DCIT 5(1), MUMBAI V. ESSAR OIL LTD, MUMBAI

ITA 1000/MUM/2009

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71004 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 12-07-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 13-02-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAHESH KUMAR
• Assessee Lawyers: S E DASTUR AW MR NIRAJ SHETH
• Keywords: Business income; Depreciation; Business expenditure; Residential status; Double taxation relief; Proportionate interest; Retrospective amendment; Permanent establishment; Advance ruling; Question of law; Bad and doubtful debts; Competent authority; Capital receipt; Revenue expenditure
• Section: 63; 90; 143(3); 260A; 37(1)

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI . .. . . .. . , ,, , ! ! ! ! , ' ' ' ' # $% # $% # $% # $% , ,, , & ! & ! & ! & ! ' ' ' ' BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 2428/MUM./2007 ( &( ) '*) / ASSESSMENT YEAR : 200405 ) ESSAR OIL LIMITED ESSAR HOUSE , 11, K.K. MARG OPP. RACE COURSE, MAHALAXMI (W) MUMBAI 400 034 .. +, / APPELLANT ( V/S ADDL. COMMISSIONER OF INCOME TAX CIRCLE5(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... -.+, / RESPONDENT !+ . / PERMANENT ACCOUNT NUMBER AAACE0890P . / ITA NO. 2442/MUM./2007 ( &( ) '*) / ASSESSMENT YEAR : 200405 ) ADDL. COMMISSIONER OF INCOME TAX CIRCLE5(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .. +, / APPELLANT ( V/S ESSAR OIL LIMITED ESSAR HOUSE , 11, K.K. MARG OPP. RACE COURSE, MAHALAXMI (W) MUMBAI 400 034 .... -.+, / RESPONDENT !+ . / PERMANENT ACCOUNT NUMBER AAACE0890P ESSAR OIL LIMITED 2 . / ITA NO. 1000/MUM./2009 ( &( ) '*) / ASSESSMENT YEAR : 200506 ) DY. COMMISSIONER OF INCOME TAX CIRCLE5(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .. +, / APPELLANT ( V/S ESSAR OIL LIMITED ESSAR HOUSE , 11, K.K. MARG OPP. RACE COURSE, MAHALAXMI (W) MUMBAI 400 034 .... -.+, / RESPONDENT !+ . / PERMANENT ACCOUNT NUMBER AAACE0890P &( )0 1 2 / ASSESSEE BY : MR. S.E. DASTUR A/W MR. NIRAJ SHETH !' 1 2 / REVENUE BY : MR. MAHESH KUMAR (' 1 / DATE OF HEARING 12.07.2013 $ 34* 1 / DATE OF ORDER 28.08.2013 $ $ $ $ / ORDER # $% # $% # $% # $% , ,, , & ! & ! & ! & ! 5 5 5 5 / PER AMIT SHUKLA, J.M. THE CROSS APPEALS HAVE BEEN PREFERRED BY THE RIVAL PARTIES CHALLENGING THE IMPUGNED ORDER DATED 15 TH FEBRUARY 2007, FOR THE ASSESSMENT YEAR 200405 AND THE REVENUE HAS PREFERRED ONE MORE APPE AL CHALLENGING THE IMPUGNED ORDER DATED 15 TH DECEMBER 2008, FOR THE ASSESSMENT YEAR 2005 06, WHICH WERE PASSED BY THE LEARNED COMMISSIONER ( APPEALS)V, MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ) SINCE THESE APPEALS WERE HEARD TOGETHER, THEREFORE, AS A MATTER OF CONVENIENCE, TH EY ARE BEING DISPOSED OFF BY WAY OF THIS CONSOLIDATED ORDER. ESSAR OIL LIMITED 3 2. WE FIRST PROCEED TO DISPOSE OFF THE REVENUES APPEA L IN ITA NO.2442/MUM./ 2007, FOR THE ASSESSMENT YEAR 200405, VIDE WHICH, FOLLOWING GROUNDS HAVE BEEN RAISED: 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND AS PER LAW, THE LD. CIT(A) ERRED IN DIRECTING THE A.O. TO ALLOW THE EXP ENDITURE OF RS.1,48,71,588/- INCURRED BY THE ASSESSEE FOR EXPLO RATION AND PRODUCTION OF OIL AND GASES AS REVENUE EXPENDITURE. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND AS PER LAW, THE LD.CIT(A) ERRED IN DIRECTING THE A.O. TO EXCLUDE TH E 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 ESTAB LISHMENT IN OMAN AND QATAR AND AS THE INCOME FROM THE AFORESAID BRANCH I N OMAN AND QATAR ERE DERIVED THERE FROM, IT WAS ONLY THE OMAN AND QATAR GOVERNMENT WHICH WAS ENTITLED TO LEVY THE TAX AS PER ARTICLE 7 OF DTAA I GNORING 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 INC LUDES 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. 3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND AS PER LAW, THE LD.CIT(A) ERRED IN HOLDING THAT LONG TERM CAPITAL G AINS OF RS.1,67,30,82,857/- AND RS.17,81,27,873/- ARISING O N SALE OF BRANCHES OF ENERGY DIVISION IN OMAN AND QATAR RESPECTIVELY IS N OT TAXABLE IN INDIA, WITHOUT APPRECIATING THE INTENT AND THE PURPOSE OF DTAA WITH BOTH THE COUNTRIES. 4) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND AS PER LAW, THE LD.CIT(A) ERRED IN DIRECTING THE A.O. TO ALLOW PROP ORTIONATE INTEREST CORRESPONDING TO THE INVESTMENT IN JETTY, CALCULATE D OUT OF THE TOTAL INTEREST INCURRED ON THE RATIO OF OWN FUNDS TO BORROWED FUND S AS ON 31.3.97. 5) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND AS PER LAW, THE LD.CIT(A) ERRED IN HOLDING THAT INTEREST RECEIVED F ROM SUPPLIER M/S. ESSAR STEEL LTD AMOUNTING TO RS.1,48,62,816/- AND EMPLOYE ES AMOUNTING TO RS.33,906/- ARE DIRECTLY RELATED TO SETTING UP OF T HE REFINERY, HENCE IS TO BE CAPITALIZED AND ADJUSTED AGAINST THE COST OF THE PR OJECT AND DIRECTING THE A.O. NOT TO TREAT THE SAME AS INCOME FROM OTHER SOURCES. 6) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND AS PER LAW, THE LD.CIT(A) ERRED IN REJECTING THE A.O. TO DELETE THE ADDITION OF RS.6,13,97,726/- BEING INTEREST RECEIVED BY THE ASS ESSEE FROM THE ESCROW ACCOUNT AND ALLOW CAPITALIZATION ON INTEREST IN THE REFINERY PROJECT. 7) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND AS PER LAW, THE LD. CIT(A) ERRED IN DIRECTING THE A.O. TO ALLOW THE BAD DEBT OF RS.46,15,914/- RELATING TO NIKO RESOURCES LTD. ESSAR OIL LIMITED 4 3. IN GROUND NO.1, THE REVENUE HAS CHALLENGED THE DELE TION OF EXPENDITURE OF ` 1,48,71,588, INCURRED BY THE ASSESSEE FOR EXPLORAT ION AND PRODUCTION OF OIL AND GASSES AS REVENUE EXPENDITURE . 4. AT THE OUTSET, BOTH THE PARTIES ADMITTED BEFORE US THAT THIS ISSUE IS IDENTICAL TO THE ISSUE DECIDED BY THE TRIBUNAL IN A SSESSEES OWN CASE IN THE EARLIER YEARS, RIGHT FROM THE ASSESSMENT YEARS 1996 97 TO 199899, WHEREIN THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESS EE. IT HAS BEEN FURTHER POINTED OUT BY THE LEARNED SR. COUNSEL, MR. S.E. DA STUR, THAT THIS ISSUE HAS TRAVELED UP TO THE STAGE OF HIGH COURT UNDER SECTIO N 260A WHEREIN THE REVENUES APPEALS ON THIS SCORE HAVE ALSO BEEN DISM ISSED. A COPY OF THE JUDGMENT HAS BEEN PLACED BEFORE US. 5. THE RELEVANT FACTS, APROPOS THIS ISSUE, ARE THAT TH E ASSESSEE IS ENGAGED IN THE BUSINESS OF CONTRACT DRILLING, OFFS HORE CONSTRUCTION, EXPLORATION OF MINERAL OIL & GASSES AND TRADING OF PETRO PRODUCTS. IN THE COMPUTATION OF INCOME, THE ASSESSEE HAS CLAIMED DED UCTION OF ` 1,48,71,588, BEING EXPENDITURE INCURRED DURING THE YEAR FOR SETTINGUP OF THE PROJECT OF REFINING OF CRUDE OIL AND WAS TREATE D AS DEFERRED REVENUE EXPENDITURE. THE ASSESSEE, IN RESPONSE TO THE SHOW CAUSE NOTICE ISSUED BY THE ASSESSING OFFICER, SUBMITTED THAT IT IS ENGAGED IN THE BUSINESS OF OPERATION OF RIGS FOR EXTRACTION OF OIL, UNDERTAKIN G OFFSHORE CONTRACTS FOR LAYING OF PIPELINE SETUP FOR REFINERY AND MARKETIN G OF PETRO PRODUCTS. DURING THE YEAR UNDER APPEAL, THE COMPANY WAS IN THE PROCE SS OF SETTINGUP OF PROJECT OF REFINING CRUDE OIL AND FOR THIS PURPOSE, IT HAS INCURRED EXPENDITURE ON EXPLORATION SITES AND ON BIDDING OF TENDERS, TRA VELING ETC. THESE EXPENDITURES ARE REVENUE IN NATURE, HOWEVER, IN THE BOOKS OF ACCOUNT, THEY HAVE BEEN TREATED AS DEFFERED REVENUE EXPENDITURE. LOOKING TO THE NATURE OF EXPENSES, WHICH ARE DIRECTLY RELATED TO ONGOING BU SINESS, THE ENTIRE EXPENDITURE INCURRED DURING THE FINANCIAL YEAR SHOU LD BE ALLOWED IN THIS YEAR. RELIANCE WAS ALSO PLACED ON THE DECISION OF THE TRI BUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 199697. FURTHER, RELIANCE WAS ALSO PLACED ON THE ESSAR OIL LIMITED 5 JUDGMENT OF HON'BLE SUPREME COURT IN PRODUCE EXCHAN GE CORPORATION LTD. V/S CIT, [1970] 77 ITR 739 (SC). THE ASSESSING OFFI CER REJECTED THE ASSESSEES CONTENTIONS AND OBSERVED THAT THESE ARE ONLY PRELIMINARY EXPENSES WHICH CANNOT BE HELD TO BE RELATED TO ANY BUSINESS ACTIVITY CARRIED OUT BY THE ASSESSEE DURING THE YEAR AND ALSO THESE EXPENSES ARE NOT EVEN ELIGIBLE FOR DEDUCTION UNDER SECTION 35D. FURTHER, SIMILAR ISSUE HAS COME UP FOR CONSIDERATION IN ASSESSMENT YEAR 200304 WHEREI N THE ASSESSING OFFICER DISALLOWED SUCH EXPENDITURE. THE LEARNED COMMISSION ER (APPEALS), HOWEVER, RELYING UPON THE EARLIER DECISIONS OF THE TRIBUNAL IN ASSESSEES OWN CASE, DIRECTED THE ASSESSING OFFICER TO ALLOW THESE EXPEN SES AS REVENUE EXPENDITURE. 6. AFTER CAREFULLY CONSIDERING THE RIVAL CONTENTIONS, RELEVANT FINDINGS OF THE ASSESSING OFFICER AS WELL AS THE LEARNED COMMIS SIONER (APPEALS) AND THE ORDERS OF THE TRIBUNAL IN EARLIER YEARS IN ASSESSEE S OWN CASE, WE FIND THAT THE ISSUE BEFORE US IS IDENTICAL TO THE ISSUE DECID ED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 199697. FO R BETTER APPRECIATION OF THE FACTS OF THE PRESENT ISSUE, IT IS NECESSARY TO REPRODUCE THE RELEVANT FACTS AND FINDING RECORDED BY THE TRIBUNAL. 13. THE SECOND ISSUE TO BE CONSIDERED FOR THE ASSE SSMENT YEAR 1996-97 IS REGARDING THE EXPENDITURE OF RS.1,60,04,350 INCURRE D BY THE ASSESSEE COMPANY IN THE PREVIOUS YEAR FOR EXPLORATION AND PR ODUCTION 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 BE EN BIDDING FOR VARIOUS CONTRACTS AS PART OF ITS BUSINESS OF EXTRACTION OF OIL. IN THIS CONNECTION, THE ASSESSEE COMPANY HAVE BEEN INCURRING EXPENDITURE TO WARDS 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 TREATE D THE EXPENDITURE AS DEFERRED REVENUE EXPENDITURE AND HAS WRITTEN OFF ON LY RS.11,22,867 AS EXPENDITURE PERTAINING TO THE RELEVANT ASSESSMENT Y EAR. BUT IN THE RETURN OF INCOME, THE ASSESSEE CLAIMED THE FULL AMOUNT AS REV ENUE 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 CIT(A) ALSO AGREED WITH THE FINDING OF THE ASSESSING OFFICER AND CONFIRMED THE DISALLOWANCE. ESSAR OIL LIMITED 6 13.1 THERE IS NO DOUBT ABOUT THE FACT THAT THE BASI C BUSINESS OPERATIONS OF THE ASSESSEE COMPANY ARE OPERATION OF RIGS FOR EXTRACTI ON OF OIL AND UNDERSTANDING OTHER OIL RELATED ACTIVITIES. THEREFORE, IN THE INT EREST OF ASSESSEES BUSINESS AND IN CONTINUATION OF THE BUSINESS CARRIED ON BY I T, THE ASSESSEE COMPANY HAD TO EXPLORE THE CHANCES OF DEVELOPMENT IN THE FI ELD OF OIL EXPLORATION FOR WHICH IT HAD TO SUBMIT ITSELF FOR BIDDING AND TENDE RS. SUBMITTING TENDERS AND BIDS IN THE FIELD OF OIL EXPLORATION IS A HIGHLY SO PHISTICATED TECHNICAL TASK FOR WHICH THE ASSESSEE COMPANY HAD TO INCUR SUBSTANTIAL AMOUNT OF EXPENDITURE. THE POTENTIAL STATUS OF THE SITE HAS TO BE STUDIED, VISITS TO THE PROPOSED SITES HAVE TO BE UNDERTAKEN, TECHNICAL CONSULTANCY HAS TO BE ARRANGED FOR AND FEASIBILITY HAS TO BE STUDIED. AS THE MATTER IS HIG HLY COMPLEX AND TECHNICAL, EVEN FOR MAKING A BID, THE ASSESSEE COMPANY HAS TO INCUR HUGE AMOUNT OF EXPENDITURE, IF THE ASSESSEE WAS SUCCESSFUL IN OBTA INING THE BID AND CONTRACTS, NO DOUBT, SUCH EXPENDITURE WOULD HAVE BEEN ALLOWED AS REVENUE EXPENDITURE EVEN BY THE ASSESSING AUTHORITY ON THE GROUND THAT THOSE EXPENSES ERE INCURRED BY THE ASSESSEE COMPANY FOR THE BUSINESS U NDERTAKEN BY IT. BUT THE SAID LOGIC SHOULD NOT FAIL WHERE THE ASSESSEE COULD NOT WIN THE BIDS AND CONTRACTS. EVEN IF THE ASSESSEE COULD NOT OBTAIN TH E CONTRACTS OF OIL EXPLORATION IN SUCH CASES, THE REAL ACTIVITY CARRIED ON BY THE ASSESSEE COMPANY WAS DOING BUSINESS BY WAY OF FURTHER PROSPECTING ITS ACTIVITI ES. IF THE ASSESSEE COMPANY DID NOT UNDERTAKE SUCH PROSPECTING, IT COULD NOT RE MAIN IN BUSINESS. THE EXPENDITURE DOES NOT BECOME CAPITAL ONLY FOR THE RE ASON THAT THE ASSESSEE WAS NOT SUCCESSFUL IN BIDDING THE CONTRACTS. IF THE ASSESSEE COMPANY WAS DOING BUSINESS IN AN ENTIRELY DIFFERENT FIELD, THE CASE OF HE ASSESSEE WOULD HAVE BEEN DIFFERENT ON THE GROUND THAT THE ASSESSEE WAS SPENDING MONEY ON AN ALTOGETHER, NEW PROJECT AND AS THE PROJECT WAS N OT FRUCTIFIED THE EXPENSES WOULD NOT HAVE BEEN ALLOWED AS N EXPENDITURE. BUT I N THE PRESENT CASE, THE ASSESSEE IS VERY MUCH IN THE BUSINESS OF OIL EXTRAC TION AND IN FACT THE ACTIVITIES FOR WHICH THE EXPENDITURE WAS INCURRED W AS IN FURTHERANCE OF THE SAME LINE OF BUSINESS AND, THEREFORE, WE DO NOT FIN D ANY REASON WHY THE EXPENDITURE OF ` 1,60,04,350 INCURRED BY THE ASSESSEE COMPANY SHOUL D NOT BE EXPENDITURE IN COMPUTING ITS TAXABLE INCOME. 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 P ART 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 I NTER-LACING OF FUNDS AND RESOURCES. THE ACTIVITIES WERE CARRIED OUT AS INSEP ARABLE FROM .HE EXISTING LINE OF BUSINESS. THEREFORE, IN THE LIGHT OF THE DECISIO NS OF THE SUPREME COURT I-J 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 TATA CHEMICALS LTD VS DCIT BY THE BOMBAY TRIBUNA L IN 72 ITS 1. THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE DIRE CT THE ASSESSING AUTHORITY TO ALLOW THE SUM OF ` 1,60,04,350 AS DEDUCTION IN COMPUTING THE TAXABLE INCOME OF THE ASSESSEE COMPANY. 7. THE AFORESAID FINDINGS OF THE TRIBUNAL HAVE BEEN FO LLOWED IN THE SUBSEQUENT YEARS ALSO. SINCE THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT ISSUE, THEREFORE, FOLL OWING THE EARLIER YEARS PRECEDENCE, WE DO NOT FIND ANY GOOD REASON TO INTER FERE WITH THE ORDER ESSAR OIL LIMITED 7 PASSED BY THE LEARNED COMMISSIONER (APPEALS) ON THI S ISSUE AND DECLINE TO INTERFERE IN THIS MATTER AS SUCH. WE ALSO FIND THAT THIS ISSUE HAS ALSO COME UP FOR CONSIDERATION BEFORE THE JURISDICTIONAL HIGH CO URT IN AN APPEAL PREFERRED BY THE REVENUE UNDER SECTION 260A, WHEREIN THE SUBS TANTIAL QUESTION OF LAW ON THIS POINT HAS NOT BEEN ADMITTED AND THE REVENUE S APPEAL HAS BEEN DISMISSED. ACCORDINGLY, GROUND NO.1, RAISED BY THE REVENUE IS TREATED AS DISMISSED. 8. THE ISSUE INVOLVED IN GROUND NO.2 AND 3, ARE BY AND LARGE, SAME AND, THEREFORE, BOTH THE GROUNDS ARE BEING DISCUSSED AND ADJUDICATED TOGETHER. 9. FACTS IN BRIEF : THE ASSESSEE, WHICH IS CARRYING OUT A CONTRACT W ORK OF DRILLING OIL WELLS THROUGH ITS ENERGY DIVISION, HAS SHOWN FOLLOWING RESULTS IN THE PROFIT & LOSS ACCOUNT: S. NO. NAME OF THE BRANCH PROFIT EARNED REMARK (I) OMAN (MUSCAT) 3,20,80,443 NOT OFFERED FOR TAX (II) QATAR (-) 90,38,012 (III) BARODA (INDIA). (-) 11,48,835/- 10. THE NET PROFIT FROM OMAN AND QATAR WAS THUS WORKED OUT AT ` 2,30,42,431, AFTER SETTINGOFF OF THE LOSSES OF QAT AR. HOWEVER, THE SAID PROFIT WAS NOT INCLUDED IN THE TOTAL INCOME OF THE COMPANY AND NO TAX WAS OFFERED IN THE RETURN OF INCOME FILED IN INDIA. THE ASSESSI NG OFFICER, ACCORDINGLY, ISSUED A SHOW CAUSE NOTICE TO JUSTIFY THE EXCLUSION OF THE PROFIT EARNED FROM ITS FOREIGN PROJECT IN OMAN AND QATAR FROM THE TOTA L INCOME. IN RESPONSE, THE ASSESSEE SUBMITTED THAT IT HAS ESTABLISHED A BR ANCH IN OMAN AND QATAR FROM WHERE IT HAD ENTERED INTO CONTRACTS WITH THE G OVERNMENT AGENCY OF THESE COUNTRIES TO UNDERTAKE DRILLING OF OIL WELLS. FOR EXECUTING THE CONTRACTS, IT HAS ESTABLISHED A BRANCH AND FULL FLEDGED OFFICE IN THESE TWO COUNTRIES. THE RELEVANT ACCOUNTING RECORDS WERE ALSO KEPT IN THE R ESPECTIVE COUNTRIES EVEN THOUGH THE RESULT OF ALL THE ACTIVITIES WAS CONSOLI DATED IN INDIA. BOTH THE ESSAR OIL LIMITED 8 COUNTRIES OMAN AND QATAR HAVE INCOME TAX LAWS AND T HE INCOME EARNED BY THE ASSESSEE IN THESE COUNTRIES WERE TAXABLE UNDER THEIR RESPECTIVE INCOME TAX LAWS. THESE BRANCHES HAVE BEEN FILING THEIR RET URN OF INCOME IN RESPECT OF BUSINESS ACTIVITIES CARRIED OUT THERE AND WERE ASSE SSED ON THE PROFITS EARNED AS PER DOMESTIC INCOME TAX LAWS OF THESE COUNTRIES. IN CASE OF OMAN, THE GOVERNMENT OF OMAN AND GOVERNMENT OF INDIA HAVE ENT ERED INTO DOUBLE TAXATION AVOIDANCE AGREEMENT (FOR SHORT DTAA ) WHICH CAME INTO EFFECT FROM 1 ST APRIL 1998. IT WAS SUBMITTED BY THE ASSESSEE THAT PRIOR TO THE SAID DTAA, THE ASSESSEE WAS ADDING THE PROFITS EARNED FR OM THE OPERATIONS CARRIED ON IN THESE COUNTRIES AND OFFERED THE SAME FOR TAXATION IN INDIA, HOWEVER, AFTER THE NOTIFICATION OF DTAA THE INCOME THROUGH BRANCHES EARNED IN OMAN HAS NOT BEEN OFFERED FOR TAX IN INDIA IN VI EW OF ARTICLE7. SIMILARLY, IN CASE OF QATAR ALSO, THE DTAA CAME INTO EFFECT FR OM 1 ST APRIL 2001 AND SINCE THEN THE ASSESSEE HAS BEEN EXCLUDING THE INCO ME EARNED FROM QATAR FOR TAX IN INDIA IN VIEW OF ARTICLE7. A DETAIL REA SONING AND EXPLANATION WAS GIVEN AS TO WHY IN VIEW OF ARTICLE7, THE INCOME WH ICH HAS BEEN OFFERED FOR TAX IN THE OTHER CONTRACTING STATE I.E., OMAN AND Q ATAR, THE SAME CANNOT BE HELD TO BE TAXABLE IN INDIA. IN SUPPORT, RELIANCE W AS PLACED ON THE DECISION OF KARNATAKA HIGH COURT IN CIT V/S R.M. MUTHAIAH, [199 3] 202 ITR 508 (KAR.), WHEREIN IN THE CONTEXT OF INDOMALAYSIAN TREATY, IT WAS HELD THAT INCOME SPECIFIED IN ARTICLES6 AND 7, RELATING TO THE P.E. WERE OUTSIDE THE PURVIEW OF TAXATION IN INDIA. DRAWING THE SIMILARITY BETWEEN T HE ARTICLE7 OF OMAN AND QATAR AND ARTICLE7 OF MALAYSIAN TREATY, IT WAS SUB MITTED THAT IF THE INCOME HAS BEEN TAXED IN THE CONTRACTING STATE, THEN THE S AME CANNOT BE TAXED IN INDIA. BESIDES THIS, RELIANCE WAS ALSO PLACED ON TH E JUDGMENT OF HON'BLE SUPREME COURT IN CIT V/S P.V.A.L. KULANDAGAN CHETTI AR, [2004] 267 ITR 654 (SC) WHEREIN THE VIEW TAKEN BY THE KARNATAKA HIGH C OURT IN R.M. MUTHAIAH (SUPRA) AND MADRAS HIGH COURT JUDGMENT IN CIT V/S S .R.M. FIRM AND OTHERS, [1994] 208 ITR 400 (MAD.) WHEREIN SIMILAR VIEW WAS TAKEN, HAS BEEN AFFIRMED. ESSAR OIL LIMITED 9 11. THE ASSESSING OFFICER DID NOT ACCEPT THE ASSESSEES CONTENTIONS ON THE GROUND THAT ARTICLE7 DEALS WITH PROFITS ATTRIBUTAB LE TO THE P.E. WHICH IS TREATED AS DISTINCT AND SEPARATE. HOWEVER, THE INDI AN RESIDENT IS TAXED ON HIS GLOBAL INCOME IN INDIA IN VIEW OF SECTION 5(1) OF T HE I.T. ACT, AND, THEREFORE, THE INCOME EARNED BY THE ASSESSEE FROM FOREIGN COUN TRIES HAS TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE TO DETERMINE TH E LIABILITY FOR TAX PURPOSES. IF THE TAX HAS BEEN PAID AS PER THE TAXAT ION LAW OF THAT COUNTRY I.E., THE CONTRACTING STATE, THE RELIEF FOR TAX PAI D OR TAX CREDIT IS TO BE GIVEN IN INDIA. HE FURTHER MADE REFERENCE TO ARTICLE 25 O F DTAA FOR OMAN AND OBSERVED THAT AN INCOME WHICH IS SUBJECT TO TAX IN BOTH THE CONTRACTING STATE THEN RELIEF FROM DOUBLE TAXATION SHALL BE GIVEN BY GIVING CREDIT OF TAXES PAID IN OMAN. ACCORDINGLY, THE TAX PAID IN OMAN TO THE T UNE OF ` 50,40,215, THE CREDIT WAS GIVEN BY THE ASSESSING OFFICER WHILE COM PUTING THE TAX LIABILITY FROM THE INCOME ATTRIBUTABLE TO OMAN. THUS, HE HELD THAT THE INCOME IN OMAN AND QATAR PROJECTS IS ASSESSABLE IN INDIA AND AFTER SETTINGOFF THE LOSS INCURRED IN QATAR PROJECT, HE ADDED THE TAXABLE INC OME TO THE EXTENT OF ` 2,30,42,431 AND ALSO ALLOWED CREDIT OF TAXES PAID O F ` 50,40,215 IN OMAN. 12. FURTHER, ON A PERUSAL OF THE STATEMENT OF INCOME OF LONG TERM CAPITAL GAIN, HE OBSERVED THAT THE ASSESSEE HAD SHOWN LONG TERM CAPITAL GAIN OF ` 1,88,29,63,618, FROM THE SALE OF ENERGY DIVISION AS A GOING CONCERN TO A BUYER M/S. DALMA ENERGY LLC OF U.A.E. FOR A LUMP SU M CONSIDERATION OF ` 304.21 CRORES ON 13 TH MAY 2003. ON SUCH SALE, THE LONG TERM CAPITAL GAIN WAS WORKED OUT UNDER SECTION 50B OF THE ACT, AND WA S ALLOCATED AMONGST VARIOUS BRANCHES AS PER THE FIXED ASSET RATIO. THE BRANCH WISE ALLOCATION OF LONG TERM CAPITAL GAIN WAS SHOWN AS UNDER: (I) OMAN (MUSCAT) ` . 167,30,82,857/- (II) QATAR ` . 17,81,27,873/- (III) BARODA (INDIA) ` . 3,17,52,888/- TOTAL ` . 188,29,63,618/- ESSAR OIL LIMITED 10 13. HE FURTHER NOTED THAT WHILE DETERMINING THE TAX ON LONG TERM CAPITAL GAIN, THE ASSESSEE HAS OFFERED TAX ONLY ON CAPITAL GAINS RELATABLE TO INDIAN SETUP AT VADODARA. HOWEVER, TAX ON LONG TERM CAPIT AL GAIN FOR OMAN AND QATAR HAS BEEN CLAIMED AS EXEMPT AS PER ARTICLE15 OF OMAN DTAA AND ARTICLE13 OF QATAR DTAA. THE ASSESSING OFFICER HAS SUMMARIZED THE CONTENTION OF THE ASSESSEE IN THIS REGARD IN THE FO LLOWING MANNER: ESSAR OIL SOLD ITS ENTIRE BUSINESS IN OMAN AND QAT AR. THE CAPITAL GAINS EARNED ON SALE OF ITS BUSINESS WERE EXCLUDED FROM C OMPUTATION OF TAXATION IN INDIA BASED ON SUPREME COURT DECISIONS AND CBDT CIR CULARS ISSUED FOR INTERPRETING SIMILAR CLAUSES IN MAURITIUS DTT. THE CBDT CIRCULARS 333, 621,682 AND 789 DEALT WITH TAXATION OF CAPITAL GAINS UNDER TAX TREATIES, IN PARTICULAR WITH MAURITIUS. A S THE DTT ENTERED BY INDIAN GOVERNMENT WITH OMAN AND QATAR HAS MIRROR IMAGE CLA USE WITH THAT MAURITIUS, THE CIRCULAR ISSUED FOR INTERPRETING MAU RITIUS TREATY SQUARELY APPLIES TO INTERPRETATION OF OMAN AND QATAR TREATY. IN AZADI BACHO ANDOLANS CASE, THE CIRCULAR NO. 789 WAS HELD BY DELHI HIGH COURT AS VOID. THE CENTRAL GOVERNMENT CHALLENGED TH IS DECISION AND APPEALED TO SUPREME COURT. SUPREME COURT UPHELD THE SAID CIRCULAR AND WHILE DE CIDING THE SAID CASE HAD ALSO OBSERVED THE DECISIONS OF CERTAIN HIGH COURT I NCLUDING RM MUTHIAH (SUPRA) IN KULANDAGAN CHETTIARS CASE, SUPREME COURT HELD W HILE INTERPRETING MALAYSIAN TAX TREATY REGARDING INCOME FROM PES. INC LUDING CAPITAL GAINS ARISING THEREIN, THAT BY ENTERING INTO TAX TREATY, THE INDIAN GOVERNMENT GAVE AWAY ITS RIGHT TO TAX CAPITAL GAINS ARISING IN OTHE R COUNTRIES WITH WHOM IT ENTERED INTO TAX TREATIES. IT IS TO BE NOTED THAT M ALAYSIAN TREATY NEVER HAD A SEPARATE CLAUSE DEALING WITH CAPITAL GAINS AS THAT MALAYSIA DOES NOT TAX CAPITAL GAINS. WHERE AS, QATAR AND OMAN HAS SEPARATE CLAUSE IN TREATY LIKE MAURITIUS TO TAX CAPITAL GAINS. IN RM MUTHIAH, THE HIGH COURT OF KARNATAKA HELD THA T THE STAND TAKEN FOR THE REVENUE THAT FOR RATE PURPOSES AS WELL AS FOR THE D ETERMINATION OF THE TOTAL INCOME, ALL SUCH INCOME DERIVED FROM A SOURCE IN MA LAYSIA SHALL FIRST BE TAKEN INTO CONSIDERATION IN COMPUTATION DOES NOT MERIT AC CEPTANCE AND ALLOWING THE DEPARTMENT TO DO SO WOULD AMOUNT TO PERMITTING FLAG RANT VIOLATION OF LAW. THIS DECISION WAS NOT CHALLENGED BY THE GOVERNMENT AND HENCE BECAUSE FINAL, AS OBSERVED BY THE SUPREME COURT. TAX TREATIES ARE FOR THAT MATTER CONSIDERED TO BE M INI LEGISLATIONS CONTAINING THEMSELVES ALL THE RELEVANT ASPECTS OR FEATURES WHI CH ARE AT VARIANCE WITH THE GENERAL TAXATION LAWS OF THE RESPECTIVE COUNTRIES. SUCH VARIATIONS ARE IN SOME CASES IN ADDITION TO THE EXISTING LOCAL TAX LAWS AN D IN OTHER CASES IN LIEU THEREOF. HENCE IT SHOULD BE GIVEN FULL IMPACT. CONCEPTUALLY THOUGH THERE EXISTS TOW DIFFERENT METH ODS OF ELIMINATION OF DOUBLE TAXATION, VIZ., THE EXEMPTION METHOD OR THE TAX CREDIT METHOD. THE ESSAR OIL LIMITED 11 EXEMPTION METHOD ABSOLVES THE ASSESSEE CONCERNED FR OM UNDERGOING THE ORDEAL OF ASSESSMENT AT BOTH PLACES AND SEEKING A R EFUND OF ANY EXCESS TAX HE MIGHT HAVE PAID AFTER THE COMPLETION OF THE ASSE SSMENT AS ENVISAGED IN THE TAX CREDIT SYSTEM. THE CBDT WHILE INTERPRETING MAURITIUS TAX TREATY WH ICH HAS SIMILAR ARTICLE, THAT INDIA WILL NOT TAX CAPITAL GAINS UNDER THOSE TREATY PROVISIONS. HENCE WE STATE THAT THE CIRCULARS AND DECISIONS SUP PORTS THE VIEW THAT THE AO HAS TO BE RECOGNIZE THE TAXABILITY OF CAPITAL GAINS AS PER THE TAX TREATY PROVISIONS STRICTLY, AND SHOULD NOT ATTEMPT TO TAX THE SAME IN INDIA. AS THE ASSESSEE DISPOSED OFF THE ENTIRE PES ITSELF, SUB ARTICLE 2 OF ARTICLE REGARDING CAPITAL GAINS IN BOTH OMAN AND QATAR TREA TIES APPLY TO THIS SALE, AND THE GAIN ARISING OUT OF SUCH SALE IS TO BE ASSESSED IN THE COUNTRY WHERE PE WAS SITUATED. IN OUR CASE PES WERE SITUATED IN OMAN AND QATAR, AND COMPANY SOLD ITS PE WITH ALL THE ASSETS, LIABILITIES, CONTRACTS ETC. THEREFORE, THE GAINS ON SALE OF A PE ARE NOT ALL TAXABLE IN INDIA. 14. THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTE NTIONS AND HELD THAT THE ASSESSEE WHICH IS AN INDIAN COMPANY WAS LIABLE TO PAY CAPITAL GAINS IN INDIA ALSO AS ARTICLE15 OF THE OMAN DTAA PROVIDES THAT GAINS DERIVED BY A RESIDENT OF A CONTRACTING STATE FROM ALIENATION OF PROPERTY REFERRED TO IN ARTICLE6 FORMING PART OF A BUSINESS PROPERTY OF A P.E. SITUATED IN OTHER CONTRACTING STATE MAY ALSO BE TAXED IN OTHER CONTRA CTING STATE. THE PHRASE MAY ALSO BE TAXED MEANS THAT THE INDIA HAS ALSO RIGHT TO TAX ON THE INCOME OF ITS RESIDENT AND WHATEVER TAX HAS BEEN PAID IN O THER CONTRACTING STATE THE CREDIT SHALL BE GIVEN AS PER ARTICLE25. HE ANALYSE D VARIOUS PARAGRAPHS OF ARTICLE15 OF OMAN TREATY AND OBSERVED THAT WHEREVE R THE WORD MAY HAS BEEN USED, THE TAXABILITY OF THAT PARTICULAR INCOME LIES IN BOTH THE COUNTRIES AND WHERE THE WORD SHALL IS USED, THEN THE TAXABILITY OF THAT INCOME IS WIT H ONE PARTICULAR COUNTRY. THE TAXABILITY, IN CASE OF INDIAN RESIDENT, SHALL ALWAYS BE IN INDIA WHEREVER THE WORD MAY HAS BEEN USED IN THE DTAA AND THE CREDIT WILL BE GIVEN FOR THE TAX PAID IN OTHER CONT RACTING STATE. ACCORDINGLY, HE TREATED THE ENTIRE LONG TERM CAPITAL GAIN INCLUD ING OMAN AND QATAR TO BE TAXABLE IN INDIA AND SINCE NO TAX WAS PAID IN OMAN, THEREFORE, NO CREDIT WAS GIVEN. ESSAR OIL LIMITED 12 15. BEFORE THE LEARNED COMMISSIONER (APPEALS), WITH REG ARD TO THE ISSUE OF BUSINESS INCOME FROM OMAN AND QATAR PROJECTS, IT WA S SUBMITTED THAT THIS ISSUE HAS COME UP FOR CONSIDERATION IN ASSESSEES O WN CASE FOR THE ASSESSMENT YEAR 19992000 TO 200203 WHEREIN THIS I SSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY HOLDING THAT I NCOME FROM OMAN PROJECT IS NOT TAXABLE IN INDIA IN VIEW OF ARTICLE7 AND FU RTHER IN APPEAL FOR THE ASSESSMENT YEAR 200203, SIMILAR VIEW WAS TAKEN IN THE CASE OF BUSINESS INCOME FROM QATAR ALSO. SINCE THERE IS NO CHANGE IN FACTS OR THE LEGAL POSITION IN TERMS OF DTAA AGREEMENT BETWEEN INDIA A ND THESE COUNTRIES, THEREFORE, HE HELD THAT INCOME ATTRIBUTABLE TO ITS BRANCHES FROM OMAN AND QATAR ARE NOT TAXABLE IN INDIA. 16. AS REGARDS TAXATION OF LONG TERM CAPITAL GAIN OF ` 167,30,82,857 AND ` 17,81,27,873, ARISING OUT OF SALE OF ASSETS HELD BY THE P.E. IN OMAN AND QATAR TO BE TAXED IN INDIA, THE ASSESSEE BEFORE THE LEARNED COMMISSIONER (APPEALS) FILED A VERY DETAIL SUBMISSION WHICH HAS BEEN DEALT BY THE LEARNED COMMISSIONER (APPEALS) FROM PAGES4 TO 13 OF HIS OR DER. COMMENTS OF THE ASSESSING OFFICER WERE ALSO INVITED ON THESE SUBMIS SIONS AND THE SAID WRITTEN ARGUMENTS OF THE ASSESSING OFFICER HAVE BEEN DEALT BY THE LEARNED COMMISSIONER (APPEALS) AT PAGES13 TO 15 OF HIS ORD ER. 17. THE LEARNED COMMISSIONER (APPEALS), AFTER DISCUSSIN G THE RELEVANT FACTS, OBSERVED THAT THE KEY ISSUE IS THE USE OF PH RASE MAY BE TAXED IN ARTICLE15(2) OF THE TREATY WITH OMAN AND ARTICLE1 3(2) OF THE TREATY WITH QATAR HAVE TO BE EXAMINED. RELYING UPON VARIOUS DEC ISIONS CITED BY THE ASSESSEE IN THE CONTEXT OF DTAAS OF MALAYSIA, MAURI TIUS AND SRI LANKA, HE HELD THAT THE USE OF THE WORD MAY IN THESE AGREEMENTS HAS A CLEAR INDICATION OF GRANTING THE RIGHT OF JURISDICTION TO THE EXCLUSION OF OTHER THE DTAAS WITH MALAYSIA, MAURITIUS AND SRI LANKA ARE SI MILAR TO DTAA WITH OMAN AND QATAR IN RESPECT OF TAXABILITY OF CAPITAL GAINS . THUS, ANY DECISION, INTERPRETATION AND CIRCULARS UNDER THOSE TREATIES W OULD, THEREFORE, BE APPLICABLE TO OMAN AND QATAR TREATIES AS WELL. THE WORD MAY IS PERMISSIVE ESSAR OIL LIMITED 13 AND IT PERMITS TAXABILITY RATHER GIVING AN OPTION. HE REFERRED TO THE CASE OF P.V.A.L. KULANDAGAN CHETTIAR (SUPRA) WHEREIN THE HO N'BLE SUPREME COURT HAS ANALYSED THE MALAYSIAN TREATY WITH REGARD TO TH E CAPITAL GAIN. HE ALSO REFERRED TO THE JUDGMENT OF KARNATAKA HIGH COURT IN R.M. MUTHAIAH (SUPRA) AND THE JUDGMENT OF MADRAS HIGH COURT IN S.R.M. FIR M & ORS. (SUPRA). THE ANALYSIS OF THESE JUDGMENTS HAS BEEN DEALT BY HIM I N PARA6.4 AND 6.5 AND FINALLY, HE CAME TO THE CONCLUSION, VIDE PARA6.6 T O 6.8 OF HIS ORDER WHICH ARE REPRODUCED BELOW: 6.6 THE CIRCULAR OF THE CBDT REFERRED TO BY THE A PPELLANT IS IN AN IDENTICAL SITUATION. HERE ALSO DESPITE THE USE OF THE PHRASE MAY TAXABILITY IN INDIA HAS BEEN CLARIFIED TO BE NOT THE INTENTION. THE APPELLA NT HAS RAISED A VERY STRONG ISSUE ABOUT THE RESIDUARY CLAUSE. IF THE PHRASE MA Y GIVES AN OPTION THEN THE RESIDUARY CLAUSE ARTICLE 15(6) OF DTAA WITH OMAN AN D ARTICLE 13(6) OF DTAA WITH QATAR BECOMES DEVOID OF ANY CONTENT. THIS ALSO LEADS TO THE CONCLUSION THAT THE INTENTION OF USING THE PHRASE MAY WAS NE VER TO GIVE AN OPTION. TAX TREATIES ARE CONSIDERED TO BE MINI LEGISLATIONS CON TAINING WITHIN THEMSELVES ALL THE RELEVANT ASPECTS OR FEATURES WHICH ARE AT VARIA NCE WITH THE GENERAL TAXATION LAWS OF THE RESPECTIVE COUNTRIES. SUCH VAR IATIONS ARE IN SOME CASES IN ADDITION TO THE EXISTING LOCAL TAX LAWS AND IN OTHE R CASES IN LIEU THEREOF. HENCE IT SHOULD BE GIVE FULL IMPACT AND NEEDS TO BE READ IN TOTO FOR ARRIVING AT A CONCLUSION. THE ARGUMENT OF REDUNDANCY OF THE RESID UARY CLAUSE FOR TAXING CAPITAL GAINS ITSELF HAS TO BE GIVEN DUE WEIGHTAGE IN INTERPRETATION OF THE NATURE INVOLVED HERE. I CAN NOT SUBSCRIBE TO THE VI EW THAT ANY PORTION OF A TAXING STATUTE CAN BE ACCEPTED AS REDUNDANT WHILE M AKING AN INTERPRETATION WHEN AN ALTERNATIVE AND MORE LOGICAL INTERPRETATION GIVES TO THE SAME PORTION A SPECIFIC AND DEFINITE MEANING. THE ARGUMENT THAT TAXING STATUTE CANNOT BE INTERPRETED TO LEAD TO A SITUATION OF UNCERTAINTY C ANNOT BE LOST SIGHT OF WHILE INTERPRETATION OF ANY TAXATION PROVISION. 6.7 I HAVE PERUSED THE OBJECTION RAISED BY THE A.O. IN THE APPEAL PROCEEDINGS. IN FIND THAT IDENTICAL ARGUMENTS WERE TAKEN UP BEFORE HONBLE SUPREME COURT IN CHETTIARS CASE. THESE ARE CONTAIN ED IN PAGES 267 ITR 660 (B) TO 661 (A) AND, HONBLE SUPREME COURT DID NOT C ONCUR WITH THESE VIEWS THAT IN A SITUATION OF THIS KIND WHAT WAS ENVISAGED WAS TAX CREDIT ALONE. THE A.O HAS NOT SAID ANYTHING CONCRETE AGAINST THE VARI OUS DECISIONS RELIED UPON BY THE APPELLANT. 6.8 FOR THE REASONS DETAILED ABOVE, AND IN VIEW OF CBDT CIRCULAR AND THE DECISIONS OF THE COURTS REFERRED I AM CONVINCED THA T THE USE OF THE PHRASE MAY IN THE DOUBLE TAXATION AVOIDANCE AGREEMENTS H AS A PERMISSIVE CONNOTATION AND DOES NOT GIVE AN OPTION TO TAX CAPI TAL GAIN IN INDIA AS WELL. IT IS ACCORDINGLY HELD THAT THE CAPITAL GAINS ARISING TO THE APPELLANT FROM SLUMP SALE ATTRIBUTABLE TO ITS UNITS IN OMAN AND QATAR IS NOT TAXABLE IN INDIA. ARGUMENTS ADVANCED BY THE PARTIES : ESSAR OIL LIMITED 14 18. THE LEARNED DEPARTMENTAL REPRESENTATIVE, MR. MAHESH KUMAR, AFTER REFERRING TO THE NATURE OF PROFIT ATTRIBUTABLE TO P .E. IN OMAN AND QATAR AND THE CAPITAL GAIN ARISING FROM SALE OF ASSETS OF THE P.E., SUBMITTED THAT THE LEARNED COMMISSIONER (APPEALS) HAS MAINLY RELIED UP ON THE JUDGMENT OF HON'BLE SUPREME COURT IN CIT V/S P.V.A.L. KULANDAGA N CHETTIAR (SUPRA) WITH RESPECT TO THE ISSUE OF CAPITAL GAIN AND EARLIER YE ARS ORDERS OF THE LEARNED COMMISSIONER (APPEALS) WITH REGARD TO THE TAXABILIT Y OF THE PROFIT OF THE P.E. HE ADMITTED THAT THE TRIBUNAL HAS ALSO CONFIRMED TH E ORDER OF THE LEARNED COMMISSIONER (APPEALS) FOR THE EARLIER YEARS AND DE CIDED THE ISSUE OF PROFITS OF THE P.E. IN FAVOUR OF THE ASSESSEE, WHEREIN IT H AS BEEN HELD THAT IF THE TAXES HAVE BEEN PAID IN OMAN, THEN THE SAME CANNOT BE TAXED IN INDIA. IN ARRIVING TO THIS CONCLUSION, THE TRIBUNAL HAS AGAIN PLACED RELIANCE ON THE DECISION OF P.V.A.L. KULANDAGAN CHETTIAR (SUPRA). E VEN THE HIGH COURT HAS ALSO CONFIRMED THE SAID ORDER OF THE TRIBUNAL IN AP PEAL UNDER SECTION 260A, FILED BY THE DEPARTMENT. HOWEVER, HE SUBMITTED THA T SUCH A VIEW CANNOT BE AFFIRMED NOW IN THIS YEAR FOR THE VARIOUS REASONS, FIRSTLY, THE MAIN ISSUE INVOLVED IS THE INTERPRETATION OF THE PHRASE MAY BE TAXED AS APPEARING IN ARTICLE7(1) AND ARTICLE15 OF OMAN DTAA AND ARTICL E7(1) AND ARTICLE13 OF QATAR DTAA AND THE HON'BLE SUPREME COURT P.V.A.L. K ULANDAGAN CHETTIAR (SUPRA) HAS REFRAINED FROM INTERPRETING THE PHRASE MAY BE TAXED . THE SAID DECISION WAS BASED ON ITS OWN FACTS AND THE COURT W AS BESIZED WITH THE ISSUE OF CLOSE ECONOMIC RELATIONSHIP BETWEEN THE TAX PAYE R AND MALAYSIA AND WHETHER THE TAX PAYER WAS DEEMED RESIDENT OF MALAYS IA OR NOT. THE HON'BLE SUPREME COURT HAS SPECIFICALLY REFRAINED ITSELF FRO M GIVING ANY INTERPRETATION FOR THE PHRASE MAY BE TAXED AND SECONDLY, IN ANY CASE, ALL THE JUDGMENTS WHICH HAVE BEEN REFERRED TO BY THE LEARNED COMMISSI ONER (APPEALS), WERE RENDERED ON THE ISSUES INVOLVED PRIOR TO THE ASSESS MENT YEAR 200405 AS, W.E.F. 1 ST APRIL 2004, SUB-SECTION (3) OF SECTION 90 HAS BEEN INTRODUCED WHICH EMPOWERS THE GOVERNMENT TO ISSUE NOTIFICATIONS FOR CLARIFYING VARIOUS TERMS USED IN THE DTAA AS REFERRED TO IN SUB-SECTION (1) OF SECTION 90. IN ESSAR OIL LIMITED 15 PURSUANCE THEREOF, THE CBDT HAS ISSUED, NOTIFICATIO N NO. 91 OF 2008 DATED 28 TH AUGUST 2008, WHICH NOW CATEGORICALLY ENVISAGES THA T, WHEREIN THE DTAA PROVIDES THAT ANY INCOME OF A RESIDENT IN 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 INCOM E TAX ACT, 1961, AND RELIEF SHALL BE GRANTED IN ACCORDANCE WITH THE METH ODS FOR ELIMINATION OR AVOIDANCE OF DOUBLE TAXATION PROVIDED IN SUCH AGREE MENT. THUS, HENCEFORTH, THE PHRASE MAY BE TAXED HAS TO BE UNDERSTOOD AND INTERPRETED IN THE MANNER THAT THE INDIA HAS A RIGHT TO TAX ITS CITIZE N ON THE INCOME ACCRUED OR DERIVED IN THE OTHER CONTRACTING STATE (FOREIGN COU NTRY, WHICH IS PARTY TO THE DTAA) AND IF ANY TAX HAS BEEN PAID IN OTHER CONTRAC TING STATE, THE RELIEF / CREDIT WOULD BE GIVEN ON SUCH TAXES. THIS IS WHAT P RECISELY THE ASSESSING OFFICER HAS DONE IN THIS CASE. AFTER THE ISSUANCE O F NOTIFICATION, THIS CONTROVERSY IS NO LONGER RESINTEGRA AND ALL THE JU DGMENTS RENDERED IN THIS CONTEXT WHICH ARE CONTRARY TO THE SAID NOTIFICATION WILL NOT HAVE ANY BINDING PRECEDENCE UPON THIS COURT. 19. LD. D.R. SHRI MAHESH KUMAR FURTHER SUBMITTED THAT T HE INTENTION OF THE GOVERNMENT ALSO GETS FORTIFIED BY THE INSERTION OF EXPLANATION (3) TO SECTION 90 WHICH HAS BEEN BROUGHT IN THE STATUTE BY THE FIN ANCE ACT, 2012, THOUGH WITH RETROSPECTIVE EFFECT FROM 1 ST OCTOBER 2009, FURTHER CLARIFIES THIS POINT. THE EXPLANATION 3 CLEARLY PROVIDES THAT IF ANY MEAN ING IS NOT ASSIGNED TO ANY TERM IN THE DTAA, THEN THE NOTIFICATION ISSUED THER E UNDER ASSIGNING SUCH MEANING SHALL BE DEEMED TO HAVE EFFECT FROM THE DAT E OF WHICH THE SAID AGREEMENT CAME INTO FORCE. THUS, THE EXPLANATION BE ING CLARIFICATORY IN NATURE MAKES THE NOTIFICATION APPLICABLE FROM THE D ATE OF DTAA, ITSELF. IN SUPPORT OF THIS CONTENTION, HE ALSO REFERRED TO THE MEMORANDUM ASSIGNED TO EXPLANATION (3) IN THE FINANCE ACT, 2012, WHICH ENV ISAGES THAT ASSIGNMENT OF A MEANING IN RESPECT OF A TERM USED IN THE TREATY G IVEN IN THE NOTIFICATION ISSUED IN PURSUANCE OF SUBSECTION (3) OF SECTION 9 0 IS TO CLARIFY THE PARTICULAR INTENT AND OBJECTS OF THE GOVERNMENT DUR ING THE COURSE OF ESSAR OIL LIMITED 16 NEGOTIATION LEADING TO FORMALIZATION OF THE TREATY. THUS, THE CLARIFICATION GIVEN BY THE GOVERNMENT OF INDIA SHOULD NORMALLY AP PLY FROM THE DATE WHEN THE AGREEMENT WHICH HAS USED SUCH TERM CAME INTO FO RCE. IN THIS MANNER, THE GOVERNMENT OF INDIA WHICH IS ONE OF THE CONTRAC TING STATES HAS STRONGLY REFLECTED ITS INTENTION THAT THE PHRASE MAY BE TAXED HAS TO BE UNDERSTOOD IN THE MANNER THAT THE GOVERNMENT OF INDIA HAS A RI GHT TO TAX ITS RESIDENT AND WHATEVER TAXES HAS BEEN PAID BY THE RESIDENT IN OTHER CONTRACTING STATE THE CREDIT OF SUCH TAXES WOULD BE GIVEN. THE EARLIE R INTERPRETATION GIVEN BY THE COURTS SHOULD NOT BE TAKEN INTO COGNIZANCE IN V IEW OF THIS CLARIFICATION BY THE GOVERNMENT. UNDER THE TREATY, WHICH ARE ENTERED INTO BY THE DIPLOMATS, INTENTION OF THE PARTIES HAS TO BE SEEN AND IN THE WAKE OF THESE NOTIFICATIONS AND AMENDMENTS, THE INTENTION OF THE GOVERNMENT OF INDIA IS ABSOLUTELY CLEAR. 20. LD. D.R. FURTHER ELABORATING THIS POINT, SUBMITTED THAT EVEN OTHERWISE ALSO, THERE ARE VARIOUS OTHER DECISIONS WHICH HAVE BEEN RENDERED INDEPENDENT OF NOTIFICATION WHEREIN IT HAS BEEN HEL D THAT THE PHRASE MAY BE TAXED IN VARIOUS ARTICLES OF THE TREATY IS TO BE RECKONE D AS RIGHT TO TAX BY THE RESIDENT STATE ALSO. WHEREVER THE PHRASE MAY BE TAXED HAS BEEN USED, IT ENVISAGES THAT A RIGHT TO TAX THE INCOME HAS BEE N GIVEN TO OTHER CONTRACTING STATE I.E., THE FOREIGN COUNTRY AND ALS O RESERVING THE RIGHT TO TAX IN THE RESIDENT COUNTRY. THIS HAS BEEN HELD SO BY T HE TRIBUNAL, DELHI BENCH, IN TELECOMMUNICATION CONSULTANT INDIA LTD. V/S ACIT , ITA NO.1293 & 1294/DEL./2009, ORDER DATED 29 TH MARCH 2012. IN THIS CASE, THE TRIBUNAL HAS DEALT WITH THIS ISSUE IN DETAIL AFTER REFERRING TO THE OECD COMMENTARY, VARIOUS INTERNATIONAL VIEWS AND HAS ALSO DISTINGUIS HED THE DECISION OF P.V.A.L. KULANDAGAN CHETTIAR (SUPRA). THE LEARNED D EPARTMENTAL REPRESENTATIVE ALSO REFERRED TO VARIOUS PARAGRAPHS OF THE TRIBUNAL ORDER WHEREIN PRECISELY THE SAME ISSUE HAS BEEN DEALT BY THE TRIBUNAL. HE FURTHER PLACED RELIANCE ON THE AAR RULING IN S. MOHAN, [200 7] 294 ITR 117, WHEREIN IT HAS BEEN HELD THAT THE EXPRESSION MAY BE TAXED HAS TO BE INTERPRETED AS ESSAR OIL LIMITED 17 THE RIGHT TO TAX IS AVAILABLE TO BOTH THE CONTRACTI NG STATES UNDER THEIR RELEVANT DOMESTIC LAWS. THE DECISION IN P.V.A.L. KU LANDAGAN CHETTIAR (SUPRA) HAS ALSO BEEN CONSIDERED AND DISTINGUISHED. LASTLY, HE PLACED RELIANCE ON THE DECISION OF CHENNAI BENCH OF THE TRIBUNAL IN ITO V/ S M/S. DATA SOFTWARE RESEARCH CO. PVT. LTD., ITA NO.2072/MUM./2006, ORDE R DATED 27 TH NOVEMBER 2007, WHEREIN ON INTERPRETATION OF A SIMILAR PHRASE APPEARING IN INDOU.S. DTAA, IT HAS BEEN HELD THAT IF THE P.E. OF A RESIDE NT INDIAN IS ASSESSED IN U.S.A., IT IS ENTITLED TO TAX CREDIT FOR THE TAX PA ID IN THE CONTRACTING STATE BUT THERE IS NOTHING IN THE DTAA WHICH STATES THAT SUCH PROFIT HAS TO BE EXEMPTED IN INDIA. THUS, THE TRIBUNAL WAS OF THE OP INION THAT BOTH THE COUNTRIES HAVE THE JURISDICTION TO TAX WHEREVER THE RE IS AN EXPRESSION MAY BE TAXED . 21. SIMILARLY, WHILE ARGUING THE TAXABILITY OF CAPITAL GAIN, HE SUBMITTED THAT THE PHRASE AGAIN USED IN ARTICLE15 OF OMAN DTAA AN D ARTICLE13 OF QATAR DTAA IS MAY BE TAXED , THEREFORE, THE SAME ARGUMENTS ARE APPLICABLE HERE ALSO. HE FURTHER SUBMITTED THAT WHEREVER THE EXPRES SION SHALL BE TAXED , IS USED, IT CONNOTES THE EXCLUSIVE RIGHT OF ONE STATE IN CONTRADISTINCTION TO RIGHT OF OTHER STATE. HE ALSO REFERRED TO THE COMME NTS OF THE ASSESSING OFFICER GIVEN IN THE REMAND REPORT WHICH HAS BEEN I NCORPORATED BY THE LEARNED COMMISSIONER (APPEALS) IN HIS ORDER. 22. PER CONTRA, THE LEARNED SR. COUNSEL, MR. S.E. DASTU R, SUBMITTED THAT, FIRST OF ALL, THIS ISSUE STANDS CONCLUDED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN ASSESS EES OWN CASE FOR THE ASSESSMENT YEAR 200203, WHEREIN THE DECISION OF TH E TRIBUNAL HAS BEEN AFFIRMED. THUS, THERE IS NO POINT IN GOING FOR DETA IL INTERPRETATION AND DISCUSSION ABOUT THE ISSUE OF THE PHRASE MAY BE TAXED AS THE TRIBUNAL HAS HELD THAT ONCE THE ASSESSEE HAS PAID THE TAX ON THE PROFITS ATTRIBUTABLE TO ITS P.E. IN OMAN AND QATAR, THE SAME INCOME CANNOT BE T AXED IN INDIA. SIMILARLY, ON THE ISSUE OF CAPITAL GAIN ALSO, SAME REASONING HAS TO BE APPLIED. IN ANY CASE, HE SUBMITTED THAT THE INTERPRETATION O F THE EXPRESSION MAY BE ESSAR OIL LIMITED 18 TAXED HAS COME UP FOR CONSIDERATION NOT ONLY BEFORE THE VARIOUS HIGH COURTS BUT ALSO BEFORE THE HON'BLE SUPREME COURT. THIS ISS UE, FOR THE FIRST TIME, HAS COME UP FOR CONSIDERATION BEFORE THE KARNATAKA HIGH COURT IN R.M. MUTHAIAH (SUPRA) WHICH WAS IN RELATION TO INDOMALAYSIAN DTA A. HERE ALSO, THE HIGH COURT HAD AN OCCASION TO DEAL WITH THE PHRASE MAY BE TAXED AS GIVEN IN ARTICLE6(1) WHICH READ AS INCOME FROM IMMOVABLE PROPERTY MAY BE TAXED IN THE CONTRACTING STATE IN WHICH SUCH PROPERTY IS SITUATED . THE HIGH COURT HELD THAT THE RESULT OF THIS CLAUSE IS THAT WHERE T HE INCOME FROM IMMOVABLE PROPERTY IN MALAYSIA HAS BEEN EXPRESSED AS MAY BE TAXED BY THE GOVERNMENT OF MALAYSIA, THEN IT OPERATES AS A BAR O N THE POWER OF THE INDIAN GOVERNMENT TO TAX SUCH INCOME. THIS BAR WOUL D OPERATE IN SECTIONS 4 & 5 OF THE INCOME TAX ACT, 1961 ALSO. HE DREW OUR A TTENTION TO THE RELEVANT ARGUMENTS PLACED BY THE CONTENDING PARTIES AND ALSO THE OBSERVATIONS AND THE FINDINGS GIVEN BY THE HIGH COURT. THE HIGH COUR T HAS ALSO DREW ITS INFERENCE FROM THE LANGUAGE OF SUBSECTIONS (A) AND (B) OF SECTION 90 WHEREIN, THE FORMER REFERENCE IS FOR GRANTING OF RE LIEF IN RESPECT OF THE INCOME ON WHICH INCOME TAX HAS BEEN PAID BOTH UNDER THE DOMESTIC LAW AND UNDER THE LAWS OF OTHER COUNTRIES AND LATER CLAUSE REFERS TO AVOIDANCE OF DOUBLE TAXATION WHICH MEANS ONCE TAX HAS BEEN PAID TO THE OTHER CONTRACTING STATE THEN NO TAX IS TO BE PAID HERE IN INDIA. THIS DISTINCTION, HE SUBMITTED, HAS TO BE TAKEN INTO CONSIDERATION WHILE DECIDING T HIS ISSUE BECAUSE ONCE THE ASSESSEE HAS PAID TAX IN OTHER CONTRACTING STATE IN TERMS OF THE AGREEMENT, THEN BY NECESSARY IMPLICATIONS, INDIAN GOVERNMENT C ANNOT LEVY TAX ON THE SAME INCOME. HERE ALSO, VARIOUS ARTICLES OF INDOMA LAYSIAN DTAA ARE SIMILAR TO THAT OF ARTICLES OF OMAN DTAA ESPECIALLY ARTICLE 7. HE ALSO POINTED OUT THAT NO APPEAL WAS FILED BY THE REVENUE IN THE SUPR EME COURT AGAINST THE SAID JUDGMENT AND THIS FACT HAS BEEN NOTED BY THE S UPREME COURT IN P.V.A.L. KULANDAGAN CHETTIAR (SUPRA). 23. THEREAFTER, THIS ISSUE AGAIN CAME UP FOR CONSIDERAT ION BEFORE THE HONBLE MADRAS HIGH COURT IN S.R.M. FIRM & ORS. (SU PRA), WHEREIN THE HIGH ESSAR OIL LIMITED 19 COURT HAD AN OCCASION TO DEAL WITH INDOMALAYSIAN D TAA WITH REGARD TO THE CAPITAL GAIN ARISING ON SALE OF PROPERTY IN MALAYSI A. IN THIS JUDGMENT, MR. DASTUR, SUBMITTED, THE HIGH COURT HAD CONSIDERED TH IS ASPECT FROM ALL THE ANGLES AND HAS MADE A DISTINCTION BETWEEN DIFFERENT METHOD OF ELIMINATION OF DOUBLE TAXATION VIZ. EXEMPTION METHOD AND THE TAX C REDIT METHOD. UNDER THE EXEMPTION METHOD, ONCE A TAX HAS BEEN PAID IN THE O THER CONTRACTING STATE, THE SAME INCOME CANNOT BE TAXED IN INDIA AND IF BOT H THE COUNTRIES HAVE JURISDICTION TO TAX, THEN CREDIT OF TAXES PAID IN O THER CONTRACTING STATE HAS TO BE GIVEN. HE DREW OUR ATTENTION TO VARIOUS ARGUMENT S AND CONTENTIONS RAISED BY EITHER PARTY AND THEN SPECIFICALLY REFERRED TO T HE FINDINGS GIVEN AT PAGES 420 TO 422 (OF THE ITR PUBLICATION). THE SUM AND SU BSTANCE OF THE RATIO LAID DOWN BY THE HIGH COURT IS THAT FIRSTLY, WHENEVER TH E ENABLING WORDS SUCH AS MAY BE TAXED ARE USED, THE CONTENTION OF THE REVENUE THAT THERE IS NO PROHIBITION OR EMBARGO UPON THE AUTHORITIES EXERCIS ING THE POWERS UNDER INDIAN INCOME TAX ACT FROM ASSESSING THE INCOME CON CERNED DOES NOT HAVE ANY MERIT AS ONCE THE ASSESSEE HAS PAID TAXES IN RE LATION TO THE INCOME EARNED IN OTHER CONTRACTING STATES UNDER THEIR LAW, THE SAME CANNOT BE TAXED IN INDIA. SECONDLY, THE RELIANCE PLACED ON OECD COM MENTARY AND ARTICLES OF MODEL CONVENTION OF 1997 ON BEHALF OF THE REVENUE I S INAPPROPRIATE AND UNJUSTIFIED AND; THIRDLY, THE INCOME FROM IMMOVABLE PROPERTY CAN BE TAXED ONLY BY THE CONTRACTING STATE IN WHICH SUCH PROPERT Y IS SITUATED AND THERE IS NO SCOPE OF TAXING THE SAME IN OTHER CONTRACTING ST ATE. 24. MR. DASTUR, POINTED OUT THAT THE DECISION OF R.M. M UTHAIAH (SUPRA) HAS BEEN APPROVED BY THE HON'BLE SUPREME COURT IN UNION OF INDIA V/S AZADI BACHAO ANDOLAN & ANR., [2003] 263 ITR 706 (SC). HE DREW OUR SPECIFIC ATTENTION TO PAGES723 AND 724 (OF THE ITR PUBLICAT ION), WHEREIN THE HON'BLE SUPREME COURT HAS APPROVED THE REASONING OF THE SAI D DECISION. IN THIS CASE, THE HON'BLE SUPREME COURT WAS DEALING WITH THE SCOP E OF TOTAL INCOME SPECIFIED IN SECTIONS 4 AND 5 VISAVIS THE SCOPE O F SECTION 90 IN RELATION TO INDOMAURITIUS DTAA. HE REFERRED TO VARIOUS ARTICLE S OF MAURITIUS TREATY ESSAR OIL LIMITED 20 WHICH WERE IDENTICAL TO ARTICLE7(1) OF MALAYSIAN T REATY, OMAN AND QATAR TREATY AND ALSO ARTICLES15(2) AND 13(2) OF OMAN AN D QATAR TREATY RESPECTIVELY, WHEREIN THE SIMILAR PHRASE MAY BE TAXED HAS BEEN USED. HE POINTED OUT THAT THIS WAS A CASE WHERE THE UNION OF INDIA HAS COME IN APPEAL. REFERRING TO THE VARIOUS PARAGRAPHS OF THE SAID JUDGMENTS, HE SUBMITTED THAT SECTIONS 4 AND 5 ARE SUBJECT TO SECT ION 90 AND THE COURT WAS DEALING WITH THE ISSUE OF CAPITAL GAIN, WHEREIN, IF A CAPITAL GAIN IS LIABLE TO BE TAXED IN MAURITIUS, THE SAME CANNOT BE TAXED IN IND IA. IN THIS MANNER, THE HON'BLE SUPREME COURT HAS APPROVED THE CASE OF R.M. MUTHAIAH (SUPRA) AND THE VIEW TAKEN BY THE HIGH COURT IS NOW THE LAW LAI D DOWN BY THE HON'BLE SUPREME COURT. 