD THAT ASSESSEE IS ENTITLED TO CREDIT OF TAXES PAID IN USA ON INCOME EARNED IN USA. IN NUTSHELL IF THE-ASSESSEE HAS PAID TAXES IN FORE IGN COUNTRIES ON INCOME EARNED FROM PE IN THOSE COUNTRIES CREDIT OF THOSE TAXES CAN BE CLAIMED IN INDIA. THEREFORE THE CRUX OF CONTROVERSY IS WHET HER INDIA HAS GIVEN UP ITS RIGHT TO TAX UNDER ARTICLE 7 OF ANY DTAA APPLICABLE TO THE ASSESSEE. ADMITTEDLY INDIA HAS NOT WAIVED OFF ITS RIGHT TO T AX UNDER ARTICLE 7 AND DTAA SAYS THAT INDIA SHALL GIVE CREDIT FOR TAXES PA ID IN COUNTRY OF SOURCE. ANY SOVEREIGN COUNTRY CAN ENTER INTO ANY TREATY IT DEEMS FIT WITH ANOTHER SOVEREIGN AND THAT TREATY SHALL BE APPLICABLE THROU GH SECTION 90 OF IT ACT 1961. TO GIVE AN EXAMPLE INDIA HAS GIVEN UP ITS RI GHT TO TAX CAPITAL GAIN ARISING IN INDIA TO RESIDENTS OF MAURITIUS UNDER IN DO-MAURITIUS DTAA. BUT THIS IS NOT THE SITUATION IN CASE OF DT AA APPLICAB LE TO PRESENT ASSESSEE. FINALLY IT IS PRAYED THAT THESE GROUNDS OF ASSESSE ES MAY BE DISMISSED. 21. WE HAVE HEARD BOTH THE SIDES IN DETAIL. WE HAV E ALSO PERUSED THE CASE LAWS RELIED UPON. THE ASSESSEE IS A PUBLIC SECTOR COMPANY INCORPORATED IN INDIA AND ASSESSED TO TAX IN INDIA AS TAX RESIDENT. THE ASSESSEE IS HAVING DOMESTIC OPERATIONS AS WELL AS OVERSEAS OPERATIONS AND DERIVES INCOME FROM BOTH KINDS OF OPERATION. SINCE THE ASSESSEE COMPAN Y IS INCORPORATED IN INDIA THE PROVISIONS OF INCOME-TAX ACT BEING A DOMESTIC LAW IS APPLICABLE TO THE ASSESSEE. ACCORDINGLY ALL THE INCOMES OF THE ASSE SSEE COMPANY INCLUDING THE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 45 GLOBAL INCOME ARE LIABLE TO BE TAXED IN INDIA. SEC TION 4 OF THE INCOME-TAX ACT IS A CHARGING SECTION OF INCOME-TAX WHICH PROVIDES THAT WHERE ANY CENTRAL ACT ENACTS THAT INCOME-TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATES INCOME-TAX AT THE RATE OR THOSE RATE S SHALL BE CHARGED FOR THAT YEAR IN ACCORDANCE WITH AND [SUBJECT TO THE PROVIS IONS (INCLUDING PROVISIONS FOR THE LEVY OF ADDITIONAL INCOME-TAX) OF THIS ACT ] IN RESPECT OF THE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON. THE P ROVISIONS OF THIS SECTION ALSO PROVIDE THAT WHERE BY VIRTUE OF ANY PROVISION OF THIS ACT INCOME-TAX IS TO BE CHARGED IN RESPECT OF INCOME OF A PERIOD OTHER T HAN THE PREVIOUS YEAR NOTWITHSTANDING SHALL BE CHARGED ACCORDINGLY. SECT ION 5 OF THE INCOME-TAX ACT DEFINES THE SCOPE OF THE TOTAL INCOME WHICH REA D AS UNDER :- 5. (1) SUBJECT TO THE PROVISIONS OF THIS ACT THE TOTAL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH ( A ) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON ; OR ( B ) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR ; OR ( C ) ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING SUC H YEAR : PROVIDED THAT IN THE CASE OF A PERSON NOT ORDINARILY RESIDENT IN INDIA WITHIN THE MEANING OF SUB-SECTION (6) OF SECTION 6 THE INCOME WHICH ACCRUES OR ARISE S TO HIM OUTSIDE INDIA SHALL NOT BE SO INCLUDED UNLES S IT IS DERIVED FROM A BUSINESS CONTROLLED IN OR A PROFESSION SET UP IN INDIA. ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 46 (2) SUBJECT TO THE PROVISIONS OF THIS ACT THE TOTA L INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A NON-RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH ( A ) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON ; OR ( B ) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR. THUS THE SUB-CLAUSE (C) OF CLAUSE (1) TO SECTION 5 PROVIDES THAT THE TOTAL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A RE SIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH ACCRUES OR ARISE S TO HIM OUTSIDE INDIA DURING SUCH YEAR. AS PER THE PROVISIONS OF INCOME- TAX ACT THE ASSESSEE IS A RESIDENT OF INDIA. DUE TO STATE OF RESIDENCY INDI A HAS INHERENT RIGHT TO TAX THE GLOBAL INCOME OF THE ASSESSEE AS PER PROVISIONS OF SECTION 5 OF INCOME-TAX ACT 1961. THE ASSESSEE HAS PERMANENT ESTABLISHMEN T IN THE FOREIGN COUNTRIES FROM WHERE THE PROJECT INCOME HAVE BEEN DERIVED AND WITH WHOM INDIA HAS ENTERED INTO DOUBLE TAXATION AVOIDANCE AGREEMENT. THE ASSESSEE HAS OPTED FOR APPLICATION OF DTAA UNDER SECTION 90(2) OF THE INCOME-TAX ACT. THE CHARACTER OF THE INCOME EARNED BY THE ASSESSEE IS INCOME FROM BUSINESS. ARTICLE 7 OF RELEVANT DTAAS WHICH ARE APPLICABLE I N THE ASSESSEES CASE ARE SIMILARLY WORDED. IN THESE DTAAS IT HAVE BEEN PRO VIDED THAT THE PROFIT OF AN ENTERPRISE OF CONTRACTING STATE SHALL BE TAXABLE ON LY IN THAT STATE UNLESS THE ENTERPRISE CARRIES ON BUSINESS IN OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE CARRIES ON BUSINESS AS ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 47 AFORESAID THE PROFITS OF THE ENTERPRISES MAY BE TA XED IN THE OTHER CONTRACTING STATE BUT ONLY SO MUCH OF THEM AS IS ATTRIBUTABLE D IRECTLY OR INDIRECTLY TO THAT PERMANENT ESTABLISHMENT. THIS ARTICLE 7 OF THE ALL RELEVANT DTAA IS CONSISTING OF TWO PARTS I.E. ONE IS THAT THE PROF IT OF AN ENTERPRISE OF A CONTRACTING STATE SHALL BE TAXABLE ONLY IN THAT STA TE; AND THE SECOND PART IS THAT WHEN THE ENTERPRISE CARRIES ON BUSINESS IN THE OTHE R CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT. IN THAT SITUATION THE PR OFITS OF ENTERPRISE MAY BE TAXED IN THE OTHER CONTRACTING STATE BUT ONLY SO MU CH OF THEM AS IS ATTRIBUTABLE TO THAT PERMANENT ESTABLISHMENT. THUS THE FIRST P ART OF THE ARTICLE GIVES EXCLUSIVE RIGHT TO THE TAXATION OF BUSINESS INCOME TO THE STATE OF RESIDENCY AS THE PHRASE USED AS SHALL BE TAXABLE ONLY. THE SE COND PART OF THIS ARTICLE 7 OF THE RELEVANT DTAA PROVIDES RIGHT TO TAXATION OF THE STATE OF RESIDENCY AS WELL AS TO THE OTHER CONTRACTING STATE WHEREIN THE PERMA NENT ESTABLISHMENT SITUATED. THUS THE ARTICLE 7 PROVIDES THAT IN SUCH A SITUATI ON THE STATE OF THE RESIDENTS DOES NOT HAVE EXCLUSIVE RIGHT TO TAX BUT IT HAS INH ERENT RIGHT TO TAX SUCH INCOME. THE ARTICLE ALSO PROVIDES THAT THE STATE O F THE SOURCE HAS ALSO RIGHT TO TAX THE BUSINESS INCOME. IT IS A NON-EXCLUSIVE RIG HT IN CASE THERE EXIST A PERMANENT ESTABLISHMENT. THE PHRASE USED MAY BE TAXED. THEREFORE THE COMBINED READING OF THE SENTENCES OF ARTICLE 7 OF R ELEVANT DTAA MEANS THAT THE STATE OF SOURCE HAS NON-EXCLUSIVE RIGHT TO TAX OF BUSINESS INCOME ATTRIBUTABLE TO PERMANENT ESTABLISHMENT. IN VIEW O F THIS SUCH INCOME MAY BE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 48 TAXED AS PER THE DOMESTIC LAWS. THIS NON-EXCLUSIVE RIGHT OF STATE OF SOURCE DOES NOT EXTINGUISH THE INHERENT RIGHT OF STATE OF RESIDENCY TO TAX GLOBAL INCOME OF ITS RESIDENTS. IN THE CIRCUMSTANCES WHE RE THE STATE OF THE RESIDENTS OF THE TAXPAYER HAD GIVEN UP ITS INHERENT RIGHT TO TAX THE GLOBAL INCOME IN SUCH SITUATION THE PHRASE USED IN ARTICLE 7 OF THE DTAA IS SHALL BE TAXABLE ONLY. SINCE ALL THE DTAA APPLICABLE IN THE CASE O F ASSESSEE THE PHRASE USED MAY BE