2009-VIL-342-ITAT-DEL

Equivalent Citation: TTJ 124, 924, [2009] 28 SOT 395 (DELHI)

Income Tax Appellate Tribunal DELHI

IT APPEAL NO. 638 (DELHI) OF 2007

Date: 09.01.2009

DEPUTY COMMISSIONER OF INCOME-TAX.

Vs

MIDEAST INDIA LIMITED.

BENCH

Member(s)  : GEORGE MATHAN., P. M. JAGTAP.

JUDGMENT

This appeal is preferred by the Revenue against the order of learned CIT(A)-XIII, New Delhi, dt. 30th Nov., 2006 and in the solitary ground raised therein, the Revenue has challenged the action of the learned CIT(A) in deleting the addition of Rs. 20,14,06,921 made by the AO on account of income earned by the assessee company outside India i.e., in USSR.

2. The assessee in the present case is a company resident in India. It filed its return of income for the year under consideration on 29th March, 2000 declaring a loss of Rs. 18,65,98,968. From the perusal of the annual report filed by the assessee company along with the said return, it was noticed by the AO that the assessee company had earned a profit from its foreign operation to the tune of Rs. 20,14,06,921 during the year under consideration. Relying on the assessment order passed in assessee's own case for asst. yr. 1997-98 wherein a similar income earned by the assessee from the foreign operation was held to be chargeable to tax in India in its hands, the amount of Rs. 20,14,06,921 was added by the AO to the income returned by the assessee in an assessment completed under s. 143(3) vide an order dt. 28th March, 2001.

3. The addition made by the AO on account of income earned from foreign operation was challenged by the assessee in an appeal filed before the learned CIT(A) and after considering the submissions made on its behalf before him as well as the material on record, it was noted by the learned CIT(A) that similar addition made in assessee's own case for asst. yrs. 1991-92, 1992-93 and 1993-94 had already been deleted by the Tribunal vide its order dt. 12th June, 1998 for the following reasons given in para No. 7 of the said order:

"7. The assessee in this case is a company resident in India. It is an admitted fact that the assessee has a branch in Germany as well as in Russia. The definition of 'PE' under both the agreements includes a place of management, a branch, an office and a factory etc. Therefore, the assessee is having a PE in both the other Contracting States namely, Germany and Russia. These branch offices functioned independently at the respective countries and there is no business connection on the basis of which it can be said that part of the income is attributable to the Indian connection. The turnover and the profit of the branch offices are separately accounted for. There is no dispute about the amount of income of both the foreign branches. In such a case we have to follow the decision of the Special Bench of the Tribunal in the case of P.V.A.L. Kulandagan Chettiar vs. ITO referred to above. As the provisions of the DTAA with the Federal Republic of German and the Russian Federation are exactly the same as in the case of Malaysia, this view which we are taking is fortified by the decision of the Hon'ble Madras High Court in the case of CIT vs. VR.S.R.M. and the Hon'ble Karnataka High Court in the case of R.M. Muthaiah. We accordingly direct the AO to exclude the foreign income of the assessee for both the years."

4. The learned CIT(A) further noted that the decision of Special Bench of the Tribunal in the case of P.V.A.L. Kulandagan Chettiar vs. ITO (1983) 3 ITD 426 (Mad)(SB) relied upon by the Tribunal while deciding the similar issue in favour of the assessee has been subsequently affirmed by the Hon'ble Supreme Court by their judgment reported at CIT vs. P.V.A.L. Kulandagan Chettiar (Dead) Through LRs (2004) 189 CTR (SC) 193 : (2004) 267 ITR 654 (SC). He, therefore, followed the decision of the Tribunal in assessee's own case for asst. yrs. 1991-92, 1992-93 and 1993 rendered on a similar issue and deleted the addition of Rs. 20,14,06,921 made by the AO on account of income earned by the assessee company from foreign operation. Aggrieved by this relief allowed by the learned CIT(A) to the assessee company, the Revenue has preferred this appeal before the Tribunal.

