ITAT on Meaning of expression ’may be taxed’ used in India’s tax treaties

Tribunal held that use of the expression ’may be taxed’ in the second sentence of Article 7 on business profits would permit both the state, in which the permanent establishment (PE) is situated (Source State or PE State), as well as the Residence State of the enterprise, the right to tax the business profits attributable to the PE.

 INCOME TAX APPELLATE TRIBUNAL, DELHI

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

ORDER

PER B.C. MEENA, ACCOUNTANT MEMBER :

ITA No. 1293/Del/2009 pertaining to assessment year 2000-0 1 emanates from the order of CIT (Appeals)-XIX, New Delhi 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 (Appeals)-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.

2. The assessee is a public sector undertaking owned by the Government of India under the administrative control of Ministry of Communication. The company is doing business of providing full range of consultancy, design and engineering services in all the fields of telecommunication 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 / consultancy projects in many countries in Africa and Middle East besides South and 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 the 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 assessment year 2000— 01 read as under :-

“1. That on the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) – XIX (“CIT (Appeals)”) has erred in confirming the action of the Additional Commissioner of Income Tax, Range- 16, New Delhi (“Assessing Officer”) 148 of the Income Tax Act, 1961 (“Act”) that the reopening of assessment was in accordance with the provisions of Section 147 /148 of the Income-tax Act, 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 appellant that all the primary facts necessary for assessment were fully and truly disclosed during the course of the original assessment  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 case laws cited are not applicable to the facts of the case. There were wrong claims and accordingly there was escapement of income. After recording proper reasons, 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 the action of the Assessing Officer in extending the scope of inquiry during the course of re-assessment proceedings by including the grounds not covered in the reassessment notice issued 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 the disallowance of the claim of deduction made by the appellate under Section 80 HHB of the Act amounting to Rs.8,02,147.

4. That on the facts and in the circumstances of the case and in law, the Learned CIT (Appeals) has erred in confirming 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 the action of the Assessing Officer that the business income amounting to Rs. 10,68,26,533 attributable to the Permanent Establishment(s) of the appellate located in Oman, Mauritius, Netherlands and Tanzania, is exigible to income tax in India under the scheme of the Act.

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 Evasion with respect to taxes on income.

7. That on the facts of the case and in law, the orders passed by the Learned CIT (Appeals) and the Assessing Officer are bad in law and void-ab-initio.

4. The return of income for the year 2000-0 1 was filed on 29.11.2000 declaring income at Rs. 17,86,33,080/- under the normal provisions of the Income-tax Act and Rs.19,1 1,37,820/- computed as 30% of the book profits under the provisions of section 1 15JA. Subsequently, 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.21,28,33,925/- under normal provisions of the Act which was higher than the 30% of the book profit as per the provisions of section 1 15JA which worked out at Rs.20,44,03,265/-. Against that order, the assessee 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 1 15JA of the Act after appeal effect. Subsequently, a notice u/s 148 was issued for reassessment. In response to that notice, assessee filed the return on 30.04.2007. Assessee also requested the Assessing Officer to communicate the reasons for reopening. Assessing Officer furnished the reasons for reopening. These reasons for reopening were (i) incorrect allowance of deduction in respect of export profit Rs. 12,04,607/-; and (ii) incorrect claim of deduction Rs.3,08,026/-. In the original return filed, the assessee also claimed section 80HHC deduction of Rs.3 1,28,849/- and a prescribed form 10CCAC was also 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 that the CIT (A) is not justified in sustaining the reopening of the assessment 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 proceedings was based merely on the basis of change of opinion. The CIT (A) was not justified in holding that the case laws cited by the assessee were not applicable to the facts of the case. He further pleaded that the CIT (A) was also not justified in holding that the assessee had made a wrong claim and accordingly, there was escapement of income. The learned AR further pleaded that the reopening of the assessment was made after four years and all the conditions as laid out in the proviso to section 147 for reopening of the assessment were not applicable to the facts and circumstances of the assessee’ s case. The reopening 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 against 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 provisions 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 reserve 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 reserve 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 return of income was accompanied with the supporting documents. All the material facts required were disclosed fully and truly. The reopening is after 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.);

(iii) Hindustan Lever Ltd. vs. ACIT & Ors. – 268 ITR 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 288 (Bom);

(ii) Garden Silk Mills Pvt. Ltd. vs. DCIT – 237 ITR 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 ITR 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 following decisions :-

(i) Bhavesh Developers vs. Assessing Officer – (2010) 329 ITR 249 (Bom.) wherein the Hon’ble High Court has held, “recourse to the power under section 147 cannot be sustained on a mere change of opinion, there being no failure of the assessee to disclose fully and truly, all material facts necessary for assessment. The basic contention prescribed by the statute for

the exercise of the power has not been fulfilled. The petition has to be allowed.”

(ii) Carlton Overseas (P) Ltd. vs. ITO – (2010) 188 Taxman 11 (Del.) wherein the Hon’ble High Court has held as under :-

“The Audit Report (objection) merely gives an opinion with regard to the non-availability of the deduction both under Section 80-IA and under Section 80-HHC and that the deduction under Section 80-IA was not deducted from the profits of the business while computing deduction under Section 80-HHC. Clearly, therefore, there was no new or fresh material before the Assessing Officer except the opinion of the Revenue Audit Party.”