TAXED THEREFORE INHERENT RIGHT OF TAXATI ON OF GLOBAL BUSINESS INCOME IN INDIA IS NOT LOST. 21.1 CASE LAWS RELIED UPON BY ASSESSEE ARE BASICALL Y BASED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. P.V .A.L. KULANDAGAN CHETTIAR CITED SUPRA. IN THE CASE HON'BLE APEX C OURT HAD STATED GENERAL PRINCIPLES GOVERNING TAXATION OF GLOBAL INCOME. IN THIS CASE HON'BLE APEX COURT HAD UPHELD THE DECISION OF HON'BLE HIGH COURT WHERE HIGH COURT TOOK A VIEW THAT INDIAN TAX AUTHORITIES COULD NOT TAX TH E INCOME OF THE APPLICANT ON THE TEST OF CLOSE PERSONAL AND ECONOMIC RELATIONS. HON'BLE SUPREME COURT CLARIFIED THAT IT AFFIRMED THE JUDGMENT OF HON'BLE HIGH COURT FOR DIFFERENT REASONS. HON'BLE SUPREME COURT OBSERVED AS UNDER : - HERE IN THESE APPEALS WE ARE CONCERNED WITH INC OME ARISING FROM IMMOVABLE PROPERTY. WE WILL PROCEED ON THE BASIS THAT FISCAL CONNECTION ARISES IN RELATION TO TAXATI ON EITHER BY REASON OF RESIDENCE OF THE ASSESSEE OR BY REASON OF THE LOCATION OF THE IMMOVABLE PROPERTY WHICH IS THE SOURCE OF IN COME. IN THE CLAUSES WHICH WE HAVE SET OUT ABOVE FISCAL DOMICIL E IS SET OUT IN ART. IV WHICH STATES THAT IN A CASE WHERE THE PERSO N IS A RESIDENT IN BOTH THE CONTRACTING STATES FISCAL DOMICILE WIL L HAVE TO BE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 49 DETERMINED WITH REFERENCE TO THE FACT THAT IF THE C ONTRACTING STATE WITH WHICH HIS PERSONAL AND ECONOMIC RELATIONS ARE CLOSER HE SHALL BE DEEMED TO BE A RESIDENT OF THE CONTRACTING STATE IN WHICH HE HAS AN HABITUAL ABODE. THIS IMPLIES THAT T AX LIABILITY ARISES IN RESPECT OF A PERSON RESIDING IN BOTH THE CONTRACTING STATES HAS TO BE DETERMINED WITH REFERENCE TO HIS C LOSE PERSONAL AND ECONOMIC RELATIONS WITH ONE OR THE OTHER. THE IMMOVABLE PROPERTY IN QUESTION IS SITUATE IN MA LAYSIA AND INCOME IS DERIVED FROM THAT PROPERTY. FURTHER IT HAS ALSO BEEN HELD AS A MATTER OF FACT THAT THERE IS NO PERM ANENT ESTABLISHMENT IN INDIA IN REGARD TO CARRYING ON THE BUSINESS OF RUBBER PLANTATIONS IN MALAYSIA OUT OF WHICH INCOME IS DERIVED AND THAT FINDING OF FACT HAS BEEN RECORDED BY ALL T HE AUTHORITIES AND AFFIRMED BY THE HIGH COURT. WE THEREFORE DO N OT PROPOSE TO RE-EXAMINE THE QUESTION WHETHER THE FINDING IS C ORRECT OR NOT. PROCEEDING ON THAT BASIS WE HOLD THAT BUSINESS INC OME OUT OF RUBBER PLANTATIONS CANNOT BE TAXED IN INDIA BECAUSE OF CLOSER ECONOMIC RELATIONS BETWEEN THE ASSESSEE AND MALAYSI A IN WHICH THE PROPERTY IS LOCATED AND WHERE THE PERMANENT EST ABLISHMENT HAS BEEN SET UP WILL DETERMINE THE FISCAL DOMICILE. ON THE FIRST ISSUE THE VIEW TAKEN BY THE HIGH COURT IS CORRECT. WE NEED NOT ENTER INTO AN EXERCISE IN SEMANTICS AS TO WHETHER THE EXPRESSION 'MAY BE' WILL MEAN ALLOCATIO N OF POWER TO TAX OR IS ONLY ONE OF THE OPTIONS AND IT ONLY GR ANTS POWER TO TAX IN THAT STATE AND UNLESS TAX IS IMPOSED AND PAI D NO RELIEF CAN BE SOUGHT. READING THE TREATY IN QUESTION AS A WHOL E WHEN IT IS INTENDED THAT EVEN THOUGH IT IS POSSIBLE FOR A RESI DENT IN INDIA TO BE TAXED IN TERMS OF SS. 4 AND 5 IF HE IS DEEMED T O BE A RESIDENT OF A CONTRACTING STATE WHERE HIS PERSONAL AND ECONO MIC 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 VI EW THAT THE HIGH COURT IS JUSTIFIED IN REACHING ITS CONCLUSION THOUGH FOR DIFFERENT REASONS FROM THOSE STATED BY THE HIGH COU RT. THE CONTENTION PUT FORTH BY THE LEARNED ATTORNEY GE NERAL THAT CAPITAL GAINS IS NOT INCOME