5. The learned Departmental Representative submitted before us that while deciding a similar issue in favour of the assessee for asst. yrs. 1991-92, 1992-93 and 1993-94, the Tribunal applied the treaty with Russian Federation which was notified on 21st Aug., 1998 and entered into on 11th April, 1998. He contended that the said treaty had become applicable only from the first day of April next following the calendar year in which the agreement was entered into and the same, therefore, was applicable only from asst. yr. 2000-01. He contended that the decision rendered by the Tribunal in assessee's own case for asst. yrs. 1991-92, 1992-93 and 1993-94 thus was based on interpretation of the treaty which was not applicable and the same being per incuriam, the learned CIT(A) was not justified in following the said decision while giving relief to the assessee on this issue. He contended that prior to asst. yr. 2000-01, the treaty entered into with the Union of Soviet Socialistic Republic vide Notification No. GSR 812(E), dt. 4th Sept., 1989 was applicable. He filed the copy of the said treaty stated to be applicable in the case of the assessee for the year under consideration as well as for the earlier years and invited our attention to art. 7 thereof which provides that the profits of a resident of a Contracting State shall be taxable only in that State unless the resident carries on business in another Contracting State through a PE situated therein. It is further provided that if the resident carries on business as aforesaid, the profits of the resident may be taxed in the other State but only so much of them as is directly or indirectly attributable to that PE. He also invited our attention to art. 22 of the Indo-USSR treaty applicable in the present case and invited our attention to sub-cl. (2) of the said article which reads as under:

"In the case of India, double taxation shall be avoided as follows:

(a) where a resident of India derives income which, in accordance with the provisions of this agreement, may be taxed in the USSR, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the USSR, whether directly or by deduction. Such deduction shall not, however, exceed that part of income-tax (as paid before the deduction is given), which may be attributable to the income which may be taxed in the USSR.

(b) Where a resident of India derives income which, in accordance with the provisions of this agreement, shall be taxable only in the USSR, India may include this income in the tax base but shall allow as a deduction from the income-tax that part of the income-tax which is attributable to the income derived from the USSR."

6. The learned Departmental Representative submitted that the Indo-USSR treaty which is applicable in the present case clearly provides for avoidance of double taxation by allowing credit for tax paid in the countries of source against the tax payable in the country of residence on the basis of global income. He contended that there is, however, no provision for excluding the income earned in the country of source from the global income. He contended that as per art. 22 of the Indo-Russian DTAA, the income earned by the assessee company in USSR through a PE shall be included in its global income being a resident in India and it will be entitled only to claim the credit for taxes paid in USSR. He contended that the income of the USSR branch office of the assessee company thus is liable to be included in its global income and only the credit for the tax paid in the USSR can be allowed to it in terms of para 2(a) of art. 22 of the Indo-USSR treaty.

7. As regards the decision of Special Bench of Tribunal in the case of P. V.A.L. Kulandagan Chettiar which stands affirmed by the Hon'ble Supreme Court in (2004) 189 CTR (SC) 193 : (2004) 267 ITR 654 (SC) relied upon by the Tribunal while deciding the issue in favour of the assessee for asst. yrs. 1991-92, 1992-93 and 1993-94, the learned Departmental Representative submitted that Hon'ble Supreme Court as well as the Special Bench of Tribunal in that case have dealt with the issue of income from "immovable property" which is covered under art. 6 of the DTAA whereas in the present case, the issue is relating to the business income which is covered under art. 7 of the DTAA. He contended that the ratio of the decision of Special Bench of Tribunal in the case of P.V.A.L. Kulandagan Chettiar as affirmed by the Hon'ble Supreme Court thus has no application in the present case. He also contended that although the final operative decision of Special Bench of Tribunal in the case of P.V.A.L. Kulandagan Chettiar has been held to be correct 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. In this regard, he pointed out from the judgment of Hon'ble Supreme Court that it was a case of dual residence of the taxpayer and since the taxpayer, as held by the Hon'ble Supreme Court, was deemed to be a resident of a Contracting State where his personal and economic relations were found to be closer, his residence in India was, held to be irrelevant. He contended that the decision rendered by the Special Bench of Tribunal thus has been finally affirmed by the Hon'ble Supreme Court for reasons different from those given by the Special Bench of the Tribunal and this position is clearly indicated by their Lordships in the judgment. He submitted that the facts of the present case, however, are entirely different inasmuch as the assessee company undisputedly is a resident of India only having incorporated in India and its economic and physical relations cannot be considered to be closer to USSR as compared to India during the year under consideration. He contended that the decision of the Tribunal in assessee's own case for asst. yrs. 1991-92, 1992-93 and 1993-94 thus cannot be applied to decide the issue involved in the present case involving asst. yr. 1998-99 and the learned CIT(A) was not justified in giving relief to the assessee company relying on the said decision.