“There is a well known difference between a wrong claim made by an assessee after disclosing all the true and material facts and a wrong claim made by the assessee by withholding the material facts fully and truly. It is only in the latter case 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 of 2005 (Bom.) wherein the Hon’ble High Court has held as under :-

“The proceedings initiated by the assessing officer 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, issuance 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 of 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. 17,86,33,080/- 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 under normal provisions and Rs. 19,00,95,167 u/s 1 15J. In order u/s 143(3) dated 12-03-2003, total income was determined at Rs.21,28,33,925 under normal provisions and Rs.20,44,03,265 u/s 1 15J. CIT(A) vide his order dated 23-07-2003 deleted certain disallowances made by AO and in appeal effect order, income was computed at Rs.17,51,57,580 under normal provisions and Rs.19,31,00,360  u/s 1 15J. Vide notice u/s 148 dated 30-03-2007, reassessment proceedings were initiated. In response, assessee filed return on 30-04-2007. Reasons for re-opening were communicated to assessee on 06-07-2007. 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.3 1,28,849

(ii) Incorrect claim of deduction u/s 80 HHB –Rs.8,02,147

5.1 Ld. DR submitted that the assessee has challenged re-opening proceedings on ground that all primary facts necessary for assessment were fully and truly disclosed during the course of original assessment proceedings and initiation of re-opening proceedings was done merely 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 escapement of income. The AO has found that the assessee has inflated its claim u/s 80HHC by allocating less indirect expenses attributable to export of trading goods. Relevant figures have given in page 3 of CIT(A) order. By applying ratio 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.22,27,037 as claimed by the assessee. Thus, the claim of deduction u/s 80HHC was not allowable. Further, AO also found that the assessee has credited Rs.32,00,00,000 to foreign project reserve account but has claimed deduction u/s 80HHB for  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 facts have fully and truly disclosed and there is no failure on its part is not 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 10CCAC certificate has been filed, but it does not contain working of indirect expenses attributable to exported trading goods which is vital element for computation of deduction available. Assessee has not furnished all such details. This fact has also been mentioned on page 9 of assessment order u/s 147. According to provision contained in explanation 1 to section 147, production of books of accounts does not exonerate the assessee even if AO could have found the relevant facts by exercising due diligence. This has been consistently held in many decisions including following :-

(i) Indo-Aden Salt Manufacturing and Trading Co. vs CIT 159 ITR 624 (SC)

(ii) ITO vs Lakhmani Mewal Das 103 ITR 437 (SC)

(iii) Malegaon Electricity Co. P. Ltd. vs CIT 78 ITR 466 (SC)

5.2 Ld. DR further pleaded that as per Explanation (e) given below 80HHC(3), indirect cost means costs, not being direct 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 indirect cost in this manner.

5.3 For claim of deduction u/s 80HHB, the contention of assessee is that shortfall in credit of foreign project reserve account has been made good in the subsequent year. This argument is of no help because assessee has to meet with prescribed requirements during the period under consideration. Clearly, AO has wrongly allowed claim u/s 80HHB during assessment 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 wrongly 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 assessee 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). Incidentally, this case law is also on claim of deduction u/s 80HHB.

5.5 Ld. DR further submitted that Courts have consistently held that at initiation stage, there should be a prima facie case for making a reasoned belief that income has escaped assessment. Courts can not examine sufficiency of reasons and AO need not make exact computation of escaped income. For this, Ld. DR placed reliance on the following 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 appeal of assessee should be dismissed and re-opening of assessment may be upheld.

6. We have heard both the sides in detail. The notice has been issued after four years period wherein the reopening on the basis of change of opinion is not permitted, however, 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 shall be deemed to be an escapement of income. In the assessee’ s 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 assessee’ s information while allowing 80HHC in original order were taken only Rs.22,27,037/- while the indirect expenses attributable to the trading goods must have been considered 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 issues relating to deduction u/s 80HHC and 80HHB have not been discussed at all. Although for claiming deduction u/s 80HHC, certificate in form no.10CCAC has been filed, but it does not contain working of indirect expenses attributable to exported trading goods. This fact is vital element for computation of deduction available to the assessee which has not been furnished by the assessee. Therefore, the provisions contained in Explanation 1 to section 147, the production of books of accounts does not exonerate the assessee even if AO could have found the relevant facts by exercising due diligence. This proposition has been held by various courts including the following :-

(i) Indo-Aden Salt Manufacturing and Trading Co. vs CIT 159 ITR 624 (SC)

(ii) ITO vs Lakhmani Mewal Das 103 ITR 437 (SC)

(iii) Malegaon Electricity Co. P. Ltd. vs CIT 78 ITR 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 trading goods to the total turnover”

The assessee had not worked out interest cost in this manner. Further, the assessee has claimed deduction u/s 80HHB for Rs.32,08,02,147/-. The assessee has credited to foreign project reserve account of Rs.32 crores only. The provisions of section 80HHB (3) provides such conditions 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 foreign projects or as the case may be or of the work forming part of the foreign 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 verified by such accountant, certifying that deduction has been correctly claimed in accordance with the provisions of this section. The other condition which 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 foreign project reserve account by debiting the profit and loss account of the previous year in respect of which the deduction under this section is to be allowed 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 years next following for the purposes of his business other than for distribution by way of dividends or profits or amount brought into India in foreign exchange. The foreign project reserve account was credited of Rs.30 crores only while claim was made of Rs.32,08,02,147/-. Thus, prima facie, there was excess deduction claimed u/s 80HHB by the assessee of Rs.8,02,147/-. The deduction claimed u/s 80HHB, the assessee has made a short fall credit in the foreign project reserve account. It is claimed that the short fall has been made good 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 while making the original assessment by wrongly applying the provisions of law. In view of the facts, the initiation of the reopening proceedings subsequently does not amount to change of opinion. Similar view has also been upheld in the case of Som Dutt Builders (P) Ltd. vs. DCIT reported in 98 ITD 78 (Kol.). It is also a trite law that while reopening the assessment there should be a prima facie case for making a reasoned belief that income has escaped assessment. The Courts cannot consider sufficiency of reasons and correctness of material at that stage. Existence of belief can be challenged by assessee but not the sufficiency of the reasons to belief. This view had 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. Narayanappa 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 assessee is regarding confirming the action of Assessing Officer and extending the scope of enquiry during the course of reassessment proceedings by including the grounds not covered in the reassessment notice issued u/s 148 of the Income-tax Act which the assessee claimed has attained finality during the regular assessment.