AND THEREFORE IS NOT COVERED BY THE TREATY CANNOT BE ACCEPTED AT ALL BECAUSE FOR PU RPOSES OF THE ACT CAPITAL GAINS IS ALWAYS TREATED AS INCOME ARISI NG OUT OF IMMOVABLE PROPERTY THOUGH SUBJECT TO DIFFERENT KIND OF ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 50 TREATMENT. THEREFORE THE CONTENTION ADVANCED BY TH E LEARNED ATTORNEY GENERAL THAT IT IS NOT A PART OF THE TREAT Y CANNOT BE ACCEPTED BECAUSE IN THE TERMS OF TREATY WHEREVER AN Y EXPRESSION IS NOT DEFINED THE EXPRESSION DEFINED IN THE IT AC T WOULD BE ATTRACTED. THE DEFINITION OF INCOME WOULD THEREF ORE INCLUDE CAPITAL GAINS. THUS CAPITAL GAINS DERIVED FROM IMM OVABLE PROPERTY IS INCOME AND THEREFORE ART. 6 WOULD BE ATTRACTED. HON'BLE SUPREME COURTS CONCLUSIONS REST ON THE FAC T THAT THE PERSONAL AND ECONOMIC RELATIONS OF THE ASSESSEE IN RELATION TO C APITAL ASSET WERE FAR CLOSER IN THE STATE OF MALAYSIA THAN IN INDIA. IN VIEW OF THESE FACTS THE RESIDENCY OF INDIA WAS HELD TO BE IRRELEVANT. 21.2 THE FISCAL DOMICILE OF THE ASSESSEE HAD TO BE DECIDED IN VIEW OF THE PROVISIONS OF TREATY. IN THE CASE OF CIT VS. P.V.A .L. KULANDAGAN CHETTIAR THERE WAS DUAL RESIDENCY AND IN THAT VIEW OF MATTER ISSUE WAS SO DECIDED. ASSESSEES CONTENTION THAT ITS FOREIGN INCOME IS TA XABLE INCOME IN FOREIGN COUNTRIES AND IT CANNOT BE TAXED IN INDIA IS AN UNT ENABLE CONTENTION. IT IS A FALLACIOUS VIEW TAKEN BY THE ASSESSEE BY WRONG INTE RPRETATION OF ARTICLE 7 OF RELEVANT DTAA. 21.3 WE WOULD ALSO LIKE TO MENTION THAT IN THE SPHE RE OF INTERNATIONAL TAXATION THERE ARE TWO FUNDAMENTAL SYSTEMS OF TAXA TION ONE IS BASED ON RESIDENCY OF THE TAXPAYER AND THE OTHER IS BASED ON THE SOURCE OF THE INCOME. IN THE INTERNATIONAL ARENA MOST OF THE COUNTRIES F OLLOW THE RESIDENCY BASED TAXATION SYSTEM. ACCORDING TO THIS SYSTEM A COUNT RY CAN TAX ITS RESIDENTS ON THE GLOBAL INCOME OF THE TAXPAYER WHILE THE NON-RES IDENTS ARE TAXED ONLY ON ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 51 THE INCOME SOURCED INSIDE THE COUNTRY. THE PROVIS IONS OF SECTION 5 OF INCOME-TAX ACT 1961 AS ENUMERATED ABOVE GIVE A SCO PE OF A TOTAL INCOME OF THE ASSESSEE WHO IS RESIDENT OF INDIA. AS PER THES E PROVISIONS THE INCOME OF THE RESIDENT TAXABLE IN INDIA INCLUDES ALL INCOME F ROM WHATEVER SOURCE DERIVED WHICH IS RECEIVED OR IS DEEMED TO BE RECEIVED IN IN DIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON OR ACCRUES OR ARISES OR IS DE EMED TO ACCRUE OR ARISE IN INDIA DURING SUCH YEAR OR ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING SUCH YEAR. THUS THE SCOPE OF THE TOTAL INCOME IN THE C ASE OF A RESIDENT ALSO EXTENDED TO THE INCOME ACCRUES OR ARISES TO HIM OUT SIDE INDIA DURING SUCH YEAR. UNDER THE SOURCE BASED SYSTEM A COUNTRY CAN TAX A PERSON WHETHER RESIDENT OR NON-RESIDENT ONLY ON INCOME SOURCED IN SIDE THE COUNTRY. HAD ALL THE COUNTRIES IN THE WORLD FOLLOWING SOURCE BASED T AXATION SYSTEM THEN THE PROBLEM OF DOUBLE TAXATION WOULD NOT HAVE ARISEN. HOWEVER UNDER THE RESIDENT BASED SYSTEM THERE ARISES A SITUATION OF DOUBLE TAXATION BECAUSE COUNTRIES WHERE THE TAXPAYER IS A RESIDENT THEN IT WILL HAVE TO PAY TAX ON ITS GLOBAL INCOME. TO AVOID THE DOUBLE TAXATION TWO R ULES ARE DEVISED IN THE DTAAS I.E. ONE IS BY WAY OF PROVIDING DISTRIBUTI VE RULES UNDER WHICH TAXING RIGHTS ALLOCATED BETWEEN CONTRACTING STATE W ITH RESPECT TO VARIOUS KINDS OF INCOME; AND THE SECOND RULE IS TO PUT