Law on non-taxing foreign PE profits no longer good law after insertion of s. 90(3) & Notification dated 28.08.2008 (which has clarificatory effect)

Essar Oil Limited vs. ACIT (ITAT Mumbai)

The assessee, an Indian company, had a P.E. in Oman and Qatar. The net business profits of the said Oman & Qatar Branch was Rs. 2.30 crore. The assessee also earned long term capital gains on sale of assets of the said P.E. in Oman and Qatar. The assessee claimed that as the said business profits and LTCG were taxed in accordance with the taxation laws of Oman & Qatar, they were not chargeable to tax in India. The assessee relied on the judgement of the Tribunal and High Court in its own case (included in this file) where the view was taken that as the DTAA provided that the business profits & capital gains of the PE “may be taxed in the other Contracting State”, the Country of residence i.e., India loses its right to tax if the Country of source has taxed the income. This view was based on the verdicts of the Supreme Court in P.V.A.L. Kulandagan Chettiar 267 ITR 654 and that of the High Courts in R.M. Muthaiah 202 ITR 508 (Kar) & S.R.M. Firm 208 ITR 400 (Mad). The department argued that the aforesaid law was no longer good law in view of s. 90 (3) inserted by the Finance Act, 2003, which provides that any term used but not defined in the Act or the DTAA shall have the same meaning as assigned to it in the notification issued by the Central Government. Pursuant thereto, the Central Government has issued a Notification No. 91/2008, dated 28.08.2008, wherein it has been expressly provided that where the tax treaty provides that any income of a resident of India “may be taxed” in other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Act and relief shall be granted in accordance with the method of elimination or avoidance of double taxation provided in the DTAA. HELD by the Tribunal:

The law laid down by the Courts on the interpretation of the expression “may be taxed” that once the tax is payable or paid in the country of source, then the country of residence is denied of the right to levy tax on would no longer apply after the insertion of s. 90 (3) w.e.f. 1.4.2004, i.e. AY 2004-05 pursuant to which Notification dated 28.08.2008 has been issued. The said Notification is clarificatory in nature and hence the interpretation given by the Central Government through the Notification is effective from 1.4.2004. Also, as the phrase “may be taxed” is not appearing in the statute but is appearing in the DTAA, the interpretation as understood and intended by the negotiating parties should be adopted. Here one of the parties i.e., Government of India has clearly specified the intent and the object of this phrase and the meaning assigned by the Government of India for a phrase or term used in the DTAA notification will prevail. The result is that the business income from the P.E. in Oman and Qatar and also the capital gain from sale of assets in these countries will be chargeable to tax in India.