8. We have heard both the sides on the issue and after hearing both the sides, we find that the Hon’ble Bombay High Court in 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 income which come to his notice during the reassessment proceedings. The Explanation 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 section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub¬section (2) of section 148. The language of Explanation 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 assessee’ s appeal and the same is dismissed.

9. In ground no.3, the assessee has raised the issue regarding confirming the disallowance of claim of deduction made u/s 80HHB of the Act amounting to Rs.8,02, 147/-.

10. The assessee has made total claim of Rs.32,08,02,147/- while the reserve has been made upto Rs.32 crores only. There 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 evaluate reasonability of circumstances and they can positively take into account the subsequent developments. Reliance was placed on M/s. Marg Constructions vs. JCIT, 2003 TTJ 440 and Assam Roller Flour Mills vs. CIT – (1996) 227 ITR 43 (Raj.). In the case of Assam Roller Flour Mills, cited 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, however, is required to be applied after taking into account such subsequent 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, such 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 justice between the parties and to impart to them not merely legal or technical justice but, as far as possible, real and substantial justice. Justice is to be imparted in accordance with law and not simply in subordination to law. The former expression promotes and advances expansion and development of law; the latter makes law, rather, stagnant and stoic. A developing society 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 current years book in which assessment is framed. Reliance is placed upon Supreme Court decision in the case of CIT vs. Modi Spinning & Weaving Mills Co. Ltd. with the Circular No.189 dated 30th 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 provisions should be interpreted liberally. It is also submitted that the Assessing Officer while passing the assessment order under section 147 read with section 143(3) should have taken into account the subsequent development of making good the deficiency in the next year. The same was intimated to him vide letter dated October 17, 2007. On that basis, the assessee prayed 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 submissions 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 entitle it to the benefit of section 80HHB This being so, the Income tax Department should not stand on mere technicalities and must give an opportunity to the petitioner to fulfill the requirements of section 80HHB(3) and, on such compliance within a reasonable time, it should grant the benefit to the petitioner under that provision.”

11. On the other hand, the learned DR submitted that it is a fact that there was a short fall in the Foreign Projects Reserve Account 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 provisions 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 profits and gains as is referred to in sub-section (1) in relation to the relevant assessment year] is debited to the profit and loss account of the previous year in respect of which the deduction under this section is to be allowed 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 years next following for the purposes of his business other than for distribution by way of dividends or profits.”

It is also prayed that each assessment year is an independent assessment year and the provisions of section has to be applied accordingly. 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 exchange.

In the assessee’ s case, the amount credited to foreign project reserve account is least. Therefore, the deduction has been rightly limited to the extent of Rs.32 crores. Ld. DR also placed the facts of Continental Construction Ltd., cited by Ld. DR, are not applicable to the assessee’ s case. The assessee’ s reliance on the CBDT Circular No.189 dated 30.01.1976 is also of no help as the same was issued in respect of the development rebate. Similarly, the case laws relied upon by the assessee is also not applicable to the facts of assessee’ s case as the case of CIT vs. Modi Spinning Weaving Mills Ltd., cited supra, is also related to the development rebate. 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 Assam Roller Flour Mills, cited supra, are also at variance to the facts of assessee’ s case, hence not applicable to the assessee’ s case.

12. We have heard both the sides on the issue. The provisions of section 80HHB categorically provides that deduction under this section shall be allowed to the extent of least of the following amounts :-

(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 exchange.

It is also a trite law that each assessment year is a separate independent assessment year and all the provisions of section have 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 completely different set of facts. In that case, the assessee had adjudicated certain foreign projects under the agreements which were approved by the Central Board of Direct Taxes under section 80-O of the Act. The Department, however, contended that in those foreign projects, only section 80HHB could apply and Hon’ble 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 the section of 80HHB. In those circumstances, the Hon’ble High Court has taken a view that the Department ought not to stand on mere technicalities but ought to give the petitioner an opportunity to fulfill the requirements 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 assessee was under the bonafide belief in not complying with the provisions of section 80HHB. Similarly, the facts of Assam Roller Flour Mills, cited supra, also at variance to the facts of assessee’ s case. Therefore, reliance on that also is not of any help to the assessee. In that case, the Hon’ble High 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 relevant accounting year and the general rule, however, is required to be applied 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 and a branch office of the assessee entered into a contract with the foreign company to import crude palm oil and accordingly obtained an import licence from the concerned authorities on 30th 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 credit was, however, later on canceled by the bank. On January 13, 1978, the Government 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 issuing another public notice on February 22, 1978, to the effect that licenses issued prior to January 13, 1978, were to be treated as valid even though the imports were not covered by an irrevocable letter of credit but certain restrictions like selling the imported goods only to the Government or its agencies on specified rates or selling to non-Government parties only after obtaining 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 assessee was given an option either to pay reshipment expenses and fine or to pay for clearance of the goods. A personal penalty was imposed on the assessee. 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 expenditure 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 directed that ITO shall charge the tax on this amount when the same was refunded by the customs department. The Tribunal disallowed the claim of the assessee and held that the penalty was imposed for the fabrication of the provisions of Customs Act.