STATE OF R ESIDENCE UNDER AN OBLIGATION TO GIVE EITHER CREDIT FOR TAXES PAID IN THE SOURCE STATE OR TO EXEMPT THE INCOME ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 52 WHICH IS TAXED IN SOURCE STATE. THESE TWO RULES HA VE ALSO BEEN EXPLAINED IN PARA 19 OF OECD COMMENTARY WHICH READS AS UNDER :- 19. FOR THE PURPOSE OF ELIMINATING DOUBLE TAXATION THE CONVENTION ESTABLISHES TWO CATEGORIES OF RULES. FIR ST ARTICLES 6 TO 21 DETERMINE WITH REGARD TO DIFFERENT CLASSES O F INCOME THE RESPECTIVE RIGHTS TO TAX OF THE STATE OF SOURCE OR SITUS AND OF THE STATE OF RESIDENCE AND ARTICLE 22 DOES THE SAME WI TH REGARD TO CAPITAL. IN THE CASE OF A NUMBER OF ITEMS OF INCOME AND CAPITAL AN EXCLUSIVE RIGHT TO TAX IS CONFERRED ON ONE OF TH E CONTRACTING STATES. THE OTHER CONTRACTING STATE IS THEREBY PREV ENTED FROM TAXING THOSE ITEMS AND DOUBLE TAXATION IS AVOIDED. AS A RULE 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 TWO CLASSES OF INC OME (DIVIDENDS AND INTEREST) ALTHOUGH BOTH STATES ARE GIVEN THE RIGHT TO TAX THE AMOUNT OF TAX THAT MAY BE IMPOSED IN TH E STATE OF SOURCE IS LIMITED. SECOND INSOFAR AS THESE PROVISI ONS CONFER ON THE STATE OF SOURCE OR SITUS A FULL OR LIMITED RIGH T TO TAX THE STATE OF RESIDENCE MUST ALLOW RELIEF SO AS TO AVOID DOUBL E TAXATION; THIS IS THE PURPOSE OF ARTICLES 23 A AND 23 B. THE CONVE NTION LEAVES IT TO THE CONTRACTING STATES TO CHOOSE BETWEEN TWO METHODS OF RELIEF I.E. THE EXEMPTION METHOD AND THE CREDIT ME THOD. THE TAXATION LAW IN INDIA FOLLOWS THE CREDIT METHOD FOR RELIEVING THE BURDEN OF DOUBLE TAXATION. UNDER THE DISTRIBUTIVE RULES THE TAXING RIGHTS ARE DISTRIBUTED BETWEEN THE CONTRACTING STATES. EXCLUS IVE RIGHTS TO TAXATION IN RESPECT OF CERTAIN INCOMES ARE GIVEN TO ONE STATE A ND THUS OTHER STATE IS PRECLUDED FROM TAXING THOSE INCOMES AND THEREFORE T HE DOUBLE TAXATION IS AVOIDED. AS A RULE SUCH EXCLUSIVE RIGHTS ARE GIVE N TO STATE OF RESIDENCE. IN RESPECT OF THE OTHER TYPES OF INCOME THE RIGHT TO TAX IS NOT EXCLUSIVE ONE. THE OTHER STATE MAY ALSO TAX THAT INCOME AND DEPENDING UPON TAXING RIGHTS OF THE SOURCE STATE INCOME ARE CLASSIFIED INTO THREE CATE GORIES AND SUCH CLASSIFICATION ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 53 ARE PROVIDED IN PARA 20 TO 23 OF THE OECD COMMENTAR Y WHICH READ AS UNDER:- 20. INCOME AND CAPITAL MAY BE CLASSIFIED INTO THRE E CLASSES DEPENDING ON THE TREATMENT APPLICABLE TO EACH CLASS IN THE STATE OF SOURCE OR SITUS: - INCOME AND CAPITAL THAT MAY BE TAXED WITHOUT ANY LIMITATION IN THE STATE OF SOURCE OR SITUS - INCOME THAT MAY BE SUBJECTED TO LIMITED TAXATION IN THE STATE OF SOURCE AND - INCOME AND CAPITAL THAT MAY NOT BE TAXED IN THE S TATE OF SOURCE OR SITUS. 21. THE FOLLOWING ARE THE CLASSES OF INCOME AND CAP ITAL THAT MAY BE TAXED WITHOUT ANY LIMITATION IN THE STATE OF SOURCE OR SITUS: - INCOME FROM IMMOVABLE PROPERTY SITUATED IN THAT S TATE (INCLUDING INCOME FROM AGRICULTURE OR FORESTRY) GA INS FROM THE ALIENATION OF SUCH PROPERTY AND CAPITAL REPRESENTING IT (ARTICLE 6 AND PARAGRAPH 1 OF ARTIC LES 13 AND 22); - PROFITS OF A PERMANENT ESTABLISHMENT SITUATED IN THAT STATE GAINS FROM THE ALIENATION OF SUCH A PERMANEN T ESTABLISHMENT AND CAPITAL REPRESENTING MOVABLE PRO PERTY FORMING PART OF THE BUSINESS PROPERTY OF SUCH A PER MANENT ESTABLISHMENT (ARTICLE 7 AND PARAGRAPH 2 OF ARTICLE S 13 AND 22); AN EXCEPTION IS MADE HOWEVER IF