The expression ‘may also be taxed’ used in Article 7 permits only the State of Source to tax such income and the State of Residence is precluded from taxing such income

ORDER

PER N.V. VASUDEVAN, J.M,

This is an appeal by the assessee against the order dated 8/2/2007 of CIT(A)-V, Mumbai relating to the assessment year 2003- 04. Ground No. 1 raised by the revenue reads as follows:

“1. On the facts and in the Circumstances of the Case and as per law, the ld.C IT(A) erred in directing the AO to allow the expenditure of Rs. 78,28,226/- incurred by the assessee for exploration and production of oil and gases as revenue expenditure.”

2. The assessee is in the business of Contract drilling, offshore Construction, exploration of mineral oil and gases, trading in petroleum products. In the Computation of income, the assessee had Claimed a deduction of Rs. 72,26,225/- being expenses incurred during the year which have been included in miscellaneous Expenses. The assessee submitted it was in the business of:

(a) Operation of rigs for extraction of oil.

(b) Undertaking offshore Contracts for laying of pipelines etc.

(c) Setting up of Refinery etc.

(d) Marketing of petroleum products.

The Assessee submitted that Activities at (a) &(b) had been going since inception of the Company and were taken over as business in 1993 from Essar Gujarat Ltd. The Assessee submitted that as far as Activity at ( C) is concerned, during the previous year, the Assessee was in the process of setting up the project of refining, Crude oil by setting up a 10.5 million ton refinery. The Assessee submitted that as part and parcel of Activity (a) and (b) it has been bidding for various Contracts, exploration sites and had incurred expenditure on travelling bidding for tenders, exploration Activities at blocks etc. The expenditure so incurred were revenue expenditure in nature. In books of accounts these expenses have been shown as deferred revenue expenses. The Assessee submitted that since the expenses were in the nature of revenue and directly related with the ongoing business, entire expenses incurred during this financial year should be allowed. The AO however was of the view that the expenses incurred were only in the nature of preliminary expenses which can not be related to any business Activity Carried on by the assessee during the year. The AO held that these expenses are to be Capitalized in the books as preoperative expenditure on successful Completion of the bid and award of contract. The AO held that in A. Yrs. 1994-95 & 1995-96, the assessee’s Claim for similar deduction was disallowed and for the reasons given therein, the deduction Claimed was disallowed.

3. On appeal by the assessee, the CIT(A) deleted the addition made by the AO following order of ITAT in assessee’s own Case in A.Y 1996-97 to 1998-99 in ITA Nos.3643 to 3645/M/02, wherein identical issue had been decided in favour of the Assessee by the Tribunal. Aggrieved by the order of CIT(A), the Revenue has preferred Ground No.1 before the Tribunal.

“13. The second issue to be Considered for the assessment year 1996- 97 is regarding the expenditure of Rs. 1,60,04,350/- incurred by the assessee Company in the previous year for exploration and production of oil and gases. The assessee Company is engaged in the business of operation of rigs for extraction of oil, undertaking off-shore Contracts for laying of pipelines and setting up of refineries, etc. The assessee Company during the previous year relevant to the assessment year under appeal had been bidding for various Contracts as part of its business of extraction of oil. In this connection, the assessee Company have been incurring expenditure towards travelling, bidding of tenders, etc. etc. The assessee Company had incurred an amount of Rs. 1,60,04,350/- on that account during the relevant previous year. The assessee Company in its books of account has treated the expenditure as deferred revenue expenditure and has written off only Rs. 11,22,867/- as expenditure pertaining to the relevant assessment year. But in the return of income, the assessee Claimed the full amount as revenue expenditure. The assessing officer did not allow the expenditure as Claimed by the assessee on the ground that expenditure incurred on bidding for exploration was Capital in nature. The assessee officer did not allow the expenditure as Claimed by the assessee on the ground that expenditure incurred on bidding for exploration was Capital in nature. The CIT(A) also agreed with the finding of the assessing officer and Confirmed the dis allowance.