25. HE FURTHER MADE THE DISTINCTION BETWEEN THE VARIOUS EXPRESSION USED IN THE TREATY LIKE MAY BE TAXED , MAY ALSO BE TAXED AND SHALL BE TAXED ONLY AS USED IN VARIOUS ARTICLES OF THE TREATIES AND ALS O CITED VARIOUS EXAMPLES. HE SUBMITTED THAT WHEREVER THE PHRASE SHALL BE TAXED ONLY IS USED, THEN THE RIGHT HAS BEEN GIVEN TO THE EXCLUSION OF THE OTHER STATE I.E., ONLY ONE CONTRACTING STATE HAS A RIGHT TO TAX. IN CASE OF US E OF EXPRESSION MAY ALSO BE TAXED , THE RIGHT CAN BE SAID TO HAVE BEEN CONFERRED ON B OTH THE COUNTRIES TO TAX THE INCOME AND IN SUCH CASES, INDIA HAS ALSO JURISDICTION TO TAX THE SAME INCOME, AS ONCE THE TAXES HAVE BEEN PAID IN OT HER CONTRACTING STATE WHEREIN THE RATE OF TAX HAS BEEN PROVIDED AND CAP H AS BEEN GIVEN ON SUCH DIFFERENCE, THIS MEANS THAT BOTH THE COUNTRIES HAVE A JURISDICTION TO TAX THE SAID INCOME AND CREDIT HAS TO BE GIVEN WITH REGARD TO THE TAXES PAID. HE ALSO CITED CERTAIN EXAMPLES FROM INDOUS TREATY TO PROVE THIS POINT. HOWEVER, WHERE THE PHRASE USED IS MAY BE TAXED , THIS CANNOT BE INFERRED AS BOTH THE CONTRACTING STATES HAVE THE RIGHT TO TAX THE SAME I NCOME BECAUSE ONCE THE TAX HAS BEEN PAID IN THE OTHER CONTRACTING STATE, T HEN THE STATE OF RESIDENCE HAS TO EXEMPT LEVY OF TAX AND IS PRECLUDED FROM TAX ING THE SAME. 26. THEREAFTER, THE LEARNED SR. COUNSEL REFERRED TO THE JUDGMENT OF HON'BLE SUPREME COURT IN P.V.A.L. KULANDAGAN CHETTIAR (SUPR A). IN THIS JUDGMENT, HE ESSAR OIL LIMITED 21 SUBMITTED, THE HON'BLE SUPREME COURT HAS AFFIRMED T HE DECISION OF S.R.M. FIRM & ORS. (SUPRA) THOUGH FOR DIFFERENT REASONS FR OM THOSE STATED BY THE HIGH COURT. HE ALSO ADMITTED THAT EVEN THOUGH THE H ON'BLE SUPREME COURT HAS REFRAINED ITSELF FOR GIVING ANY KIND OF INTERPR ETATION OF THE PHRASE MAY BE TAXED TO MEAN ANY KIND OF ALLOCATION OF POWER TO TAX BY WHICH CONTRACTING STATE, HOWEVER, THE HON'BLE SUPREME COU RT HAS AFFIRMED THE ENTIRE JUDGMENT OF THE MADRAS HIGH COURT AND HAS AL SO REFERRED TO R.M. MUTHAIAH (SUPRA) CASE. THIS, INTERALIA, MEAN THAT THE RATIO AND THE DECISION OF S.R.M. FIRM & ORS. (SUPRA), WHEREIN THE HIGH COU RT HAS CATEGORICALLY EXPRESSED ITS VIEW ON THE ISSUE OF EXCLUSION OF TAX WHERE THE ENABLING WORDS MAY BE TAXED HAS BEEN USED, STANDS AFFIRMED. ONCE THE TAX HAS B EEN PAID IN FOREIGN COUNTRY ON AN INCOME, THEN THE SAME CANN OT BE TAXED IN INDIA. APART FROM THESE DECISIONS, THE MADHYA PRADESH HIGH COURT IN DCIT V/S TURQUOISE INVESTMENTS AND FINANCE LTD., [2008] 299 ITR 143 (M.P), HAS FOLLOWED THE DECISION OF S.R.M. FIRM & ORS. (SUPRA) AND P.V.A.L. KULANDAGAN CHETTIAR (SUPRA). IN THIS CASE, THE HIGH COURT WHIL E DEALING WITH THE ISSUE OF DIVIDEND INCOME AS GIVEN IN ARTICLE9 OF INDOMALAY SIAN TREATY HAS GIVEN A FINDING THAT THE DIVIDEND INCOME WOULD BE TAXED ONL Y IN THE CONTRACTING STATE WHERE SUCH INCOME HAS ACCRUED. IN THIS ARTICLEXI, THE PHRASE USED IS MAY BE TAXED AND THE HIGH COURT HAS SOLELY RELIED UPON THE REAS ONING GIVEN IN THE DECISION OF MADRAS HIGH COURT IN S.R.M. FIRM & ORS. (SUPRA) WHICH IS EVIDENT FROM PAGES147 TO 150 (ITR PUBLICATION) OF THE JUDGMENT AND ALSO ACKNOWLEDGE THAT THE HON'BLE SUPREME COURT HAS UPHE LD THIS DECISION IN P.V.A.L. KULANDAGAN CHETTIAR (SUPRA)S CASE. THIS J UDGMENT OF THE HIGH COURT HAS BEEN AFFIRMED IN TOTO BY THE HON'BLE SUPREME CO URT IN DCIT V/S TURQUOISE INVESTMENTS AND FINANCE LTD., [2008] 300 ITR 001 (SC). IN THIS CASE, THE HON'BLE SUPREME COURT HAS NOT ONLY AFFIRM ED THE JUDGMENT OF THE HIGH COURT BUT ALSO REAFFIRMED THE REASONING AND T HE JUDGMENT OF S.R.M. FIRM & ORS. (SUPRA) AND ALSO REITERATED THE DECISIO N OF P.V.A.L. KULANDAGAN CHETTIAR (SUPRA). HE SPECIFICALLY DREW OUR ATTENTIO N TO PAGE4 (ITR PUBLICATION) OF THE SAID JUDGMENT. THUS, IN VIEW OF THIS CATEGORICAL LAW WHICH ESSAR OIL LIMITED 22 HAS BEEN APPROVED AND AFFIRMED BY THE HON'BLE SUPRE ME COURT, THERE IS NO SCOPE OF ANY CONTRARY INTERPRETATION ABOUT THE PHRA SE MAY BE TAXED WHICH MEANS THAT ONCE THE TAX HAS BEEN CHARGED IN A PARTI CULAR STATE, THEN IT IS IMPLIED THAT THE SAME WILL NOT BE CHARGED TO TAX BY THE OTHER STATE. THE LEARNED SR. COUNSEL FURTHER SUBMITTED THAT THE TRIB UNAL, PUNE BENCH, IN DCIT V/S PATNI COMPUTER SYSTEM LTD., [2008] 114 ITD 159 (PUNE), HAS CATEGORICALLY SPECIFIED THAT THE DECISION OF R.M. M UTHAIAH (SUPRA) AND S.R.M. FIRM & ORS. (SUPRA) LAYS DOWN THE PREVAILING LEGAL POSITION IN INDIA WHICH HAS BEEN AFFIRMED BY THE HON'BLE SUPREME COURT IN AZADI BACHAO ANDOLAN (SUPRA) AND P.V.A.L. KULANDAGAN CHETTIAR (SUPRA) AN D THAT ONCE THE INCOME IS HELD TO BE TAXABLE IN A TAX JURISDICTION UNDER T HE DTAA, UNLESS THERE IS A SPECIFIC MENTION THAT IT CAN ALSO BE TAXED IN THE O THER TAX JURISDICTION, THE OTHER TAX JURISDICTION IS DENUDED OF ITS POWER TO T AX THE SAME. HE DREW OUR SPECIFIC CONTENTIONS TO PAGES167 AND 168 (ITD PUBL ICATION) OF THE ORDER WHEREIN THIS ISSUE HAS BEEN CLARIFIED IN DETAIL. 27. REGARDING RELIANCE PLACED BY THE LEARNED DEPARTMENT AL REPRESENTATIVE ON AAR RULING IN S. MOHANS CASE (SUPRA), HE SUBMIT TED THAT FIRST OF ALL THE SAID DECISION CANNOT BE HELD TO BE APPLICABLE AS IN THAT CASE, THE ASSESSEE WAS A RESIDENT OF NORWAY WHO WORKED IN NORWAY AND T HEREFORE, THERE WAS NO QUESTION OF TAXING HIS INCOME IN INDIA. INSOFAR AS THE INTERPRETATION OF THE WORDS MAY BE TAXED AS GIVEN BY THE AAR IS WHOLLY CONTRADICTORY TO THE LAW LAID DOWN BY THE HIGH COURT AND AS APPROVED BY THE HON'BLE SUPREME COURT. THE TRIBUNAL, MUMBAI BENCH, IN MS. POOJA BHATT V/S DCIT, [2008] 26 SOT 574 (MUM.) HAS GIVEN A VERY DETAIL REASONING AS TO WHY THE AAR RULING IN S. MOHAN (SUPRA) CANNOT BE FOLLOWED IN THIS CASE. THE TRIBUNAL HAS AGAIN AFTER CONSIDERING THE VARIOUS PHRASES USED IN DIFFERENT A RTICLES OF THE TREATY, HAS HELD THAT INSOFAR AS THE EXPRESSION MAY BE TAXED IN OTHER CONTRACTING STATE HAS BEEN USED, THEN IT MEANS THAT THE ONLY THE CONT RACTING STATE OF THE SOURCE HAS THE AUTHORITY TO TAX SUCH AN INCOME AND RESIDENT STATE IS PRECLUDED FROM TAXING SUCH AN INCOME. IN THIS PRESE NT CASE ALSO, THE ESSAR OIL LIMITED 23 JUDGMENTS OF HON'BLE SUPREME COURT IN P.V.A.L. KULA NDAGAN CHETTIAR (SUPRA), TURQUOISE INVESTMENTS AND FINANCE LTD. (SU PRA) AND HIGH COURT DECISION IN S.R.M. FIRM & ORS. (SUPRA) AND R.M. MUT HAIAH (SUPRA) WAS REFERRED AND RELIED UPON TO ARRIVE AT THIS CONCLUSI ON. HE DREW OUR SPECIFIC ATTENTION TO PARAS6 TO 10 OF THE SAID ORDER. REGAR DING THE DECISION OF THE TRIBUNAL, CHENNAI BENCH, IN DATA SOFTWARE RESEARCH CO. PVT. LTD. (SUPRA) AS RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTAT IVE, HE SUBMITTED THAT THE TRIBUNAL HAS FAILED TO CONSIDER ANY OF THE JUDG MENTS OF HIGH COURT AND THE SUPREME COURT. SUCH A JUDGMENT IS CONTRARY TO T HE VIEW AND LAW LAID DOWN BY THE HIGH COURT AND THE SUPREME COURT AND, T HEREFORE, THE SAME COULD NOT BE FOLLOWED. AS REGARDS RELIANCE PLACED B Y THE LEARNED D.R. ON THE DECISION OF THE TRIBUNAL, DELHI BENCH, IN TELECOMMU NICATION CONSULTANT INDIA LTD. (SUPRA), THE LEARNED SR. COUNSEL SUBMITTED THA T EVEN THOUGH BEFORE THE TRIBUNAL ALL THESE DECISIONS WERE CITED INCLUDING T HAT OF THE ASSESSEES OWN CASE (I.E., ESSAR OIL). HOWEVER, THE TRIBUNAL, WHIL E GIVING ITS FINDING HAS COMPLETELY OMITTED TO CONSIDER THESE JUDGMENTS AND HAS ONLY DISTINGUISHED THE JUDGMENT OF P.V.A.L. KULANDAGAN CHETTIAR (SUPRA ). THE TRIBUNAL HAS PLACED HEAVY RELIANCE ON OECD COMMENTARY WHICH HAS BEEN SPECIFICALLY HELD TO BE NOT APPLICABLE IN INDIA BY THE MADRAS HIGH CO URT IN S.R.M. FIRM & CO. (SUPRA). THUS, THIS DECISION CANNOT BE SAID TO HAVE ANY BINDING PRECEDENCE, AS IT COMPLETELY LOST SIGHT OF THE RATIO LAID DOWN BY THE HIGH COURT IN S.R.M. FIRM & ORS. (SUPRA) AND R.M. MUTHAIAH (SUPRA), WHIC H HAVE BEEN AFFIRMED AND APPROVED BY THE HON'BLE SUPREME COURT. 28. LASTLY, ON THIS ISSUE, HE SUBMITTED THAT SECTION 5 OF THE ACT IS SUBJECT TO OTHER PROVISIONS OF THE ACT, WHICH INCLUDES SECT ION 90 AS HELD BY THE HON'BLE SUPREME COURT IN AZADI BACHAO ANDOLAN (SUPR A)S CASE. WHEREVER THERE IS A PROVISION FOR GRANTING OF RELIEF UNDER D TAA, IT CONNOTES MAINLY GIVING CREDIT OF TAXES AND WHEREVER THE TREATY SPEA KS OF AVOIDANCE OF DOUBLE TAXATION OF INCOME, THEN IT MEANS IT CANNOT BE TAXE D IN EITHER OF THE CONTRACTING STATES. AFTER GIVING HIS DETAILED REASO NING AND THE ARGUMENTS, HE ESSAR OIL LIMITED 24 SUBMITTED DATE WISE CHRONOLOGY OF THE JUDGMENT AND CASES, SO AS TO ESTABLISH THAT THE LAW RELATING TO MAY BE TAXED IS STILL THE SAME AS WOULD BE APPLICABLE FOR THE YEAR UNDER APPEAL IN CASE OF THE ASSESSEE. FOR THE SAKE OF READY REFERENCE, THE CHRONOLOGY OF THE DATES AND TH E REMARK SUBMITTED BY THE LEARNED SR. COUNSEL IS REPRODUCED HEREIN BELOW: JUDGMENT DATE ISSUING AUTHORITY REMARKS CIT V/S R.M. MUTHAIAH 11.12.1992 KARNATAKA HIGH COURT A) ACCEPTED BY THE REVENUE AS NO APPEAL TO THE SUPREME COURT B) SPECIFICALLY APPRO VED IN AZADI CIT V/S SRM FIRM & ORS. 15.03.1994 MADRAS HIGH COURT A) FOLLOWS MUTHAIAH WHICH IS APPROVED BY SUPREME COURT B) AFFIRMED BY SUPREME COURT IN CHETTAIR UNION OF INDIA & ANR. V/S AZADI BACHAO ANDOLAN & ANR. 07.10.2003 SUPREME COURT MUTHAIAH APPROVED SECTION 90(3) 01.04.2004 REPEALED ON 30.9.09 CIT V/S KULANDAGAN CHETTAIR 26.05.2004 SUPREME COURT AFFIRMS THE CONCLUSION OF SRM FIRM. DOES NOT DOUBT HIGH COURTS REASONING. DCIT V/S TURQUOISE INVESTMENTS FINANCE LTD. 28.03.2006 M.P. HIGH COURT HOLDS THAT THE SUPREME COURT IN CHETTAIR SQUARELY UPHOLDS THE DECISION OF THE MADRAS HIGH COURT IN SRM FIRM ASSESSEES CASE FOR A.Y. 9900 TO 0001 31.01.2007 ITAT DCIT V/S PATNI COMPUTER SYSTEMS REVENUE SUPPORTED AZADI VIEW 29.06.2007 ITAT HOLDS THAT AZADI APPROVES MUTHAIAH AND SRM FIRM IN RE : S. MOHAN 24.08.2007 AAR IN POOJA BHATTS CA SE TRIBUNAL HOLDS THAT ESSAR OIL LIMITED 25 THE AAR DECISION IS GIVEN WITHOUT CONSIDERING THE SCHEME OF TAXATION UNDER THE TREATY. ITO V/S DATA SOFTWARE RESEARCH CO. PVT. LTD. 27.11.2007 ITAT IN VIEW OF BINDING SUPREME COURT DECISION, THIS DECISION WILL NOT BE APPLICABLE. ASSESSEES CASE FOR A.Y. 200102 31.12.2007 ITAT ALLOWED IN FAVOUR OF THE ASSESSEE ON SAME FACTS AND ISSUE. DCIT V/S TURQUOISE INVESTMENTS & FINANCE LTD. 20.02.2008 SUPREME COURT HOLDS THAT THE REASONING IN THE HIGH COURTS DECISION IN SRM FIRM AND OF THE SUPREME COURT IN CHETTAIR CONCLUDES ALL THE POINTS IN APPEAL BEFORE IT. POOJA BHATT V/S DY. CIT 20.08.2008 ITAT FOLLOWS SRM FIRM & MUTHAIAH, TURQUOISE, ETC., DISSENTS FROM S. MOHAN. NOTIFICATION NO.91 OF 2008 28.08.2008 CBDT ISSUED UNDER OLD SECTION 90(3) IN ASSESSEES APPEAL FOR A.Y. 200203 08.09.2008 ITAT TRIBUNAL ALLOWED IN FAVOUR. ASSESSEES CASE FOR A.Y. 19992000 16.10.2008 HIGH COURT DEPTT. APPEAL DISMISSED AND TRIBUNAL ORDER WAS CONFIRMED. ASSESSEES CASE FOR A.Y. 200001 16.10.2008 HIGH COURT DEPTT. APPEAL DISMISSED AND TRIBUNAL ORDER WAS CONFIRMED. NEW SECTION 90 INCLUDING SUBSECTION (3) 01.10.2009 EXPLANATION 3 TO SECTION 90 01.10.2009 APPLIES TO NOTIFICATIONS ISSUED UNDER NEW SECTION 90(3) ASSESSEES CASE FOR A.Y. 200203 07.07.2011 HIGH COURT DEPTT. APPEAL DISMISSED AND TRIBUNAL ORDER WAS ESSAR OIL LIMITED 26 CONFIRMED. ASSESSEES CASE FOR A.Y. 200304 12.08.2011 ITAT DEPTT. APPEAL DISMISSED AND TRIBUNAL ORDER WAS CONFIRMED. TELECOMMUNICATIONS CONSULTANTS INDIA LTD. V/S ACIT 29.03.2012 ITAT CONTRARY TO BINDING SUPREME COURTS DECISIONS 29. COMING TO THE MAIN ARGUMENT OF THE LEARNED DEPARTME NTAL REPRESENTATIVE WITH REGARD TO THE AMENDMENT IN SECT ION 90, WHEREBY SUB SECTION (3) WAS INSERTED FROM THE ASSESSMENT YEAR 2 00405 AND THE NOTIFICATION NO.91 OF 2008, DATED 28 TH AUGUST 2008, ISSUED IN PURSUANCE THEREOF WHICH HAS THE EFFECT OF NEGATING THE EARLIE R DECISIONS RENDERED BY THE HIGH COURT AND ALSO AS AFFIRMED BY THE HON'BLE SUPR EME COURT, THE LEARNED SR. COUNSEL, MR. DASTUR, HAS MADE MANIFOLD ARGUMENT S BEFORE US. HIS FIRST AND FOREMOST CONTENTIONS ARE THAT SUBSECTION (3) O F SECTION 90, USES THE EXPRESSION ANY TERM WHICH IS USED IN THE AGREEMENT WHICH UNDERTAKES TO MEAN SOME KIND OF NOUN (PROPER OR COMMON) WHICH POI NTS OUT TO SOMETHING DEFINED. HE GAVE VARIOUS EXAMPLES OF VARIOUS TERMS AS DEFINED IN THE TREATIES. HE POINTED OUT THAT EVEN THE HIGH COURT I N S.R.M. FIRM & ORS. (SUPRA), WHILE USING THE PHRASE MAY BE TAXED HAS USED THE WORD ENABLING WORDS AND NOT TERM . HE POINTED OUT THE RELEVANT PORTION OF THE SAID DECISION SPECIFICALLY AT PAGES414 AND 422 (ITR PUB LICATION) OF THE SAID JUDGMENT. EVEN IN THE DECISION OF TURQUOISE INVESTM ENTS AND FINANCE LTD., THE MADHYA PRADESH HIGH COURT HAS USED THE SAID PHR ASE MAY BE TAXED AS WORDS. VARIOUS DICTIONARY MEANINGS WERE PROVIDED BE FORE US FOR THE MEANING OF THE USAGE OF THE WORD TERM . THUS, THE NOTIFICATION NO.91 ISSUED BY THE CBDT, HAS USED THE PHRASE MAY BE TAXED AS TERM WHICH IS NOT CORRECT AS IT DOES NOT COME WITHIN THE AMBIT OF THE WORD TERM . SECTION 90(3) MAKES IT ABUNDANTLY CLEAR THAT THE GOVERNMENT CAN ISSUE NOTI FICATION ONLY WITH REGARD TO ANY TERM WHICH HAS NOT BEEN DEFINED UNDER THE INCOME TAX AC T, 1961, OR IN THE AGREEMENT AND NOT TO ANY SIMPLE PHRASE OR WORD. HIS SECOND LIMB ESSAR OIL LIMITED 27 OF ARGUMENT ON THE NOTIFICATION NO.91 ISSUED BY THE CBDT ON 28 TH AUGUST 2008 IS THAT, IT IS BEYOND THE SCOPE OF SECTION 90( 3) WHEREIN THE GOVERNMENT IS EMPOWERED TO ISSUE NOTIFICATION TO CLARIFY THE T ERMS USED IN THE AGREEMENT WHICH IS NOT DEFINED EITHER IN THE ACT OR IN THE AG REEMENT. HE SUBMITTED THAT IN VIEW OF THE EXPRESSED LAW LAID DOWN BY THE HIGH COURTS AND THE SUPREME COURT AS CITED ABOVE, THAT WHEREVER AN ARTICLE IN D TAA PROVIDES THAT INCOME OF A RESIDENT OF INDIA MAY BE TAXED IN OTHER STATE, IT MEANS THAT OTHER STATE ALONE HAS A RIGHT TO TAX THE INCOME AND INDIA IS BARRED FROM TAXING IT, THE NOTIFICATION ISSUED BY THE GOVERNMENT IS CONTRA RY TO THE LAW LAID DOWN BY THE HON'BLE SUPREME COURT. THE CONTEXT REQUIRES THA T THE PHRASE MAY BE TAXED DOES NOT GIVE AN OPTION TO THE COUNTRY OF RESIDENC E TO TAX THE INCOME IN QUESTION AND IT DISABLES IT FROM TAXING SUCH INC OME AND THE TAXING JURISDICTION IS CONFERRED ON THE OTHER STATE I.E., COUNTRY OF SOURCE. THE SAID NOTIFICATION ISSUED BY THE CBDT IS DIAMETRICALLY OP POSITE TO THE LAW EXPRESSED BY THE HON'BLE SUPREME COURT AND, HENCE, SUCH A NOT IFICATION CANNOT BE SAID TO BE CONSISTENT WITH THE PROVISIONS EXPRESSED IN S ECTION 90(3) WHICH SPECIFICALLY PROVIDES THAT NOTIFICATION CANNOT BE I NCONSISTENT WITH THE PROVISIONS OF THIS ACT OR THE AGREEMENT. ONCE THE S UPREME COURT HAS INTERPRETED THE WORD MAY BE TAXED , IT IS THE LAW OF THE LAND WHICH IS BINDING ON EVERYONE UNDER ARTICLE 141 OF THE CONSTITUTION AND ANY NOTIFICATIO N ISSUED CONTRARY TO SUCH A LAW CANNOT BE GIVEN EFFECT AND NO CREDENCE CAN BE G IVEN TO SUCH CIRCULAR OR NOTIFICATION. IN SUPPORT OF THIS CONTENTIONS, HE PL ACED STRONG RELIANCE ON THE DECISION OF THE CONSTITUTIONAL BENCH OF THE HON'BLE SUPREME COURT IN COMMISSIONER OF CENTRAL EXCISE V/S RATAN MELTING AN D WIRE INDUSTRIES, [2008] 14 DTR 324 (SC), WHEREIN IT HAS BEEN HELD TH AT WHEN THE SUPREME COURT AND HIGH COURT DECLARES THE LAW, THEN IT WOUL D NOT BE APPROPRIATE THAT THE COURT SHOULD FOLLOW ANY CIRCULAR WHICH IS CONTR ARY TO SUCH LAW AND IT HAS NO EXISTENCE IN THE EYES OF LAW. FURTHER, RELIANCE WAS PLACED ON THE DECISION OF THE SUPREME COURT IN HINDUSTAN AERONAUTIC V/S CI T, [2000] 243 ITR 808 (SC) AND THE DECISION OF JURISDICTIONAL HIGH COURT IN TATA IRON & STEEL LTD. ESSAR OIL LIMITED 28 V/S N.C. UPADHYAYA, [1974] 96 ITR 001 (BOM.) IN SUP PORT OF THE SAME CONTENTION. 30. MR. DASTURS THIRD LIMB OF ARGUMENT WAS THAT THE NO TIFICATION WHICH IS SAID TO HAVE BEEN ISSUED UNDER SECTION 90(3), IMPOS ES A TAX LIABILITY AND, HENCE, IT HAS TO BE CONSTRUED IN A VERY STRICT MANN ER AND BURDEN IS ON THE REVENUE THAT ITEM IS IN QUESTION IS WITHIN THE AMBI T OF THE PROVISIONS IMPOSING A TAX. THE NOTIFICATION CANNOT OVERRULE TH E DECISION OF THE SUPREME COURT OR ANY LAW APPROVED BY IT AS IT IS BINDING IN ALL THE COURTS UNDER ARTICLE 141 OF THE CONSTITUTION. ONCE PRIOR TO THE NOTIFICA TIONS THERE WERE SEVERAL DECISION OF THE HIGH COURT AND ALSO APPROVED BY THE SUPREME COURT, THEN SUCH A WELL SETTLED LAW CANNOT BE SET AT NAUGHT BY THE NOTIFICATION. IN THE PRESENT CASE, THE JURISDICTIONAL HIGH COURT IN ASSE SSEES OWN CASE HAS GIVEN A RULING IN FAVOUR OF THE ASSESSEE BY UPHOLDING THE DECISION OF THE TRIBUNAL, THAT THE INCOME WHICH HAS BEEN TAXED IN OMAN CANNOT BE TAXED IN INDIA. THEREFORE, SUCH A NOTIFICATION CANNOT OVERRULE THE BINDING PRECEDENCE OF THE JURISDICTIONAL HIGH COURT IN CASE OF THE ASSESSEE. 31. THE LEARNED SR. COUNSEL, MR. DASTUR, FURTHER RAISED AN IMPORTANT CONTENTION THAT SUB-SECTION (3) OF SECTION 90, HAS BEEN OMITTED BY FINANCE (NO.2) ACT, 2009 WITH EFFECT FROM 1 ST OCTOBER 2009 AND HAS BEEN SUBSTITUTED BY A NEW SUB-SECTION (3). THE NOTIFICATION BY THE G OVERNMENT OF INDIA WAS ISSUED ON 28 TH AUGUST 2008, I.E., UNDER THE OLD SUB-SECTION (3). NOW, ON ACCOUNT OF THE OMISSION OF THE OLD SUB-SECTION (3), UNDER WHICH THE NOTIFICATION WAS ISSUED, THE SAID NOTIFICATION NO L ONGER REMAINS IN EXISTENCE. SINCE THE OLD SUB-SECTION (3) IS NO LONGER IN EXIST ENCE, THE NOTIFICATION ISSUED THERE UNDER ALSO CANNOT SURVIVE SINCE THE VERY PROV ISION UNDER WHICH IT WAS ISSUED NO LONGER REMAINS IN THE STATUTE. THE MERE F ACT THAT THE OLD SUB- SECTION (3) AND THE NEW SUB-SECTION (3) ARE SIMILAR LY WORDED CANNOT AFFECT THE AFORESAID PROPOSITION. HE SUBMITTED THAT REPEAL OF AN ACT IS DIFFERENT FROM OMISSION OF A PROVISION AND ONLY IN REPEAL OF AN ACT, NOTIFICATIONS ISSUED THERE UNDER ARE SAVED BY SECTION 297(2)(K) A ND (I). HERE, THE ENTIRE ESSAR OIL LIMITED 29 SECTION WAS SUBSTITUTED BY THE FINANCE ACT, 2009, A ND NEW SECTION WAS BROUGHT IN THE STATUTE W.E.F. 1 ST OCTOBER 2009, AND SUCH A SUBSTITUTION AMOUNTS TO OMISSION ONLY. FOR THE DIFFERENCE BETWEE N REPEAL AND OMISSION , HE REFERRED AND RELIED UPON THE JUDGMENT OF THE C ONSTITUTIONAL BENCH OF THE HON'BLE SUPREME COURT IN RAYALA CORPOR ATION (P) LTD. & ORS V/S DIRECTORATE OF ENFORCEMENT, 1970 AIR 494. IN THIS J UDGMENT, THE HON'BLE SUPREME COURT WAS DEALING WITH SIMILAR ISSUE WHERE THE NOTIFICATION ISSUED BY GOVERNMENT ON A PROVISION OF A RULE WHICH WAS OM ITTED AND IN PLACE NEW PROVISION WAS ENACTED; THE HON'BLE SUPREME COURT HE LD THAT ANY ACTION TAKEN UNDER THE NOTIFICATION WILL CEASE TO OPERATE AS THE ENABLING RULE HAS BEEN OMITTED. SIMILAR LAW HAS BEEN EXPRESSED BY THE HON'BLE SUPREME COURT IN KOLHAPUR CANESUGAR WORKS LTD. V/S UNION OF INDIA , 2000 AIR SC 811. THE TRIBUNAL ORDER OF MUMBAI BENCH IN WNS GLOBAL SERVIC ES PVT. LTD. ITA NO.2566/MUM./2009, WAS ALSO RELIED UPON. ACCORDINGL Y, HE SUBMITTED THAT THE SAID NOTIFICATION CANNOT BE RELIED UPON OR CAN BE BROUGHT INTO OPERATION ANY MORE AFTER THE SUBSTITUTION OF NEW SECTION. THI S ASPECT OF THE ARGUMENT WAS HEAVILY RELIED UPON BY THE LEARNED SR. COUNSEL. 32. MR. DASTUR FURTHER ARGUED THAT, SUB-SECTION (3) WAS INSERTED IN SECTION 90 WITH EFFECT FROM 1 ST APRIL 2004 TO EMPOWER THE CENTRAL GOVERNMENT TO ISSUE A NOTIFICATION THERE UNDER. THE CENTRAL GOVER NMENT ISSUED NOTIFICATION NO. 91/2008 DATED 28 TH AUGUST 2008 AFTER A PERIOD OF 4 YEARS. EVEN AFTER ITS ISSUE, THE NOTIFICATION HAS NEVER BEEN PRESSED INTO SERVICE TILL THE PRESENT CASE AND THAT TOO ONLY IN ARGUMENTS BY THE DR BEFOR E THE TRIBUNAL. EARLIER IN ALL THE DECISIONS, THIS NOTIFICATION HAS NOT BEEN R ELIED UPON. THE NOTIFICATION, IF AT ALL, WILL APPLY FROM THE PERIOD 28 TH AUGUST 2008 TO 30 TH SEPTEMBER 2009 ( I.E., THE DATE WHEN THE OLD SUB-SECTION (3) WAS O MITTED) AND DEFINITELY NOT IN THE ASSESSMENT YEAR 2004-05. 33. LASTLY, WITH REGARD TO THE EXPLANATION (3) TO SECTI ON 90, WHICH HAS BEEN BROUGHT BY THE FINANCE ACT, 2012, WITH RETROSP ECTIVE EFFECT FROM 1 ST OCTOBER 2009, MR. DASTUR, SUBMITTED THAT IT WILL NO T ALTER THE POSITION IN CASE ESSAR OIL LIMITED 30 OF THE ASSESSEE AS EXPLANATION 3 TO SECTION 90 HAS BEEN INSERTED IN THE STATUTE WITH EFFECT FROM 1 ST OCTOBER 2009 AND APPLIES WHERE A MEANING IS ASSIGNED TO A TERM BY A NOTIFICATION ISSUED UNDER S UB-SECTION (3) OF SECTION 90. AS THE EXPLANATION HAS BEEN ADDED TO THE SUBSTI TUTED OR NEW SUB-SECTION (3), THEREFORE, IT WILL APPLY TO A NOTIFICATION, IF ANY, ISSUED UNDER THE NEW SUB-SECTION (3). THE PRESENT NOTIFICATION IN QUESTI ON HAS NOT BEEN ISSUED UNDER THE NEW SUB-SECTION (3) AND, THEREFORE, THE E XPLANATION (3) HAS NO APPLICATION HERE IN THIS CASE. FURTHER, EXPLANATION (3) REQUIRES THAT THE NOTIFICATION MUST BE IN FORCE, WHEREAS THE PRESENT NOTIFICATION IS NO LONGER IN FORCE. THIS IS FURTHER SUPPORTED BY THE FACT THAT E XPLANATION (3) IS GIVEN RETROSPECTIVE EFFECT FROM 1 ST OCTOBER 2009 ONLY (BEING THE DATE WHEN THE NEW SUB-SECTION (3) WAS INSERTED) AND NOT FROM 1 ST APRIL 2004, (WHEN THE OLD SUB-SECTION (3) WAS INSERTED). THIS, INTERALIA, ME ANS THAT EXPLANATION (3) CANNOT BE GIVEN RETROSPECTIVE EFFECT I.E., PRIOR TO 1 ST OCTOBER 2009. IF AT ALL, THE EXPLANATION (3) WILL APPLY ONLY TO A NOTIFICATI ON ISSUED AFTER 1 ST OCTOBER 2009 AND NOT PRIOR TO IT. 34. THUS, THE NOTIFICATION ISSUED ON THE BASIS OF EARLI ER PROVISIONS OF SECTION 90(3), WHICH HAS BEEN OMITTED, THIS NOTIFIC ATION DOES NOT SURVIVE. IN SUPPORT OF THE PROPOSITION OF LAW, HE REITERATED TH E RELIANCE PLACED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN RAYALA CORPORA TION PVT. LTD. & ORS. (SUPRA) AND ALSO THE DECISION OF MUMBAI BENCH OF TH E TRIBUNAL IN WNS GLOBAL SERVICES PVT. LTD. (SUPRA) AND SUBMITTED THAT ONCE THE SECTION HAS BEEN OMITTED, THEN ANY ACTION TAKEN IN PURSUANCE OF SUCH PROVISION CANNOT BE ENFORCED. THEREFORE, ANY NOTIFICATION WHICH HAS BEE N ISSUED PRIOR TO 1 ST OCTOBER 2009, IT HAS NO EFFECT AND NO COGNIZANCE CA N BE TAKEN. IT IS ONLY WHEN ANY CIRCULAR AND NOTIFICATION IS ISSUED AFTER 1 ST OCTOBER 2009, CAN BE SAID TO HAVE SOME APPLICATION, IF AT ALL. IN SUPPOR T OF THIS CONTENTION, THE DECISION OF THE HON'BLE SUPREME COURT IN CIT V/S KE RALA ELECTRIC WORKS, 261 ITR 721 (SC) WAS RELIED UPON. ESSAR OIL LIMITED 31 35. LASTLY, THE LEARNED SR. COUNSEL, MR. DASTUR, CONCLU DED THAT THE NOTIFICATION ISSUED BY THE CBDT WILL HAVE NO RELEVA NCE, FIRSTLY, IT HAS BEEN ISSUED CONTRARY TO THE LAW LAID DOWN BY THE HON'BLE SUPREME COURT; SECONDLY, IT HAS BEEN ISSUED ON 1 ST AUGUST 2008, AND WILL NOT HAVE RETROSPECTIVE EFFECT SO AS TO GIVE ANY INTERPRETATI ON IN THE ASSESSMENT YEAR PRIOR TO THE ASSESSMENT YEAR 200809 AND SECONDLY, SUBSECTION (3) OF SECTION 90, IN PURSUANCE OF WHICH THE SAID NOTIFICA TION WAS ISSUED, HAS BEEN SUBSTITUTED BY THE FINANCE ACT, 2012, WITH RETROSPE CTIVE EFFECT FROM 1 ST OCTOBER 2009 AND, HENCE, THIS NOTIFICATION IS NO LO NGER IN EXISTENCE AND CANNOT BE ENFORCED. 