8. The learned counsel for the assessee, at the outset, submitted that the assessee company is having a PE in USSR and this being the undisputed position, the income earned by the assessee company in USSR and attributable to that PE is taxable only in USSR as per art. 7 of the Indo-USSR DTAA claimed to be applicable by the learned Departmental Representative in the present case involving asst. yr. 1998-99. As regards the reliance placed by the learned Departmental Representative on art. 22 of the said treaty to contend that the assessee was entitled to claim only the credit for tax paid in USSR and not for the exemption of income earned in USSR, he contended that the said article comes in force only when the income earned by the assessee in USSR is held to be taxable in India. According to the learned counsel for the assessee, when the income earned by the assessee company in USSR was taxable in USSR as a result of there being a PE in that country in terms of art. 7, art. 22 cannot be applied in its case and the reliance of the learned Departmental Representative on the said article is completely misplaced. He further submitted that the decision of Special Bench of Tribunal in the case of P.V.A.L. Kulandagan Chettiar even though has been affirmed by the Hon'ble Supreme Court for the reasons different from the ones given by the Special Bench of Tribunal, there is nothing in the judgment of the Hon'ble Supreme Court to show that the reasons given by the Special Bench of Tribunal were held to be improper or incorrect by the Hon'ble apex Court. He contended that the decision of Special Bench of Tribunal in the case of P.V.A.L. Kulandagan Chettiar thus still holds the field and the same having been affirmed by the Hon'ble Supreme Court although for different reasons, it is a binding precedent. He contended that the Tribunal, therefore, was fully justified in following the said decision of the Special Bench of Tribunal to decide a similar issue in favour of the assessee for asst. yrs. 1991-92, 1992-93 and 1993-94. He pointed out that even the AO himself has accepted the stand of the assessee on this issue in the assessments completed for asst. yrs. 1994-95 and 1995-96 under s. 143(3). He contended that the issue involved in the present case thus is squarely covered by the decision of Special Bench of Tribunal in the case of P.V.A.L. Kulandagan Chettiar which has been affirmed by the Hon'ble Supreme Court in principle and this Division Bench is bound to follow the said decision being a binding precedent.

9. We have considered the rival submissions and also perused the relevant material on record. It is observed that a similar issue was involved in assessee's own case for the earlier years i.e., asst. yrs. 1991-92, 1992-93 and 1993-94 and the Tribunal vide its consolidated order dt. 12th June, 1998 has decided the same in favour of the assessee for the said years following the decision of Special Bench of Tribunal in the case of P.V.A.L Kulandagan Chettiar which has been subsequently affirmed by the Hon'ble Supreme Court. The learned Departmental Representative, however, has made an attempt to distinguish the said decision by raising various contentions. First of all, he has submitted that the Tribunal has applied a wrong treaty to decide the issue in assessee's own case for asst. yrs. 1991-92, 1992-93 and 1993-94 inasmuch as the treaty taken into consideration by it was applicable only from asst. yr. 2000-01. He has contended that the treaty entered into between India and USSR as notified by Notification No. GSR 812(E), dt. 4th Sept., 1989 was actually applicable upto asst. yr. 1999-2000. He has also filed a copy of the said treaty and it is worthwhile to refer to art. 7 of the said treaty which, being relevant in the present context, is extracted below:

"7(1) The profits of a resident of a Contracting State shall be taxable only in that State unless the resident carries on business in the other Contracting State through a PE situated therein. If the resident carries on business as aforesaid, the profits of the resident may be taxed in the other State but only so much of them as is directly or indirectly attributable to that PE."