14. It is to be seen that the Activities Carried on by the assessee were not in the nature of an independent business, but it was part of the existing business Carried on by it under the Control and supervision of the same management. The Activities were inter-connected and there was no inter-lacing of funds and resources. The Activities were Carried out as inseparable from the existing line of business. Therefore, in the light of the decisions of the Supreme Court in the Case of Produce Exchange Corporation Ltd. vs. CIT 77 ITR 739 and Veecumsees vs. CIT 220 ITR 185, these expenses need to be allowed as revenue in nature. The very same principle has been followed in the decision of the Tata Chemicals Ltd. vs. DCIT by the Bombay Tribunal in 72 ITS 1. Therefore, in the facts and Circumstances of the Case, we direct the assessing authority to allow the sum of Rs. 1,60,04,350/- as deduction on Computing the taxable income of the assessee Company.”

The above reasoning of the ITAT would equally apply to the impugned expenditure incurred during the previous year for setting up refinery. We, therefore, Confirm the order of the CIT(A) and dismiss Ground No.1

5. Ground No. 2 raised by the revenue reads as under:

“On the facts and in the circumstances of the Case and as per law, the ld. CIT(A) erred in directing the AO not to tax the principal amount of lease rental of Rs. 1,11,58,514/- of the asset leased out to M/s. Essar Steel Ltd.”

6. In Assessment Year 1995-96, the assessee entered into transaction of lease of assets with M/s. Essar Steel Ltd. The assessee Claimed depreciation on the assets so leased. The Revenue took a stand that the lease was a finance lease and disallowed the Claim for depreciation. The assessee in this assessment year Claimed that the lease rentals should not be Considered as income because of the revenue’s stand that the lease was a finance lease and only interest element on the loan advanced Comprised in the lease rentals should be Considered as income and repayment of principal Cannot be treated as income. The stand of the assessee was not accepted by the AO because the Claim of the assessee for depreciation had already been allowed in A.Y 1995-96 by the appellate Authorities. The CIT(A) directed the AO to allow the Claim of the assessee. The revenue has raised ground No.2 against the direction of CIT(A).7. At the time of hearing the ld. Counsel for the assessee fairly submitted that in view of the order of ITAT in A.Y 1995-96 in ITA No.2827/M/00 dated 26/4/ 2007 allowing depreciation, the direction of the CIT(A) Cannot be sustained. He however, submitted that in the event of deprecation being disallowed by appellate forum, the assessee should be at liberty to revive its Claim for excluding repayment of principal from its taxable income. We acceptthe please of the ld. Counsel for the assessee and allow Ground No.2 subject to the rider that in the event of depreciation Claim of assessee being disallowed, to the extent of repayment of principal amount under the agreement for lease of assets, the same should not be treated as income.

8. Ground No. 3 raised by the revenue reads as follows:

“3. On the facts and in the Circumstances of the Case and as per law, the ld. CIT(A) erred in directing the AO to exclude the profits from Oman Branch and Qatar Branch for tax purposes in India, holding that as the assessee has been Carrying on business through a permanent establishment in Oman and Qatar and as the income from the aforesaid Branch in Oman and Qatar are derived there from, it was only the Oman and Qatar Government which was entitled to levy the tax as per Article 7 of DTAA ignoring the fact that as the assessee is a Resident of India, it has to be taxed on its entire income in India as per section 5(1) of the I.T. Act 1961, which includes all the income:

i) Received or deemed to be received.

ii) Accrues or arises or deemed to accrue and arise

iii) Accrues or arises outside India.”

 9. The Assessee had undertaken projects in Sultanate of Oman & State of Qatar. The profits from the Oman & Qatar project amounting to Rs. 39,88,03,909/- and loss of Rs. (36,53,785/-) respectively had not been included in the total income by the Assessee. The AO Called upon the Assessee to explain why the income arising out of Oman & Qatar projects should not be included in the total income of the Company.  to the AO, the assessee is a Resident of India and therefore it has to be taxed on its entire income in India as per section 5(1) of the I.T. Act 1961, which includes all the income:

i) Received or deemed to be received.

ii) Accrues or arises or deemed to accrue and arise

iii) Accrues or arises outside India.”

10. In reply to the query of the AO, the assessee submitted that it had established a Branch in both in the sultanate of Oman as well as the State of Qatar. The Assessee submitted that it had entered into Contracts with the Government agencies of the two Countries to undertake drilling of oil wells. For executing the said Contracts, the Company has full-fledged office and project set up in Oman & Qatar. The Operations were looked after by a CEO designate assisted by technical, administrative and finance team. The relevant accounting records were kept in respective Countries only, even though the result of all Activities are Consolidated in India. The Assessee also pointed out that it had obtained, as per local requirements in the two Countries, a license for operating a Branch in the respective Countries.