36. THE LEARNED DEPARTMENTAL REPRESENTATIVE, MR. MAHESH KUMAR IN REJOINDER, SUBMITTED THAT FIRST OF ALL, ALL THESE J UDGMENTS RELIED UPON BY THE LEARNED SR. COUNSEL DO NOT LAY DOWN ANY LAW REGARDI NG THE INTERPRETATION OF THE PHRASE MAY BE TAXED . NO DISTINCTION HAS BEEN MADE BY THE COURT WITH REGARD TO THE VARIOUS PHRASES USED IN THE ARTICLES LIKE SHALL BE TAXED OR MAY BE TAXED . RELYING UPON THE DECISION OF THE HON'BLE SUPREME COURT IN CIT V/S SUN ENGINEERING WORKS P. LTD., [1992] 198 I TR 297 (SC), HE SUBMITTED THAT THE JUDGMENT HAS TO BE READ IN THE C ONTEXT IN WHICH IT HAS BEEN RENDERED AND THE QUESTIONS ON WHICH THE SAID D ECISION WAS GIVEN, PICKING UP OF WORDS AND PHRASES FROM HERE AND THERE DO NOT LAY DOWN THE CORRECT PROPOSITION OF LAW. THE ISSUE BEFORE THE KA RNATAKA HIGH COURT IN R.M. MUTHAIAH (SUPRA)S CASE WAS WHETHER THE AGREEMENT E NTERED INTO BETWEEN THE GOVERNMENT OF INDIA AND GOVERNMENT OF MALAYSIA TAKES AWAY POWER OF THE INDIAN GOVERNMENT TO LEVY TAX IN RESPECT OF THE INCOME RECEIVED FROM VARIOUS SOURCES REFERRED TO IN THE SAID AGREEMENT. THEREFORE, THE HIGH COURT WAS NOT ADJUDICATING THE ISSUE OF THE PHRASE MAY BE TAXED AS BEING USED WORLD OVER. FURTHER, NEITHER ANY OF THE COMMENTARIE S NOR ANY INTERNATIONAL VIEW WAS CONSIDERED BY THE HIGH COURT WITH REGARD T O THE INTERPRETATION NOR THE MEANING OF THE PHRASE MAY BE TAXED. THE HIGH COURT HAS MISSED A VERY VITAL POINT THAT INTENTION OF THE CONTRACTING PARTIES HAS TO BE CONSIDERED ESSAR OIL LIMITED 32 WHILE ASSIGNING ANY MEANING TO ANY PHRASE USED IN T HE TREATY. THIS ASPECT HAS NOT BEEN DEALT UPON BY THE HIGH COURT IN ANY MA NNER. MOREOVER, THE AGREEMENT WITH MALAYSIA WAS REVISED IN THE YEAR 200 4 AND PROTOCOL ADDED THEREIN CLEARLY PROVIDES THAT RIGHT TO TAX UNDER AR TICLE 6 WHICH WAS THE SUBJECT MATTER OF THE APPEAL BEFORE THE HIGH COURT HAS BEEN GIVEN TO THE COUNTRY OF THE RESIDENT. THIS SHOWS THAT THE INTENT ION OF THE PARTIES WERE NOT TO GIVE EXCLUSIVE RIGHT TO THE COUNTRY OF SOURCE ON LY. THE HIGH COURT WAS DEALING WITH THE OLD TREATY WHICH HAS UNDERGONE A M AJOR CHANGE AFTER THE INTRODUCTION OF MODEL CONVENTION OF THE TREATY WHIC H CLEARLY PROVIDES ALLOCATION OF JURISDICTION OF TAX AND DISTRIBUTION RULES. AFTER THE MODEL CONVENTION, OECD COMMENTARY AND INTERNATIONAL CONVE NTION, HAVE BEEN INTRODUCED WHICH HAVE CLARIFIED THE PHRASE MAY BE TAXED AS GIVING TAXING RIGHT TO BOTH THE JURISDICTION AND CREDIT OF TAXES ARE GIVEN AS PER THE VARIOUS ARTICLES OF THE TREATIES. THE OMAN AND QATAR TREATY ARE BASED ON MODEL CONVENTION AND, HENCE, THE INTERNATIONAL VIEW SHOUL D BE TAKEN INTO CONSIDERATION. SIMILARLY, IN S.R.M. FIRM & ORS. (SU PRA)S CASE, THE SAME WAS BASED ON OLD MALAYSIAN TREATY WHEN NO PROPER COMMEN TARY AND OECD COMMENTARY WERE AVAILABLE. FURTHER, IN THIS CASE AL SO, NO DISTINCTION HAS BEEN MADE BETWEEN WHAT IS MEANT BY THE PHRASE MAY BE TAXED AND THE MEANING OF SHALL BE TAXED . THE FORMAT AND THE APPROACH OF THE OLD TREATY AND THE TREATY BASED ON THE MODEL CONVENTION ARE QU ITE DIFFERENT. FOR E.G., EARLIER TREATIES DID NOT HAVE ANY CONCEPT OF CAPITA L OR OTHER SOURCES. THE JUDGMENT OF S.R.M. FIRM & ORS. (SUPRA) IS NOT AN AU THORITY ON THE INTERPRETATION OF THE PHRASE MAY BE TAXED BECAUSE THE SAID JUDGMENT WAS THE SUBJECT MATTER OF APPEAL BEFORE THE HON'BLE SUP REME COURT IN P.V.A.L. KULANDAGAN CHETTIAR (SUPRA)S CASE, WHEREIN THE HON 'BLE SUPREME COURT HAS CATEGORICALLY EXPRESSED THAT THEY ARE NOT DEALING O R DECIDING THE MEANING OF THE EXPRESSION MAY BE TAXED AND HAS UPHELD THE DECISION OF THE HIGH COURT ON ALTOGETHER DIFFERENT REASON. THUS, THE HON'BLE S UPREME COURT DID NOT CONSIDER THE ISSUE AS SETTLED. IN ANY CASE, IF THE TERM OR EXPRESSION GIVEN IN THE TAX TREATY HAS NOT BEEN DEFINED OR IN THE DOMES TIC LAWS, THEN ESSAR OIL LIMITED 33 COMMENTARIES CAN BE REFERRED TO AND RELIED UPON. TH IS VIEW HAS BEEN EXPRESSED BY THE JURISDICTIONAL HIGH COURT IN DIT V /S BALAJI SHIPPING U.K. LTD. IN INCOME TAX APPEAL NO.3024 OF 2009, ORDER DA TED 6 TH AUGUST 2012 AND ALSO BY THE TRIBUNAL, MUMBAI BENCH, IN ADIT V/S FED ERAL EXPRESS CORPORATION, [2010] 125 ITD 001 (MUM.). THE COPIES OF THESE JUDGMENTS WERE FURNISHED BEFORE US. 37. THE LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER REF ERRED TO THE VIEWS OF THE PROF. KLAUS VOGEL ON DOUBLE TAXATION CONVENTION WHEREIN, HE HAS EXPRESSED THAT WHEREVER THE MODEL CONVENTION USES T HE WORDS MAY BE TAXED THEN IT REFERS TO THE STATE OF SOURCE, HOWEVER, TH E LEGAL CONSEQUENCES IN THE STATE OF RESIDENCE REMAINS OPEN. THE TAXATIO N IS LEFT TO THE STATE OF SOURCE IN SOME CASES SUBJECT TO LIMITATION IN THE A MOUNT. HE ALSO REFERRED TO THE MEANING OF THE PHRASE SHALL BE TAXED AS EXPRESSED BY THE LEARNED AUTHOR. THEREAFTER, HE ALSO REFERRED TO THE OECD CO MMENTARY WHICH HAS BEEN REFERRED TO AND RELIED UPON BY THE TRIBUNAL, D ELHI BENCH, IN TELECOMMUNICATION CONSULTANT INDIA LTD. (SUPRA). 38. REPLYING ON THE ISSUE WHETHER THE HON'BLE SUPREME C OURT IN AZADI BACHAO ANDOLAN (SUPRA)S CASE HAS LAID DOWN A LAW O N THE PHRASE MAY BE TAXED , HE SUBMITTED THAT IT IS NOT SO, BECAUSE THE HON'B LE SUPREME COURT WAS MAINLY DEALING WITH THE ARTICLE13 OF MAURITIUS DTAA WHEREIN THE WORDS USED WERE SHALL BE TAXED AND THE ISSUE WAS MORE OF ROUTING OF MONEY THROUGH TAX HAVEN AND THE PRIMACY OF THE SECTION 90 VISAVIS SECTIONS 4 AND 5 OF THE ACT. HE POINTED OUT CERTAIN OBSERVATIO NS OF THE HON'BLE SUPREME COURT AS GIVEN IN PAGE722 (OF THE INCOME TAX REPOR T) THAT THE REASONING ON WHICH THE DECISION OF R.M. MUTHAIAH (SUPRA) HAS BEE N AFFIRMED BY THE HON'BLE SUPREME COURT IS WITH REGARD TO THE PRIMACY OF SECTION 90 OVER THE OTHER PROVISION OF THE ACT AND WHETHER SECTIONS 4 & 5 WAS THE SUBJECT TO THE PROVISIONS OF SECTION 90 OR NOT. IT WAS IN THIS REG ARD THAT THE HON'BLE SUPREME COURT HAS APPROVED MANY SUCH CASES WHICH IN CLUDED R.M. MUTHAIAH (SUPRA)S CASE. HENCE, NO LAW HAS BEEN LAID DOWN BY THE HON'BLE SUPREME ESSAR OIL LIMITED 34 COURT ON THE INTERPRETATION OF THE PHRASE MAY BE TAXED . HAD IT SO, THEN THERE WAS NO REQUIREMENT BY THE HON'BLE SUPREME COU RT IN ITS LATER DECISION IN P.V.A.L. KULANDAGAN CHETTIAR (SUPRA) TO SPECIFY THAT THEY ARE NOT ENTERING INTO SEMANTICS OF INTERPRETING THE PHRASE MAY BE TAXED . VARIOUS ARTICLES GIVEN IN THE DTAA DO NOT GIVE ANY POWER TO LEVY TAX BECAUSE THE POWER TO LEVY TAXES FLOWS FROM DOMESTIC LAWS OF EITHER OF TH E CONTRACTING STATES. LASTLY, WITH REGARD TO THE DECISIONS OF TURQUOISE I NVESTMENTS AND FINANCE LTD. (SUPRA), BY THE MADHYA PRADESH HIGH COURT AND THE HON'BLE SUPREME COURT, HE REITERATED THE SAME SUBMISSIONS THAT THES E DECISIONS WERE BASED ON OLD MALAYSIAN TREATY AND HAS MAINLY FOLLOWED THE DECISION OF S.R.M. FIRM & ORS. (SUPRA) AND PROCEEDED ON THE PREMISE THAT TH E HON'BLE SUPREME COURT IN P.V.A.L. KULANDAGAN CHETTIAR (SUPRA) HAS A FFIRMED THE SAID DECISION WITHOUT LOOKING INTO THE FACT THAT THE HON'BLE SUPR EME COURT HAD AFFIRMED THE SAID DECISION ON DIFFERENT REASONING AND NOT ON THE INTERPRETATION OF THE ISSUE OF THE PHRASE MAY BE TAXED . IN ALL THESE CASES, THE HIGH COURT AND THE SUPREME COURT HAS NOT TAKEN INTO CONSIDERATION THE MODEL CONVENTION OR HAVE CONSIDERED ANY CONTEMPORANEOUS THINKING AND TH E INTERNATIONAL VIEWS. SIMILARLY, HE MADE DISTINCTION WITH REGARD TO THE D ECISIONS OF THE TRIBUNAL IN PATNI COMPUTER SYSTEM LTD. (SUPRA) AND MS. POOJA BH ATT (SUPRA). 39. REGARDING THE ARGUMENTS OF THE LEARNED SR. COUNSEL ON THE ISSUE OF NOTIFICATION, HE SUBMITTED THAT THAT THE SUPREME CO URT HAS NOT LAID DOWN ANY LAW ABOUT THE INTERPRETATION OF THE PHRASE MAY BE TAXED BECAUSE IN AZADI BACHAO ANDOLANS CASE, THE SUPREME COURT HAS NOT LA ID DOWN ANY LAW ABOUT THE INTERPRETATION OF THE PHRASE MAY BE TAXED BECAUSE IN THIS CASE THE SUPREME COURT HAS APPROVED THE DECISION IN R.M. MUT HAIAH (SUPRA) FOR A DIFFERENT REASONING AND IN P.V.A.L. KULANDAGAN CHET TIAR (SUPRA)S CASE, THE HON'BLE SUPREME COURT HAS SPECIFICALLY REFRAINED FR OM GIVING ANY INTERPRETATION ON THIS ISSUE. THUS, THERE IS NO LAW LAID DOWN BY THE SUPREME COURT SO AS TO HAVE ANY BINDING EFFECT AS A JUDICIA L PRECEDENCE. HE REFERRED TO THE MEMORANDUM OF THE FINANCE ACT, 2003, BY WHIC H SECTION 90(3) WAS ESSAR OIL LIMITED 35 INTRODUCED AND THE PURPOSE FOR WHICH THE SAME WAS B ROUGHT IN STATUTE W.E.F. 1 ST APRIL 2004 I.E., THE ASSESSMENT YEAR 200405. HE S UBMITTED THAT BY THIS AMENDMENT, THE LEGISLATURE HAS EMPOWERED THE CENTRA L GOVERNMENT TO ISSUE NOTIFICATION FOR ASSIGNING ANY MEANING TO A TERM US ED IN THE AGREEMENT WHICH HAS BEEN NEITHER DEFINED IN THE ACT NOR IN TH E AGREEMENT. THE PURPOSE OF THE NOTIFICATION WAS THAT A PROPER MEANING SHOUL D BE GIVEN WHICH, ACCORDING TO THE GOVERNMENT OF INDIA, IS THE TRUE I NTENTION FOR UNDERSTANDING THE VARIOUS TERMS USED IN THE TREATIES. THE MEMORAN DUM EXPLAINING THE SAID AMENDMENT PROVIDES THAT IN ORDER TO ADDRESS THE PRO BLEM ARISING DUE TO CONTRACTING INTERPRETATION OF THE TERM IT HAS PROPO SED TO INSERT NEW PROVISION EMPOWERING THE CENTRAL GOVERNMENT TO DEFINE SUCH TE RM BY WAY OF NOTIFICATION IN THE OFFICIAL GAZETTE. 40. ON THE DEFINITION AND THE MEANING OF THE WORD TERM , WHICH HAS BEEN ARGUED BY THE LEARNED SR. COUNSEL THAT IT CONNOTES FOR ANY KIND OF A NOUN HAVING A PARTICULAR MEANING, HE SUBMITTED THAT THIS IS NOT CORRECT AS THE WORD TERM CAN ALSO BE USED FOR A VERB ALSO. HE ALSO REFERRED TO VARIOUS DICTIONARY MEANINGS TO SHOW THAT THE TERM IS ALSO A WORD OR A PHRASE USED TO DESCRIBE THING OR FOR ANY KIND OF EXPRESSIONS. I T CAN BE FOR A CONCEPT TO CONVEY A MEANING. HENCE, IT WOULD BE TOO NARROW A V IEW TO INTERPRET THE WORD TERM AS GIVEN IN SECTION 90(3) THAT IT WILL NOT COVER T HE PHRASE OR EXPRESSION LIKE MAY BE TAXED . REGARDING LEARNED SR. COUNSELS ARGUMENT THAT NOTIFICATION IS BEYOND THE SCOPE OF SECTION 90 (3), HE SUBMITTED THAT THE ASSESSEE CANNOT RAISE THIS OBJECTION AT THE STAGE O F TRIBUNAL I.E., THE VIRES OF THE NOTIFICATION CANNOT BE CHALLENGED IN THE TRIBUN AL BECAUSE IT HAS BEEN ISSUED UNDER THE PROVISIONS OF THE ACT. IN SUPPORT OF HIS CONTENTIONS, HE HAS RELIED UPON THE DECISION OF THE HON'BLE SUPREME COU RT IN K.S. VENKATARAMAN & CO. V/S STATE OF MADRAS, REPORTED IN 1966 AIR 108 9 AND THE DECISION OF M/S. KANPUR VANASPATI STORES V/S C.S.T., 1973 AIR 2 373, WHEREIN IT HAS BEEN HELD THAT NO ONE CAN CHALLENGE THE VALIDITY OF A PROVISIONS OF AN ACT OR RULE MADE THERE UNDER OR EVEN A NOTIFICATION ISSUED EITHER UNDER THE ACT OR ESSAR OIL LIMITED 36 UNDER THE RULE BEFORE THE AUTHORITIES WHO ARE CONST ITUTED UNDER THE ACT. THUS, THE TRIBUNAL BEING A CREATION OF THE ACT CANN OT HOLD THE NOTIFICATION AS ULTRA VIRES. FURTHER, IT CANNOT BE HELD THAT THE NO TIFICATION HAS BEEN ISSUED IN VIOLATION OF LAW AS ALREADY SUBMITTED BY HIM THAT T HE HON'BLE SUPREME COURT HAS NOT LAID DOWN ANY LAW ON THIS SCORE. THE NOTIFI CATION GOES TO SHOW THE LEGISLATIVE OR THE GOVERNMENT OF INDIA INTENT FOR I NTERPRETING THE PHRASE USED IN THE AGREEMENT AND BEYOND THAT NO OTHER INTERPRET ATION OR MEANING SHOULD BE ASSIGNED TO SUCH NOTIFICATION. THE NOTIFICATION DOES NOT IMPOSE ANY KIND OF TAX LIABILITY BECAUSE THE LIABILITY TO TAX ALREADY EXIST IN SECTIONS 4 AND 5 AND THE NOTIFICATION ONLY CLARIFIES AS TO WHO HAS THE R IGHTFUL JURISDICTION TO TAX THE AMOUNT. 41. FURTHER, HE SUBMITTED THAT SUBSECTION (3) OF SECTI ON 90, HAS NOT BEEN OMITTED BY THE FINANCE ACT, 2012, BUT IT HAS BEEN S UBSTITUTED. THERE IS NO CHANGE OF ANY LANGUAGE OR EXPRESSION USED IN THE EA RLIER SECTIONS AND NEW SECTION. IT IS NOT A CASE OF REPEAL OR OMISSION BUT A SUBSTITUTION. IN SUPPORT OF HIS CONTENTION, HE FILED RELEVANT EXTRACTS FROM THE BOOK PRINCIPLE OF STATUTORY INTERPRETATION AUTHORED BY SHRI J.P. SINGH, TO CANVASS THAT THESE WORDS HAVE DIFFERENT MEANING AND FOR DIFFERENT PURP OSES. WHILE DISTINGUISHING THE DECISION OF RAYALA CORPORATION P VT. LTD. & ORS. (SUPRA), HE SUBMITTED THAT THE ISSUE INVOLVED BEFORE THE SUPREM E COURT WAS WHETHER THE NOTIFICATION ISSUED UNDER THE RULE THAT HAS CEASED TO EXIST AND THE OFFENCE COMMITTED DURING THAT PERIOD IN WHICH THE RULE WAS ENFORCED CAN BE TAKEN INTO COGNIZANCE FOR ENFORCING THE PUNISHABLE OFFENC E. THERE, IT WAS A CASE OF OMISSION AND NOT OF SUBSTITUTION. SIMILARLY, IN CAS E OF W.N.S. GLOBAL SERVICES (SUPRA), THE TRIBUNAL WAS DEALING WITH THE OMISSION OF SECTION AND ITS OPERATION IN THE SUCCEEDING YEARS. THUS, NONE OF TH ESE JUDGMENTS ARE APPLICABLE ON THE ISSUE OF SUBSTITUTION OF THE PROV ISIONS OF THE ACT BECAUSE IN THE PRESENT CASE, THIS SECTION HAS BEEN SUBSTITUTED LATER WITHOUT ANY SUBSTANTIAL CHANGE AS THE LANGUAGE OF THE SECTION R EMAINS EXACTLY THE SAME. THIS DOES NOT MEAN THAT ANY ACTION TAKEN UNDER SECT ION 90 PRIOR TO ITS ESSAR OIL LIMITED 37 SUBSTITUTION CANNOT BE ENFORCED AT ALL IN THE YEAR IN WHICH THEY WERE APPLICABLE. HE FURTHER REITERATED THAT EXPLANATION (3) TO SECTION 90, WHICH WAS BROUGHT IN STATUTE WITH RETROSPECTIVE EFFECT FR OM 1 ST OCTOBER 2009 ONLY REINFORCE THE INTENTION OF THE LEGISLATION THAT ANY NOTIFICATION ISSUED, WOULD BE APPLICABLE FROM THE DATE OF AGREEMENT. THERE CAN NOT BE TWO DIFFERENT MEANING OF THE PHRASE MAY BE TAXED ONE PRIOR TO NOTIFICATION AND OTHER AFTER THE NOTIFICATION. THIS CANNOT BE THE INTENTIO N OF THE LEGISLATURE. THE NOTIFICATION ONLY CLARIFIES THE MEANING AND THE INT ENTION OF THE GOVERNMENT AND DOES NOT IMPOSE ANY KIND OF TAX LIABILITY. UNDE R THE GENERAL CLAUSES ACT, 1897, ANY NOTIFICATION ISSUED UNDER THE SPECIFIC PR OVISION OF A STATUTE CONTINUES UNTIL IT IS WITHDRAWN BY SUBSEQUENT AMEND MENT. THE INSERTION OF EXPLANATION (3) HAS SET AT REST THAT NOTIFICATION I SSUED WILL APPLY FROM THE DATE OF THE AGREEMENT AND THERE IS NO AMBIGUITY IN LAW. REGARDING THE DECISION OF RATAN MELTING AND WIRE INDUSTRIES (SUPR A) OF THE HONBLE SUPREME COURT, HE SUBMITTED THAT IT WAS RENDERED ON THE ISSUE OF A CIRCULAR WHICH HAS BEEN ISSUED CONTRARY TO THE DECISION OF T HE SUPREME COURT, WHEREAS IN THE PRESENT CASE, AS SUBMITTED EARLIER, NO SPECIFIC LAW ON THE PHRASE MAY BE TAXED HAS BEEN SETTLED BY THE SUPREME COURT. 42. TO SUM UP, MAIN LIMB OF ARGUMENTS OF THE LD. D.R. A RE THAT (I) NONE OF THE DECISIONS RELIED UPON BY THE LEARNED SR . COUNSEL HAVE LAID DOWN ANY KIND OF CATEGORICAL LAW THAT THE PHRASE MAY BE TAXED GIVES EXCLUSIVE RIGHT TO THE COUNTRY OF SOURCE AND THE SUPREME COURT IN P.V.A.L. KULANDAGAN CHETTIAR (SUPR A) HAS SPECIFICALLY REFRAINED ITSELF FOR GIVING ANY INTERP RETATION ON THE PHRASE MAY BE TAXED ; (II) THESE DECISIONS WERE DEALING WITH THE OLD TREATIES WHICH HAVE UNDERGONE SUBSTANTIAL CHANGE AFTER THE MODEL CONVEN TION, BASED ON WHICH, OMAN AND QATAR TREATIES HAVE BEEN SIGNED, THEREFORE, ESSAR OIL LIMITED 38 THE INTERNATIONAL COMMENTARIES INCLUDING THAT OF OE CD ON THIS ISSUE HAS TO BE TAKEN INTO CONSIDERATION; (III) THE NOTIFICATION ISSUED BY THE CENTRAL GOVERNMENT I N PURSUANCE OF SUBSECTION (3) OF SECTION 90 BROUGHT ON STATUTE FROM THE ASSESSMENT YEAR 200405 HAS SET THE ISSUE AT REST A ND ALL THE EARLIER DECISIONS RENDERED FOR THE EARLIER ASSESSME NT YEARS WILL NOT BE APPLICABLE; (IV) THE NOTIFICATION ISSUED BY THE CENTRAL GOVERNMENT S HOWS THE INTENTION OF THE GOVERNMENT OF INDIA AS TO WHAT IS MEANT BY THE PHRASE MAY BE TAXED WHICH HAS TO BE KEPT IN MIND; AND (V) LASTLY, THE EXPLANATION (3) TO SECTION 90, THOUGH B ROUGHT IN STATUTE BY THE FINANCE ACT, 2012, W.E.F. 1 ST OCTOBER 2009, ALSO GOES TO SHOW THAT THE INTENTION OF THE LEGISLATURE AND THE GOVERNMENT OF INDIA THAT MEANING ASSIGNED BY THE CE NTRAL GOVERNMENT IN THE NOTIFICATION HAS TO BE RECKONED F ROM THE DATE OF THE AGREEMENT. 43. THUS, ACCORDING TO LD. D.R. IN THE ENTIRE SCENARIO, THE ISSUE OF THE PHRASE MAY BE TAXED HAS TO BE INTERPRETED IN A MANNER THAT THE COUNTRY OF THE SOURCE CAN LEVY TAXES BUT THE COUNTRY OF RESIDE NCE DOES NOT LOOSE ITS RIGHT TO TAX THE RESIDENT. BOTH THE COUNTRIES HAVE A SIMULTANEOUS JURISDICTION EXCEPT FOR THE FACT THAT EITHER OF THE CONTRACTING STATES WILL GIVE CREDIT OF SUCH A TAX PAID IN OTHER CONTRACTING STATES. 44. LEARNED SR. COUNSEL, MR. DASTUR, SOUGHT PERMISSION OF THE BENCH TO GIVE REJOINDER OF SOME OF THE SUBMISSIONS MADE BY T HE LEARNED DEPARTMENTAL REPRESENTATIVE AS THESE WERE NOT PART OF HIS ORIGIN AL PLEADINGS. SUCH PERMISSION WAS GRANTED BY THE BENCH. ESSAR OIL LIMITED 39 45. THE LEARNED SR. COUNSEL FOR THE ASSESSEE, FIRST OF ALL, SUBMITTED THAT THERE IS NO DISTINCTION MADE FOR THE PHRASE MAY BE TAXED IN THE OLD TREATY AND IN THE MODEL CONVENTION TREATY. THE WORDS SHALL BE TAXED ONLY , MAY BE TAXED AND MAY ALSO BE TAXED ARE CONTINUED TO BE USED IN THE OLD TREATY AS WELL AS IN MODEL CONVENTION TREATY. HE CITED VAR IOUS EXAMPLES OF ARTICLES UNDER DIFFERENT DTAA UNDER BOTH THE CATEGORIES OF T HE TREATY. HE EMPHASIZED THAT WHEREVER THERE HAS BEEN INTENTION THAT BOTH TH E COUNTRIES SHOULD HAVE RIGHT TO TAX, THE PHRASE USED IS MAY ALSO BE TAXED . IN SUPPORT OF THIS, HE CITED VARIOUS ARTICLES IN VARIOUS DTAA. THE ASSESSI NG OFFICER HAS TREATED AS MAY BE TAXED AND MA ALSO BE TAXED IN A SAME CONNATION, HOWEVER, THERE IS REMARKABLE DIFFERENCE. HE STRONGLY OBJECTED TO T HE SUBMISSION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE HIGH C OURT AND THE SUPREME COURT HAVE NOT INTERPRETED THE WORDS MAY BE TAXED AND NO LAW HAS BEEN LAID DOWN. AFTER REFERRING TO THE SPECIFIC PARAGRAP HS AND DECISION OF R.M. MUTHAIAH (SUPRA)S CASE AND S.R.M. FIRM & ORS. (SUP RA)S CASE, HE SUBMITTED THAT IN THE LATER JUDGMENT, THE HIGH COURT HAS EXPR ESSLY DEALT THIS ISSUE IN A VERY DETAILED MANNER. FURTHER, THE HON'BLE SUPREME COURT IN AZADI BACHAO ANDOLAN (SUPRA), WHILE APPROVING THE REASONS GIVEN IN THE JUDGMENT OF R.M. MUTHAIAH (SUPRA)S CASE, HAS REFERRED TO VARIOUS AR TICLES WHEREIN THE PHRASE USED IS MAY BE TAXED . HE DREW OUR SPECIFIC ATTENTION TO PAGES715 TO 71 9 AND 724, ETC., AS APPEARING IN THE ITR PUBLICATION. IN FACT, THIS ISSUE GETS CONCLUDED BY THE JUDGMENT IN AZADI BACHAO ANDOLANS CASE. IF THE SUPREME COURT IN ONE WAY OR THE OTHER HAS UPHELD ANY REASON ING, IT IS NOT OPEN FOR THE PARTIES TO ARGUE CONTRARY, FOR THIS, HE REFERRE D TO CATENA OF CASE LAWS AS TO HOW ANY REASONING OF ANY JUDGMENT APPROVED BY TH E HON'BLE SUPREME COURT BECOMES THE LAW OF THE LAND AND EVEN TO THE E XTENT OF OBITER DICTA OF THE HON'BLE SUPREME COURT IS ALSO BINDING UPON ALL THE COURTS. ONCE THE SUPREME COURT IN THE SUBSEQUENT DECISION IN TURQUOI SE INVESTMENTS AND FINANCE LTD. (SUPRA) HAS PRECISELY APPROVED AND CON FIRMED THE DECISION IN S.R.M. FIRM & ORS. (SUPRA) AND R.M. MUTHAIAH (SUPRA ), THEN THERE IS NO QUESTION THAT THE SUPREME COURT HAS NOT LAID DOWN A NY SUCH LAW. HE ESSAR OIL LIMITED 40 SPECIFICALLY DREW OUR ATTENTION TO THE DECISION OF THE MADHYA PRADESH HIGH COURT, WHICH HAS BEEN AFFIRMED BY THE HON'BLE SUPRE ME COURT. 46. REGARDING RELIANCE PLACED ON THE JUDGMENT OF SUN EN GINEERINGS CASE SUPRA, HE SUBMITTED THAT IT IS NOT A QUESTION OF FE W WORDS AND PHRASES HERE AND THERE BUT THERE ARE PARAGRAPHS AND PARAGRAPHS O F FINDING GIVEN BY THE HON'BLE SUPREME COURT BY WHICH THE DECISION OF THE HIGH COURT HAVE BEEN UPHELD WHEREIN PRECISELY THE ISSUE OF THE PHRASE MAY BE TAXED HAS BEEN DEALT WITH. REGARDING THE VIEW OF PROF. KLAUS VOGEL , HE SUBMITTED THAT SUCH A VIEW CANNOT OVERRIDE THE DECISION OF THE HIGH COURT AND THE HON'BLE SUPREME COURT WHICH ARE PREVAILING IN INDIA. HE ALSO FILED RELEVANT EXTRACT OF ANOTHER EMINENT AUTHOR PHILIP BAKER WHEREIN HE HAS TAKEN A VIEW THAT THE KARNATAKA HIGH COURT DECISION IN R.M. MUTHAIAHS CASE SUPRA A ND THE DECISION OF MADRAS HIGH COURT IN S.R.M. FIRM & ORS. (SUPRA) ARE WHOLLY ERRONEOUS VIEW AND DOES NOT GIVE CORRECT INTERPRETATION OF THE PHRASE USED IN THE TREATY SPECIFICALLY MAY BE TAXED . SUCH A VIEW CANNOT BE UPHELD BY THE INDIAN COURTS BECAUSE IT IS BINDING UPON THE INDIAN COURTS AND SUCH A VIE W HAS TO BE OUT RIGHTLY REJECTED. IN INDIA, THE DECISION OF THE HON'BLE SUP REME COURT IS THE LAW OF THE LAND BY VIRTUE OF ARTICLE141 OF THE CONSTITUTI ON. REGARDING OECD COMMENTARY, HE SUBMITTED THAT THE SAME CANNOT BE RE LIED UPON AS, FIRSTLY, THE HIGH COURT IN S.R.M. FIRM & ORS. (SUPRA), HAS S PECIFICALLY DECLINED TO FOLLOW OECD COMMENTARY AND; SECONDLY, INDIA IS NOT A PARTY TO OECD. HE FURTHER DISTINGUISHED ALL THE DECISIONS WHICH WERE RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE AND POINTED OUT THAT HO W THEY ARE NOT APPLICABLE IN THE PRESENT CASE AND TO THE ISSUE INV OLVED. REGARDING LEARNED DEPARTMENTAL REPRESENTATIVES ARGUMENT ABOUT THE AM ENDMENT IN INDO MALAYSIAN TREATY AND INSERTION OF PROTOCOL, HE SUBM ITTED THAT IT HAS BEEN BROUGHT FROM THE YEAR 2007 WHICH MEANS THAT IT IS C LARIFYING THE DECISION THAT FROM NOW ONWARDS THE PHRASE MAY BE TAXED CAN ALSO TO BE MEANT IN THE COUNTRY OF RESIDENCE. THIS PROTOCOL IS ONLY REL EVANT FOR ARTICLE6(1), ESSAR OIL LIMITED 41 THEREFORE, IT HAS NO RELEVANCE FOR OTHER ARTICLES A S NO SUCH EXCEPTIONS HAVE BEEN CARVED OUT. 47. HE REPEATED THAT IN ASSESSEES OWN CASE FOR THE EAR LIER YEARS, THE TRIBUNAL AND THE HIGH COURT HAVE DECIDED THIS ISSUE IN ASSESSEES FAVOUR IN ASSESSMENT YEAR 200001 AND 200304. THEREFORE, NOW A CONTRARY VIEW CANNOT BE TAKEN IN THE ASSESSMENT YEAR 200405. HE FURTHER SUBMITTED THAT IN THE EXPLANATION (3), THE PHRASE USED IS WHERE ANY TERM IS USED IN ANY AGREEMENT ENTERED INTO . THIS MEANS, ANY AGREEMENT ENTERED AFTER 1 ST OCTOBER 2009, OR ANY AMENDMENT IN THE AGREEMENT ENT ERED OR ANY AGREEMENT ENTERED AFTER 1 ST OCTOBER 2009. THE WORD IS USED WHICH REPRESENTS THE PRESENT AND FUTURE AND NOT THE PAST. IN SUPPORT OF THIS, HE RELIED UPON THE JUDGMENT OF HON'BLE SUPREME COURT I N F.S. GANDHI V/S CWT, [1990] 184 ITR 34 (SC). REGARDING THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT VIRES OF THE NOTIF ICATION CANNOT BE CHALLENGED BEFORE THE TRIBUNAL, HE SUBMITTED THAT H E IS NOT CHALLENGING THE VIRES OF THE NOTIFICATION, ALBEIT SUCH A NOTIFICATI ON CANNOT BE IMPLEMENTED IN ASSESSEES CASE FOR THE VARIOUS REASONS AS STATED E ARLIER BY HIM. WHAT HAS BEEN ARGUED BY HIM IS THE INTERPRETATION OF THE NOT IFICATION ON THE GROUND THAT IT IS INCONSISTENT WITH THE PROVISIONS OF THE ACT AS THE HON'BLE SUPREME COURT HAS INTERPRETED A PARTICULAR WORD THEN CONTEX T PROVIDES THAT IT HAS TO BE INTERPRETED IN THE MANNER AS DONE BY THE HON'BLE SUPREME COURT AND HE HAS NOT SAID THAT NOTIFICATION IS TO BE DECLARED AS VIRES. IF THERE ARE TWO INTERPRETATIONS ONE BY THE HON'BLE SUPREME COURT AN D THE OTHER BY THE NOTIFICATION, THE FORMER HAS TO BE FOLLOWED. DISTIN GUISHING THE DECISION OF KANPUR VANASPATI STORES (SUPRA) AND OTHER DECISIONS OF THE HON'BLE SUPREME COURT IN K.S. VENKATARAMAN & CO. (SUPRA), HE SUBMIT TED THAT THEY ARE NOT APPLICABLE AS THE ASSESSEE HAS NOT ARGUED FOR STRIK ING OFF THE NOTIFICATION. HE RELIED UPON VARIOUS OTHER CASE LAWS IN SUPPORT THAT THE TRIBUNAL HAS POWER TO INTERPRET THE NOTIFICATION WHETHER IT WAS CONSISTEN T WITH THE PROVISIONS OF THE ACT OR NOT. THE MAIN SUCH DECISIONS RELIED UPON BY HIM ARE THE DECISION OF ESSAR OIL LIMITED 42 ANDHRA PRADESH HIGH COURT IN CIT V/S HYDERABAD ASBE STOS CEMENT PRODUCTS LTD. [1998] 172 ITR 762 (A.P) AND THE DECISION OF M ADRAS HIGH COURT IN CIT V/S ELGI EQUIPMENTS LTD., [2000] 242 ITR 460 (MAD. ). HE SUBMITTED THAT SECTION 90(3) PROVIDES THAT NOTIFICATION SHOULD NOT BE INCONSISTENT OR CONTRARY TO THE ACT OR AGREEMENT. THE NOTIFICATION HAS BEEN ISSUED BY THE CBDT IS DIRECTLY IN CONTRAVENTION OF THE ACT AS IT IS CONTR ARY TO THE HON'BLE SUPREME COURT DECISION WHICH IS THE LAW OF THE LAND. HE ALS O RELIED UPON THE DECISION OF THE HON'BLE SUPREME COURT IN CIT V/S TAJ MAHAL H OTEL, [1971] 82 ITR 44 (SC), THAT EVEN THE INCOME TAX RULES CANNOT TAKE AW AY WHAT IS CONFERRED BY THE ACT. THEREFORE, THE TRIBUNAL IS ABSOLUTELY COMP ETENT TO HOLD THAT IN THE MATTER OF NOTIFICATION IF IT IS INCONSISTENT WITH T HE DECISION OF THE HON'BLE SUPREME COURT, THE SAME CAN BE IGNORED AS IT DOES N OT TANTAMOUNT TO DECLARING ULTRA VIRES. EVEN THOUGH THE PROVISIONS O F SUBSECTION (3) OF SECTION 90 HAS BEEN BROUGHT IN THE STATUTE W.E.F. 1 ST APRIL 2004, HOWEVER, THE MEANING ASSIGNED BY THE HON'BLE SUPREME COURT E ARLIER CANNOT BE DONE AWAY BY THE NOTIFICATION AS IT WOULD TANTAMOUNT TO BEING INCONSISTENT WITH THE PROVISIONS OF THE ACT AND AGREEMENT. 