In that view of the matter, the Hon’ble High Court held that taking into account, the subsequent order of Government of India knocking off the penalty in 1982, and on taking the effect of such order of the Government of India to the year of account with the help of doctrine 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 expenditure. Therefore, the facts of the case were completely different than the facts of the assessee’ s case. In the case of CIT vs. Modi Spinning & Weaving Mills Ltd., cited supra, the facts are at variance to the facts of assessee’ s case. In that case, issue was related to development rebate, therefore, had no application to assessee’s case.

12.1 In these facts and circumstances, in our considered view, the assessee’ s reliance on the above case laws cited and Board’s Circular is of no help. The express provisions of section 80HHB (3)(ii) laid down conditions which are necessary to be fulfilled for claiming deduction. Assessee had failed to fulfill all the conditions. In view of these facts, we dismiss this ground of assessee’ s appeal.

13. Ground No.4 is related to confirming the disallowance made in respect of the deduction u/s 80HHC amounting to Rs.31,28,849/-.

14. Ld. AR submitted that the assessee is maintaining separate books of account for export business, therefore, indirect expenses relatable to the export goods need not to be worked out as per provisions of section 80HHC(3). For this proposition, the learned AR relied 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 TTJ 108 (Del.). 15. On the other hand, the learned DR submitted that the contention of the assessee is not at all tangible in view of the Explanation (e) as provided in section 80HHC(3). Even in the case of CIT vs. General Sales Limited, cited supra, the Hon’ble Delhi High Court has held as under :-

“We are of view that this direction given by ITAT is unexceptionable. The AO has to first determine whether the assessee is maintaining separate books of a/c or not and then depending upon his conclusion, the AO would have to apply the law laid down u/s 80HHCof the act. Obviously, the AO will evaluate the books of a/c and determine how much of expenditure, direct and indirect, is attributable to export activities of the assessee.”

In the assessee’ s case, there is no mention of maintenance of separate books of account in assessment order and Assessing Officer has not seized with such situation. In the case of Glaxo Smithkline Asia P. Ltd. vs. ACIT, cited supra, the ITAT has held that only those administrative expenses will be apportioned in ratio of export turnover to total turnover, which have relation with export business. Thus, in that case also, the ITAT has advocated the method of apportionment in ratio of export turnover to total turnover. In view of these facts, the Assessing Officer has correctly worked out indirect expenses as per Explanation (e) to section 80HHC (3) and rightly denied 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 Assessing Officer has to apply the law as laid down u/s 80HHC on the basis of evaluation of books of account and by determining regarding the expenditure, direct 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 expenses will have to be apportioned in the ratio of export turnover to total turnover which have relations with the export business. Thus the apportionment of the expenditure in the ratio of export turnover to total turnover has been upheld. In view of these facts, we find no merits in the ground of assessee’ s appeal. We uphold that the Assessing Officer has correctly worked out indirect expenses as per the Explanation (e) to section 80HHC(3). Keeping these facts in view, this ground of assessee’ s appeal also stands dismissed.

17. In ground nos.5 & 6, the issue raised is regarding taxability in India of income earned in the foreign countries covered under DTAA. The assessee is resident of India. We would also like to state that in the appeal for assessment year 2005-06 ITA No.1294/Del/2009 and appeal for assessment year 2006-07 ITA No.72/Del/2010, this is the only issue which is the subject matter of appeal before us.

18. During the year under consideration, the assessee has earned income from foreign projects in Oman, Mauritius, Netherlands and Tanzania. Income pertaining to these projects has not been included 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 only in respective countries as per the DTAA and not taxable in India.

19. While pleading on behalf of the assessee, the learned AR submitted that income attributable to permanent establishment in foreign country with whom DTAA are in existence should be considered in taking the following contentions in view. For the purposes of interpretation of an international treaty, an important aspect that needs to be considered is that treaties are negotiable and entered into at a political level and have several considerations as their basis. The main function of a Double Taxation Avoidance Agreement (DTAA) is essential for providing a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. For this, Ld. AR relied on the decision of Union of India vs. Azadi Bachao Andolan – 263 ITR 706 (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 double taxation. In this regard, the learned AR made a reference to the decision 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 Contracting State, the same should be taxed in India is an oversimplified statement on the whole regime of Double Taxation Avoidance Agreement. It is true that the prime motivating factor in developing the concept of Double Taxation Avoidance Agreement is the genuine hardship of the international assessee that the same amount of income became the subject of taxation both in the home state and in the Contracting State. It is to alleviate this burden of double taxation that the instrument of Double Taxation Avoidacne Agreement 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 be avoided. Ld. AR pleaded that Article 23 of OECD model countries would be applicable only where income may be taxed in both countries. In the 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, determination 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 Article 4 of OECD Model Convention (Residence) in respect of residency is not 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 taxable only in the State unless the enterprise carries on business in the other Contracting State through a PE situated therein. Therefore, once the Revenue accepts that there is PE outside India, the same shall be taxable only in the country of source according to Article 7 and residence would not be determinative criteria. For this proposition, Ld. AR placed reliance on CIT v. Lakshmi Textile Exporters Ltd. (2001) 245 ITR 521 (Mad)). Further, Ld. AR submitted that the classification of the Articles under the Double Taxation Avoidance Agreement from the OECD Commentary merits consideration 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 which includes the phrase ‘may be taxed’ means the Contracting States permitted 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 Bench of Hon’ble ITAT were incorrect merely because the decision of the Hon’ble 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. Mideast India Ltd. (2009) 28 SOT 395 (ITAT) wherein it has been observed as below :-