11. The Assessee pointed out that both Oman & Qatar have income tax laws. In accordance with the said law, the income earned by the Assessee, in those Countries are taxable in the said Countries. It was submitted that as required under the local income tax law in Oman& Qatar, the Assessee has been filing tax returns in respective Countries and are being assessed on the profits of the Oman & Qatar Branch as per the local laws and tax assessments in Oman and Qatar were completed in accordance with local law.

12. The Assessee further submitted that the Government of Sultanate of Oman as well as the Government of the State of Qatar have entered into Agreements for Avoidance of Double Taxation (hereinafter referred to as DTAA). The agreement between the Republic of India and the Government of Sultanate of Oman was notified by SO 563(E), dated 23/09/97, and Came into effect from April 01, 1998. The Assessee pointed out that prior to the said notification; the Assessee was including the operational results from the above Country for its tax purposes in India. After notification of applicability of DTAA, the Assessee has excluded the income earned at Oman for tax in India due to the application of the Article 7 of above said agreement.

13. Similarly the Government of India and Government of Qatar have entered into a Double Taxation Avoidance Agreement for Avoidance of double taxation and prevention of fiscal evasion. This agreement was notified by GSR 96(E), dated 08^th February, 2000 and Came into effect from January, 15^th 2000. Prior to notification, the Company was including the operational results for its tax purposes in India. After notification of applicability of DTAA, the appellant Company has excluded the income earned at Qatar for tax in India due to the application of the Article 7 of the above said Agreement.

14. The Assessee submitted that as far as tax returns in India were Concerned, the profits of the Oman Branch and the loss from Qatar Branch were separately Calculated and the profits/loss so Calculated were excluded while Calculating the Indian Tax liability on the basis of Article 7 of India-Oman DTAA and India-Qatar treaty respectively.

“The profits of an enterprise of Contravting States shall be taxable only in that Contravting State unless the enterprise Carries on business in other Contravting State through a permanent establishment situated therein. If the enterprise Carries on business as aforesaid, the profit of the enterprise may be taxed in that other Contravting State but only so much so that income or profit as is attributable directly or indirectly to that permanent establishment.”

INDIA – QATAR DTTA – ARTICLE 7

“The profits of an enterprise of Contravting States shall be taxable only in that Contravting State unless the enterprise Carries on business in other Contravting State through a permanent establishment situated therein. If the enterprise Carries on business as aforesaid, the profit of the enterprise may also be taxed in that other Contravting State but only so much of them as is attributable to that permanent establishment.”

15. It was the plea of the Assessee that under section 5 of the Income Tax Act, 1961 (the Act) the world income of a resident entity is liable to tax in India. However, as per section 90(2) of the Act, in Case where India has entered into a Double Tax Avoidance Agreement (DTAA) with any Country, then the provisions of the Treaty would over-ride the provisions of the Act insofar as the Treaty provisions are more beneficial to the assessee. The Assessee submitted that since it had a permanent establishment in both the Countries and since as per the DTAA, the income earned through Such permanent establishment has to be taxed only in the other Country. The emphasis by the Assessee was on the expression “may be taxed” and According to the Assessee it is only the Country where the permanent establishment is situate that has the right to tax and not the Country in which the Assessee is resident. The Assessee submitted that since the income in question has already been taxed in the other Country, the same Cannot be taxed in India and therefore the Assessee has excluded the said income in its Computation of income.