48. HE FURTHER REITERATED THAT WITHOUT PREJUDICE TO THE NOTIFICATION WHICH WAS BROUGHT ON STATUTE W.E.F. 28 TH AUGUST 2008, WOULD NOT BE MADE APPLICABLE FOR THE ASSESSMENT YEAR 200405 AND STRI CTLY SPEAKING IT CAN ONLY APPLY FROM THE ASSESSMENT YEAR 200910 ONLY IF AT A LL. EVEN THE EXPLANATION (3) AND SUBSTITUTED SECTION 90 HAS COME INTO IN EXI STENCE ONLY FROM 1 ST OCTOBER 2009 AND, HENCE, THEY ARE NOT APPLICABLE FO R THE ASSESSMENT YEAR 200405. LASTLY, HE SUBMITTED THAT THE SUBSTITUTION OF THE SECTION COMES WITHIN THE REALM OF OMISSION OF THE SECTION ONLY WH ICH MEANS IT EFFACED FROM THE STATUTE. HE FURTHER RELIED UPON THE DECISION OF THE HON'BLE SUPREME COURT IN KOLHAPUR CANE SUGAR WORKS LTD., REPORTED I N AIR 2000 SC 811, WHEREIN RULE10A OF CENTRAL EXCISE RULES, WAS DELET ED AND NEW RULE 10A, WAS INSERTED, THE HON'BLE SUPREME COURT HELD THAT E ARLIER PROVISIONS WILL NOT APPLY. HE SUBMITTED THAT THE WORDS OMISSION , DELETION AND SUBSTITUTION , ESSAR OIL LIMITED 43 CONVEYS THE SAME THING, THEREFORE, THE DISTINCTION MADE BY THE LEARNED DEPARTMENTAL REPRESENTATIVE IS NOT CORRECT. TO PROV E HIS POINT HE GAVE EXAMPLES FROM VARIOUS PROVISIONS OF THE ACT AND ALS O REFERRED TO SECTION 297(2)(K), WHEREIN THERE IS A SPECIFIC SAVING CLAUS E PROVIDED UNDER THE ACT IF THERE IS NO SAVING CLAUSE, THEN IT MEANS THAT SUBST ITUTED SECTION WILL ONLY APPLY AND NOT THE EARLIER ONE. THUS, HE SUBMITTED T HAT THE LEARNED DEPARTMENTAL REPRESENTATIVES CONTENTIONS CANNOT BE UPHELD ON ANY OF THE GROUNDS WHICH HAVE BEEN CANVASSED BEFORE THIS COURT AND DEPARTMENTAL APPEAL SHOULD BE DISMISSED ON THIS SCORE. DECISION : 49. WE HAVE GIVEN OUR ANXIOUS CONSIDERATION TO THE E NTIRE GAMUT OF ARGUMENTS PLACED BEFORE US BY BOTH THE SIDES. THE G ENESIS OF THE CONTROVERSY IN GROUND NO.2 AND 3, ARISES FROM THE F ACT THAT THE ASSESSEE HAS A P.E. IN OMAN AND QATAR. FROM THE OMAN BRANCH, THE ASSESSEE HAS DERIVED BUSINESS PROFIT FOR SUMS AGGREGATING TO ` 3,20,80,443 AND FROM QATAR BRANCH, THE ASSESSEE HAS INCURRED LOSSES OF ` () 90,38,012. AFTER SETTING OFF THE LOSSES OF QATAR, THE NET INCOME WORKED OUT TO ` 2,30,42,431, WHICH WAS NOT INCLUDED IN THE TOTAL INCOME OF THE COMPANY IN THE RETURN OF INCOME FILED IN INDIA. THE REASON FOR NOT INCLUDING THE S AME WAS THAT THE ASSESSEE HAS ALSO BEEN FILING THE RETURN OF INCOME IN THE RE SPECTIVE COUNTRIES I.E., OMAN AND QATAR AND IS BEING ASSESSED ON THE PROFIT AS PER THE DOMESTIC LAW. IN THIS REGARD, THE ASSESSEE HAS TAKEN SHELTER OF A RTICLE7(1) OF THE DTAA. THE ASSESSING OFFICER HELD THAT THE INCOME FROM OMA N AND QATAR IS ALSO ASSESSABLE IN INDIA AND HAS TO BE ADDED TO THE TOTA L INCOME IN INDIA. ACCORDINGLY, HE HAS ALSO GIVEN CREDIT OF TAXES PAID AT ` 50,40,215, IN OMAN. THE ASSESSEES CONTENTIONS MAINLY HAVE BEEN THAT BY VIRTUE OF ARTICLE7(1) OF THE INDOOMAN DTAA, ONCE THE TAXES HAVE BEEN PAID I N THE SOURCE COUNTRY (I.E., OMAN), THE SAME PROFIT CANNOT BE TAXED IN TH E COUNTRY OF RESIDENT I.E., IN INDIA. THE MAIN RELIANCE IN THIS REGARD WAS PLAC ED ON THE PHRASE USED IN ESSAR OIL LIMITED 44 THE ARTICLE7(1) MAY BE TAXED IN OTHER CONTRACTING STATE , WHICH, ACCORDING TO THE ASSESSEE, MEANS THAT THE COUNTRY OF RESIDENC E I.E., INDIA LOOSES ITS RIGHT TO TAX IF THE ASSESSEE HAS PAID TAXES IN THE SOURCE COUNTRY. IN THIS REGARD, TWO HIGH COURT DECISIONS IN R.M. MUTHAIAH ( SUPRA) AND S.R.M. FIRM AND ORS. (SUPRA) WERE RELIED UPON ALONG WITH THE DE CISION OF THE HON'BLE SUPREME COURT IN P.V.A.L. KULANDAGAN CHETTIAR (SUPR A). 50. THE SECOND ISSUE AROSE WITH RESPECT TO LONG TERM CA PITAL GAIN ON SALE OF ASSETS OF P.E. IN OMAN AND QATAR. THE LONG TERM CAPITAL GAIN FOR OMAN AND QATAR WAS CLAIMED AS EXEMPT AND WAS NOT INCLUDE D IN THE INCOME OF THE ASSESSEE. RELIANCE WAS PLACED ON ARTICLE15(1) OF T HE INDOOMAN DTAA AND ARTICLE13(1) OF INDOQATAR DTAA. HERE ALSO, THE AS SESSEE HAS RAISED THE SAME CONTENTION THAT ONCE THE CAPITAL GAIN IS TAXAB LE AS PER THE DOMESTIC LAW OF OMAN AND QATAR, THEN THERE IS NO REQUIREMENT UND ER THE RESPECTIVE DTAAS TO OFFER THE SAME IN INDIA. HERE ALSO, THE PH RASE USED IN THE SAID ARTICLES IS MAY BE TAXED IN OTHER CONTRACTING STATE . 51. THE LEARNED COMMISSIONER (APPEALS), ON THE FIRST IS SUE, HAS MAINLY RELIED UPON THE FIRST APPELLATE ORDER FOR THE ASSES SMENT YEARS 19992000 TO 200203 IN ASSESSEES OWN CASE WHEREIN IT WAS HELD THAT THE INCOME FROM THE OMAN PROJECT IS NOT TAXABLE IN INDIA AND SIMILA RLY IT WAS HELD IN CASE OF QATAR ALSO. THE EARLIER DECISION OF THE LEARNED COM MISSIONER (APPEALS) HAS BEEN AFFIRMED BY THE TRIBUNAL IN THE APPEAL FILED B Y THE DEPARTMENT WHEREIN RELYING UPON THE DECISION OF THE HON'BLE SUPREME CO URT IN P.V.A.L. KULANDAGAN CHETTIAR (SUPRA), THE TRIBUNAL HELD THAT ONCE THE PROFITS HAVE BEEN TAXED IN OMAN, THE SAME CANNOT BE TAXED IN IND IA. AGAINST THE SAID ORDER, THE DEPARTMENT HAS PREFERRED APPEAL BEFORE T HE HIGH COURT UNDER SECTION 260A, WHEREIN THE HIGH COURT HAS AFFIRMED T HE DECISION OF THE TRIBUNAL AFTER OBSERVING AND HOLDING AS UNDER: AS REGARDS THE THIRD QUESTION IS CONCERNED, IT IS NOT IN DISPUTE THAT THE ASSESSEE HAS A PERMANENT ESTABLISHMENT AT OMAN AND THE ASSESSEE ESSAR OIL LIMITED 45 HAS BEEN TAXED IN RESPECT OF THE INCOME EARNED FROM THE SAID ESTABLISHMENT UNDER THE PROVISIONS OF THE INCOME TA X LAW AT OMAN. THEREFORE, IN THE LIGHT OF ARTICLE 7 OF DOUBLE TAXA TION AVOIDANCE AGREEMENT (DTAA) ENTERED INTO BY AND BETWEEN INDIA AND OMAN AND IN THE LIGHT OF THE JUDGMENT OF THE APEX COURT IN T HE CASE CIT VS. P.V.A.L. KULANDAGAN CHETTIAR, 267 ITR 654, THE DEC ISION OF THE TRIBUNAL IN EXCLUDING THE PROFIT EARNED FROM THE PE RMANENT ESTABLISHMENT AT OMAN CANNOT BE FAULTED. 52. ON THE ISSUE OF THE CAPITAL GAIN, THE LEARNED COMMI SSIONER (APPEALS) AGAIN RELYING UPON THE PHRASEOLOGY USED IN ARTICLES 13 AND 15 OF THE RESPECTIVE DTAAS MAY BE TAXED HELD THAT ONCE THE CAPITAL GAIN IS TAXABLE IN THESE COUNTRIES, THEN BY VIRTUE OF DTAA, THE SAME C ANNOT BE TAXED IN INDIA. AGAIN RELIANCE WAS ALSO PLACED ON THE AFORESAID THR EE DECISIONS AND ACCORDINGLY THIS ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE. PHRASES USED IN THE ARTICLES 53. THE TAXABILITY OF A BUSINESS PROFIT OF A P.E. HAS B EEN DEALT WITH IN ARTICLE7(1) OF INDOOMAN DTAA, THE RELEVANT PORTIO N OF WHICH IS REPRODUCED BELOW:- ARTICLE 7 : BUSINESS PROFITS-1 THE PROFITS OF AN E NTERPRISE OF A CONTRACTING STATE SHALL BE TAXABLE ONLY IN THAT STA TE UNLESS THE ENTERPRISE CARRIES ON BUSINESS IN THE OTHER CONTRAC TING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE EN TERPRISE CARRIES ON BUSINESS AS AFORESAID, THE PROFITS OF THE ENTERPRIS E MAY BE TAXED IN THE OTHER CONTRACTING STATE BUT ONLY SO MUCH OF THEM AS IS ATTRIBUTABLE DIRECTLY OR INDIRECTLY TO THAT PERMANENT ESTABLISHM ENT. FROM THE ABOVE, IT CAN BE INFERRED THAT FIRSTLY, TH E PROFIT OF AN ENTERPRISE OF A CONTRACTING STATE I.E., RESIDENT ST ATE OF THE ENTERPRISE SHALL BE ESSAR OIL LIMITED 46 TAXABLE ONLY IN THE RESIDENT STATE UNLESS THE ENTER PRISE CARRIES ON BUSINESS IN THE CONTRACTING STATE I.E., THE COUNTRY OF SOURCE T HROUGH THE P.E. SITUATED THEREIN. SECONDLY, IF THE ENTERPRISE CARRIES ON THE BUSINESS IN THE SOURCE COUNTRY, THROUGH THE PE SITUATED THEREIN, THE PROFI TS OF THE ENTERPRISE MAY BE TAXED IN THE OTHER CONTRACTING STATE I.E., SOURCE COUNTRY BUT ONLY TO THE EXTENT IT IS ATTRIBUTABLE DIRECTLY OR INDIRECTLY TO THAT P.E. THE PHRASE SHALL BE TAXABLE ONLY PROVIDES EXCLUSIVELY THE TAXING RIGHT TO THE RESID ENT STATE. THE PHRASE MAY BE TAXED GIVES THE OPTION TO THE OTHER CONTRACTING STATE I. E., THE SOURCE COUNTRY TO TAX TO THE EXTENT OF PROFIT A TTRIBUTABLE TO THE P.E. SITUATED THEREIN. SINCE THERE IS NO ISSUE OF TAXABI LITY OF BUSINESS PROFIT FROM QATAR, HENCE, WE ARE NOT DEALING WITH ARTICLE7(1) OF INDOQATAR DTAA. THE ARTICLE DEALING WITH THE CAPITAL GAIN IS ARTICLE15 OF INDOOMAN DTAA WHICH FOR THE SAKE OF READY REFERENCE, PARAS1 AND 2 ARE REPRODUCED HEREIN BELOW: ARTICLE 15 : CAPITAL GAINS- 1 GAINS DERIVED BY A R ESIDENT OF A CONTRACTING STATE FROM THE ALIENATION OF IMMOVABLE PROPERTY REFERRED TO IN ARTICLE 6, AND SITUATED IN THE OTHER CONTRACT ING STATE MAY BE TAXED IN THAT OTHER CONTRACTING STATE. 2. GAINS FROM THE ALIENATION OF MOVABLE PROPERTY FO RMING PART OF THE BUSINESS PROPERTY OF A PERMANENT ESTABLISHMENT WHICH AN ENTERPRISE OF A CONTRACTING STATE HAS IN THE OTHER CONTRACTING STATE OR OF MOVABLE PROPERTY PERTAINING TO A FIXED BASE AVAI LABLE TO A RESIDENT OF A CONTRACTING STATE IN THE OTHER CONTRACTING ST ATE FOR THE PURPOSE OF PERFORMING INDEPENDENT PERSONAL SERVICES, INCLUD ING SUCH GAINS FROM THE ALIENATION OF SUCH A PERMANENT ESTABLISHMENT (A LONE OR TOGETHER WITH THE WHOLE ENTERPRISE) OR OF SUCH FIXED BASE, M AY BE TAXED IN THAT OTHER CONTRACTING STATE. HERE ALSO, THE PHRASEOLOGY USED IS MAY BE TAXED IN OTHER CONTRACTING STATE . IN CASE OF QATAR DTAA, ARTICLE13(1) AND 13(2) US ES THE WORDS MAY ESSAR OIL LIMITED 47 ALSO BE TAXED , WHICH, FOR THE SAKE OF READY REFERENCE, ARE REPRO DUCED BELOW: ARTICLE 13:- CAPITAL GAINS 1. GAINS DERIVED BY RES IDENT OF A CONTRACTING STATE FROM THE ALIENATION OF IMMOVABLE PROPERTY REFERRED TO IN ARTICLE 6 AND SITUATED IN THE OTHER CONTRACTI NG STATE MAY ALSO BE TAXED IN THAT OTHER STATE. 2. GAINS FROM THE ALIENATION OF MOVABLE PROPERTY FO RMING PART OF THE BUSINESS PROPERTY OF A PERMANENT ESTABLISHMENT WHIC H AN ENTERPRISE OF A CONTRACTING STATE HAS IN THE OTHER CONTRACTING ST ATE OR OF MOVABLE PROPERTY PERTAINING TO A FIX BASE AVAILABLE TO RESI DENT OF A CONTRACTING STATE IN THE OTHER CONTRACTING STATE FOR THE PURPOS E OF PERFORMING INDEPENDENT PERSONAL SERVICES, INCLUDING SUCH GAINS FROM THE ALIENATION OF SUCH A PERMANENT ESTABLISHMENT (ALONE OR WITH TH E WHOLE ENTERPRISE) OR OF SUCH FIXED BASE, MAY ALSO BE TAXE D IN THAT OTHER STATE. IN THIS ARTICLE, THE PHRASEOLOGY USED IS SLIGHTLY D IFFERENT AND INSTEAD OF THE PHRASE MAY BE TAXED , THE PHRASE MAY ALSO BE TAXED IN OTHER CONTRACTING STATE HAS BEEN USED. THUS, THESE PHRASEOLOGIES MAY BE TAXED , MAY ALSO BE TAXED AND SHALL ONLY BE TAXED WOULD BE THE SUBJECT MATTER OF OUR DISCUSSION IN THE SUCCEEDING PARAGRAPHS AS THIS IS THE CORE ISSUE BEFORE US. 54. THE WORDS AND THE PHRASE MAY BE TAXED ARE NOT APPEARING IN THE STATUTE BUT ARE APPEARING IN THE DTAAS. NOWHERE IN THE INCOME TAX ACT, 1961, OR IN THE RESPECTIVE DTAAS, THIS PHRASE HAS B EEN DEFINED OR EXPLAINED. FROM THE ARGUMENTS WHICH HAVE BEEN NOTED BY US AT L ENGTH IN THE FORGOING PARAGRAPHS, IT EMERGES THAT THERE ARE TWO SCHOOL OF THOUGHTS, ONE INTERNATIONAL VIEW WHICH IS BASED ON OECD COMMENTAR IES ON MODEL CONVENTION, EMINENT INTERNATIONAL JURIST AND FOREIG N COURT DECISIONS AS REFERRED BY THE JURISTS. THE SECOND SCHOOL OF THOUG HT WHICH IS MOSTLY ESSAR OIL LIMITED 48 PREVALENT IN INDIA BY VIRTUE OF VARIOUS HIGH COURT DECISIONS LIKE R.M. MUTHAIAH (SUPRA), S.R.M. FIRM AND ORS. (SUPRA) AND TURQUOISE INVESTMENTS AND FINANCE LTD. (SUPRA). THESE JUDGMENTS HAVE ALSO BEE N AFFIRMED BY THE HON'BLE SUPREME COURT IN SOME CONTEXT OR THE OTHER, AS CANVASSED BY THE LEARNED SR. COUNSEL, WHICH SHALL BE DEALT BY US IN THE SUCCEEDING PARAGRAPHS. THOUGH THERE ARE ALSO CERTAIN OTHER DECISIONS WHICH HAVE TAKEN A CONTRARY VIEW, AFTER DISTINGUISHING THE SAID JUDGMENTS OR FO LLOWING THE MODEL CONVENTION AND OECD COMMENTARY. BEFORE ANALYZING VA RIOUS JUDGMENTS AS RELIED UPON BY THE LEARNED SR. COUNSEL, WE WOULD FI RST LIKE TO DEAL VERY BRIEFLY THE VIEWS EXPRESSED BY THE OECD COMMENTARY ON MODEL CONVENTION. OECD & OTHER INTERNATIONAL VIEWS 55. TWO RULES HAVE BEEN DEVISED IN DTAA TO AVOID DOUBLE TAXATION, ONE DISTRIBUTIVE RULES WHICH ALLOCATE TAXING RIGHTS BETWEEN CONTRACTING ST ATES WITH RESPECT TO VARIOUS KIND OF INCOME AND SECOND R ULE IS TO PUT THE STATE OF RESIDENCE UNDER AN OBLIGATION TO GIVE EITHER CREDIT OF TAXES PAID IN THE SOURCE STATE OR TO EXEMPT THE INCOME TAXED IN SOURCE STATE . THESE TWO RULES HAVE BEEN EXPLAINED IN PARA19 OF OECD COMMENTARY UNDER THE TITLE TAXATION OF INCOME AND CAPITAL . 19. FOR THE PURPOSE OF ELIMINATING DOUBLE TAXATIO N, THE CONVENTION ESTABLISHES TWO CATEGORIES OF RULES. FIRST, ARTICLE S 6 TO 21 DETERMINE, WITH REGARD TO DIFFERENT CLASSES OF INCOME, THE RES PECTIVE RIGHTS TO TAX OF THE STATE OF SOURCES OR SITUS AND OF THE STATE O F 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 OTH ER CONTRACTING STATE IS THEREBY PREVENTED FROM TAXING THOSE ITEMS AND DOUBLE TAXATION IS AVOIDED. AS A RESULT, THIS EXCLUSIVE RI GHT TO TAX IS CONFERRED ON THE STATE OF RESIDENCE. IN THE CASE OF OTHER ITE MS OF INCOME AND CAPITAL, THE RIGHT TO TAX IS NOT AN EXCLUSIVE ONE. AS REGARDS TOW ESSAR OIL LIMITED 49 CLASSES OF INCOME (DIVIDENDS AND INTEREST), ALTHOUG H 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 THES E PROVISIONS CONFER ON THE STATE OF SOURCE OR SITUS A FULL OR LIMITED R IGHT TO TAX, THE STATE OF RESIDENCE MUST ALLOW RELIEF- AS TO AVOID DOUBLE TAXATION; THIS IS THE PURPOSE OF ARTICLES 23A AND 23 B. THE CONVENTION LE AVES IT TO BE THE CONTRACTING STATE TO CHOOSE BETWEEN TWO METHODS OF RELIEF, I.E. THE EXEMPTION METHOD AND THE CREDIT METHOD. 56. THE SUMMARY OF THE ASSIGNMENT PRINCIPLE OF TAXATION UNDER THE OECD COMMENTARY ON MODEL CONVENTION HAS BEEN SUCCINCTLY PUT BY THE PROF. KLAUS VOGEL IN HIS BOOK DOUBLE TAXATION CONVENTION 3 RD EDITION, AS FILED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE IN THE FOLLOWIN G MANNER: ASSIGNMENT RULES: THE ASSIGNMENT PRINCIPLE APPLI ED IN THE OECD MC COMPRISES: (A) CERTAIN INCOME SHALL BE TAXABLE ONLY IN A PARTICU LAR CONTRACTING STATE. THIS TERM IS MANDATORY AND PRECLUDES THE OTH ER STATE FROM EXERCISING ITS RIGHT TO TAX. THEREFORE, THE INCOME OR CAPITAL MUST BE EXEMPTED FROM TAX IN THE OTHER CONTRACTING STATE. ( EXAMPLES: ARTICLES 8(1), 8(2), 12(1), 13(3), 13(5), 15(2), 18, 19(1), 19(2), 21(1), 22(3), 22(4)). (B) CERTAIN INCOME SHALL BE TAXABLE ONLY IN THE CONTRA CTING STATE..UNLESS. THIS TERM PROVIDES EXCLUSIVE PRIM ARY TAXING RIGHTS TO THE FIRST STATE. HOWEVER, IF CERTAIN CONDITIONS ARE MET (OR NOT MET), THE SAME INCOME MAY BE TAXED IN THE SECOND STATE. ( EXAMPLES: ARTICLES 7(1), 14(1), 15(1)). (C) CERTAIN INCOME MAY BE TAXED IN THAT OTHER STATE. THIS TERM HAS AN ENABLING RATHER THAN A MANDATORY IMPLICATION . IT GIVES A STATE THE OPTION OR RIGHT TO TAX IF IT SO WISHES, WITHOUT AFFECTING THE EXISTING ESSAR OIL LIMITED 50 RIGHTS OF THE OTHER CONTRACTING STATE. (EXAMPLES: A RTICLES 6(1), 13(1), 13(2), 15(3), 16,17(2), 22(2)). (D) CERTAIN INCOME MAY BE TAXED IN THE OTHER STATE BU T MAY ALSO BE TAXED IN THE FIRST STATE. THIS TERM GIVES BOTH STATES THE OPTIONAL RIGHT TO TAX, IF THEY WISH. THE ARTICLE MAY IMPOSE LIMITS ON SOURCE TAXATION IN CERTAIN CASES. (EXAMPLES: ARTICLES 10(2 ), 11(2)). (E) IN ONE CASE, THE ARTICLE SPECIFIES, SHALL NOT BE T AXED (ARTICLE 20). THE PHRASE SHALL BE TAXABLE OR MAY BE TAXED ARE GIVEN THE ORDINARY MEANING OF THE WORDS AS EXCLUSIVE OR NON-EXCLUSI VE TAXING RIGHTS, RESPECTIVELY. HENCE: (I) THE FIRST AND SECOND CASES ABOVE PROVIDED FOR MANDA TORY EXCLUSION BY THE OTHER STATE, UNLESS ACCEPTED IN TH E ARTICLE. THE FIRST CASE SPECIFICALLY REFERS TO TAX ALLOCATION AND NOT RELIEF, WITH EXEMPTION GRANTED BY THE OTHER STATE. THE RELIEF PRINCIPLE IS APPLICABLE IN THE SECOND CASE, IF THE OTHER STATE SATISFIES THE REQUI RED CONDITIONS AND EXERCISES ITS NON-EXCLUSIVE TAXING RIGHTS. (II) THE THIRD AND FOURTH CASES ARE SIMILAR AND PROVIDE FOR AN ENABLING, PUT NON-EXCLUSIVE, PROVISION. BOTH STATES HAVE THE OPTION TO EXERCISE THE RIGHT, WITH OR WITHOUT LIMITATION. SIN CE THE RIGHT OF THE OTHER STATE IS NOT DENIED, IT WOULD INVARIABLY LEAD TO TAX RELIEF FOR JURIDICAL DOUBLE TAXATION. FURTHER, PROF. KLAUS VOGEL HAS ELABORATED USAGE OF PHRASE SHALL BE TAXABLE ONLY TO MEAN THAT ITEMS OF INCOME OR CAPITAL CONCE RNED MUST BE EXEMPTED FROM TAX IN THE OTHER CONTRACTING STATE. T HIS PHRASE IS NORMALLY USED IN THE TAX PAYERS STATE OF RESIDENT. THE STAT E OF SOURCE THUS HAS TO GRANT EXEMPTION FOR THESE INSTANCES. THE EXPRESSION MAY BE TAXED REFERS ESSAR OIL LIMITED 51 TO THE STATE OF SOURCE AND THE LEGAL CONSEQUENCE IN THE STATE OF RESIDENT REMAINS OPEN. TAXATION IS LEFT TO THE STATE OF SOUR CE SUBJECT TO LIMITATION IN AMOUNT. WHETHER THE STATE OF RESIDENT MUST GRANT EX EMPTION OR ALLOW CREDIT FOR THE TAX PAID TO THE STATE OF SOURCE DEPENDS ON THE DISTRIBUTIVE RULES AS PROVIDED IN ARTICLE23A OR 23B. SIMILAR VIEW HAS BE EN EXPRESSED BY PHILIP BAKER IN HIS BOOK DOUBLE TAXATION CONVENTION AND INTERNATIONAL LAW. VIEW MOSTLY PREVALENT IN INDIA : 57. THE OTHER SCHOOL OF THOUGHT PREDOMINANTLY FOLLOWED IN INDIA FLOWS FROM THE VARIOUS JUDICIAL PRONOUNCEMENTS BY SOME OF THE HIGH COURTS. THIS VIEW HAS BEEN STRONGLY CANVASSED BY THE LEARNED SR. COUN SEL BEFORE US FOR THE PROPOSITION THAT THESE JUDGMENTS HAVE FOUND JUDICIA L ACCEPTANCE BY THE HON'BLE SUPREME COURT ALSO AND, HENCE, IT IS A LAW OF THE LAND INSOFAR AS INTERPRETATION OF THE PHRASE MAY BE TAXED IS CONCERNED. THE IMPORTANT JUDGMENTS WHICH HAVE BEEN RELIED UPON BY THE LEARNE D SR. COUNSEL ARE AS UNDER: I) CIT V/S R.M. MUTHAIAH, [1993] 202 ITR 508 (KAR.) IN THIS CASE, THE ISSUE WAS THAT THE ASSESSEE HAD EARNED INCOME IN MALAYSIA AND HAD CLAIMED IT AS EXEMPT FROM TAX I N INDIA IN VIEW OF DTAA BETWEEN INDIA AND MALAYSIA. THE ITO DI D NOT ACCEPT THE ASSESSEES CONTENTION AND INCLUDED THE I NCOME EARNED BY THE ASSESSEE IN MALAYSIA IN THE TOTAL INCOME OF THE ASSESSEE AND STATED THAT CREDIT WOULD BE GIVEN AFTER THE ASS ESSEE HAD PAID TAX ON THIS INCOME IN MALAYSIA. THE LEARNED CO MMISSIONER (APPEALS) HELD THAT THE INCOME EARNED IN MALAYSIA W AS EXEMPT IN INDIA BY VIRTUE OF DTAA. THIS DECISION OF THE FI RST APPELLATE AUTHORITY WAS AFFIRMED BY THE TRIBUNAL. HERE ALSO, THE ISSUE WAS WITH REGARD TO ARTICLE6(1) OF INDOMALAYSIA DTAA W HICH READS AS INCOME FROM IMMOVABLE PROPERTY MAY BE TAXED IN THE ESSAR OIL LIMITED 52 CONTRACTING STATE IN WHICH SUCH PROPERTY IS SITUATE D . THE DEPARTMENTS MAIN CONTENTION WAS THAT IN VIEW OF TH E SECTIONS 4 AND 5 OF THE ACT, THE ASSESSEE BEING RESIDENT IN IN DIA, HIS INCOME FROM WHATEVER SOURCE IS LIABLE TO BE TAXED U NDER THE INDIAN INCOME TAX ACT AND WHATEVER TAX HAVE BEEN PA ID IN MALAYSIA, THE CREDIT WOULD BE GIVEN UNDER ARTICLE2 2 OF THE SAID AGREEMENT. IT WAS ARGUED THAT THE EFFECT OF ARTICLE 6(1) IS THAT IT TAKES AWAY THE JURISDICTION OF POWER OF THE INDIAN GOVERNMENT TO LEVY ANY TAX ON THE INCOME FROM IMMOVABLE PROPERTY SITUATED IN MALAYSIA. THUS, ACCORDING TO THE DEPARTMENT, INCOME FROM IMMOVABLE PROPERTY IN MALAYSIA WILL LEAD TO TAXING OF THE SAME BY BOTH GOVERNMENT OF INDIA AS WELL AS THE GOVERNME NT OF MALAYSIA BY VIRTUE OF SECTION 5 OF THE INCOME TAX A CT, 1961. THE HIGH COURT NEGATING THE STAND OF THE DEPARTMENT, OP INED AS UNDER: WHEN A POWER IS SPECIFICALLY RECOGNIZED AS VESTING IN ONE, EXERCISE OF SUCH A POWER BY OTHERS IS TO BE READ AS NOT AVAILABLE ; SUCH A RECOGNITION OF POWER WITH THE MA LAYSIAN GOVERNMENT WOULD TAKE AWAY THE SAID POWER FROM THE INDIAN GOVERNMENT ; THE AGREEMENT THUS OPERATES AS A BAR O N THE POWER OF THE INDIAN GOVERNMENT IN THE INSTANT CASE. THIS BAR WOULD OPERATE ON SECTIONS 4 AND 5 OF THE INCOME TA X ACT, 1961, ALSO CLAUSE 2 OF ARTICLE 22 IS ATTRACTED ONLY WHEN TAX IS LEVIED BY BOTH COUNTRIES. IN A CASE WHERE ONE OF TH E GOVERNMENTS IS PRECLUDED FROM LEVYING A TAX ON THE INCOME IN VIEW OF THE SPECIFIC PROVISION IN THE AGREEMENT, TH E SAID CLAUSE- 2 CANNOT BE ATTRACTED AT ALL. THE VERY LANGUAGE OF CLAUSE 2 INDICATES THAT THE TAX SHALL HAVE TO BE PAID UNDER THE LAW OF BOTH THE COUNTRIES. THE WORDS IN CLAUSE 2(A) TO THE EFFECT IN RESPECT OF INCOME FROM SOURCE WITHIN MALAYSIA, WHIC H HAS TO BE SUBJECTED TO TAX BOTH IN INDIA AND MALAYSIA. .. CLEARLY INDICATES THAT THERE SHOULD BE A LEVY BY BOTH THE COUNTRIES BEFORE THE SAID CLAUSE COULD BE ATTRACTED . SECTION 90(A) OF THE INCOME-TAX ACT ALSO REFERS TO THE GRANTING OF RELIEF IN RESPECT OF INCOME ON WHICH INCOME TAX HAS BEEN PAID BOTH UNDER THE SAID ACT AND UNDER THE INCOME-T AX ACT OF THE OTHER COUNTRY. SIMILARLY, CLAUSE (B) ALSO REFER S TO THE AVOIDANCE OF DOUBLE TAXATION. WE ARE NOT CONCERNED WITH THE OTHER CLAUSES OF SECTION 90 IN THE INSTANT CASE. IN OTHER WORDS, THE PARTIES TO AN AGREEMENT TO AVOID DOUBLE TAXATIO N IS TO GRANT ESSAR OIL LIMITED 53 RELIEF TO THE ASSESSEE IN CASE THE LAW OF TWO COUNT RIES OPERATES ON THE SAME INCOME AND THE ASSESSEE MAY HAVE TO PAY TAX IN BOTH COUNTRIES. THE REVENUES CONTENTION IN THE INS TANT CASE IS ENTIRELY BASED ON SECTIONS 4 AND 5. BUT THESE PROVI