“The learned DR has also contended that although the 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 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 ITAT 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 … .In our opinion, the decision of Special Bench of IT AT in the case of P.V.A.L. Kulandagan Chettiar (supra) 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 Assessing Officer 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 was entirely attributable to the permanent establishment in that country.”

It was further pleaded that the ITAT in this judgment on appreciating Article 7 of the relevant DTAA also held that the profits 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. 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 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 Article 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 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 Oman, in view of Article 7 of the DTAA, the profits earned in Oman were rightly excluded in India. It is also submitted that the case of ITO v. Data Software Research Co. (P) Ltd. ITA No. 2072/Mad/2006 can be regarded as ‘per incuriam’ i.e. is rendered without having been informed about binding precedents that are directly relevant rendered in the matter of CIT v. S.R.M. Firms (1994) 208 ITR 400 (Mad) by the jurisdiction High Court. According to the doctrine of ‘per incuriam’, any judgment which has been passed in ignorance of or without considering a statutory provision or a binding precedent is not good law and the same ought to be ignored. For this proposition, reliance is placed on Siddharam Satlingappa Mhetre v. State of Maharashtra and Ors. – AIR 2011 SC 312. It is also submitted that reliance on Organisation for Economic Co¬operation and Development’s (‘OECD’) Commentary on Model Tax Convention has not been accepted by the Courts of India as having a precedent value. Referred to Ms. Pooja Bhatt v. DCIT (2008) 26 SOT 574 (lTAT) (pages 143-144 of Case Law Paper Book at Para 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 the contention of the Department since it has been observed in the ruling that the language of treaty provision in which the expression ‘may be taxed’ was used in Indo-Malaysia DTAA which was under consideration in the CIT v. P.V.A.L. Kulangandan Chettiar (2004) 267 1TR 654 (SC) is not comparable to the language employed in Article 16(1) of Indo-Norway DTAA, which was the subject matter of the S. Mohan’s ruling. It is further submitted that according to the provisions of Section 255 of the Act, where an earlier co-ordinate bench has taken a decision, subsequent bench cannot differ from 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 proposition, 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 income earned in foreign country under DTAA. In the appeals, for Assessment Years 2005-06 and 2006-07, this issue is also the subject matter of appeal. Ld. 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 fundamental principles of international taxation. Ld. DR submitted that there are two systems of international taxation. One is residence based taxation and another is source based taxation. Except very few countries, almost all the countries follow residence based taxation system. According to this system of taxation, a country can tax its residents on their global income wherever it is earned, while non-residents are taxed only on income sourced inside the country. Such powers of taxation are derived from constitution of the country and are enshrined in its domestic tax laws. India follows residence 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 world been following Source based taxation, then it would have been an ideal situation where there is no double taxation. But under residence base system, there arises situation of double taxation because the country where the person 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 Rules’ which allocate taxing rights between contracting states with respect to various kinds of incomes. Second rule is to put state of residence under an obligation 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. First, Articles 6 to 21 determine, with regard to different classes of 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 with 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 the Contracting States. The other Contracting State is thereby prevented 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 income (dividends and interest), although both States are given the right to tax, the amount of tax that may be imposed in the State of source is limited. Second, insofar as these provisions confer on the State of source or situs a full or limited right to tax, the State of residence must allow relief ~ as to avoid double taxation; this is the purpose of Articles 23 A and 23 B. The Convention leaves it to the Contracting States to choose between two methods of relief, i.e. the exemption method and the credit method.”

India follows credit method for relieving double taxation.

20.1 Under distributive rules, taxing rights are distributed between contracting states. Exclusive rights to taxation in respect of certain incomes are given to one state and thus other state is precluded from taxing those incomes and therefore double taxation is avoided. As 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 also tax that income and depending upon taxing rights of source state, incomes are classified into three categories. These are discussed in detail in para 20 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 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 State of source or situs.

21. The following are the cases of income and capital that may be taxed without any limitation in the State of source or situs:

– income from immovable property situated in that State (including income from agriculture or forestry), gains from the alienation of such property, and capital representing it (Article 6 and paragraph 1 of Articles 13 and 22);

– profits of a permanent establishment situated in that State, gains from the alienation of such a permanent establishment, and capital representing movable property forming part of the business property of such a permanent establishment (Article 7 and paragraph 2 of Articles 13 and 22); an exception is made, however, if the permanent 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 sportsmen exercised in that State, irrespective of whether such income accrues to the artiste or sportsman himself or to another person (Article 17);

– directors’ fees paid by a company that is a resident of that State (Article 16);

– remuneration in respect of an employment in the private sector, exercised in that State, unless the employee is present therein for a period not exceeding 183 days in any twelve month period commencing or ending in the fiscal 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 pensions paid in respect of government service (Article 19).