16. The AO however held that the scope of the relevant Article of the DTAA has been misinterpreted by the assessee. He held that the DTAA with foreign Countries are made deriving power from Section 90(1) of the Income Tax Act. While interpreting the DTAA all the Articles and Clauses must be read together and a particular Article, Clause or Sentence should not be read and interpreted in isolation. Article 7 of the DTAA with Oman and Qatar enables those Countries to bring to tax the profit attributable to the permanent establishment of the Assessee in Oman and Qatar. However, the assessee is a resident of India and has to be taxed on its entire global income in India. In this regard, the AO referred to the provisions of Section 5(1) of the Income Tax Act, 1961 which defines the scope of total income of a resident, which includes all incomes (a) Received or deemed to be received, (b) Accrues or arises or deemed to accrue or arise and (C) Accrues or arise to him outside India. The fact that the same income suffers tax in Oman and Qatar respectively will not be a bar for India to bring to tax the entire global income of the resident. The authority of Oman and Qatar to tax income earned by the Assessee in their Country is because of the fact that the source of income earned by the Assessee is from those Countries. The right of the Indian Government to tax the Assessee on the very same income is because the Assessee as a resident of the Country has the benefit of the Government’s public goods and services to facilitate the economic Activity that produces income in India as well abroad. It is only in recognition of the right of both Countries to tax the same income double taxation Avoidance agreements are entered into between Countries. If such relief from double taxation is not given international business arrangements would never come into being. The AO further held that there can be no doubt that the income earned on the project at Oman and Qatar has to be included in the total income of the assessee to determine the liability for tax purposes in India. Thereupon, depending on the taxation laws of that Country and the terms and Conditions stipulated in double taxation agreement, a relief for the tax paid in the other Country by means of tax Credit is given. The AO thereafter referred to Article-25 of the DTAA between India and Oman which provides as follows:

“Article 25: Avoidance of double taxation:

1. The law in force in either of the Contravting States will Continue to govern the taxation of income in the respective Contravting States except where provisions to the Contrary are made in this Agreement.

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

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

4. The tax payable in a Contravting State mentioned in paragraph 2 and paragraph 3 of the Article shall be deemed to include the tax which would have been payable but for the tax incentives granted under the laws of the Contravting States and which are designated to promote economic development.

5. Income which, in accordance with the provisions of this Agreement, is not to be subjected to tax in a Contravting State, may be taken into account for Calculating the rate of tax to be imposed in that Contravting State.”

“11. Ground No. 1 raised by the Revenue in its appeal reads as follows:-

On the facts and Circumstances of the Case and in law, learned CIT(A) erred in directing the Assessing Officer to exclude the profits from Oman Branch and Qatar Branch for tax purposes in India, holding that as the assessee has been Carrying on business through a Permanent Establishment in Oman and Qatar and as the income from the aforesaid Branch in Oman and Qatar were derived there from, it was only the Oman and Qatar Government which was entitled to levy the tax as per Article 7 of DTAA, ignoring the fat that as the assessee is a Resident of India, it has to be taxed on its entire income in India as per section 5(1) of the I.T. Act, 1961 which includes all incomes :-

ii) Accrues or arises or deemed to accrue and arise

iii) Accrues or arises outside India.

12. The assessee Company had undertaken project in Oman and Qatar. The profits from the Oman and Qatar projects amounting to Rs. 32,99,08,359/- had not been included in the total income of the Company. The Assessing Officer Called upon the assessee to explain why the income arising out of Oman and Qatar project should not be included in the total income of the Company. Vide letter dated 31.01.2005, the assessee submitted it has established a Branch in both Oman and Qatar, which has entered into Contracts with the Government agencies to undertake drilling of oil wells. For executing the said Contracts, the Company has full-fledged office and project set up in Oman and Qatar. The operations are looked after by a CEO designated assisted by technical, administrative and finance team. The relevant accounting records are kept in respective Countries only, even though the result of all Activities are Consolidated in India. The Company has also obtained, as per local requirement, a license for operating a Branch in respective Countries. Both Oman and Qatar have income tax laws. As a result, the income earned by the assessee in these Countries are taxable in the said Countries. As required under the local income tax law in Oman & Qatar, the assessee has been filing tax returns in respective Countries and are being assessed on the profits of the Oman and Qatar Branch as per the local laws. The tax assessments in Oman and Qatar are Completed in accordance with local procedures. The Government of Oman and Qatar and Government of India have entered into a Double Taxation Avoidance Agreement for Avoidance of double taxation and prevention of fiscal evasion. The agreement with Oman was notified by SO 563(E) dated 23.9.97 and Came into effect from April 01, 1998. Agreement with Qatar came into effect from 1.4.2001. Prior to notification, the assessee was including the operational results from both the above Countries for its tax purpose in India. After notification of applicability of DTAA, the assessee has excluded the income earned at Oman for tax in India due to the application of the Article-7 of above said agreement.

Article 7 of DTAA with Oman and Qatar is as follows  :-

The profits of an enterprise of a Contravting states shall be taxable only in that Contravting state, unless the enterprise Carries on business in other Contravting state through a permanent establishment situated therein. If the enterprise Carries on business as aforesaid, the profit of the enterprise may be taxed in that other Contravting state but only so much that income or profit as is attributable directly or indirectly to that permanent establishment.