SIONS SHALL HAVE TO BE READ SUBJECT TO THE PROVISIONS OF THE AG REEMENT IN QUESTION. THE AGREEMENT IN QUESTION, BY NECESSARY I MPLICATION, TAKES AWAY THE POWER OF THE INDIAN GOVERNMENT TO LE VY TAX ON THE INCOME IN RESPECT OF CERTAIN CATEGORIES AS PER ARTICLES 6,7,8,9,10,11, ETC. OF THE AGREEMENT. IN CASE THE I NCOME FROM A SOURCE IS NOT COVERED BY ANY OF THE PROVISIONS OF THE AGREEMENT, THEN THE PROVISIONS OF SECTIONS 4 AND 5 OF THE INCOME TAX ACT WOULD OPERATE ON THE SAID INCOME AN D THE TAX CERTAINLY COULD BE LEVIED BY THE INDIAN GOVERNMENT. IN SUCH AN EVENT, TO CLAIM THE BENEFIT AGAINST DOUBLE TAXATION , CLAUSE 2 OF ARTICLE 22 OF THE AGREEMENT SHALL HAVE TO BE SATISF IED. THE HIGH COURT ALSO REFERRED TO CBDT CIRCULAR NO.33 3, DATED 2 ND APRIL 1982 WHICH PROVIDED THAT WHERE A SPECIFIC PRO VISION IS MADE IN THE DTAA THAT PROVISION WILL PREVAIL OVER T HE GENERAL PROVISIONS CONTAINED IN THE INCOME TAX ACT, 1961. T HUS, THE HIGH COURT, THOUGH NOT SPECIFICALLY DISCUSSED THE P HRASEOLOGY OF MAY BE TAXED BUT IN THE CONTEXT OF VARIOUS ARTICLES, WHEREIN THIS PHRASE HAS BEEN USED, HAS HELD THAT ONCE THE T AX HAS BEEN PAID IN THE OTHER COUNTRY, IT TAKES AWAY THE POWER OF THE INDIAN GOVERNMENT TO LEVY TAX ON SUCH INCOME. WHILE DOING SO, THEIR LORDSHIPS HAVE ALSO REFERRED TO ARTICLE7 WHEREIN T HE PHRASEOLOGY USED WAS MAY BE TAXED . THIS JUDGMENT IN A WAY LAYS DOWN THE PROPOSITION THAT AN INCOME HAS BEEN T AXED IN THE SOURCE COUNTRY; THE INDIAN GOVERNMENT LOSES ITS RIG HT TO TAXATION. HENCE, THERE IS NO QUESTION OF GIVING ANY CREDIT IN INDIA. II) CIT V/S S.R.M. FIRM AND OTHERS, [1994] 208 ITR 400 (MAD. ) IN THIS CASE, THERE WERE BUNCH OF APPEALS WITH REG ARD TO INDO MALAYSIAN DTAA WHEREIN THE MAIN ISSUE WAS THE INCOM E DERIVED FROM RUBBER ESTATE IN MALAYSIA AND CAPITAL GAIN ARI SING FROM SALE OF PROPERTY IN MALAYSIA, WHETHER CAN BE ASSESSED IN INDIA OR NOT. ESSAR OIL LIMITED 54 IN THIS CASE, THE HIGH COURT THOUGH HELD THAT THE M ALAYSIAN INCOME COULD NOT BE SUBJECTED TO TAX IN INDIA IN AC CORDANCE WITH THE PROVISIONS OF DTAA AND HERE ALSO THE ISSUE RELA TED TO INTERPRETATION OF ARTICLES6 AND 7. IN THIS CASE, T HE HIGH COURT SPECIFICALLY, DEALT WITH THE EXPRESSION MAY BE TAXED . THE RELEVANT OBSERVATIONS GIVEN AT PAGE420 (OF ITR PUB LICATION), ARE AS UNDER: THE CONTENTION ON BEHALF OF THE REVENUE THAT WHERE VER THE ENABLING WORDS SUCH AS MAY BE TAXED ARE USED THERE IS NO PROHIBITION OR EMBARGO UPON THE AUTHORI TIES EXERCISING POWERS UNDER THE INCOME-TAX ACT, 1961, F ROM ASSESSING THE CATEGORY OR CLASS OF INCOME CONCERNED CANNOT BE COUNTENANCED AS OF SUBSTANCE OR MERIT. AS RIGHTLY POINTED OUT ON BEHALF OF THE ASSESSEES, WHE N REFERRING TO AN OBVIOUS POSITION SUCH ENABLING FORM OF LANGUAGE HAS BEEN LIBERALLY USED AND THE SAME CANNO T BE TAKEN ADVANTAGE OF BY THE REVENUE TO CLAIM FOR IT A RIGHT TO BRING TO ASSESSMENT THE INCOME COVERED BY SUCH CLAUSES IN THE AGREEMENT, AND THAT THE MANDATORY FO RM OF LANGUAGE HAS BEEN USED ONLY WHERE THERE IS ROOM OR SCOPE FOR DOUBTS OR MORE THAN ONE VIEW POSSIBLE, BY IDENTIFYING AND FIXING THE POSITION AND PLACING IT BEYOND DOUBT. THE RELIANCE SOUGHT TO BE PLACED ON BEHALF O F THE REVENUE ON THE COMMENTARIES ON THE ARTICLES OF THE MODEL CONVENTION OF 1977 PRESENTED BY THE ORGANIZAT ION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD) IS INAPPROPRIATE AND UNJUSTIFIED. FURTHER, IT IS NOT R EALLY THE FORMAT ADOPTED THAT REALLY MATTERS WHEN BASICALLY T HEY DIFFER IN THEIR CONTENT AND APPROACH. A PERUSAL AND COMPARISON OF THE CONTENT AND PURPORT OF THE ARTICL ES IN THE MODEL CONVENTION AND THOSE ACTUALLY FOUND IN TH E AGREEMENT WITH MALAYSIA UNDER CONSIDERATION WOULD G O TO SHOW THE WIDE RANGE OF DIFFERENCE WHICH WOULD PER S E ESSAR OIL LIMITED 55 RENDER THE COMMENTARIES ON THE MODEL CONVENTION WHO LLY INAPPLICABLE AND EXPOSE THE UNREASONABLENESS AND FUTILITY IN SEEKING TO APPLY THE SAME AS A GUIDE FO R INTERPRETATION AND CONSTRUCTION OF THE ARTICLES IN THE AGREEMENT UNDER CONSIDERATION. WE ARE OF THE VIEW T HAT THE COMMENTARIES RELIED UPON CAN BE OF NO USE AND U TILITY AND CANNOT ALSO AFFORD A SAFE OR RELIABLE GUIDE OR AID FOR SUCH CONSTRUCTION. THUS, IN THIS CASE, NOT ONLY THE HIGH COURT HAS SPE CIFICALLY DEALT WITH THE PHRASE MAY BE TAXED, BUT HAS ALSO DISCARDED THE RELIANCE PLACED IN THE COMMENTARIES GIVEN BY THE OE CD ON MODEL CONVENTION. THUS, THE INTERPRETATION OF THE P HRASE MAY BE TAXED WAS MEANT TO MEAN THAT ONCE THE INCOME IS LIABLE TO BE TAXED IN MALAYSIA OR HAS BEEN TAXED THERE, THEN THE GOVERNMENT OF INDIA CANNOT LEVY TAX ON THAT INCOME OR INCLUDE SUCH INCOME IN THE TOTAL INCOME OF THE ASSESSEE. TH US, IN THIS JUDGMENT, TWO MAIN PROPOSITION HAS BEEN LAID DOWN A S SUBMITTED BY MR. DASTUR ALSO, THAT FIRSTLY, THE PHR ASE MAY BE TAXED HAS BEEN SPECIFICALLY EXPLAINED SO AS TO MEAN THAT THE INCOME WHICH HAS BEEN TAXED IN THE COUNTRY OF SOURC E, PRECLUDES THE STATE OF RESIDENCE FOR TAXING THE SAME AND, SEC ONDLY, THE OECD COMMENTARY AND OTHER VIEWS TAKEN BY THE INTERN ATIONAL JURIST CANNOT BE REFERRED TO AND RELIED UPON, WHICH WAS THE MAIN HARPING POINT OF THE LEARNED DEPARTMENTAL REPRESENT ATIVE. III) UNION OF INDIA V/S AZADI BACHAO ANDOLAN & ANR., [20 03] 263 ITR 706 (SC) THIS JUDGMENT WAS REFERRED BY THE LEARNED SR. COUN SEL FOR THE PROPOSITION THAT IN THIS CASE THE HON'BLE SUPREME C OURT HAS APPROVED THE REASONING OF THE DECISION GIVEN BY THE HONBLE KARNATAKA HIGH COURT IN R.M. MUTHAIAH (SUPRA), WHER EIN IT HAS ESSAR OIL LIMITED 56 BEEN CATEGORICALLY HELD THAT IN THE CONTEXT OF ARTI CLE6(1) OF INDOMALAYSIA TREATY THAT, ONCE THE INCOME IS TAXAB LE IN MALAYSIA, THEN THE SAME CANNOT BE TAXED IN INDIA. O N A PERUSAL OF THE JUDGMENT OF THE HON'BLE SUPREME COURT, IT IS SEEN THAT THE HON'BLE SUPREME COURT HAS AFFIRMED THE JUDGMENT OF R.M. MUTHAIAH (SUPRA) ON THE ISSUE, WHETHER PROVISIONS O F SECTIONS 4 AND 5 ARE SUBJECT TO THE PROVISIONS OF SECTION 90 A ND IN CASE OF ANY CONFLICT BETWEEN THESE PROVISIONS, SECTION 90 W ILL PREVAIL. IN THIS CONTEXT, THE HON'BLE SUPREME COURT HAS REFERRE D TO SERIES OF DECISIONS AND ONE OF THEM BEING THE DECISION OF R.M . MUTHAIAH (SUPRA), WHICH HAS BEEN DEALT WITH AT PAGES723 TO 725 OF ITR PUBLICATION), WHEREIN IT HAS BEEN OBSERVED AND HELD AS FOLLOWS: A SURVEY OF THE AFORESAID CASES MAKES IT CLEAR THA T THE JUDICIAL CONSENSUS IN INDIA HAS BEEN THAT SECTION 9 0 IS SPECIFICALLY INTENDED TO ENABLE AND EMPOWER THE CEN TRAL GOVERNMENT TO ISSUE A NOTIFICATION FOR IMPLEMENTATI ON OF THE TERMS OF A DOUBLE TAXATION AVOIDANCE AGREEMENT. WHEN THAT HAPPENS, THE PROVISIONS OF SUCH AN AGREEM ENT, WITH RESPECT TO CASES TO WHICH WHERE THEY APPLY, WO ULD OPERATE EVEN IF INCONSISTENT WITH THE PROVISIONS OF THE INCOME TAX ACT. WE APPROVE OF THE REASONING IN THE DECISIONS WHICH WE HAVE NOTED. IF IT WAS NOT THE IN TENTION OF THE LEGISLATURE TO MAKE A DEPARTURE FROM THE GEN ERAL PRINCIPAL OF CHARGEABILITY TO TAX UNDER SECTION 4 A ND THE GENERAL PRINCIPAL OF ASCERTAINMENT OF TOTAL INCOME UNDER SECTION 5 OF THE ACT, THEN THERE WAS NO PURPOSE IN MAKING THOSE SECTIONS SUBJECT TO THE PROVISIONS OF THE A CT. THE VERY OBJECT OF GRAFTING THE SAID TWO SECTIONS WITH THE SAID CLAUSE IS TO ENABLE THE CENTRAL GOVERNMENT TO ISSUE A NOTIFICATION UNDER SECTION 90 TOWARDS IMPLEMENTATIO N OF THE TERMS OF THE DTAS WHICH WOULD AUTOMATICALLY OVE RRIDE THE PROVISIONS OF THE INCOME-TAX AND ASCERTAINMENT OF ESSAR OIL LIMITED 57 TOTAL INCOME, TO THE EXTENT OF INCONSISTENCY WITH T HE TERMS OF THE DTAC. THUS, THE ISSUE OF INTERPRETATION OF THE PHRASE MAY BE TAXED WAS NOT DIRECTLY DEALT WITH BY THE HON'BLE SUPREME COURT BUT IN A WAY IT CAN BE HELD THAT THE ENTIRE REASONING OF T HE DECISION OF R.M. MUTHAIAH (SUPRA) HAS BEEN AFFIRMED. ON A PERUSAL OF THE ENTIRE JUDGMENT, OF AZADI BACHAO ANDOLAN, ONE VERY IMPORTANT FEATURE IS NOTICEABLE, WHICH IS A SLIGHT DEVIATION FROM ONE OF THE VIEW EXPRESSED BY THE HONBLE HIGH COURT IN S.R.M. FIRM & ORS (SUPRA) THAT THE OECD COMMENTARY CANNOT BE RELIED UPON IN THE CO NTEXT OF INDIA, IS THAT THE HON'BLE SUPREME COURT HAS REFERRED TO AND RELIE D UPON NOT ONLY THE OECD COMMENTARY AND MODEL CONVENTION BUT ALSO VIEWS OF EMINENT INTERNATIONAL JURIST LIKE PHILIP BAKER, KLAUS VOGEL , LORD MC NAIR AND CATENA OF FOREIGN COURT DECISION. THE HON'BLE SUPREME COURT H AS REPEATEDLY REFERRED TO AND HEAVILY RELIED UPON THESE INTERNATIONAL VIEW S IN SUPPORT OF THEIR REASONING. THIS IS EVIDENT FROM PARAGRAPHS APPEARI NG FROM PAGES741 TO 753. THUS, IN VIEW OF THIS CATEGORICAL EXPRESSION B Y THE HON'BLE SUPREME COURT IN RELYING UPON THE FOREIGN DECISIONS AND INT ERNATIONAL VIEWS INCLUDING THAT OF THE OECD COMMENTARY ON MODEL CONVENTION, SU CH OBSERVATION AND FINDINGS OF THE MADRAS HIGH COURT JUDGMENT IN S.R.M . FIRM & ORS. (SUPRA) CANNOT BE HELD AS A LAW THAT OECD COMMENTARY CANNOT BE RELIED UPON AT ALL. ONCE THE HON'BLE SUPREME COURT DID NOT HAVE ANY INH IBITION ON RELYING ON THE VIEWS EXPRESSED IN THE COMMENTARY AND THE VIEWS OF EMINENT JURIST GIVING INTERPRETATION OF THE TREATIES, THEN IT CANN OT BE HELD THAT SUCH A COMMENTARY CANNOT BE REFERRED TO FOR TAKING A CLUE AS EXTERNAL AID FOR INTERPRETATION OF VARIOUS PHRASES USED IN THE TAX T REATIES. THESE COMMENTARIES THOUGH MAY NOT HAVE BINDING PRECEDENCE BUT CERTAINLY HAVE A PERSUASIVE VALUE IN UNDERSTANDING THE EXPRESSION US ED IN THE AGREEMENT WHICH ALSO REFLECTS THE INTENTION OF THE PARTIES WH O ARE PARTY TO THE AGREEMENT AS MOST OF THE TREATIES ARE BASED ON MODE L CONVENTION. WHEN THE ESSAR OIL LIMITED 58 MODEL CONVENTION OF THE TREATY OR OECD MODEL HAS BE EN MADE THE BASIS OF THE AGREEMENT THEN THE COMMENTARIES GIVEN UNDER THE SE CONVENTIONS ACT AS AN EXTERNAL AID AND A GUIDING FACTOR FOR INTERPRETI NG CERTAIN WORDS AND EXPRESSION USED AND IT IS ASSUMED THAT THE PARTIES TO THE AGREEMENT UNDERSTOOD THE SAME IN THE MANNER PROVIDED BY THE C OMMENTARIES. ACCORDINGLY, WE DO NOT FEEL PERSUADED BY THE ARGUME NT OF THE LEARNED SR. COUNSEL THAT THE OECD COMMENTARIES AND INTERNATIONA L VIEWS CANNOT BE RELIED UPON AT ALL IN VIEW OF THE DECISION IN S.R.M . FIRMS & ORS. (SUPRA). IV) CIT V/S P.V.A.L. KULANDAGAN CHETTIAR, [2004] 267 IT R 654 (SC) THIS JUDGMENT HAS BEEN RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE AS WELL AS BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. IN FACT, BASED ON THIS JUDGMENT, TH E TRIBUNAL AND THE HIGH COURT IN ASSESSEES CASE HAVE DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. THIS WAS A CASE OF INDOMAL AYSIAN DTAA, WHEREIN THE ISSUE REVOLVED AROUND WHETHER A PERSON WHO IS RESIDENT IN BOTH THE CONTRACTING STATES IS DEEMED T O BE A RESIDENT OF THAT CONTRACTING STATE WITH WHICH HIS P ERSONAL AND ECONOMIC RELATIONS ARE CLOSER. THE BRIEF FACTS EMAN ATING FROM THE SAID DECISION ARE THAT THE ASSESSEE FIRM OWNED AN I MMOVABLE PROPERTY AT MALAYSIA AND DURING THE YEAR UNDER ASSE SSMENT, THE ASSESSEE EARNED INCOME FROM THE RUBBER ESTATE. IT A LSO SOLD THE PROPERTY IN MALAYSIA ON WHICH SHORT TERM CAPITAL GA IN HAD ARISEN. THE ITO ASSESSED BOTH THE INCOME AS ASSESSABLE IN I NDIA AND BROUGHT THE SAME TO TAX IN INDIA. IN THE FIRST APPE AL, THE LEARNED COMMISSIONER (APPEALS) HELD THAT UNDER ARTICLE7(1) UNLESS THE ASSESSEE HAS A P.E. OF BUSINESS IN INDIA, SUCH BUSI NESS INCOME IN MALAYSIA CANNOT BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE AND ALSO NO PART OF THE CAPITAL GAIN ARISEN IN MALA YSIA CAN BE TAXED IN INDIA. THE ORDER OF THE FIRST APPELLATE AU THORITY WAS ALSO CONFIRMED BY THE TRIBUNAL ONE VERY IMPORTANT FACT I S THAT THE ESSAR OIL LIMITED 59 DECISION OF S.R.M. FIRM & ORS. (SUPRA) WAS ALSO A S UBJECT MATTER OF THE APPEAL BEFORE THE HON'BLE SUPREME COURT. THE HON'BLE SUPREME COURT AFFIRMING THE DECISION OF HIGH COURT OBSERVED AND HELD AS UNDER: '14. HENCE, IN THESE APPEALS, WE ARE CONCERNED WITH INCOME ARISING FROM IMMOVABLE PROPERTY. WE WILL PRO CEED ON THE BASIS THAT FISCAL CONNECTION ARISES IN RELAT ION TO TAXATION EITHER BY REASON OF RESIDENCE OF THE ASSES SEE 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 A RT. IV WHICH STATES THAT IN A CASE WHERE THE PERSON IS A R ESIDENT IN BOTH THE CONTRACTING STATES, FISCAL DOMICILE WIL L HAVE TO BE DETERMINED WITH REFERENCE TO THE FACT THAT IF TH E CONTRACTING STATE WITH WHICH HIS PERSONAL AND ECONO MIC RELATIONS ARE CLOSER, HE SHALL BE DEEMED TO BE A RE SIDENT OF THE CONTRACTING STATE IN WHICH HE HAS AN HABITUA L ABODE. THIS IMPLIES THAT TAX LIABILITY ARISES IN RE SPECT 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. 15. THE IMMOVABLE PROPERTY IN QUESTION IS SITUATED IN MALAYASIA 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 REG ARD TO CARRYING ON THE BUSINESS OF RUBBER PLANTATIONS IN MALAYASIA PUT OF WHICH INCOME IS DERIVED AND THAT F INDING OF FACT HAS BEEN RECORDED BY ALL THE AUTHORITIES AN D AFFIRMED BY THE HIGH COURT. WE, THEREFORE, DO NOT P ROPOSE TO RE-EXAMINE THE QUESTION WHETHER THE FINDING IS C ORRECT OR NOT. PROCEEDING ON THAT BASIS, WE HOLD THAT BUSI NESS INCOME OUT OF RUBBER PLANTATIONS CANNOT BE TAXED IN INDIA ESSAR OIL LIMITED 60 BECAUSE OF CLOSER ECONOMIC RELATIONS BETWEEN THE ASSESSEE AND MALAYSIA IN WHICH THE PROPERTY IS LOCA TED AND WHERE THE PERMANENT ESTABLISHMENT HAS BEEN SET UP WILL DETERMINE THE FISCAL DOMICILE. ON THE FIRST IS SUE, THE VIEW TAKEN BY THE HIGH COURT IS CORRECT. FURTHER, ON THE ISSUE OF INTERPRETATION OF THE EXPR ESSION MAY BE TAXED , THE HON'BLE SUPREME COURT HAS REFRAINED FROM EXPRESSING ANY OPINION. THE RELEVANT OBSERVATIONS O F THE HONBLE SUPREME COURT ARE REPRODUCED HEREUNDER AS THIS HAS BEEN HEAVILY RELIED UPON BY THE LEARNED DEPARTMENTAL REP RESENTATIVE. 16. WE NEED NOT ENTER INTO AN EXERCISE IN SEMANTIC S AS TO WHETHER THE EXPRESSION MAY BE WILL MEAN ALLOCA TION OF POWER TO TAX OR IS ONLY ONE OF THE OPTIONS AND I T ONLY GRANTS POWER TO TAX IN THAT STATE AND UNLESS TAX IS IMPOSED AND PAID, NO RELIEF CAN BE SOUGHT. REGARDIN G THE TREATY IN QUESTION AS A WHOLE WHEN IT IS INTENDED T HAT 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 B E A RESIDENT OF A CONTRACTING STATE WHERE HIS PERSONAL AND ECONOMIC RELATIONS ARE CLOSER, THEN HIS RESIDENCE I N INDIA WILL BECOME IRRELEVANT. THE TREATY WILL HAVE TO BE INTERPRETED AS SUCH AND PREVAILS OVER SS. 4 AND 5 O F THE ACT. THEREFORE, WE ARE OF THE VIEW THAT THE HIGH CO URT IS JUSTIFIED IN REACHING ITS CONCLUSION, THOUGH FOR DI FFERENT REASONS FROM THOSE STATED BY THE HIGH COURT. IF WE ANALYSE THIS JUDGMENT THEN IN THIS CASE THE H ON'BLE SUPREME COURT HAS RENDERED ITS DECISION AFTER CONSI DERING THE FACT THAT THERE WAS A CLOSE ECONOMIC RELATION BETWE EN THE ASSESSEE AND MALAYSIA AND THE P.E. OF THE ASSESSEE WAS IN MALAYSIA AND THERE WAS NO P.E. IN INDIA. THEREFORE, THE ASSESSEE ESSAR OIL LIMITED 61 WAS DEEMED TO BE RESIDENT OF MALAYISA. ONCE THE TAX PAYER IS DEEMED TO BE A RESIDENT OF MALAYSIA, INDIAN RESIDEN CY WAS IMMATERIAL. FROM THE ANALYSIS OF THE ABOVE DECISION , TWO THINGS ARE ABSOLUTELY CLEAR FIRSTLY, THE HON'BLE SUPREME C OURT HAS REFRAINED ITSELF FROM GIVING ANY INTERPRETATION ON THE PHRASE MAY BE TAXED , SECONDLY, THE REASONING OF THE HIGH COURT WAS UPHELD ON DIFFERENT GROUND. THIS DECISION DOES NOT EXPRESS ANY LAW ON THE INTERPRETATION OF THE PHRASE MAY BE TAXED . V) DCIT V/S TURQUOISE INVESTMENTS AND FINANCE LTD., [2 008] 299 ITR 143 (M.P) AND AFFIRMED BY THE HON'BLE SUPREME C OURT IN [2008] 300 ITR 001 . THIS JUDGMENT WAS AGAIN IN RELATION TO THE INDO MA LAYSIA DTAA AND THE MATTER RELATED TO THE DIVIDEND RECEIVED IN MALAYSIA WHICH WAS CLAIMED BY THE ASSESSEE AS NOT TAXABLE IN INDIA. THE HIGH COURT ACCEPTED THE ASSESSEES CONTENTION AND U PHELD THE VIEW TAKEN BY THE TRIBUNAL. THE HIGH COURT HAS STRO NGLY REFERRED TO AND RELIED UPON THE DECISIONS OF S.R.M. FIRM & O RS. (SUPRA), R.M. MUTHAIAH (SUPRA) AND P.V.A.L. KULANDAGAN CHETT IAR (SUPRA). THE HIGH COURT ALSO HELD THAT THE HON'BLE SUPREME C OURT IN P.V.A.L. KULANDAGAN CHETTIAR (SUPRA) HAS AFFIRMED T HE DECISION OF S.R.M. FIRM & ORS. (SUPRA). THIS DECISION OF THE HIGH COURT HAS BEEN AFFIRMED BY THE HON'BLE SUPREME COURT IN T HE SAME CASE REPORTED AS 300 ITR 001. THE HON'BLE SUPREME C OURT AFFIRMED THE DECISION OF HIGH COURT AFTER OBSERVING AND HOLDING AS UNDER: 10. WE HAVE GONE THROUGH THE JUDGMENT OF THE MADRA S HIGH COURT IN CIT V. VR. S.R. M FIRM [1994] 208 ITR 400 AND THE JUDGMENT OF THIS COURT IN CIT V. P.V. A. L. KULANADAGAN CHETTIAR [2004] 267 ITR 654 AND WE ARE SATISFIED THAT THE POINT INVOLVED IN THESE APPEALS STANDS ESSAR OIL LIMITED 62 CONCLUDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THE MADRAS HIGH COURT IN CIT V. VR. S.R.M. FIRM[1994] 208 ITR 400 WHICH WAS DULY AFFIRMED BY THIS COURT IN THE CASE OF CIT V. P.V.A. L. KULANDAGAN CHETTIAR [2004] 267 ITR 654. INCIDENTALL Y, IT MAY BE MENTIONED THAT THE REVIEW PETITION FILED AGA INST THE DECISION OF THIS COURT IN CIT V. P.V. A. L. KUL ANDAGAN CHETTIAR [2004] 267 ITR 654 WAS ALSO DISMISSED ON NOVEMBER 1, 2007. THUS, THE HON'BLE SUPREME COURT REITERATED AND AFFI RMED THE DECISION OF S.R.M. FIRM & ORS. (SUPRA) ON THE GROUND THAT TH E SAME HAS BEEN AFFIRMED BY THE HON'BLE SUPREME COURT IN P.V.A.L. KULANDAGAN CHETTIAR (SUPRA). THE AFORESAID DECISION HAVE BEEN EXTENSIVELY REFERRED T O AND RELIED UPON BY THE LEARNED SR. COUNSEL FOR THE PROPOSITION THAT THERE CANNOT BE ANY DOUBT ABOUT THE INTERPRETATION OF PHRASE USED MAY BE TAXED IN THE DTAA AND SUCH AN INTERPRETATION ASSUMES THE CHARACTER OF BEING LAW L AID DOWN BY THE HON'BLE SUPREME COURT WHICH IS BINDING ON ALL THE SUBORDINA TE COURTS. NOT ONLY THIS, HE SUBMITTED THAT IN ASSESSEES CASE, THE HON'BLE J URISDICTIONAL HIGH COURT HAS AFFIRMED THE SAID PROPOSITION AND THE SAME IS B INDING. 57. IF WE ANALYSE ALL THE JUDGMENTS AS HAVE BEEN REFER RED TO ABOVE, IT IS EVIDENT THAT: FIRSTLY, IN R.M. MUTHAIAH (SUPRA), THE EXPRESSION MAY BE TAXED HAS NOT BEEN EXPRESSLY DEALT WITH, HOWEVER, IN THE CONTEXT OF ARTICLE6(1), WHEREIN SIMILAR PHRASEOLOG Y HAS BEEN USED, THE HIGH COURT HAS GIVEN ITS DECISION THAT ON CE IT HAS BEEN TAXED IN THE FOREIGN COUNTRY, THE SAME CANNOT BE TAXED IN INDIA. THUS, THIS DECISION IN A WAY INTERPRETS T HE PHRASE MAY BE TREATED TO MEAN THAT SOURCE COUNTRY HAS A RIGHT TO TAX TO THE EXCLUSION OF RESIDENT STATE; ESSAR OIL LIMITED 63 SECONDLY, IN S.R.M. FIRM & ORS. (SUPRA), THE HIGH COURT HAS IN A VERY CLEAR TERMS, HAS INTERPRETED THE EXPRESSI ON MAY BE TAXED TO MEAN THAT ONCE THE INCOME IS TAXABLE IN OTHER CONTRACTING STATE THAT IS COUNTRY OF SOURCE THEN CO UNTRY OF RESIDENT I.E., INDIA IS PRECLUDED FROM INCLUDING TH E SAME INCOME IN INDIA; THIRDLY, THE HON'BLE SUPREME COURT IN AZADI BACHAO ANDOLAN (SUPRA), HAS APPROVED THE REASONING OF R.M. MUTHAIA H (SUPRA) IN AN ENTIRELY DIFFERENT CONTEXT, THEREFORE, IT CAN NOT BE HELD THAT THE HON'BLE SUPREME COURT HAS CARVED OUT ANY E XPRESS LAW ON THE PHRASEOLOGY OF MAY BE TAXED ; FOURTHLY, IN P.V.A.L. KULANDAGAN CHETTIAR (SUPRA)S THE HON'BLE SUPREME COURT HAS SPECIFICALLY REFRAINED FR OM GIVING ANY SUCH INTERPRETATION OF MAY BE TAXED AND AFFIRMED THE DECISION OF HIGH COURT ON A DIFFERENT REASONING AND GROUNDS. THUS, THIS DECISION DOES NOT CARVE OUT ANY EXPRESS LAW ON THE PHRASE MAY BE TAXED ; AND LASTLY, THE HON'BLE SUPREME COURT IN TURQUOISE INVE STMENTS AND FINANCE LTD. (SUPRA) HAS NOT ONLY CONFIRMED THE DECISION OF R.M. MUTHAIAH (SUPRA) BUT ALSO DECISION OF THE M .P. HIGH COURT, WHEREIN EXTENSIVELY RELIANCE WAS PLACED ON T HE DECISION OF S.R.M. FIRM & ORS. (SUPRA). THUS, THIS DECISION OF THE HON'BLE SUPREME COURT IN A WAY HAS CONFIRMED TH E ENTIRE REASONING OF THE S.R.M. FIRM & ORS. (SUPRA) WHICH, IN OUR OPINION, IS SLIGHTLY DIFFERENT FROM THE JUDGMENT OF THE HON'BLE SUPREME COURT IN P.V.A.L. KULANDAGAN CHETTIAR (SUPR A) TO THE EXTENT THAT THE PHRASE MAY BE TAXED WAS NOT EXPRESSLY DEALT WITH BY THE HON'BLE SUPREME COURT AS THE REAS ONING OF THE HIGH COURT WAS AFFIRMED ON DIFFERENT GROUND. TH US, THE ESSAR OIL LIMITED 64 LATER DECISION OF THE HON'BLE SUPREME COURT IN TURQ UOISE INVESTMENTS AND FINANCE LTD. (SUPRA) R CAN BE SAID TO BE THE VIEW EXPRESSED BY THE DECISION IN S.R.M. FIRMS & OR S. (SUPRA) BY THE MADRAS HIGH COURT. IN THIS BACKGROUND, THAT THE THREE HIGH COURTS HAVE EXPRESSED THEIR VIEWS AND WHICH HAVE BEEN AFFIRMED BY THE HON'BLE S UPREME COURT IN SOME CONTEXT OR THE OTHER, SPECIALLY THE DECISION OF TUR QUOISE INVESTMENTS AND FINANCE LTD. (SUPRA), WHEREIN THE APEX COURT HAS AP PROVED THESE DECISIONS COMPLETELY, THEN AS A JUDICIAL PRECEDENCE, ONE HAS TO ACCEPT THAT THE PHRASE MAY BE TAXED HAS TO BE INFERRED AS ALLOCATING THE TAXING RIGHT TO THE SOURCE COUNTRY ONLY ON THE INCOME EARNED IN SUCH COUNTRY A ND THE COUNTRY OF RESIDENT IS COMPLETELY PRECLUDED FROM TAXING THE SA ME INCOME. 58. AT THIS JUNCTURE, IT WOULD BE NECESSARY TO BRIEFLY REFER TO CONTRARY DECISIONS TO THE AFORESAID PROPOSITION. THESE JUDGM ENTS ARE:- (I) TELECOMMUNICATION CONSULTANT INDIA LTD. V/S ACIT, I TA NO.1293 & 1294/DEL./2009, ORDER DATED 29 TH MARCH 2012 THIS DECISION HAS EXTENSIVELY BEEN REFERRED TO AND RELIED UPON THE OECD COMMENTARY AND HAS DISTINGUISHED THE JUDGM ENT IN P.V.A.L. KULANDAGAN CHETTIAR (SUPRA) ON THE GROUND THAT THE PHRASE MAY BE TAXED HAS NOT BEEN EXPRESSLY DEALT WITH. HOWEVER, THIS DECISION DOES NOT DISTINGUISH THE OTH ER THREE HIGH COURT DECISIONS AND THE JUDGMENT OF HON'BLE SUPREME COURT IN TURQUOISE INVESTMENTS AND FINANCE LTD. (SUPRA). ESSAR OIL LIMITED 65 (II) AUTHORITY OF ADVANCE RULING IN CASE OF S. MOHAN, RE : [2007] 294 ITR 117 (AAR) IN THIS CASE AGAIN, THE DECISION ON P.V.A.L. KULAN DAGAN CHETTIAR (SUPRA) WAS DISTINGUISHED. HOWEVER, THIS CASE HAS B EEN SPECIFICALLY NOT FOLLOWED BY THE TRIBUNAL IN CASE O F MS. POOJA BHATT (SUPRA). III) ITO V/S M/S. DATA SOFTWARE RESEARCH CO. PVT. LTD., ITA NO.2072/MUM./2006, ORDER DATED 27 TH NOVEMBER 2007 IN THIS CASE, THE TRIBUNAL, CHENNAI BENCH, HAS NOT MADE ANY REFERENCE TO ANY HIGH COURT DECISION WHICH HAS BEEN REFERRED TO ABOVE AND HAS ALSO NOT ANALYSED AS TO WHY THESE JUD GMENTS ARE NOT APPLICABLE. 