22. The following are the classes of income that may be subjected to limited taxation in the State of source:

– dividends: provided the holding in respect of which the dividends are paid is not effectively connected with a permanent establishment in the State of source, that State must limit its tax to 5 per cent of the gross amount 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 case of dividends, the State of source must limit its tax to 10 per cent of the gross amount of the interest, except for any interest in excess of a normal amount (Article 11).

23. Other items of income or capital may not be taxed in the State of source or situs; as a rule they are taxable only in the State of residence of the taxpayer. This applies, for example, to royalties (Article 12), gains from the alienation of shares or securities (paragraph 5 of Article B), private sector pensions (Article 18), payments received by a student for the purposes of his education or training (Article20), and capital represented by shares or securities (paragraph 4 of Article 22). Profits from the operation of ships or aircraft in international traffic or of boats engaged in inland waterways transport, gains from the alienation of such ships, boats, or aircraft, and capital represented 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 profits that are not attributable to a permanent establishment in the State of source  are taxable only in the State of residence (paragraph 1 of Article 7).”

The distributive rules use the words, ‘shall be taxable only’, ‘may be taxed’ and ‘may also be taxed’. Interpretation of these phrases 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 exclusive right to tax is given to one of the Contracting States; and the relevant Article states that the income or capital in question “shall be taxable only” in a Contracting State. The words “shall be taxable only” in a contracting State preclude the other Contracting State from taxing, thus double taxation is avoided. The State to which the exclusive right to tax is given is normally the State of which the taxpayer is a resident within 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 of Article 4.

7. For other items of income or capital, the attribution of the right to tax is not exclusive and the relevant Article then states that the income or capital in question “may be taxed” 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 double taxation. Paragraphs 1 and 2 of Article 23A and paragraph 1 of 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 the 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 tax 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 tax is not exclusive, the  convention uses the phrase ‘may be taxed’. Regarding ‘dividend’ and ‘interest’ income’, primary right of taxation is given to state of residence, though this is not exclusive right as paragraph 1 of relevant articles 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. Therefore, if an item of income is ‘may be taxed’ in state of source and nothing is mentioned about taxing right of state of residence in convention itself, then state of residence is not precluded from taxing such income and can tax it using inherent right of state of residence to tax global income of its resident. If state of source is given exclusive right to tax an item of income by using 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 inherent right to tax.

20.2 Ld. DR further submitted that with this background of basics of DT AA, present controversy is to be examined. The assessee is resident of India and thus being state of residence, India has inherent right to tax global income of assessee as per section 5 of IT Act, 1961. The assessee has PE in foreign countries with whom India has entered into DTAA. The assessee has opted for application of DTAA u/s 90(2) of IT Act. The character of income of assessee under issue is business income and therefore Article 7 of relevant

DTAA’s is applicable. In all these DTAA’s, Article 7 is similarly worded, which reads as under :-

“The profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. If the enterprise carries on business aforesaid, the profits of the enterprise may be taxed in the other state but only so much of them as is attributable to that permanent 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 phrase ‘shall be taxable only’. Second part says that if there is PE in another contracting state i.e. state of source, then right to taxation of state of residence is not exclusive but inherent right to tax of state of residence is not lost. Second 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 has 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 had 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 sentence uses phrase ‘may be taxed’, therefore inherent right of India to tax global income of its resident is not lost.

20.3 The contention of the assessee is that since its 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 ITR 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 laws 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 important to examine what Hon’ble Supreme Court has held in PVAL Kulandagan Chettiar’s case. In that case, the tax payer was resident of India and had rubber 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, India is precluded from taxing the same. The matter was decided in favour of assessee by lower authorities by interpreting phrase ‘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 not required. The assessee is resident of both India and Malaysia as per their respective 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 tie breaking rules as contained in Article 4(2) of treaty. By applying tie 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 loses status of state of residence and Malaysia becomes state of residence. Now, Malaysia being state of residence for the assessee, has inherent right to tax 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 that 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 ITR 267. Closer examination of aforesaid decision of hon’ble Supreme Court shows that it has clearly upheld the basic principle that state of residence has right to tax global income of its resident. Malaysia becomes the state of residence for assessee after applying tie breaking rules.

20.5 In subsequent cases relied upon by the assessee, it has been held that income arising in state where permanent establishment 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, militates 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 all 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 and therefore India had inherent right to tax global income of its residents. 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 cases.

20.6 Ld. DR also relied upon ITO v Data Software Research Co. P Ltd. 2008- TIOL-09-ITAT-Mad (a copy of which has been furnished). 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 consistent with OECD Commentary has been taken. In that case, issue involved was taxability of salary income under Article 16(1) which uses the phrase ‘may be taxable’ for the source state. Reliance is also placed on Manpreet Singh Gambhir vs. PCIT 26 SOT 208 (Del) which has also been relied upon by the assessee and placed on pages 170-75 of paper book. In this case, hon’ble 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 foreign countries on income earned from PE in those countries, credit of those taxes can be claimed in India. Therefore, the crux of controversy is whether 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 tax under Article 7 and DTAA says that India shall give credit for taxes paid in country of source. Any sovereign country can enter into any treaty it deems fit with another sovereign and that treaty shall be applicable through section 90 of IT Act, 1961. To give an example, India has given up its right to tax capital gain arising in India to residents of Mauritius under Indo-Mauritius DTAA. But this is not the situation in case of DT AA applicable to present assessee. Finally, it is prayed that these grounds of assessee’ s may be dismissed.