13. The A.O. and CIT(A) did not accept the Claim of the assessee and they held that the income from projects executed in Oman and Qatar is liable to taxation in India.

14. At the time of hearing, it was brought to our notice that in A.Y. 1999-2000 and 2000-01, in ITA Nos. 5142 & 5143/Mum/03, this issue was Considered by the Tribunal and the Tribunal on analysis the DTAA held as follows :-

19. The ld. D.R Contended that the Tribunal while deciding the appeal for A.Y 2002-03 failed to take note of the difference in the language of Article -7 of the DTAA between Oman to India when Compared to Articles 7 of the DTAA between India and Qatar. In this regard it was submitted that a reference to Article-7 of the DTAA with Qatar indicates that para 1 of the said Article assigns the right to tax business profits to both the Contravting states. The basic point of difference in para -1 of Article-7 of the Qatar Treaty is the use of the words “may also be taxed” as Compared to the words “may be taxed” used in Oman Treaty. Thus, in terms of para- 1 of Article 7 of the Qatar Treaty, India has a right to tax its residents with respect to profit earned by them in a permanent establishment situated outside India. It was further submitted by the learned D.R. that the above reasoning is supported by the decision of the Mumbai Tribunal rendered in the Case of Ms. Pooja Bhatt [123 TTJ (Mumbai) 404]. Drawing our attention to para-7 of the said order, the learned D.R. pointed out that the Tribunal has distinguished the terms “shall be taxed only”, “may be taxed” and “may also be taxed”. The Tribunal has held that when the words “may also be taxed is used, it means that both the Contravting states have agreed to tax. It was submitted that as the order passed by the Tribunal in assessee’s own Case for A.Y 2002-03 does not Contain any independent reasoning, the same Cannot have any precedent value. On the other hand, the decision in the Case of Pooja Bhatt (supra), directly supports the stand of the revenue. It was therefore submitted that the decision in the Case of Pooja Bhatt (supra) should be followed. It was also submitted that in Case the Tribunal feels that there is a Conflict between the decision in assessee’s own Case for A.Y 2002-03 and the decision in the Case of Pooja Bhatt (supra), the Honourable Bench may kindly make a reference to the Hon’ble President for Constitution of Special Bench to decide this issue.

20. The ld. Counsel for the assessee however, submitted that the decision of the Tribunal is based on the principle that Income which has suffered tax abroad should not be taxed again in India even if the assessee is resident under the Act and consequently the entire global income of such assessee is taxable in India. According to him the wordings of the treaty would not make any difference as Contended by the ld. D.R.

21. We have considered the rival submission. At the outset we accept the Contention of the ld. D.R that the Tribunal while deciding the appeal of assesse for A.Y 2002-03 has proceeded on the assumption that the wordings of Article 7 of DTAA between India and Oman on the one hand and that between India and Qatar are similar. The expression used in Article 7 of the DTAA between India and Oman is “may be taxed”, while the words used in Article 7 of India Qatar DTAA is “may also be taxed”. Could there be different Consequences because of the above difference in the language of the DTAA? This aspect was Considered by the ITAT Mumbai in the Case of Pooja Bhat (supra). The facts of the Case were the Assessee in that Case was a film artiste who participated in an entertainment show performed in Canada and Received a sum of US $6,000. The tax was also deducted at source in Canada equal to the sum of US $900. The assessee Claimed in the Course of assessment proceedings that a sum of Rs. 1,86,000 (US $6,0000) Could not be taxed in India in view of art. 18 of Indo-Canada treaty [wrongly mentioned as art. 17 by the AO and the CIT(A)] However, her Contention was rejected by the AO. It was found by the AO that the assessee was a resident of India and Consequently, it was held by him that her entire global income was taxable under the provisions of the IT Act, 196 1(the Act). When the issue Came up before the Tribunal, the Tribunal after Considering the decision of the Honourable Supreme Court in the Case of CIT vs. Kulandgan Chettiar 267 ITR 654(SC) held as follows:

“7. After giving our due Consideration to the above rival Contentions, we are of the humble view that income derived by the assessee from the exercise of her Activity in Canada is taxable only in source Country, i.e. Canada for the reasons given hereafter. The scheme of taxation of income is Contained in Chapter III of DTAA/Indo Canada treaty. On an analysis of various Articles Contained in Chapter III, we find that the scheme of taxation is divided in three Categories. The first Category includes art.7 (business profits without PE in the other State), art.8 (air transport), art.9 (shipping), art 14 capital gains on alienation of ships or aircraft operated in international traffic), art. 15 (professional services), art. 19 (pensions) which provide that income shall be taxed only in the State of residence. The second Category includes art.6 (income from immovable property), art.7 (business profits where PE is established in other Contravting State), art. 15 (income from professional services under Certain Circumstances), art 16( income from dependent personal services where employment is exercised in other Contravting State), art. 17 (director’s fees), art 18 (income of artistes and athletes), art.20 (Government Service) which provide that Such income may be taxed in the other Contravting State, i.e. State of Income Course. The third Category includes art. 11 (dividends), art 12 (interest), art. 13 (royalty and fee for technical services), art. 14 (Capital gains on other properties and Article 22 (other income) which provide that Such income may be taxed in both the Contravting States. For example, para 1 of art. 11 proves that dividend income may be taxed in other Contravting State while para 2 provides that dividend income may also be taxed in the State of residence. Similarly, art. 14(2) and art. 22 provide that income may be taxed in both the Countries. The above analysis Clearly shows that intention of parties to the DTAA is very Clear. Wherever the parties intended that income is to be taxed in both the Countries, they have specifically provided in Clear terms. Consequently, it Cannot be said that the expression “may be taxed” used by the Contravting parties gave option to the other Contravting States to tax Such income. In our view, the Contextual meaning has to be given to Such expression. If the Contention of the Revenue is to be accepted then the specific provisions permitting both the Contravting States to levy the tax would become meaningless. The Conjoint reading of all the provisions of Articles in Chapter III of Indo-Canada treaty, in our humble view, leads to only one Conclusion that by using the expression “may be taxed in the other State”, the Contravting parties permitted only the other State, i.e. State of income source and by implication, the State of residence was precluded from taxing Such income. Wherever the Contravting parties intended that income may be taxed in both the Countries, they have specifically provided. Hence, the Contention of the revenue that the expression “may be taxed in other State” given the option to the other State and the State of residence is not precluded from taxing Such income Cannot be accepted.

 8. The reliance of the Revenue on art.23 is also misplaced. It has been contended that art.23 gives Credit of tax paid in other state to avoid double taxation in Cases like the present one. In our opinion, Such provisions have been made in the treaty to Cover the Cases falling under the third Category mentioned in the preceding Para i.e. the Cases where the income may be taxed in both the Countries. Hence, the Cases falling under the first or second Categories would be outside the scope of art. 23 since income is to be taxed only in one State.”

22. We are of the view that the reliance placed by the learned D.R. on the aforesaid decision does not help the plea of the revenue before us. The expression “may also be taxed” in Article 7 of the DTAA between India and Qatar is followed by the words “in the state of residence” as is found in Article 11(2) of the DTAA between India and Canada. As laid down in the Case of Pooja Bhatt (supra), the intention of Countries to the DTAA is to be seen. Article 11 (2) of the DTAA between India and Qatar specifically provides that dividend Can also be taxed in the State of which the Company paying dividend is a resident. Article 12 of the DTAA between India and Qatar similarly provides right to both the source Country as well as the resident Country to tax interest income. Wherever the parties intended that income is to be taxed in both the Countries, they have specifically provided in Clear terms. Consequently, it Cannot be said that the expression “may also be taxed” used in the DTAA gave option to the other Contravting States to tax Such income. As laid down in the decision in the Case of Pooja Bhatt  (supra) Contextual meaning has to be given to Such expression. If the Contention of the Revenue is to be accepted then the specific provisions permitting both the Contravting States to levy the tax would become meaningless. In our view, by using the expression “may also be taxed in the other State”, the Contravting parties permitted only the other State, i.e. State of income source and by implication, the State of residence was precluded from taxing Such income. Wherever the Contravting parties intended that income may be taxed in both the Countries, they have specifically provided. Hence, the Contention of the revenue that the expression “may also be taxed in other State” giving the option to the other State and the State of residence is not precluded from taxing Such income Cannot be accepted.