59. ONE VERY IMPORTANT FACT IN THE PRESENT CASE IS THAT PRIOR TO THE ASSESSMENT YEAR 200304, IN ASSESSEES OWN CASE, TH E TRIBUNAL AND THE HIGH COURT HAVE UPHELD THE CONTENTION OF THE ASSESS EE ON THE ISSUE OF ARTICLE7(1) THAT ONCE THE PROFIT HAS BEEN TAXED IN OMAN AND QATAR, THE SAME CANNOT BE TAXED IN INDIA. EFFECT OF INSERTION OF SUBSECTION (3) IN SECTION 9 0 W.E.F. A.Y. 200405 60. ALL THE DECISIONS OF THE HIGH COURT AND HON'BLE SUP REME COURT INCLUDING THOSE IN ASSESSEES CASE AS DISCUSSED AB OVE, HAVE BEEN RENDERED IN THE CONTEXT OF ISSUES INVOLVED ON INTERPRETATION OF SECTION 90, PRIOR TO ASSESSMENT YEAR 200405. THE LEGISLATURE, BY FINANC E ACT, 2003, W.E.F. 1 ST APRIL 2004, HAS INSERTED SUBSECTION (3) IN SECTION 90, WHICH READS AS UNDER: ESSAR OIL LIMITED 66 (3) ANY TERM USED BUT NOT DEFINED IN THIS ACT OR I N THE AGREEMENT REFERRED TO IN SUB-SECTION (1) SHALL, UNLESS THE CO NTEXT OTHERWISE REQUIRES, AND IS NOT INCONSISTENT WITH THE PROVISIO NS OF THIS ACT OR THE AGREEMENT, HAVE THE SAME MEANING AS ASSIGNED TO IT IN THE NOTIFICATION ISSUED BY THE CENTRAL GOVERNMENT IN TH E OFFICIAL GAZETTE IN THIS BEHALF. THE PURPOSE AND THE OBJECT OF INSERTION OF SUBSE CTION (3) OF SECTION 90, WAS CLARIFIED IN THE MEMORANDUM IN THE FOLLOWING MA NNER: DOUBLE TAXATION AVOIDANCE AGREEMENTS- EXTENDING THE SCOPE TO INCLUDE AGREEMENTS FOR DEVELOPING MUTUAL TRADE AND INVESTMENT UNDER THE EXISTING SECTION 90, THE CENTRAL GOVE RNMENT MAY ENTER INTO AN AGREEMENT WITH THE GOVERNMENT OF ANY COUNTRY OUT SIDE INDIA FOR GRANTING OF RELIEF IN RESPECT OF INCOME ON WHICH HAVE BEEN P AID BOTH INCOME-TAX UNDER THE INCOME-TAX ACT AND INCOME-TAX IN THAT COUNTRY, OR FOR THE AVOIDANCE OF DOUBLE TAXATION OF INCOME UNDER THIS ACT AND UNDER THE CORRESPONDING LAW IN FORCE IN THAT COUNTRY, ETC. IN ORDER TO ENCOURAGE INTERNATIONAL TRADE AND COMME RCE, IT IS PROPOSED TO INSERT NEW CLAUSE IN SUB-SECTION (1) OF THE SEC TION 90 SO AS TO PROVIDE THAT THE CENTRAL GOVERNMENT MAY ALSO ENTER INTO AN AGREE MENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA FOR GRANTIN G RELIEF IN RESPECT OF INCOME-TAX CHARGEABLE UNDER THIS ACT OR UNDER THE C ORRESPONDING LAW IN THAT COUNTRY TO PROMOTE MUTUAL ECONOMIC RELATIONS, TRADE AND INVESTMENT. CERTAIN TERMS USED IN THE DOUBLE TAXATION AVOIDANCE AGREEMENTS (DTAAS) HAVE NOT BEEN DEFINED EITHER IN THE AGREEMENTS OR IN THE INCOME-TAX ACT. IN ORDER TO ADDRESS THE P ROBLEMS ARISING DUE TO CONFLICTING INTERPRETATIONS OF SUCH TERMS, I T IS PROPOSED TO INSERT A NEW PROVISION EMPOWERING THE CENTRAL GOVER NMENT TO DEFINE SUCH TERMS BY WAY OF NOTIFICATION IN THE OFFICIAL G AZETTE. THE PROPOSED AMENDMENT WILL TAKE EFFECT FROM 1 ST APRIL, 2004, AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YE AR 2004-2005 AND SUBSEQUENT YEARS. 61. BY VIRTUE OF SUBSECTION (3) OF SECTION 90, THE LEG ISLATURE EMPOWERED THE CENTRAL GOVERNMENT TO DEFINE SUCH TERM USED IN THE DTAA WHICH HAS NOT BEEN DEFINED EITHER IN THE ACT OR IN THE AGREEMENT, BY ISSUING NOTIFICATION IN THE OFFICIAL GAZETTE. SUCH NOTIFICATION DEFINING TH E TERM SHOULD NOT BE INCONSISTENT WITH THE PROVISIONS OF THIS ACT OR THE AGREEMENT. IN PURSUANCE OF THIS SUBSECTION, THE CENTRAL GOVERNMENT HAS ISSUED A NOTIFICATION NUMBER ESSAR OIL LIMITED 67 91/2008, DATED 28 TH AUGUST 2008, WHEREIN IT HAS BEEN EXPRESSLY PROVIDE D 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 WIT H THE PROVISIONS OF INCOME TAX ACT, 1961, AND RELIEF SHALL BE GRANTED I N ACCORDANCE WITH THE METHOD OF ELIMINATION OR AVOIDANCE OF DOUBLE TAXATI ON PROVIDED IN SUCH AGREEMENT. THE EXACT TEXT OF THE NOTIFICATION IS RE PRODUCED HEREUNDER: SCOPE OF WORDS MAY BE TAXED DOUBLE TAXATION RELIEF SECTION 90 IN EXERCISE OF THE POWERS CONFERRED BY SUB-SECTION (3) OF SECTION 90 OF THE INCOME-TAX ACT, 1961 (43 OF 19 61), THE CENTRAL GOVERNMENT HEREBY NOTIFIES THAT WHERE AN AGREEMENT ENTERED INTO BY THE CENTRAL GOVERNMENT WITH THE GOVERNMENT OF AN Y COUNTRY OUTSIDE INDIA FOR GRANTING RELIEF OF TAX OR AS THE CASE MAY BE, AVOIDANCE OF DOUBLE TAXATION, PROVIDES THAT ANY INC OME OF A RESIDENT OF INDIA MAY BE TAXED IN THE OTHER COUNTRY, SUCH INCOME SHALL BE INCLUDED IN HIS TOTAL INCOME CHARGEABLE TO TAX IN I NDIA IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME-TAX ACT, 1961 (43 OF 1961), AND RELIEF SHALL BE GRANTED IN ACCORDANCE WITH THE METH OD FOR ELIMINATION OR AVOIDANCE OF DOUBLE TAXATION PROVIDED IN SUCH AG REEMENT. 62. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS HEAVILY RELIED UPON THIS NOTIFICATION ISSUED IN PURSUANCE OF SUBSECTION (3) AND HAS SUBMITTED THAT ALL THE EARLIER DECISIONS GIVEN BY THE HIGH COURTS NOW CANNOT BE HELD TO BE LAYING DOWN THE LAW FOR THE EXPRESSION MAY BE TAXED . ON THE OTHER HAND, THE MAIN CONTENTION OF THE LEARNED SR. COUNSEL IS T HAT THIS NOTIFICATION IS CONTRARY TO THE LAW LAID DOWN BY THE HIGH COURT AND AFFIRMED BY THE HON'BLE SUPREME COURT. THUS NOTIFICATION CANNOT BE HELD TO BE APPLICABLE. HIS OTHER CONTENTIONS HAVE BEEN THAT THIS NOTIFICATION IN ANY MANNER CANNOT BE GIVEN ANY RETROSPECTIVE EFFECT SO AS TO BE MADE APPLICABL E IN THE ASSESSMENT YEAR 200405. ESSAR OIL LIMITED 68 63. IN OUR OPINION, AS A RESULT OF THE AMENDMENT W.E.F . 1 ST APRIL 2004, BY WHICH SUBSECTION (3) TO SECTION 90 HAS BEEN BROUGH T IN THE STATUTE FROM THE ASSESSMENT YEAR 200405, THERE WOULD BE A CLEAR DEP ARTURE FROM THE EARLIER POSITION, WHEREIN VARIOUS COURTS HAVE INTERPRETED T HE EXPRESSION MAY BE TAXED, INASMUCH AS NOW THE CENTRAL GOVERNMENT WHICH IS ON E OF THE CONTRACTING PARTIES TO THE AGREEMENT WITH THE OTHER SOVEREIGN STATES HAS BEEN EMPOWERED TO ASSIGN MEANING TO THE VARIOUS TER MS AND EXPRESSIONS USED IN THE AGREEMENT. THE CENTRAL GOVERNMENT HAS E XERCISED THIS POWER BY WAY OF ISSUING A NOTIFICATION IN THE OFFICIAL GAZET TE WHEREIN THE PHRASEOLOGY MAY BE TAXED HAS BEEN SPECIFICALLY INTERPRETED, EXPLAINING THE E FFECT OF THE USE OF THIS PHRASE AND WHAT HAS BEEN THE INTENTION OF THE CENTRAL GOVERNMENT, WHILE NEGOTIATING THE TREATY. 64. FIRST OF ALL, IT HAS TO BE BORNE IN MIND THAT THE S TATUTE IS AN EDICT OF THE LEGISLATURE AND ONE OF THE IMPORTANT WAYS OF CONSTR UING A STATUTE IS TO SEEK THE INTENTION OF THE LEGISLATURE. THE DUTY OF THE C OURT, WHILE INTERPRETING THE LANGUAGE OF THE WORDS USED IN THE STATUTE IS TO SEE THE TRUE INTENTION OF THE LEGISLATURE I.E., SENTENTIAL LEGIS AND THE PURPOSE FOR WHICH SUCH STATUTE WAS ENACTED. THE TRUE PURPORT OF ENACTING SECTION 90(3) THUS GETS CLEAR AS TO WHAT WAS THE INTENTION OF THE LEGISLATURE, WHICH IS ALSO EVIDENT FROM THE MEMORANDUM CLAUSE AS REPRODUCED EARLIER. ON THE OTH ER HAND THE PARAMOUNT GOAL IN AN INTERPRETATION OF A TREATY BET WEEN THE TWO SOVEREIGN STATES IS ALSO TO LOOK INTO THE LANGUAGE USED AND T HE INTENTION OF THE PARTIES ON PLAIN READING OF THE PROVISIONS CONSISTENT WITH THE GOAL / AIM FOR WHICH THE AGREEMENT HAS BEEN ENTERED INTO BETWEEN SUCH PA RTIES. THE MEANING GIVEN IN THE AGREEMENT SHOULD BE CONSISTENT WITH TH E GENUINE SHARED EXPECTATION OF THE CONTRACTING PARTIES. ORDINARY ME ANING SHOULD BE ASSIGNED TO WORDS AND PHRASES USED IN THE AGREEMENT BECAUSE THE INTERNATIONAL CONVENTIONS ARE NOT DRAFTED AS STATUTE UNDER THE LA W BUT BY DIPLOMATS ON THE BASIS OF UNDERSTANDING AND THE PURPOSE FOR WHICH TH E TREATY IS NEGOTIATED. THUS, WHILE INTERPRETING THE TREATY THE INTENTION O F THE PARTIES TAKES ESSAR OIL LIMITED 69 PRECEDENCE OVER THE EXPRESSION USED. LIBERAL APPROA CH SHOULD BE TAKEN WHILE UNDERSTANDING THE WORDS USED IN THE TREATY AN D ANY KIND OF LITERAL CONSTRUCTION SHOULD BE BY AND LARGE AVOIDED. UNLIKE THE DOMESTIC LAW WHICH CONTAINS HIGHLY TECHNICAL LEGISLATIVE LANGUAGE, TAX TREATIES ARE BASED ON MUTUAL UNDERSTANDING OF TWO CONTRACTING STATES. BY THE ISSUANCE OF THE NOTIFICATION, THE CENTRAL GOVERNMENT HAD EXPRESSED ITS INTENTION IN CLEAR TERMS AS TO WHAT IT MEANT BY EXPRESSION MAY BE TAXED . WHETHER THE NOTIFICATION IS CONTRARY TO THE ACT : 65. NOW THE NEXT QUESTION IS WHETHER SUCH A MEANING ASS IGNED IN THE NOTIFICATION IS CONTRARY TO THE PROVISIONS OF THE A CT OR AGREEMENT OR NOT, AS HAS BEEN HEAVILY CANVASSED BY THE LEARNED SR. COUNS EL. AS STATED EARLIER, THE EXPRESSION MAY BE TAXED HAS NEITHER BEEN DEFINED IN THE ACT NOR IN THE AGREEMENT. VARIOUS COURTS HAVE INTERPRETED THESE WO RDS TO MEAN IT IN A CERTAIN MANNER. WHEN THE HIGH COURT OR THE HON'BLE SUPREME COURT INTERPRETS OR ASSIGN ANY MEANING TO THE WORDS AND P HRASE USED IN THE STATUTE, IT TAKES THE SHAPE OF THE LAW, WHICH HAS A BINDING PRECEDENCE ON ALL THE COURTS SUBORDINATE TO IT. HOWEVER, WHETHER IT C AN BE SAID THAT THE SAME DICTA ARE APPLICABLE ON THE WORDS USED IN THE AGREEMENT ENTERED BETWEEN THE PARTIES IN THE PRESENT CASE, TWO SOVEREIGN STAT ES. IN OUR HUMBLE OPINION, ONCE THE CONTRACTING PARTIES HAVE EXPRESSED THEIR I NTENTION IN CLEAR TERMS AS TO WHAT THEY MEANT BY A PARTICULAR TERM OR A PHRASE AT THE TIME OF NEGOTIATION, NO CONTRARY INTERPRETATION SHOULD BE I NFERRED. THUS, WE ARE UNABLE TO PERSUADE OURSELVES WITH THE CONTENTION PU T FORTH BY THE LEARNED SR. COUNSEL THAT THE INTERPRETATION OF THE WORD MAY BE TAXED USED IN THE AGREEMENT HAS TO BE ONLY UNDERSTOOD AS HAS BEEN INT ERPRETED BY THE HIGH COURT OR BY THE HON'BLE SUPREME COURT, BECAUSE THIS TERM IS NOT APPEARING IN THE STATUTE BUT IT IS APPEARING IN THE AGREEMENT BETWEEN TWO PARTIES. IF THE SAID WORDS WERE PART OF THE STATUTE AND THE HIG H COURT AND THE HON'BLE SUPREME COURT WOULD HAVE GIVEN ANY INTERPRETATION, THEN DEFINITELY IT COULD ESSAR OIL LIMITED 70 HAVE BEEN SAID THAT THE LAW HAS BEEN LAID DOWN BY T HE HIGH COURT AND THE HON'BLE SUPREME COURT AND IF ANY NOTIFICATION ISSUE D CONTRARY TO SUCH DECISION OF THE HON'BLE SUPREME COURT, THE SAME IS ILLEGAL OR NO EFFECT CAN BE GIVEN. BUT THIS IS NOT SO IN THE PRESENT CASE AS ON E OF THE CONTRACTING PARTY TO THE AGREEMENT I.E., GOVERNMENT OF INDIA HAS EXPR ESSED ITS INTENTION IN VERY UNEQUIVOCAL TERMS AS WHAT IT MEANT BY THE SAID PHRASE MAY BE TAXED . THERE COULD NOT BE TOO MUCH READING ON SUCH CLARIFI CATION ISSUED BY THE GOVERNMENT OF INDIA. ACCORDINGLY, THE INTERPRETATIO N AND THE CLARIFICATION GIVEN BY THE CENTRAL GOVERNMENT HAS TO BE GIVEN PRE CEDENCE OVER THE INTERPRETATION GIVEN BY THE COURTS, AT LEAST ONCE T HE GOVERNMENT, IN EXERCISE OF STATUTORY POWER HAS ISSUED A NOTIFICATION CLARIF YING ITS INTENT. WHETHER THE PHRASE MAY BE TAXED IS A TERM? 66. ONE OF THE OBJECTIONS OF THE LEARNED SR. COUNSEL WA S THAT THE SECTION GIVES MANDATE TO THE CENTRAL GOVERNMENT TO ISSUE NO TIFICATION FOR ANY TERM AND MAY BE TAXED DOES NOT FALL WITHIN THE REALM OF THE TERM . HE CITED EXAMPLES FROM THE TREATY ITSELF WHEREIN CERTAIN TER MS HAVE BEEN DEFINED. FOR EXAMPLE, ARTICLE3 OF OMAN TREATY WHEREIN VARIOUS T ERMS LIKE INDIA , CONTRACTING STATE , SULTANATE OF OMAN , COMPANY , COMPETENT AUTHORITY , ENTERPRISE OF A CONTRACTING STATE , FISCAL YEAR , ETC. THESE WORDS CONNOTE SOME KIND OF A PROPER OR COMMON NOUN TO POINT OUT S OMETHING WHICH IS DEFINED. THE WORDS MAY BE TAXED CANNOT BE REFERRED AS TERM . HE ALSO STATED INSTANCES FROM THE DECISION OF S.R.M. FIRM A ND ORS. (SUPRA) WHEREIN THE COURT HAS USED THE PHRASE ENABLING WORDS . HE ALSO CITED CERTAIN DICTIONARY MEANING GIVEN IN BLACKS DICTIONARY WHER EIN THE TERM HAS BEEN DEFINED AS EXPRESSION, PARTICULARLY ONE WHICH POSSE SSES A FIXED AND KNOWN MEANING IN SOME SCIENCE OR ART PROFESSION. HE ALSO CITED OTHER DICTIONARY MEANING LIKE OXFORD ENGLISH DICTIONARY WHEREIN IT H AS BEEN DEFINED AS A PHRASE USED TO DESCRIBE A THING OR EXPRESS A CONCEP T. IN P.E. RAMANATHA AIYER, ADVANCE LAW LEXICON, THE WORD TERM HAS BEEN DEFINED TO DENOTE ESSAR OIL LIMITED 71 WORDS , PHRASES AND EXPRESSION BY WHICH THE DEFINITE MEANING OF LANGUAGE IS CONVEYED AND DETERMINED. THUS, THE PHRA SE MAY BE TAXED DO NOT FALL WITHIN THE MEANING OF TERM AND, THEREFORE, NOTIFICATION ISSUED IS CONTRARY TO THE PROVISIONS OF SECTION 90(3). THE LE ARNED DEPARTMENTAL REPRESENTATIVE HAS ALSO RELIED UPON THE SAME DICTIO NARY MEANING AND SUBMITTED THAT THE WORD TERM MEANS TO EXPRESS SOMETHING AND MAY BE TAXED IS A PHRASE AND EXPRESSION USED IN THE TREATY TO C ONNOTE THE ALLOCATION OF TAX JURISDICTION BETWEEN THE TWO CONT RACTING STATES. WE FIND FORCE IN THE ARGUMENT OF THE LEARNED DEPARTMENTAL R EPRESENTATIVE THAT THE PHRASE MAY BE TAXED HAS A DEFINITE CONNOTATION AND A MEANING. IT CONVE YS THE ALLOCATION OF TAXES BETWEEN THE CONTRACTING STA TES. IT HAS A VERY VITAL SIGNIFICANCE IN THE LANGUAGE OF THE TREATY. THE PHR ASES MAY BE TAXED , SHALL BE TAXED ONLY AND MAY ALSO BE TAXED HAVE A DEFINITE PURPOSE AND A DEFINITE MEANING WHICH IS CONVEYED. WHETHER IT IS A TERM, PHRASE OR EXPRESSION DOES NOT MAKE ANY SIGNIFICANT DIFFERENCE BECAUSE THE CONTRACTING PARTIES HAVE GIVEN A DEFINITE MEANING TO SUCH A PHR ASE AND ONCE THE GOVERNMENT OF INDIA HAVE CLARIFIED SUCH AN EXPRESSI ON, THEN IT CANNOT BE HELD THAT IT DOES NOT FALL WITHIN THE REALM OF THE WORD TERM AS GIVEN IN SECTION 90(3). THUS, WE DO NOT FEEL PERSUADED BY TH E ARGUMENT TAKEN BY THE LEARNED SR. COUNSEL. WHETHER NOTIFICATION CAN HAVE RETROSPECTIVE EFFECT? 67. ANOTHER CONTENTION WHICH HAS BEEN RAISED BEFORE US BY THE LEARNED SR. COUNSEL IS THAT NOTIFICATION ISSUED BY THE GOVERNME NT IMPOSES A TAX LIABILITY AND, THEREFORE, IT CANNOT HAVE A RETROSPECTIVE EFFE CT BECAUSE NOTIFICATION HAS BEEN ISSUED ON 29 TH AUGUST 2008 AND AT THE MOST IT WOULD BE APPLICABLE FROM THE ASSESSMENT YEAR 200910. WE FIND IT DIFFICULT T O ACCEPT THIS CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE. PRIOR TO THE ASSE SSMENT YEAR 200405, THERE WAS NO ENABLING PROVISION BY WHICH THE CENTRA L GOVERNMENT COULD HAVE CLARIFIED ANY TERM WHICH HAS BEEN USED IN THE TREATY WHICH HAS NOT ESSAR OIL LIMITED 72 BEEN DEFINED EITHER IN THE ACT OR IN THE AGREEMENT. VARIOUS COURTS HAVE INTERPRETED CERTAIN EXPRESSIONS USED IN THE TREATY SPECIFICALLY THE PHRASE MAY BE TAXED IN A DIFFERENT MANNER. VARIOUS INTERNATIONAL COMMEN TARIES AND VIEWS HAVE ALSO SPOKEN OF VARIOUS TERMS IN DIFF ERENT MANNER. TO CLARIFY THE CORRECT MEANING AND INTERPRETATION, THE LEGISLA TURE HAS EMPOWERED THE GOVERNMENT OF INDIA TO ASSIGN THE MEANING OF THE TE RM USED IN AGREEMENT IN WHICH GOVERNMENT ITSELF IS A PARTY. IN PURSUANCE OF SUCH AN ENABLING PROVISIONS IN THE STATUTE, THE CENTRAL GOVERNMENT H AS ISSUED A NOTIFICATION WHICH CLARIFIES THE INTENTION OF THE CENTRAL GOVERN MENT THAT, AS TO, WHAT IS MEANT BY A PARTICULAR TERM OR PHRASE USED IN THE AG REEMENT AND WHAT WOULD BE THE ACTUAL MEANING FOR A PARTICULAR REASON AND F OR A PARTICULAR CONTEXT. SUCH A NOTIFICATION HAS TO BE RECKONED AS MERE CLAR IFICATORY IN NATURE AND, IN OUR OPINION, WILL RELATE BACK FROM THE EFFECTIVE PE RIOD OF THE STATUTE UNDER WHICH SUCH NOTIFICATION HAS BEEN ISSUED. THE NOTIFI CATION DOES NOT IMPOSE ANY KIND OF A TAX LIABILITY AS IT MERELY CLARIFIES THE PARTICULAR EXPRESSION USED IN THE TREATY WHICH, AS PER THE GOVERNMENT OF INDIA , WAS ALWAYS MEANT TO BE LIKE THAT. NO CHARGE OF TAX IS CREATED BY THIS NOTI FICATION, HENCE, ALL THE CASE LAWS, WHICH HAS BEEN REFERRED TO BY THE LEARNED SR. COUNSEL, WILL NOT BE APPLICABLE IN THE PRESENT CASE. SINCE THE PROVISION UNDER WHICH SUCH A NOTIFICATION HAS BEEN ISSUED, HAS COME W.E.F. 1 ST APRIL 2004, I.E., THE ASSESSMENT YEAR 200405, THEN SUCH A NOTIFICATION W ILL BE SAID TO BE EFFECTIVE FROM SUCH A PERIOD ONLY AND THUS IT WILL HAVE RETROSPECTIVE EFFECT FROM THE ASSESSMENT YEAR 200405. 68. WE ARE NOT ENTERING INTO THE ARGUMENTS OF THE LEARN ED DEPARTMENTAL REPRESENTATIVE AS TO WHETHER THE TRIBUNAL IS EMPOWE RED TO DECLARE ANY NOTIFICATION AS BADINLAW OR WHETHER THE LEGALITY OF THE NOTIFICATION CAN BE CHALLENGED BEFORE THE TRIBUNAL OR NOT AS WE HAVE AL READY HELD THAT THE NOTIFICATION ISSUED IS NOT CONTRARY TO THE PROVISIO NS OF LAW OR THE AGREEMENT AND IT HAS BEEN ISSUED BY THE CENTRAL GOVERNMENT IN EXERCISE OF POWER CONFERRED BY SUBSECTION (3) OF SECTION 90. ESSAR OIL LIMITED 73 EFFECT OF SUBSTITUTION OF SECTION 90(3) W.E.F. 1 ST OCTOBER 2009 : 69. ONE VERY IMPORTANT PLEA WHICH HAS BEEN TAKEN BY THE LEARNED SR. COUNSEL BEFORE US IS THAT THE ENTIRE SECTION 90 INC LUDING SUBSECTION (3) HAS BEEN SUBSTITUTED BY THE FINANCE ACT, 2009, W.E.F. 1 ST OCTOBER 2009. THUS, ANY NOTIFICATION WHICH WAS ISSUED UNDER THE OLD SUB SECTION (3), NO LONGER REMAINS IN EXISTENCE AS THE ENABLING OLD SUBSECTIO N ITSELF IS NO LONGER IN EXISTENCE. ONCE THE EARLIER SECTION HAS BEEN OMITTE D AND NEW SECTION HAS BEEN SUBSTITUTED, THEN THE EFFECT OF SUCH A SUBSTIT UTION IS THAT EARLIER SECTION BECOMES WHOLLY INOPERATIVE. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVES SUBMISSION HAS BEEN THAT THERE IS NO DIFFERENCE IN THE EARLIER SUBSECTION (3) AND SUBSTITUTED SUBSECTION (3) AND, THEREFORE, THE EARLIER PROVISIONS WILL CONTINUE TO HOLD THE LAW TI LL 31 ST OCTOBER 2009 WHEN THE SAME WAS SUBSTITUTED. BOTH THE PARTIES HAVE REL IED UPON THE VARIOUS JUDGMENTS OF THE HON'BLE SUPREME COURT IN SUPPORT O F THEIR RESPECTIVE CONTENTIONS. 70. THE LEARNED SR. COUNSEL HAS PRIMARILY RELIED UPON T HE JUDGMENT OF THE HON'BLE SUPREME COURT IN RAYALA CORPORATION PVT. LT D. & ORS. (SUPRA) AND KOLHAPUR CANE SUGAR WORKS LTD. (SUPRA). 71. BY FINANCE ACT, 2009, THE ENTIRE SECTION 90 HAS BEE N SUBSTITUTED AND IN PLACE NEW SECTION 90 HAS BEEN INTRODUCED. HOWEVE R, ON A PERUSAL OF THE LANGUAGE USED IN THE ENTIRE NEW SECTION, IT IS SEEN THAT THERE IS NO CHANGE IN THE LANGUAGE OF THE SECTIONS, SPECIFICALLY SUBSECT ION (3), BARRING ONE PHRASE IN SUBSECTION (1) WHICH IS OR SPECIFIED TERRITORY OUTSIDE INDIA . THE MEMORANDUM EXPLAINING THE SAID AMENDMENT FOR WHICH THE SAID SECTION WAS SUBSTITUTED WAS THAT: 36. EMPOWERING CENTRAL GOVERNMENT TO ENTER INTO AGR EEMENT WITH SPECIFIED NONSOVEREIGN TERRITORIES: ESSAR OIL LIMITED 74 36.1 SECTION 90 OF THE INCOMETAX ACT EMPOWERS THE CENTRAL GOVERNMENT TO ENTER INTO DOUBLE TAXATION AVOIDANCE AGREEMENT ( DTAA) WITH THE GOVERNMENT OF ANY OTHER COUNTRY OUTSIDE INDIA FOR G RANTING DOUBLETAXATION RELIEF AND FACILITATE EXCHANGE OF INFORMATION CONCE RNING AVOIDANCE OR EVASION OF TAX. 36.2 THE SCOPE OF SECTION 90 WAS RESTRICTED TO ANY OTHER COUNTRY OUTSIDE INDIA. NEED WAS FELT TO EXPAND THE SCOPE OF THIS C OOPERATION B Y ENTERING INTO A DTAA OR TIEA (TAX INFORMATION EXCHANGE AGREEMENT) WITH NONSOVEREIGN JURISDICTIONS AS WELL. 36.3 IN ORDER TO ENABLE THE GOVERNMENT TO ENTER INT O AGREEMENTS WITH NON SOVEREIGN TERRITORIES AS WELL, SECTION 90 OF THE IN COME TAX ACT, 1961, HAS BEEN AMENDED. THE CORRESPONDING PROVISIONS UNDER SE CTION 44A OF THE WEALTH TAX ACT HAVE ALSO BEEN AMENDED SO AS TO ENABLE THE GOVERNMENT TO NOTIFY SUCH SPECIFIED TERRITORIES OUTSIDE INDIA. 36.4 APPLICABILITY THESE AMENDMENTS HAVE BEEN MAD E APPLICABLE WITH EFFECT FROM 1 ST OCTOBER 2009 AND WILL ACCORDINGLY APPLY FOR TRANSA CTIONS UNDERTAKEN ON OR AFTER SUCH DATE. 72. THUS, THE ONLY PURPOSE OF SUBSTITUTION WAS THAT THE SCOPE OF SECTION 90 WAS ALSO TO BE EXTENDED TO THE NONSOVEREIGN JURISD ICTION IN ORDER TO ENABLE THE GOVERNMENT TO ENTER INTO THE AGREEMENT WITH NON SOVEREIGN TERRITORY AS WELL. THIS AMENDMENT HAS BEEN MADE APPLICABLE W.E.F . 