10. The relevant art. 7(1) of the treaty between India and USSR which is stated to be relied upon by the Tribunal while deciding the similar issue in assessee's own case for asst. yrs. 1991-92, 1992-93 and 1993-94 and which is claimed to be applicable only from 2000-01 by the learned Departmental Representative reads as under:

"7(1) The profits derived in a Contracting State by an enterprise of the other Contracting State may be taxed in the first-mentioned State only if it is derived through a PE situated therein and only so much of them as is attributable to the activity of such PE."

11. A comparative reading of the provisions of art. 7(1) as contained in both the treaties shows that there is no material change in the position insofar as the present context is concerned. The provisions of both the articles are similar in this regard inasmuch as the profit derived 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 in the first-mentioned State to the extent the same is directly or indirectly attributable to the PE and the same thus shall not be taxable in other Contracting State. In the present 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 attributable to that PE, it follows that the entire income earned by the assessee company in USSR through its PE was chargeable to tax in that country as per art. 7(1) of the DTAA between India and USSR.

12. It is interesting to note that in the case of P.V.A.L. Kulandagan Chettiar, the Special Bench of the Tribunal while deciding a similar issue had also relied on art. 7 of the DTAA between India and Malaysia, the provisions of which read as under:

"7(1) The income, or profits of an enterprise of one of the Contracting States shall be taxable only in that Contracting State, unless the enterprise carries on business in the other Contracting State through a PE situated therein. If the enterprise carries on business as aforesaid, tax may be imposed in that other Contracting State on the income or profit of the enterprise but only on so much of that income or profits as is attributable to that PE."

13. A perusal of the aforesaid article referred to and relied upon by the Special Bench of Tribunal in the case of P.V.A.L. Kulandagan Chettiar clearly shows that the provisions contained therein are materially similar to the provisions of art. 7 of the Indo-USSR DTAA which is claimed to be applicable by the learned Departmental Representative himself in the case of the assessee involving asst. yr. 1998-99. As held by the Special Bench of Tribunal in this context relying on para 1 of art. 7, the assessee being a resident in India, the enterprise was an Indian enterprise, the profits earned by it in Malaysia were taxable in India. However, this power of India to tax as further provided in the article existed only where the enterprise did not carry on business in Malaysia through a PE situated in Malaysia. It was held that the enterprise having carried on the business in Malaysia undisputedly through a PE situated in that country, the right of Indian Government to tax the business profits earned in Malaysia was taken away because of the PE situated in Malaysia. It was held that the business profits earned in Malaysia by an Indian enterprise thus were taxable only in Malaysia and the power of India to tax the said income was taken away in view of the clear provisions of art. 7(1).