THE PERM ANENT ESTABLISHMENT IS MAINTAINED FOR THE PURPOSES OF INTERNATIONAL SHIPPING INLAND WATERWAYS TRANSPORT AND INTERNATIONAL AIR TRANSPORT (CF. PARAGRAPH 23 BELOW ); - INCOME FROM THE ACTIVITIES OF ARTISTES AND SPORTS MEN EXERCISED IN THAT STATE IRRESPECTIVE OF WHETHER SU CH INCOME ACCRUES TO THE ARTISTE OR SPORTSMAN HIMSELF OR TO ANOTHER PERSON (ARTICLE 17); ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 54 - DIRECTORS' FEES PAID BY A COMPANY THAT IS A RESID ENT OF THAT STATE (ARTICLE 16); - REMUNERATION IN RESPECT OF AN EMPLOYMENT IN THE P RIVATE SECTOR EXERCISED IN THAT STATE UNLESS THE EMPLOYE E IS PRESENT THEREIN FOR A PERIOD NOT EXCEEDING 183 DAYS IN ANY TWELVE MONTH PERIOD COMMENCING OR ENDING IN THE FIS CAL YEAR CONCERNED AND CERTAIN CONDITIONS ARE MET; AND REMUNERATION IN RESPECT OF AN EMPLOYMENT EXERCISED ABOARD A SHIP OR AIRCRAFT OPERATED INTERNATIONALLY OR ABOARD A BOAT IF THE PLACE OF EFFECTIVE MANAGEMENT OF THE ENTERPRISE IS SITUATED IN THAT STATE (ARTICLE 15); - SUBJECT TO CERTAIN CONDITIONS REMUNERATION AND P ENSIONS PAID IN RESPECT OF GOVERNMENT SERVICE (ARTICLE 19). 22. THE FOLLOWING ARE THE CLASSES OF INCOME THAT MA Y BE SUBJECTED TO LIMITED TAXATION IN THE STATE OF SOURC E: - DIVIDENDS: PROVIDED THE HOLDING IN RESPECT OF WHI CH THE DIVIDENDS ARE PAID IS NOT EFFECTIVELY CONNECTED WIT H A PERMANENT ESTABLISHMENT IN THE STATE OF SOURCE THA T STATE MUST LIMIT ITS TAX TO 5 PER CENT OF THE GROSS AMOUN T OF THE DIVIDENDS WHERE THE BENEFICIAL OWNER IS A COMPANY THAT HOLDS DIRECTLY AT LEAST 25 PER CENT OF THE CAPITAL OF THE COMPANY PAYING THE DIVIDENDS AND TO 15 PER CENT OF THEIR GROSS AMOUNT IN OTHER CASES (ARTICLE 10); - INTEREST: SUBJECT TO THE SAME PROVISO AS IN THE C ASE OF DIVIDENDS THE STATE OF SOURCE MUST LIMIT ITS TAX T O 10 PER CENT OF THE GROSS AMOUNT OF THE INTEREST EXCEPT FO R ANY INTEREST IN EXCESS OF A NORMAL AMOUNT (ARTICLE 11). 23. OTHER ITEMS OF INCOME OR CAPITAL MAY NOT BE TAX ED IN THE STATE OF SOURCE OR SITUS; AS A RULE THEY ARE TAXABL E ONLY IN THE STATE OF RESIDENCE OF THE TAXPAYER. THIS APPLIES F OR EXAMPLE TO ROYALTIES (ARTICLE 12) GAINS FROM THE ALIENATION O F SHARES OR SECURITIES (PARAGRAPH 5 OF ARTICLE B) PRIVATE SECT OR PENSIONS (ARTICLE 18) PAYMENTS RECEIVED BY A STUDENT FOR TH E PURPOSES OF HIS EDUCATION OR TRAINING (ARTICLE 20) AND CAPITAL REPRESENTED BY SHARES OR SECURITIES (PARAGRAPH 4 OF ARTICLE 22). P ROFITS FROM THE OPERATION OF SHIPS OR AIRCRAFT IN INTERNATIONAL TRA FFIC OR OF BOATS ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 55 ENGAGED IN INLAND WATERWAYS TRANSPORT GAINS FROM T HE ALIENATION OF SUCH SHIPS BOATS OR AIRCRAFT AND CAPITAL REPR ESENTED BY THEM ARE TAXABLE ONLY IN THE STATE IN WHICH THE PLACE OF EFFECTIVE MANAGEMENT OF THE ENTERPRISE IS SITUATED (ARTICLE 8 AND PARAGRAPH 3 OF ARTICLES 13 AND 22). BUSINESS PROFIT S THAT ARE NOT ATTRIBUTABLE TO A PERMANENT ESTABLISHMENT IN THE ST ATE OF SOURCE ARE TAXABLE ONLY IN THE STATE OF RESIDENCE (PARAGRA PH 1 OF ARTICLE 7). THE DISTRIBUTIVE RULES USES THE WORD SHALL BE TAXE D ONLY MAY BE TAXED AND MAY ALSO BE TAXED. THUS IF A CONTRACTING ST ATE IS TO GIVE EXCLUSIVE RIGHT TO TAX A PARTICULAR KIND OF AN INCOME THEN RELEVAN T ARTICLE OF CONVENTION USES THE PHRASE SHALL BE TAXED ONLY. AS A RULE SUCH EXCLUSIVE RIGHT IS GIVEN TO STATE OF RESIDENCE THOUGH THERE ARE A FEW ARTICLES WHERE EXCLUSIVE RIGHT