21. We have heard both the sides in detail. We have 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 company 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 assessee company including the global income are liable to be taxed in India. Section 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 rates shall be charged for that year in accordance with, and [subject to the provisions (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 provisions 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 than the previous year, notwithstanding shall be charged accordingly. Section 5 of the Income-tax Act defines the scope of the total income which read 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 such 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 arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total 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 resident includes all income from whatever source derived which accrues or arises 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, India 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 establishment 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 DTAA’s which are applicable in the assessee’ s case are similarly worded. In these DTAAs, it have been provided that the profit of an enterprise of contracting state shall be taxable only 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 aforesaid, the profits of the enterprises may be taxed in the other Contracting State but only so much of them as is attributable directly 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 profit of an enterprise of a contracting state shall be taxable only in that state; and, the second part is that when the enterprise carries on business in the other contracting state through a permanent establishment. In that situation, the profits of enterprise may be taxed in the other contracting state but only so much of them as is attributable to that permanent establishment. Thus, the first part 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 second 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 permanent establishment situated. Thus, the Article 7 provides that in such a situation, the state of the residents does not have exclusive right to tax but it has inherent right to tax such income. The article also provides that the state of the source has also right to tax the business income. It is a non-exclusive right in case there exist a permanent establishment. The phrase used “may be taxed”. Therefore, the combined reading of the sentences of Article 7 of relevant DTAA means that the state of source has non-exclusive right to tax of business income attributable to permanent establishment. In view of this, such income may be 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, where 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 of assessee the phrase used “may be taxed”, therefore, inherent right of taxation of global business income in India is not lost.

21.1 Case laws relied upon by assessee are basically 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 Court 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 the 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 income arising from immovable property. We will proceed on the basis that fiscal connection arises in relation to taxation either by reason of residence of the assessee or by reason of the location of the immovable property which is the source of income. In the clauses which we have set out above, fiscal domicile is set out in art. IV which states that in a case where the person is a resident in both the Contracting States, fiscal domicile will have to be determined with reference to the fact that if the Contracting 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 tax liability arises in respect of a person residing in both the Contracting States has to be determined with reference to his close personal and economic relations with one or the other.

The immovable property in question is situate in Malaysia and income is derived from that property. Further, it has also been held as a matter of fact that there is no permanent 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 the authorities and affirmed by the High Court. We, therefore, do not propose to re-examine the question whether the finding is correct or not. Proceeding on that basis, we hold that business income out of rubber plantations cannot be taxed in India because of closer economic relations between the assessee and Malaysia in which the property is located and where the permanent establishment 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 allocation of power to tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid, no relief can be sought. Reading the Treaty in question as a whole when it is intended that even though it is possible for a resident in India to be taxed in terms of ss. 4 and 5, if he is deemed to be a resident of a Contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant. The Treaty will have to be interpreted as such and prevails over ss. 4 and 5 of the Act. Therefore, we are of the view that the High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court.

The contention put forth by the learned Attorney General that capital gains is not income and, therefore, is not covered by the Treaty cannot be accepted at all because for purposes of the Act capital gains is always treated as income arising out of immovable property though subject to different kind of treatment. Therefore, the contention advanced by the learned Attorney General that it is not a part of the Treaty cannot be accepted because in the terms of Treaty wherever any expression is not defined, the expression defined in the IT Act would be attracted. The definition of ‘income’ would, therefore, include capital gains. Thus, capital gains derived from immovable property is income and, therefore, art. 6 would be attracted.”

Hon’ble Supreme Court’s conclusions rest on the fact that the personal and economic relations of the assessee in relation to capital 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. Assessee’ s contention that its foreign income is taxable income in foreign countries and it cannot be taxed in India is an untenable contention. It is a fallacious view taken by the assessee by wrong interpretation of Article 7 of relevant DTAA.

21.3 We would also like to mention that in the sphere of international taxation, there are two fundamental systems of taxation, 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 follow the residency based taxation system. According to this system, a country can tax its residents on the global income of the taxpayer while the non-residents are taxed only on the income sourced inside the country. The provisions of section 5 of Income-tax Act, 1961 as enumerated above give a scope of a total income of the assessee who is resident of India. As per these provisions, the income of the resident taxable in India includes all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person or accrues or arises or is deemed 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 case of a resident also extended to the income accrues or arises to him outside India during such year. Under the 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 world following source based taxation 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 rules are devised in the DTAA’s, i.e., one is by way of providing Distributive Rules under which taxing rights allocated between contracting state with respect to various kinds of income; and the second rule is to put state of residence under an obligation to give either credit for taxes paid in the source state or to exempt the income which is taxed in source state. These two rules have 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. First, Articles 6 to 21 determine, with regard to different classes of 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 with 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 the Contracting States. The other Contracting State is thereby prevented 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 income (dividends and interest), although both States are given the right to tax, the amount of tax that may be imposed in the State of source is limited. Second, insofar as these provisions confer on the State of source or situs a full or limited right to tax, the State of residence must allow relief so as to avoid double taxation; this is the purpose of Articles 23 A and 23 B. The Convention leaves it to the Contracting States to choose between two methods of relief, i.e. the exemption method and the credit method.”

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. Exclusive rights to taxation in respect of certain incomes are given to one state and thus other state is precluded from taxing those incomes and therefore the double taxation is avoided. As a rule, such exclusive rights are given 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 categories and such classification are provided in para 20 to 23 of the OECD Commentary which read as under:-

20. Income and capital may be classified into three 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 State of source or situs.