14. The learned Departmental Representative has also relied on art. 22 of the Indo-Russian DTAA to contend that the assessee company was entitled only for a deduction from tax on the income of the Indian resident of an amount equal to the income-tax paid in the USSR. According to him, this article clearly shows that the income earned by the assessee being resident of India in USSR was liable to be included in its total income as computed under the domestic law and it was entitled only for deduction of the income-tax paid in the USSR, if any, from the tax payable on its total income as computed under the domestic law. We find it difficult to accept this contention of the learned Departmental Representative. Article 22 as its heading itself suggests deals with elimination of double taxation. It is thus applicable only where despite all the provisions contained in the relevant DTAA to avoid the double taxation, there is still a case of taxation of the income twice i.e., in two countries. The OECD Commentary in fact enumerates such instances of the so-called juridical double taxation where the same income or capital is taxable in the hands of the same person by more than one State and further states that this article applies to such situations. It is also stated in the said commentary that where such situations arise, the two countries agree upon a credit to be given for the tax paid in one country against the tax levied by another country. It is thus a method for elimination of double taxation by giving credit for tax paid on income in one country against the tax leviable on the same income in another country and the occasion to invoke this method provided in art. 22 arises only when double taxation of the same income in two countries cannot be avoided. However, where there are specific provisions already contained in the relevant DTAA to avoid the double taxation, the occasion to refer to or rely on art. 22 to claim the credit for tax paid would not arise. As already observed, the relevant art. 7 which is applicable in the present case clearly provides that the income earned by the assessee being a resident of India in USSR was chargeable to tax in USSR as the same was entirely attributable to the PE in USSR and this being the position, we are of the view that there was no question of juridical double taxation of the said income and consequently, no occasion to invoke art. 22 to claim credit for the tax paid in USSR. A similar view has been expressed even by the Special Bench of Tribunal at Madras in the case of P.A.V.L. Kulandagan Chettiar wherein it was held that art. 22 contains a provision which has been made to meet a situation where some assessees in jurisdiction of some authorities may run the risk of income being doubly taxed in Malaysia as well as in India. The reliance of the learned Departmental Representative on art. 22 of the DTAA to contend that the assessee was entitled only to the credit for tax paid on income earned in USSR and not for exemption of the said income in India thus is clearly misplaced and we find no merit in his contention raised relying on the said article.

15. As already noted, a similar issue involved in assessee's own case in asst. yrs. 1991-92, 1992-93 and 1993-94 was decided by the Tribunal in favour of the assessee relying on the decision of Special Bench of Tribunal at Madras in the case of P.V.A.L. Kulandagan Chettiar which has been subsequently affirmed by the Hon'ble Supreme Court. In this regard, the learned Departmental Representative has contended that the issue involved before the Special Bench in that case was relating to the income from immovable property which is covered under art. 6 of the DTAA whereas the issue involved in the present case is relating to the business income which is covered under art. 7 of the DTAA. A perusal of the order passed by the Special Bench of Tribunal in the case of P.V.A.L. Kulandagan Chettiar, however, shows that the issue involved in the said case before the Special Bench was relating to the income derived from properties by the assessee in Malaysia as well as from business carried on by it in Malaysia and as already discussed, the issue relating to taxability of business profit was decided by the Tribunal with reference to art. 7 of the DTAA holding that such business profit was taxable in Malaysia only under art. 7 since it was undisputedly derived from business carried on in Malaysia through a PE situated in that country and no portion of such business profits was proved to be attributable to any other establishment. It was accordingly held by the Tribunal that no portion of the said income of the assessee could be taxed in India. The issue involved in the said case before the Special Bench thus was similar to the one involved in the present case and there is no such distinction as sought to be pointed out by the learned Departmental Representative.

16. The learned Departmental Representative has also contended that although the final operative decision of the Special Bench of Tribunal 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 the learned counsel for the assessee, a perusal of the judgment of the Hon'ble apex Court shows that there is nothing contained therein to indicate that the reasons given by the Special Bench of Tribunal to come to a conclusion as it did were disapproved by the Hon'ble Supreme Court or the same were found to be inappropriate or incorrect. There was thus nothing to suggest or indicate that the reasons given by the Tribunal to come to a conclusion in the case of P.V.A.L. Kulandagan Chettiar were disapproved by the Hon'ble Supreme Court and merely because the decision of the Tribunal was upheld by the Hon'ble Supreme Court for different reasons, it cannot be inferred that the reasoning given by the Tribunal was disapproved by the Hon'ble Supreme Court. In our opinion, the decision of Special Bench of Tribunal in the case of P.V.A.L. Kulandagan Chettiar thus still holds the field and the same being squarely on the point in issue involved in the present case and is binding on us, we respectfully follow the same and uphold the impugned order of the learned CIT(A) deleting the addition made by the AO to the total income of the assessee on account of income earned by it in the form of profits of business earned in USSR which were entirely attributable to the PE in that country.

17. In the result, the appeal of the Revenue is dismissed.

 

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