TO TAX IS GIVEN TO STATE OF SOURCE. THE PHRASE SHALL BE TAXED ONLY PRECLUDES OTHER CONTRACTING STATE FROM TAXING THAT INCOME. IN THE CASES WHERE DISTRIBUTION OF RIGHT TO TAX IS NOT EXCLUSIVE THE CONVENTION USES THE PHRASE MAY BE TAXED. IN SUCH MODEL OF CONVENTION THE USE OF THE PHRASE MAY BE TAXED DOES NOT GIVE EXCLUSIVE RIGHT OF TAXATION TO STATE OF RESIDE NCE. AS PER THESE MODEL OF CONVENTION THE WORD MAY BE TAXED AND MAY ALSO B E TAXED GIVES SIMULTANEOUS TAXING RIGHTS TO STATE OF SOURCE . IF IN THE DTAA AN ITEM OF INCOME IS MAY BE TAXED IN STATE OF SOURCE AND NOT HING IS MENTIONED ABOUT TAXING RIGHT OF STATE OF RESIDENCE IN CONVENTION IT SELF THEN STATE OF RESIDENCE IS NOT PRECLUDED FROM TAXING SUCH INCOME AND CAN TAX S UCH INCOME USING INHERENT RIGHT OF STATE OF RESIDENCE TO TAX SUCH GL OBAL INCOME OF ITS RESIDENT. ONLY IN THE CASE OF PHRASE SHALL BE TAXED ONLY US ED THEN ONLY THE STATE OF ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 56 RESIDENCE IS PRECLUDED FROM TAXING IT. IN SUCH CAS ES WHERE THE PHRASE MAY BE TAXED USED THE STATE OF RESIDENCE HAS BEEN GIV EN ITS INHERENT RIGHT TO TAX. IN THE ASSESSEES CASE THE CLAIM OF THE ASSESSEE I S FOR INCOME TAXABLE IN FOREIGN COUNTRIES AND IT SHOULD NOT BE TAXED IN IND IA CANNOT BE ACCEPTED AS THE PHRASE USED IS MAY BE TAXED AND IN SUCH CASES TH E STATE OF RESIDENCE HAS INHERENT POWER TO TAX SUCH INCOME WHICH HAS BEEN CL EARLY PROVIDED IN THE DTAA ITSELF. DOMESTIC LAW ALSO PROVIDES FOR TAXING SUCH INCOME. THEREFORE THERE IS NO CONTRADICTION BETWEEN THE PROVISIONS OF DTAA AND THE DOMESTIC TAX LAWS. AS WE HAVE ALREADY STATED ABOVE INDIA H AS NOT WAIVED ALL THE RIGHTS TO TAX UNDER ARTICLE 7 OF THE RELEVANT DTAA WHICH P ROVIDES THAT INDIA SHALL GIVE CREDIT TO THE TAXES PAID IN THE COUNTRY OF SOU RCE. THE FOLLOWING CASE LAWS RELIED UPON BY ASSESSEE ARE BASED ON THE DECISION O F HON'BLE SUPREME COURT IN THE CASE OF CIT VS. P.V.A.L. KULANDAGAN CHETTIAR CITED SUPRA :- (I) CIT V TORQOUISE INVESTMENT AND FINANCE LTD. 300 ITR 1 (SC) (II) DCIT V MIDEAST INDIA LTD. 28 SOT 395 (DE) (III) MS POOJA BHATT V DCIT 26 SOT 574 (MUM) (IV) CIT V ESSAR OIL (ITA. NO. 135 OF2008) BORN. THE FACTS OF ASSESSEES CASE ARE COMPLETELY DIFFERE NT SET OF FACTS THAN THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CI T VS. P.V.A.L. KULANDAGAN CHETTIAR CITED SUPRA. THE FACTS OF THA T CASE ARE NOT RELEVANT TO THE ASSESSEES CASE. IN THAT CASE ASSESSEE SOUGHT A RELIEF UNDER THE DTAA BETWEEN THE INDIA AND MALAYSIA. IN THAT CASE THE HON'BLE SUPREME COURT HELD THAT IT WAS A CASE OF DUAL RESIDENCY. THE HON 'BLE SUPREME COURTS ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 57 CONCLUSION RESTS ON THE FACT THAT PERSONAL AND ECON OMIC RELATIONS OF THE ASSESSEE IN RELATION TO CAPITAL ASSET WERE FAR CLOS ER IN THE STATE OF MALAYSIA THAN IN INDIA AND IN THESE FACTS THE RESIDENCE OF INDIA BECAME IRRELEVANT. THE ASSESSEE WAS NOT HAVING PERMANENT ESTABLISHMENT IN INDIA IN RESPECT OF THAT SOURCE OF INCOME. ON THE ASPECT AND SCOPE OF THE E XPRESSION MAY BE TAXED HON'BLE SUPREME COURT HAD NOT EXPRESSED ANY OPINION . THEREFORE THE INCOMES DERIVED FROM RUBBER PLANTATIONS OF MALAYSIA WERE HELD TO BE NOT ASSESSABLE IN INDIA. SIMILARLY THE CAPITAL GAIN A RISING ON THE SALE OF IMMOVABLE PROPERTY IN MALAYSIA WAS HELD TO BE NOT A SSESSABLE INCOME IN INDIA AND BUSINESS INCOME FOR NOT HAVING PERMANENT ESTABLISHMENT