23. For the reasons given above, we find no grounds to take a different view even in respect of income derived by the Assessee from Qatar as was taken in AY 02- 03. We therefore Confirm the order of the CIT(A) and dismiss Ground No. 3 of the Revenue.

24. Ground No. 4 raised by the revenue reads as follows:

“4. On the facts and in the Circumstances of the Case and as per law, the ld. CIT(A) erred in directing the AO to allow the assessee’s Claim as to proportionate interest Calculated out of total interest incurred by the assessee on the ratio of own funds to borrowed funds as of 31/3/1997 and allow Such interest u/s. 36(1)(iii) of the I.T. Act.”

25. Similar addition was made in AY 02-03 and the basis of Such dis allowance was as follows. During the assessment proceedings, the A.O. observed that the assessee Company had Claimed deduction on account of interest against income derived from jetty owned by the Assessee. The assessee was asked to explain as to why Such allowance should not be denied. In response to which the assessee submitted that, the Company was in the business of importing and selling petroleum products, and for the purpose of its business, it is required to have jetty along with tankages facilities and therefore, in view of Such requirement the Company had purchased a jetty during F.Y. 1996-97 for a total Consideration of Rs. 70 Crores. According to the assessee, this amount was Capitalized in its books of account and had also Claimed depreciation on Such jetty, which was also allowed. Further, it was also submitted that this jetty was used by the assessee Company for its own use as well as it was let on hire against which, income was also generated and offered for tax. During the year, the assessee had Claimed interest based on Calculation made on proportionate basis of own funds and borrowed funds. However, According to the A.O., the interest on borrowed funds Could be Claimed only if the assessee Could match the amount borrowed with purchase of jetty. Accordingly to the A.O., the assessee Could not match Such purchase of jetty with borrowed funds, and Consequently, he disallowed the entire amount of interest Claimed by the assessee.

26. During the appeal proceedings, it was submitted that the A.O. has erred in disallowing the assessee^’s Claim merely on the assumption that the assessee had not used the borrowed funds for the purpose of purchase of jetty. It was submitted that the assessee was building a Refinery and this jetty was a part of the said refinery project. This jetty was used for its own marketing business and also it was given on hire against which the assessee Company had eared income and offered for tax. It was also pointed out that the assessee Company had already been allowed depreciation on Such jetty which Clearly makes it evident that the assessee Company has used the jetty for the purpose of its marketing business and therefore, interest relating to borrowed funds applied in purchase of Such jetty should be allowed as deduction u/s. 36(1)(iii) of the Act. In this regard, it was further submitted that the assessee Company had its own funds as well as borrowed funds, which were intermingled and had become part of the Common pool and that it was not practicable to identify the source of purchase of jetty as entire Refinery project was undertaken as a whole. Hence, assessee had Claimed proportionate interest as deduction instead of interest on entire Cost of the aforesaid jetty. The assessee has also submitted that the details of own funds and borrowed funds in its paper book. According to the assessee, the A.O. has also not brought on record any material to show that purchase was made from the assessee^’s own funds and therefore, According to the assessee, the A.O.^’s Action in disallowing the interest was arbitrary and hence, dis allowance made on Such arbitrary Action should be deleted. The assessee in this regard has also relied on various Judgements.

27. The CIT(A) on the Consideration of the Assessee held as follows:”I have gone through the Contention of the assessee as well as that of the A.O. It is not in dispute that the assessee Company had been using the jetty purchased for the purpose of the marketing business and that income earned there from was also offered for tax. The A.O. has been allowing depreciation on jetty from the beginning. It is also not in dispute that the A.O. has also not brought on record any material to show that the aforesaid jetty was purchased from the own source of the assessee Company and therefore the only issue is whether interest Could be allowed, when the assessee and the A.O. Could not identify the source of Such purchase. It is now settled law that where both the A.O. and the assessee Could not identify the source of purchase, the best Course to be applied is to Calculate the amount of interest in the ratio of borrowed funds to own funds and only the proportionate interest so arrived at be allowed as deduction u/s. 36(1)(iii) of the Act. Considering this fact, the A.O. is directed to allow the assessee^’s Claim as to proportionate interest Calculated out of the total interest incurred by the assessee, on the ratio of own funds to borrowed funds as of 31.3.1997 and allow Such interest under section 36(1)(iii). As Such, this ground of the appeal is partly allowed.”