21. The following are the classes of income and capital that may be taxed without any limitation in the State of source or situs:

– income from immovable property situated in that State (including income from agriculture or forestry), gains from the alienation of such property, and capital representing it (Article 6 and paragraph 1 of Articles 13 and 22);

– profits of a permanent establishment situated in that State, gains from the alienation of such a permanent establishment, and capital representing movable property forming part of the business property of such a permanent establishment (Article 7 and paragraph 2 of Articles 13 and 22); an exception is made, however, if the permanent 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 sportsmen exercised in that State, irrespective of whether such income accrues to the artiste or sportsman himself or to another person (Article 17);

– directors’ fees paid by a company that is a resident of that State (Article 16);

– remuneration in respect of an employment in the private sector, exercised in that State, unless the employee is present therein for a period not exceeding 183 days in any twelve month period commencing or ending in the fiscal 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 pensions paid in respect of government service (Article 19).

22. The following are the classes of income that may be subjected to limited taxation in the State of source:

– dividends: provided the holding in respect of which the dividends are paid is not effectively connected with a permanent establishment in the State of source, that State must limit its tax to 5 per cent of the gross amount 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 case of dividends, the State of source must limit its tax to 10 per cent of the gross amount of the interest, except for any interest in excess of a normal amount (Article 11).

23. Other items of income or capital may not be taxed in the State of source or situs; as a rule they are taxable only in the State of residence of the taxpayer. This applies, for example, to royalties (Article 12), gains from the alienation of shares or securities (paragraph 5 of Article B), private sector pensions (Article 18), payments received by a student for the purposes of his education or training (Article 20), and capital represented by shares or securities (paragraph 4 of Article 22). Profits from the operation of ships or aircraft in international traffic or of boats engaged in inland waterways transport, gains from the alienation of such ships, boats, or aircraft, and capital represented 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 profits that are not attributable to a permanent establishment in the State of source are taxable only in the State of residence (paragraph 1 of Article 7). The Distributive Rules uses the word “shall be taxed only”, “may be taxed” and “may also be taxed”. Thus, if a contracting state is to give exclusive right to tax a particular kind of an income, then relevant 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 residence. As per these Model of Convention, the word “may be taxed” and “may also be 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 nothing is mentioned about taxing right of state of residence in convention itself, then state of residence is not precluded from taxing such income and can tax such income using inherent right of state of residence to tax such global income of its resident. Only in the case of phrase “shall be taxed only” used, then only the state of  residence is precluded from taxing it. In such cases, where the phrase “may be taxed” used, the state of residence has been given its inherent right to tax. In the assessee’ s case, the claim of the assessee is for income taxable in foreign countries and it should not be taxed in India, cannot be accepted as the phrase used is “may be taxed” and in such cases, the state of residence has inherent power to tax such income which has been clearly 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 has not waived all the rights to tax under Article 7 of the relevant DTAA which provides that India shall give credit to the taxes paid in the country of source. The following case laws relied upon by assessee are based on the decision of 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 asses see’s case are completely different set of facts than the decision of Hon’ble Supreme Court in the case of CIT vs. P.V.A.L. Kulandagan Chettiar, cited supra. The facts of that case are not relevant to the assessee’ s 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 Court’s conclusion rests on the fact that personal and economic relations of the assessee in relation to capital asset were far closer 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 expression “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 arising on the sale of immovable property in Malaysia was held to be not assessable income in India and business income for not having permanent establishment in India. The income derived from business in Malaysia not assessable in India. Thus, the facts of that case are completely at variance to the facts of assessee’ s 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 depending upon the agreement entered into between the Government of India and Government of Malaysia for avoidance of double taxation. Income from Rubber Estate in Malaysia and there was no separate establishment maintained in India in respect of the rubber estate in Malaysia. Thus, facts of that case are also at variance to the facts of assessee’ s case.

21.4 In the case of L.G. Cable vs. DDIT(International Taxation) reported in 314 ITR (AT) 301 (Delhi), the facts are different. In that case, the assessee was a non-resident company of Korea. The assessee (non-resident) entered into two contracts with Power Grid Corporation of India, one for  onshore excavation of fibre optics project and second for offshore supply of equipment. The income for onshore was offered for tax. The contract for offshore supply of equipment was carried out in Korea. The bill of lading was issued in Korea in favour of Power Grid Corporation of India. The payments were remitted directly to Korea through an irrecoverable letter of credit. In that situation, it was held that no part of income arising from supply of offshore equipment was assessable in India. Thus, facts of the case are completely at variance to the facts of assessee’ s case.

21.5 In the case of Manpreet Singh Gambhir vs. DCIT – 119 TTJ 615, the issues and facts are completely different in comparison to assessee’ s case. In that case, issue was of salary earned in USA and also 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 learned DR that the learned CIT(A) was not justified in granting credit of tax also for State Income-tax, we are in agreement with his submission. Though the appeal is not filed by the revenue, a respondent can support the order appealed against on any of the ground decided against him in terms of rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963. Referring to Article 2, the taxes covered under the OTM are in respect of taxes paid in United States only for Federal Income-tax imposed by 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 treaty provision. We, therefore, restore the order of the Assessing Officer in this regard.”

Thus, there is no comparison of facts and issue involved of assessee’ s case. In our considered view, we find no merits in the assessee’ s appeal on this issue.

22. In the result, this ground of appeal involved in all the three appeals stands dismissed. All these three appeals stand dismissed.

Order pronounced in open court on this 29th day of March, 2012.