IN INDIA. THE INCOME DERIVED FROM BUSINESS IN MALAYSIA NOT AS SESSABLE IN INDIA. THUS THE FACTS OF THAT CASE ARE COMPLETELY AT VARIANCE T O THE FACTS OF ASSESSEES CASE. 21.3 IN THE CASE OF CIT VS. S.R.M. FIRM & OTHERS 208 ITR 400 THE SUBJECT MATTER WAS TAXABILITY AND COMPUTATION OF INCOME DEP ENDING UPON THE AGREEMENT ENTERED INTO BETWEEN THE GOVERNMENT OF IN DIA AND GOVERNMENT OF MALAYSIA FOR AVOIDANCE OF DOUBLE TAXATION. INCOME FROM RUBBER ESTATE IN MALAYSIA AND THERE WAS NO SEPARATE ESTABLISHMENT MA INTAINED IN INDIA IN RESPECT OF THE RUBBER ESTATE IN MALAYSIA. THUS FA CTS OF THAT CASE ARE ALSO AT VARIANCE TO THE FACTS OF ASSESSEES CASE. 21.4 IN THE CASE OF L.G. CABLE VS. DDIT(INTERNATION AL TAXATION) REPORTED IN 314 ITR (AT) 301 (DELHI) THE FACTS ARE DIFFERENT. IN THAT CASE THE ASSESSEE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 58 WAS A NON-RESIDENT COMPANY OF KOREA. THE ASSESSEE (NON-RESIDENT) ENTERED INTO TWO CONTRACTS WITH POWER GRID CORPORATION OF I NDIA ONE FOR ONSHORE EXCAVATION OF FIBRE OPTICS PROJECT AND SECOND FOR O FFSHORE SUPPLY OF EQUIPMENT. THE INCOME FOR ONSHORE WAS OFFERED FOR TAX. THE CONTRACT FOR OFFSHORE SUPPLY OF EQUIPMENT WAS CARRIED OUT IN KOR EA. THE BILL OF LADING WAS ISSUED IN KOREA IN FAVOUR OF POWER GRID CORPORA TION OF INDIA. THE PAYMENTS WERE REMITTED DIRECTLY TO KOREA THROUGH AN IRRECOVERABLE LETTER OF CREDIT. IN THAT SITUATION IT WAS HELD THAT NO PAR T OF INCOME ARISING FROM SUPPLY OF OFFSHORE EQUIPMENT WAS ASSESSABLE IN INDIA. THU S FACTS OF THE CASE ARE COMPLETELY AT VARIANCE TO THE FACTS OF ASSESSEES C ASE. 21.5 IN THE CASE OF MANPREET SINGH GAMBHIR VS. DCIT 119 TTJ 615 THE ISSUES AND FACTS ARE COMPLETELY DIFFERENT IN COMPAR ISON TO ASSESSEES CASE. IN THAT CASE ISSUE WAS OF SALARY EARNED IN USA AND AL SO IN INDIA AND ISSUE WAS TAX CREDIT WHICH WAS DECIDED AS UNDER :- WE ARE THEREFORE OF THE OPINION THAT THE ASSESSEE CAN GET ONLY PROPORTIONATE TAX CREDIT WHICH WAS RIGHTLY COMPUTED BY THE ASSESSING OFFICER. AS REGARDS CONTENTION OF THE LEA RNED DR THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN GRANTING CR EDIT OF TAX ALSO FOR STATE INCOME-TAX WE ARE IN AGREEMENT WITH HIS SUBMISSION. THOUGH THE APPEAL IS NOT FILED BY THE R EVENUE A RESPONDENT CAN SUPPORT THE ORDER APPEALED AGAINST O N ANY OF THE GROUND DECIDED AGAINST HIM IN TERMS OF RULE 27 OF T HE INCOME- TAX (APPELLATE TRIBUNAL) RULES 1963. REFERRING TO ARTICLE 2 THE TAXES COVERED UNDER THE OT M ARE IN RESPECT OF TAXE S PAID IN UNITED STATES ONLY FOR FEDERAL INCOME-TAX IMPOSED B Y INTERNAL REVENUE CODE AND NOT THE STATE INCOME-TAX. TO THIS EXTENT THE FINDING OF THE LEARNED CIT(A) IS NOT IN ACCORDANCE WITH THE ITA NOS.1293 & 1294/DEL./2009 ITA NO.72/DEL/2010 59 TREATY PROVISION. WE THEREFORE RESTORE THE ORDER OF THE ASSESSING OFFICER IN THIS REGARD. THUS THERE IS NO COMPARISON OF FACTS AND ISSUE INV OLVED OF ASSESSEES CASE. IN OUR CONSIDERED VIEW WE FIND NO MERITS IN THE AS SESSEES APPEAL ON THIS ISSUE. 22. IN THE RESULT THIS GROUND OF APPEAL INVOLVED I N ALL THE THREE APPEALS STANDS DISMISSED. ALL THESE THREE APPEALS STAND DI SMISSED ORDER PRONOUNCED IN OPEN COURT ON THIS 29 TH DAY OF MARCH 2012. SD/- SD/- (R.P. TOLANI) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 29 TH DAY OF MARCH 2012 /TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) MEERUT. 5.CIT(ITAT) NEW DELHI. AR ITAT NEW DELHI.