1 ST OCTOBER 2009, AND WILL APPLY FOR THE TRANSACTIONS UNDERTAKEN ON OR AF TER SUCH DATE, ESPECIALLY IN THE CASES OF NON-SOVEREIGN TERRITORIES. THE SAID AM ENDMENT DOES NOT PROVIDE THAT EARLIER PROVISIONS WILL CEASE TO OPERATE. EVEN THE MEMORANDUM HAS NOT SPECIFIED THAT THE EARLIER PROVISION WILL BECOME IN OPERATIVE. THE AMENDMENT WAS PURELY FOR ENLARGING THE SCOPE AND NOT TO DELIM IT OR MAKE IT INOPERATIVE. SUCH AN AMENDMENT OR SUBSTITUTION CANNOT BE RECKONE D AS OMISSION OF THE SECTION ITSELF. IN CASE OF AN OMISSION OF THE ENTIRE SECTION, WITHOUT ANY NEW ENACTMENT OR SAVING CLAUSE, THEN SUCH AN OMISSION H AS TO BE READ AS THAT OMITTED PROVISION IS OBLITERATED FROM THE STATUTE. IN THE JUDGMENT OF RAYALA CORPORATION PVT. LTD. & ORS. (SUPRA), THE HON'BLE S UPREME COURT WAS DEALING WITH THE RULE 132A OF THE DEFENCE OF INDIA RULE, 19 62, WHICH RELATED TO PROHIBITION IN DEALING IN FOREIGN EXCHANGE WHICH WA S AMENDED BY WAY OF AMENDMENT RULES, 1965. THE QUESTION BEFORE THE HON' BLE SUPREME COURT WAS WHETHER THE PROSECUTION IN RESPECT OF CONTRAVEN TION OF ERSTWHILE RULE 132A, CAN BE COMMENCED AFTER THE RULE WAS OMITTED. THE HON'BLE SUPREME ESSAR OIL LIMITED 75 COURT ANSWERED THE QUESTION IN NEGATIVE, HOLDING TH AT THE INITIATION OF NEW PROCEEDINGS WILL NOT BE A THING DONE OR OMITTED TO BE DONE UNDER THE RULE, BUT A NEW ACT OF INITIATING THE PROCEEDINGS AFTER T HE RULE CEASED TO EXIST. THE HON'BLE SUPREME COURT AGREED WITH THE ARGUMENTS OF PETITIONERS COUNSEL THAT EVEN IF THERE WAS A CONTRAVENTION OF SECTION 1 32A(2) BY THE ACCUSED WHEN THE RULE WAS IN FORCE, THE ACT OF CONTRAVENTIO N CANNOT BE HELD TO BE THING DONE OR OMITTED UNDER THAT RULE , SO THAT AFTER THE RULE HAS BEEN OMITTED, NO PROSECUTION CAN BE INSTITUTED. ONCE THE RULE WAS OMITTED ALL TOGETHER, NO NEW PROCEEDINGS BY WAY OF PROSECUTION COULD BE INITIATED. IT MIGHT BE IN RESPECT OF AN OFFENCE COMMITTED EARLIER DURING THE PERIOD THAT RULE WAS IN FORCE. THE HON'BLE SUPREME COURT AGREEI NG WITH THE SAID SUBMISSION, OBSERVED THAT THE LANGUAGE CONTAINED IN THE PROVISIONS OF DEFENCE OF INDIA AMENDMENT RULES, 1965, CAN ONLY AF FORD PROTECTION TO ACTION ALREADY TAKEN WHILE THE RULE WAS IN FORCE BU T CANNOT JUSTIFY THE INITIATION OF A NEW PROCEEDINGS WHICH WILL NOT BE A THING DONE OR OMITTED TO BE DONE UNDER THE RULE BUT A NEW ACT OF INITIATING A PROCEEDINGS AFTER THE RULE HAD CEASED TO EXIST. THEREFORE, COMPLAIN MADE FOR THE OFFENCE UNDER RULE 132A AFTER 1 ST APRIL 1965, WHEN THE RULE WAS OMITTED HAS TO BE IN VALID. THUS, IN THIS CASE, THE COMPLAIN WAS MADE FOR THE O FFENCE UNDER RULE 132A AFTER THE SAID RULE WAS OMITTED, THE HON'BLE SUPREM E COURT HELD THAT THE PROSECUTION COULD NOT BE DONE UNDER THE SAID RULE W HICH STOOD OMITTED. IN THE PRESENT CASE, THE SITUATION IS THAT SECTION 90 SUBSECTION (3) WAS BROUGHT IN STATUTE W.E.F. 1 ST APRIL 2004, WHICH EMPOWERED THE CENTRAL GOVERNMENT TO ISSUE NOTIFICATIONS FOR CLARIFYING TH E TERM NOT DEFINED UNDER THE INCOME TAX ACT, 1961, OR THE AGREEMENT. IN PURS UANCE OF SUCH A PROVISION, THE CENTRAL GOVERNMENT HAD ISSUED A NOTI FICATION CLARIFYING THE TERM. THE SAID SECTION HAS BEEN AMENDED AND SUBSTIT UTED BY A NEW SECTION W.E.F. 1 ST OCTOBER 2009, THOUGH WITH THE SAME PROVISIONS AND SAME LANGUAGE. THE ONLY PURPOSE FOR WHICH THE SAID SECTI ON WAS SUBSTITUTED HAS ALREADY BEEN EXPLAINED BY US IN THE FOREGOING PARAS . THE ISSUE BEFORE US RELATES TO PRIOR TO 1 ST OCTOBER 2009 I.E., PRIOR TO INSERTION OF THE SUBST ITUTED ESSAR OIL LIMITED 76 SECTION AND FROM THE PERIOD 1 ST APRIL 2004, UPTO 1 ST OCTOBER 2009, THE NOTIFICATION WILL STILL HOLD GOOD. THUS, IN OUR OPI NION, THE LAW LAID DOWN BY THE HON'BLE SUPREME COURT IN RAYALA CORPORATION PVT. LT D. & ORS. (SUPRA), WILL NOT BE APPLICABLE IN THE PRESENT CASE. 73. NOW COMING TO THE DECISION OF KOLHAPUR CANE SUGAR W ORKS LTD. (SUPRA), THE ISSUE WHICH CAME FOR THE DETERMINATION OF THE CONSTITUTIONAL BENCH WAS WHETHER AFTER OMISSION OF OLD RULES 10 AN D 10A OF CENTRAL EXCISE RULES AND ITS SUBSTITUTION BY NEW RULE 10 BY NOTIFI CATION NO.267/1977, DATED 6 TH AUGUST 1977, THE PROCEEDING INITIATED BY NOTICE DA TED 24 TH JULY 1977, COULD BE CONTINUED IN LAW. THE HONBLE CONSTITUTION BENCH ANSWERING THE QUESTION IN NEGATIVE, REITERATED A VERY IMPORTANT P ROPOSITION AFTER OBSERVING AND HOLDING AS UNDER: 37. IN THE CASE IN HAND RULE 10 OR RULE 10-A IS NE ITHER A CENTRAL ACT NOR A REGULATION AS DEFINED IN THE ACT. IT MAY BE A RULE UNDER SECTION 3(51) OF THE ACT. SECTION 6 IS APPLICABLE W HERE ANY CENTRAL ACT OR REGULATION MADE AFTER COMMENCEMENT OF THE GENERA L CLAUSES ACT REPEALS ANY ENACTMENT. IT IS NOT APPLICABLE IN THE CASE OF OMISSION OF A RULE. 38. THE POSITION IS WELL-KNOWN THAT AT COMMON LAW, THE NORMAL EFFECT OF REPEALING A STATUTE OR DELETING A PROVISION IS T O OBLITERATE IT FROM THE STATUTE BOOK AS COMPLETELY AS, IF IT HAD NEVER BEEN PASSED, AND THE STATUTE MUST BE CONSIDERED AS A LAW THAT NEVER EXIS TED. TO THIS RULE, AN EXCEPTION IS ENGRAFTED BY THE PROVISIONS OF SECT ION 6(1). IF A PROVISION OF A STATUTE IS UNCONDITIONALLY OMITTED W ITHOUT A SAVING CLAUSE IN FAVOUR OF PENDING PROCEEDINGS, ALL ACTINS MUST STOP WHERE THE OMISSION FINDS THEM, AND IF FINAL RELIEF HAS NOT BE EN GRANTED BEFORE THE OMISSION GOES INTO EFFECT, IT CANNOT BE GRANTED AFT ERWARDS. SAVINGS OF THE NATURE CONTAINED IN SECTION 6 OR IN SPECIAL ACT S MAY MODIFY THE POSITION. THUS THE OPERATION OF REPEAL OR DELETION AS TO THE FUTURE AND THE PAST LARGELY DEPENDS ON THE SAVINGS APPLICABLE. IN A CASE WHERE A ESSAR OIL LIMITED 77 PARTICULAR PROVISION IN A STATUTE IS OMITTED AND IN ITS PLACE ANOTHER PROVISION DEALING WITH THE SAME CONTINGENCY IS INTR ODUCED WITHOUT A SAVING CLAUSE IN FAVOUR OF PENDING PROCEEDINGS THEN IT CAN BE REASONABLY INFERRED THAT THE INTENTION OF THE LEGIS LATURE IS THAT THE PENDING PROCEEDING SHALL NOT CONTINUE BUT A FRESH P ROCEEDING FOR THE SAME PURPOSE MAY BE INITIATED UNDER THE NEW PROVISI ON. 39. IN THE PRESENT CASE, AS NOTED EARLIER. SECTION 6 OF THE GENERAL CLAUSES ACT HAS NO APPLICATION. THERE IS NO SAVING PROVISION IN FAVOUR OF PENDING PROCEEDINGS. THEREFORE, ACTION FOR REALI ZATION OF THE AMOUNT REFUNDED CAN ONLY BE TAKEN UNDER THE NEW PROVISION IN ACCORDANCE WITH THE TERMS THEREOF. THUS, THE HON'BLE SUPREME COURT HELD THAT THE RULE MADE UNDER AN ACT IS NOT A CENTRAL ACT OR REGULATION AND IF A RULE IS REPEALED BY ANOTHER RULE, SECTION 6 OF GENERAL CLAUSES ACT WILL NOT APPLY. BE SIDES THIS, THE HON'BLE SUPREME COURT HAS MADE FURTHER OBSERVATION THAT EFF ECT OF REPEALING A STATUTE IS TO OBLITERATE IT FROM THE STATUE BOOK CO MPLETELY AS IF IT NEVER EXISTED. HOWEVER, IN SUCH A SITUATION, SECTION 6 OF GENERAL CLAUSES ACT WILL COME INTO PICTURE. FURTHER, IF A PARTICULAR PROVISI ON OF A STATUTE IS OMITTED AND THE ENTIRE PROVISION DEALING WITH SAME CONTINGE NCY IS ENTERTAINED OR ENFORCED, WITHOUT A SAVING CLAUSE IN FAVOUR OF THE PENDING PROCEEDING, THEN PENDING PROCEEDING WILL NOT CONTINUE AND A FRESH PR OCEEDING MAY BE INITIATED UNDER THE MAIN PROVISION. 74. IN THE PRESENT CASE, SECTION 90 INCLUDING SUBSECTI ON (3) HAS BEEN SUBSTITUTED BY NEW SECTION 90 WITHOUT ANY CHANGE IN THE PROVISIONS ESPECIALLY IN SUBSECTION (3). THE NOTIFICATION ISS UED UNDER THE EARLIER PROVISION OF SUBSECTION (3) WILL CONTINUE UP TO TH E PERIOD OF NEW SUBSTITUTION THAT IS UP TO 1 ST OCTOBER 2009. IT IS NOT A CASE HERE THAT AFTER 1 ST OCTOBER 2009, THE NOTIFICATION IS BEING PRESSED INTO. IF A MATTER RELATES TO AFTER 1 ST ESSAR OIL LIMITED 78 OCTOBER 2009, THEN PROBABLY IT CAN BE HELD THAT THE EARLIER NOTIFICATION ISSUED UNDER SUBSECTION (3) MAY NOT BE APPLICABLE. HOWEVE R, WE ARE REFRAINING FROM GIVING ANY OPINION AS TO WHETHER AFTER 1 ST OCTOBER 2009, THE SAID NOTIFICATION ISSUED BY THE CENTRAL GOVERNMENT WOULD BE APPLICABLE OR NOT. AS ALREADY OBSERVED SEVERAL TIMES IN FORGING PARAGRAPH S THAT NO PROCEEDINGS HAVE BEEN INITIATED IN THE WAKE OF NOTIFICATION DAT ED 28 TH AUGUST 2008, IT MERELY CLARIFIES THE INTENTION OF THE CENTRAL GOVER NMENT IN THE INTERPRETATION OF THE TERM USED IN THE AGREEMENT. A DISTINCTION HA S TO BE MADE WHERE ANY NOTIFICATION THROUGH WHICH PROCEEDING IS INITIATED THAT IS PREJUDICIAL TO THE TAX PAYER OR IT WARRANTS ANY ACTION AND BETWEEN THE NOT IFICATION WHICH HAS BEEN ISSUED FOR THE PURPOSE OF CLARIFYING THE PROVISION OF A STATUTE OR THE INTENTION OF THE LEGISLATURE OR THE GOVERNMENT. THE ONLY COND ITION IS THAT SUCH A NOTIFICATION SHOULD NOT BE CONTRARY TO THE PROVISIO NS OF THE ACT. IN OUR OPINION, THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN THE AFORESAID CASES WILL NOT BE APPLICABLE HERE. THE LEARNED DEPA RTMENTAL REPRESENTATIVE, ON THE OTHER HAND, HAS RELIED UPON SECTIONS 20 AND 24 OF THE GENERAL CLAUSES ACT, 1897, AND ALSO COMMENTARY OF MR. JUSTI CE G.P. SINGH, IN HIS BOOK PRINCIPLES OF STATUTORY INTERPRETATION . HE HAS SPECIFICALLY DRAWN OUR ATTENTION TO THE PASSAGE OF THE HON'BLE SUPREME COU RT IN CIT V/S VENKATESHWARA HATCHIES, [1999], 3 SCC 632, AS STATE D IN THE COMMENTARY. THE RELEVANT OBSERVATIONS OF THE HON'BLE SUPREME CO URT WERE AS UNDER: 12. AS NOTICED EARLIER, THE OMISSION OF SECTION 2( 27) AND RE- ENACTMENT OF SECTION 80-JJ WAS DONE SIMULTANEOUSLY. IT IS VERY WELL- RECOGNIZED RULE OF INTERPRETATION OF STATUS THAT WH ERE A PROVISION OF AN ACT IS OMITTED BY AN ACT AND THE SAID ACT SIMULTANE OUSLY RE-ENACTS A NEW PROVISION WHICH SUBSTANTIALLY COVERS THE FILED OCCUPIED BY THE REPEALED PROVISION WITH CERTAIN MODIFICATION, IN TH AT EVENT SUCH RE- ENACTMENT IS REGARDED HAVING FORCE CONTINUOUSLY AND THE MODIFICATION OR CHANGES ARE TREATED AS AMENDMENT COMING INTO FOR CE WITH EFFECT FROM THE DATE OF ENFORCEMENT OF RE-ENACTED PROVISIO N. VIEWED IN THIS BACKGROUND, THE EFFECT OF THE RE-ENACTED PROVISION OF SECTION 80-JJ WAS ESSAR OIL LIMITED 79 THAT PROFIT FROM THE BUSINESS OF LIVESTOCK AND POUL TRY WHICH ENJOYED TOTAL EXEMPTION UNDER SECTION 10(27) OF THE ACT FRO M ASSESSMENT YEARS 1964-65 TO 1975-76 BECAME PARTIALLY EXEMPT BY WAY OF DEDUCTION ON FULFILLMENT OF CERTAIN CONDITIONS. THIS JUDGMENT CLEARLY CLINCHES THE ISSUE INVOLVED IN SUPPORT OF THE D.R.S CONTENTION. 75. THE LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER REL YING UPON SECTION 24 OF THE GENERAL CLAUSES ACT, HAS SUBMITTED THAT A NY NOTIFICATION ISSUED UNDER THE PROVISIONS OF THE CENTRAL ACT, IS REPEALE D AND REENACTED WITH OR WITHOUT ANY CHANGE THEN SUCH NOTIFICATION UNDER THE EARLIER ACT SHALL CONTINUE TO BE IN FORCE UNLESS SUCH NOTIFICATION IS INCONSIS TENT WITH THE PROVISIONS RE ENACTED. IN THE PRESENT CASE ALSO, ONCE A NOTIFICAT ION IS NOT AGAINST THE PROVISION OF THE STATUTE, IT WILL CONTINUE TO HOLD OPERATIONS EVEN IF THE SAID PROVISION HAS BEEN SUBSTITUTED BY NEW PROVISION AS THE NEW PROVISION DOES NOT MAKE ANY MODIFICATION. WE FIND SUBSTANCE IN THE ARGUMENT OF THE LEARNED DEPARTMENTAL REPRESENTATIVE AS SECTION 24 O F THE GENERAL CLAUSES ACT, 1897, CLEARLY STIPULATES FOR SUCH A SITUATION. FOR THE SAKE OF READY REFERENCE, THE SAID SECTION IS REPRODUCED BELOW: 24. CONTINUATION OF ORDERS, ETC., ISSUED UNDER ENA CTMENTS REPEALED AND RE- ENACTED.- WHERE ANY 2[ CENTRAL ACT] OR REGU LATION IS, AFTER THE COMMENCEMENT OF THIS ACT, REPEALED AND RE- ENACTED WITH OR WITHOUT MODIFICATION, THEN, UNLESS IT IS OTHERWISE EXPRESSL Y PROVIDED, ANY 3[ APPOINTMENT, NOTIFICATION,] ORDER, SCHEME, RULE, FO RM OR BYE- LAW, 3[ MADE OR] ISSUED UNDER THE REPEALED ACT OR REGULATIO N, SHALL, SO FAR AS IT IS NOT INCONSISTENT WITH THE PROVISIONS RE- ENAC TED, CONTINUE IN FORCE, AND BE DEEMED TO HAVE BEEN 3[ MADE OR] ISSUED UNDER THE PROVISIONS SO RE- ENACTED, UNLESS AND UNTIL IT IS SUPERSEDED B Y ANY 3[ APPOINTMENT, NOTIFICATION,] ORDER, SCHEME, RULE, FO RM OR BYE- LAW 3[ MADE OR] ISSUED UNDER THE PROVISIONS SO RE- ENACTED 4[ AND WHEN ANY 2[ CENTRAL ACT] OR REGULATION, WHICH, BY A NOTIFICA TION UNDER SECTION 5 ESSAR OIL LIMITED 80 OR 5A OF THE SCHEDULED DISTRICTS ACT, 1874 , 5 (14 OF 1874 ) OR ANY LIKE LAW, HAS BEEN EXTENDED TO ANY LOCAL AREA, HAS, BY A SUBSEQUENT NOTIFICATION, BEEN WITHDRAWN FROM AND RE- EXTENDED TO SUCH AREA OR ANY PART THEREOF, THE PROVISIONS OF SUCH ACT OR REG ULATION SHALL BE DEEMED TO HAVE BEEN REPEALED AND RE- ENACTED IN SUC H AREA OR PART WITHIN THE MEANING OF THIS SECTION]. 76. FURTHER, THE HON'BLE SUPREME COURT IN VENKATESHWARA HATCHERIES (SUPRA) ALSO CLEARLY OPINED THAT WHERE A PROVISION OF THE ACT IS OMITTED BY AN ACT AND THE SAID ACT SIMULTANEOUSLY REENACTED. A N EW PROVISION WHICH SUBSTANTIALLY COVERS THE FIELD OCCUPIED BY REPEALED PROVISION WITH CERTAIN MODIFICATION (WHICH IN THE PRESENT CASE THERE IS NO MODIFICATION), IN THAT EVENT, SUCH REENACTMENT IS REGARDED HAVING FORCE C ONTINUOUSLY AND THE MODIFICATION OR CHANGES ARE TREATED AS AMENDMENT CO MING INTO FORCE WITH EFFECT FROM THE DATE OF ENFORCEMENT OF THE ENACTED PROVISIONS. WE ARE, THEREFORE, OF THE CONSIDERED OPINION THAT SUBSTITUT ION OF SECTION 90 W.E.F. 1 ST OCTOBER 2009, WILL NOT OBLITERATE THE EARLIER SECTI ON 90 AND SPECIFICALLY SUB SECTION (3) OF SECTION 90 WHICH HAS COME INTO EFFEC T FROM 1 ST APRIL 2004, AND NOTIFICATION ISSUED THEREIN SHALL CONTINUE TO HOLD AT LEAST UP TO 1 ST OCTOBER 2009. 77. THE LEARNED SR. COUNSEL HAS ALSO RELIED UPON ONE OF THE TRIBUNAL DECISIONS IN WNS GLOBAL SERVICES P. LTD., ITA NO.25 66/MUM./2009, ORDER DATED 10 TH AUGUST 2012, WHEREIN THE TRIBUNAL, WHILE SPEAKING THROUGH ONE OF US (JUDICIAL MEMBER) IN SUPPORT OF THE CONTENTION T HAT ONCE A PROVISION HAS BEEN OMITTED FROM THE STATUTE, THEN ALL THE ACTION MUST STOP WHERE SUCH OMITTED SECTION COMES INTO PLAY. HERE ALSO, THE TRI BUNAL HAS STRONGLY RELIED UPON THE DECISIONS OF THE HON'BLE SUPREME COURT IN RAYALA CORPORATION PVT. LTD. & ORS. (SUPRA) AND KOLHAPUR CANE SUGAR WORKS L TD. (SUPRA). THE RATIO OF THE SAID DECISIONS WILL NOT BE APPLICABLE HERE A S SECTION 10A(9) WAS OMITTED W.E.F. 1 ST APRIL 2004 WITH NO SIMILAR ENACTMENT OF THE PROVIS ION. SUCH SECTION WAS OMITTED DUE TO MISCHIEF CREATED AS HIGH LIGHTED BY THE FINANCE ESSAR OIL LIMITED 81 MINISTER IN HIS SPEECH. THE OMITTED SECTION WAS HAV ING THE EFFECT IN THE SUBSEQUENT ASSESSMENT YEAR AND, THEREFORE, IN SUCH A SITUATION, IT WAS HELD THAT THE SAID OMITTED SECTION CANNOT BE BROUGHT INT O ACTION AND IN THAT CONTEXT IT WAS OBSERVED THAT SECTION 10A HAS TO BE READ AS BEING OBLITERATED FROM THE STATUTE BOOK AND WILL NOT HAVE ANY EFFECT FROM THE YEAR IN WHICH IT WAS OMITTED. THEREFORE, THIS DECISION CANNOT BE HEL D TO BE APPLICABLE IN THE PRESENT CASE. EFFECT OF EXPLANATION (3) TO SECTION 90 BROUGHT BY THE FINANCE ACT, 2012, WITH RETROSPECTIVE EFFECT FROM 1 ST OCTOBER 2009 78. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS ARGUED THAT THE EXPLANATION (3) NOW CLEARLY CLARIFIES THAT ANY NOTI FICATION ISSUED UNDER SUB SECTION (3) FOR ASSIGNING ANY MEANING TO THE TERMS USED IN THE AGREEMENT WHICH HAS NOT BEEN DEFINED EITHER IN THE ACT OR IN THE AGREEMENT, THEN SUCH A MEANING ASSIGNED SHALL BE DEEMED TO HAVE EFFECT F ROM THE DATE ON WHICH THE SAID AGREEMENT CAME INTO FORCE. THIS NEW EXPLAN ATION (3) NOW AGAIN REITERATES THE INTENTION OF THE CENTRAL GOVERNMENT AND IN FACT, RATIFIES THE NOTIFICATION ISSUED BY THE CENTRAL GOVERNMENT. THUS , THE NOTIFICATION IN QUESTION DATED 28 TH AUGUST 2008, HAS TO BE READ AS BEING INTO FORCE FR OM THE DATE OF AGREEMENT ITSELF. 79. PER CONTRA, THE LEARNED SR. COUNSEL, HAS SUBMITTED THAT FIRST OF ALL THE LEGISLATURE IN THE YEAR 2012, HAS INTRODUCED THIS E XPLANATION (3) WITH RETROSPECTIVE EFFECT FROM 1 ST OCTOBER 2009 AND NOT FROM 1 ST APRIL 2004, OR EARLIER PERIOD. THIS MEANS THAT THE LEGISLATURE PUR POSELY INTENDED THAT SUCH AN EXPLANATION SHOULD NOT BE READ PRIOR TO 1 ST OCTOBER 2009. THUS, ANY NOTIFICATION WHICH HAS BEEN ISSUED AFTER 1 ST OCTOBER 2009, THEN ONLY SUCH A NOTIFICATION CAN BE SAID TO BE COME INTO FORCE AND NOT PRIOR TO IT. ESSAR OIL LIMITED 82 80. EXPLANATION (3) HAS BEEN ADDED BY THE FINANCE ACT, 2012, AND HAS BEEN BROUGHT WITH RETROSPECTIVE EFFECT FROM 1 ST OCTOBER 2009. THE SAME READS AS UNDER: (3) ANY TERM USED BUT NOT DEFINED IN THIS ACT OR I N THE AGREEMENT REFERRED TO IN SUB-SECTION (1) SHALL, UNLESS THE CO NTEXT OTHERWISE REQUIRES, AND IS NOT INCONSISTENT WITH THE PROVISIO NS OF THIS ACT OR THE AGREEMENT, HAVE THE SAME MEANING AS ASSIGNED TO IT IN THE NOTIFICATION ISSUED BY THE CENTRAL GOVERNMENT IN TH E OFFICIAL GAZETTE IN THIS BEHALF. THE MEMORANDUM EXPLAINING THE OBJECTS OF THE SAID E XPLANATION ALONG WITH THE PROVISIONS OF SECTION 90, WAS GIVEN AS UND ER: MEANING ASSIGNED TO A TERM USED IN DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA). SECTION 90 OF THE ACT, EMPOWERS THE CENTRAL GOVERNM ENT TO ENTER INTO AN AGREEMENT WITH FOREIGN COUNTRIES OR SPECIFIED TE RRITORIES FOR THE PURPOSE OF GRANTING RELIEFS PARTICULARLY IN RESPECT OF DOUBLE TAXATION. UNDER THIS POWER, THE CENTRAL GOVERNMENT HAS ENTERED INTO VARIOUS TRE ATIES COMMONLY KNOWN AS DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAAS). SECTION 90A OF THE ACT SIMILARLY EMPOWERS THE CENTR AL GOVERNMENT TO ADOPT AND IMPLEMENT AN AGREEMENT BETWEEN A SPECIFIE D ASSOCIATION IN INDIA AND ANY SPECIFIED ASSOCIATION IN A SPECIFIED TERRIT ORY OUTSIDE INDIA FOR GRANTING RELIEF FROM DOUBLE TAXATION ETC. ON THE LINES OF SECTION 90 OF THE ACT. SUB-SECTION (3) OF SECTIONS 90 AND 90A OF THE ACT E MPOWERED THE CENTRAL GOVERNMENT TO ASSIGN A MEANING, THROUGH NOT IFICATION, TO ANY TERM USED IN THE AGREEMENT, WHICH WAS NEITHER DEFINED IN THE ACT NOR IN THE AGREEMENT. SINCE THIS ASSIGNMENT OF MEANING IS IN RESPECT OF A TERM USED IN A TREATY ENTERED INTO BY THE GOVERNMENT WITH A P ARTICULAR INTEND AND OBJECTIVE AS UNDERSTOOD DURING THE COURSE OF NE GOTIATIONS LEADING TO FORMALIZATION OF TREATY, THE NOTIFICATION UNDER SECTION 90(3) GIVES A LEGAL FRAME WORK FOR CLARIFYING THE INTENT, AND THE CLARIFICATION SHOULD NORMALLY APPLY FROM THE DATE WHEN THE AGREEMENT WHI CH HAS USED SUCH A TERM CAME INTO FORCE. THEREFORE, THE LEGISLATIVE INTENT OF SUB-SECTION (3 ) TO SECTION 90 AND SECTION 90A THAT WHENEVER ANY TERM IS ASSIGNED A MEANING THROUGH A NOTIFICATION ISSUED UNDER SECTION 90(3) O R SECTION 90A(3), IT SHALL HAVE THE EFFECT OF CLARIFYING THE TERM FRO M THE DATE OF COMING ESSAR OIL LIMITED 83 IN FORCE OF THE AGREEMENT IN WHICH SUCH TERM IS USE D, NEEDS TO BE CLARIFIED. IT IS PROPOSED TO AMEND SECTION 90 OF THE ACT TO PR OVIDE THAT ANY MEANING ASSIGNED THROUGH NOTIFICATION TO A TERM USED IN AN AGREEMENT BUT NOT DEFINED IN THE ACT OR AGREEMENT, SHALL BE EFFECTIVE FROM THE DATE OF COMING INTO FORCE OF THE AGREEMENT . IT IS ALSO PROPOSED TO MAKE SIMILAR AMENDMENT IN SECTION 90A O F THE ACT. THE AMENDMENT IN SECTION 90 WILL TAKE EFFECT RETROS PECTIVE FROM 1 ST OCTOBER, 2009 AND THE AMENDMENT IN SECTION 90A SHAL L TAKE EFFECT RETROSPECTIVELY FROM 1 ST JUNE, 2006. [EMPHASIS ADDED ] 81. HERE AGAIN, THE LEGISLATURE HAS REITERATED THAT THE MEANING ASSIGNED IN A TREATY ENTERED INTO BY THE GOVERNMENT HAS A PARTI CULAR INTENT AND OBJECT WHICH IS TO BE UNDERSTOOD FROM THE COURSE OF NEGOTI ATIONS LEADING TO THE FORMALIZATION OF THE TREATY. THE NOTIFICATIONS WHIC H ARE ISSUED UNDER SECTION 90(3), GIVES A LEGAL FRAMEWORK FOR CLARIFYING SUCH INTENT. THIS CLARIFICATION GIVEN IN THE MEMORANDUM PROVIDES THAT NOTIFICATIONS WILL APPLY FROM THE DATE WHEN THE AGREEMENT HAS COME INTO FORCE EVEN THOUGH THE EXPLANATION (3) ITSELF HAS BEEN BROUGHT IN STATUTE W.E.F. 1 ST OCTOBER 2009. HOWEVER, THE INSERTION OF THE SAID EXPLANATION CAN ONLY BE RELIE D FOR THE PURPOSE OF SHOWING THE LEGISLATIVE INTENT. WE ARE NOT ENTERING INTO THE DEBATE AS TO WHETHER OR NOT THE SAID EXPLANATION (3) WHICH HAS B EEN BROUGHT IN STATUTE W.E.F. 1 ST OCTOBER 2009, WILL HAVE RETROSPECTIVE EFFECT OR NO T. SINCE THE ISSUE BEFORE US PERTAINS TO THE ASSESSMENT YEAR 200405, WHEREIN SUBSECTION (3) OF SECTION 90, WAS ALREADY THERE AND IN PURSUANCE O F SUCH SECTION, THE CENTRAL GOVERNMENT HAS ISSUED A NOTIFICATION CLARIF YING ITS INTENT AND OBJECT OF THE TERMS USED IN THE TREATY, THEREFORE, WE ARE NOT ENTERING INTO THIS DEBATE. THE LANGUAGE OF THE SAID EXPLANATION ALONG WITH THE MEMORANDUM OF THE OBJECT HAS TO BE SEEN FROM THE CONTEXT OF THE A CTUAL LEGISLATIVE INTENT AND THE INTENTION OF THE CENTRAL GOVERNMENT WHICH IS ON E OF THE CONTRACTING PARTIES. THUS, WE CANNOT MAKE OURSELVES OBLIVIOUS O F SUCH AN INTENT WHICH HAS BEEN REITERATED IN THE EXPLANATION (3). THIS ON LY REINFORCES OUR CONCLUSION. BEYOND THIS, WE ARE NOT ENTERING INTO T HE SEMANTICS OF RETROSPECTIVE EFFECT OF THE SAID EXPLANATION. ALL T HE OTHER ARGUMENTS RAISED ESSAR OIL LIMITED 84 BY THE LEARNED SR. COUNSEL AND THE LEARNED DEPARTME NTAL REPRESENTATIVE REGARDING RETROSPECTIVE EFFECT OF EXPLANATION (3), ARE NOT DEALT WITH IN VIEW OF OUR CONCLUSION THAT EARLIER NOTIFICATION DATED 2 8 TH AUGUST 2008, WILL APPLY FROM THE ASSESSMENT YEAR 200405. EFFECT OF EARLIER ORDERS IN CASE OF THE ASSESSEE : 82. SIMILARLY, IN VIEW OF OUR AFORESAID CONCLUSION THAT THE INTERPRETATION OF THE PHRASE MAY BE TAXED HAS TO BE SEEN FROM THE ANGLE OF CLARIFICATION ISSUED BY THE CENTRAL GOVERNMENT BY WAY OF NOTIFICA TION IN THE EXERCISE OF POWER GIVEN UNDER SECTION 90(3) W.E.F. 1 ST APRIL 2004 I.E., ASSESSMENT YEAR 200405, THE EARLIER DECISIONS GIVEN BY THE TRIBUNA L IN ASSESSEES OWN CASE CONFIRMED BY THE HIGH COURT WILL NOT BE APPLICABLE. THIS NONAPPLICABILITY OF EARLIER DECISION IN THE WAKE OF SECTION 90(3) AND T HE NOTIFICATION ISSUED IN PURSUANCE THEREOF HAS ALREADY BEEN DISCUSSED IN DET AIL IN THE FOREGOING PARAGRAPHS AND, ACCORDINGLY, THESE DECISIONS CANNOT BE SAID TO HAVE BINDING PRECEDENCE IN THE ASSESSEES CASE FROM THE ASSESSME NT YEAR 200405. WHAT IS MEANT BY MAY BE TAXED 83. THERE IS ANOTHER IMPORTANT ASPECT WHICH HAS TO BE S EEN INDEPENDENTLY WHILE COMING TO THE CONCLUSION AS TO WHAT IS MEANT BY THE PHRASE MAY BE TAXED AS GIVEN IN THE VARIOUS ARTICLES OF THE DTAA. IN T HE INTERNATIONAL TAXATION, THE STARTING POINT IS THE UNDERSTANDING O F THE DOMESTIC TAX LAW / RULES OF THE VARIOUS COUNTRIES BECAUSE THE STATE CA N LEVY TAXES BY ITS SOVEREIGN RIGHT UPON ITS RESIDENTS. THE TAX SOVEREI GNTY EMANATES FORM THE CONNECTION BETWEEN RESIDENT TAX PAYER AND THE STATE . UNDER THE DOMESTIC TAX LAWS, A TAX LIABILITY ARISES IN A COUNTRY ONLY IF THERE IS A CONNECTION BETWEEN THE TAX JURISDICTION AND THE TAX PAYERS OR THE TAXABLE EVENT. THE CONNECTING FACTORS INCLUDE TAX RESIDENCY OF THE TAX PAYER, SOURCE OF THE INCOME, THE PLACE WHERE THE INCOME IS EARNED OR DER IVED, OR THE LOCATION OF THE ASSET. ALL THESE FACTORS EMANATE FROM THE DOMES TIC TAX LAWS. THE COUNTRY ESSAR OIL LIMITED 85 OF SOURCE ALSO LEVIES TAX FROM THE INCOME EARNED OR DERIVED IN THEIR TAX JURISDICTION UNDER THEIR DOMESTIC TAX LAWS. THIS IS HOW THE CONFLICT ARISES ON TAXING THE SAME INCOME UNDER BOTH THE JURISDICTIONS WHICH LEADS TO THE DOUBLE TAXATION. TO AVOID SUCH CONFLICTS AND ELIMIN ATE DOUBLE TAXATION, DTAAS / TAX TREATIES ARE NEGOTIATED BETWEEN THE TWO STATES. THEY DETERMINE AS TO WHAT EXTENT EACH STATE MAY LEVY TAX AND COMMI T THEMSELVES TO RELINQUISHING COMPLETELY OR PARTIALLY THE IMPOSITIO N OF TAXES IN SPECIFIC SITUATIONS. THE TAX TREATIES ONLY ALLOCATE TAXING R IGHTS AND DO NOT MAKE ANY TAX RULES. THE TREATIES CANNOT IMPOSE OR LEVY TAX W HICH IS SOLELY BASED ON DOMESTIC LAWS. GENERALLY IN THE SCHEME OF DOUBLE TA X AVOIDANCE TREATY WHEREVER THE RIGHT OF TAXATION IS GIVEN TO THE SOUR CE COUNTRY, THE COUNTRY OF RESIDENT RELIEVE THE DOUBLE TAX AS IT ASSERTS THE R IGHT OF TAXATION ON THE SAME INCOME OF ITS RESIDENT. IF THE INCOMES WERE TO BE T AXED ONLY BY THE SOURCE COUNTRY, PROBABLY, THERE WOULD ARISE NO CONFLICT OF INCIDENCE OF DOUBLE TAXATION. IN THAT SCENARIO, CLEAR CUT DEMARCATION W OULD HAVE BEEN THERE, ONE WHICH IS TAXABLE IN SOURCE COUNTRY AND OTHER WHICH IS TAXABLE IN RESIDENT COUNTRY. THERE WOULD NOT BE ANY ISSUE OF GIVING CRE DIT OF TAXES. BUT THIS IS NOT SO, AS THE WORLD WIDE SCHEME FOLLOWED BY MOST O F THE COUNTRIES IS RESIDENCY BASED TAXATION, IRRESPECTIVE OF WHERE THE INCOME IS EARNED. THEREFORE, THE STATE OF RESIDENT HAS AN OBLIGATION UNDER THE DOUBLE TAXATION CONVENTIONS TO PROVIDE RELIEF FROM DOUBLE TAXATION OF INCOME EITHER BY FOLLOWING EXEMPTION METHOD OR CREDIT METHOD . IN INDIA, THE PROVISIONS OF INCOME TAX ACT, 1961, FOLLOW THE RESIDENT RULE OF T AX WHICH ARE QUITE COMPREHENSIVE SO AS TO INCLUDE THE GLOBAL INCOME OF A RESIDENT INDIAN. THIS RESIDENCY RULE IS PROVIDED IN SECTION 5 AND THE CRI TERIA OF RESIDENCY RULE HAVE BEEN PROVIDED IN SECTION 6. SECTION 5 R/W SECTIONS 4 AND 6 EMPOWER THE GOVERNMENT OF INDIA TO TAX THE INCOME OF THE RESIDE NT FROM WHATEVER SOURCE AND WHEREVER EARNED. THUS, SECTION 5 IS THE TRIGGER ING POINT OF TAXING THE INCOME OF THE RESIDENT. IN ORDER TO ELIMINATE DOUBL E TAXATION OF THE INCOME IN THE SOURCE COUNTRY, SECTION 90 PROVIDES FOR SUCH RE LIEF. SECTION 5 IS SUBJECT TO RELIEF UNDER SECTION 90 AND ANY PROVISION OF TREATY THAT IS ENTERED INTO BY THE ESSAR OIL LIMITED 86 GOVERNMENT OF INDIA UNDER SUBSECTION 1, WHICH IS M ORE BENEFICIAL TO THE TAX PAYER HAS TO BE FOLLOWED. IF A TAX PAYER GETS RELIE F UNDER SECTION 90 I.E., BY VIRTUE OF THE TREATY, THE SAME WILL HAVE PRIMACY. T HIS HAS BEEN MADE AMPLY CLEAR BY THE HON'BLE SUPREME COURT IN VARIOUS CASES INCLUDING THAT OF THE AZADI BACHAO ANDOLAN. HOWEVER, THIS DOES NOT MEAN T HAT BY VIRTUE OF SECTION 90, SECTION 5 LOSES ITS SIGNIFICANCE COMPLETELY AS THE RIGHT TO TAX ON GLOBAL INCOME OF THE RESIDENT FLOWS FROM SECTION 5 ONLY. T HIS IS THE FUNDAMENTAL RULE THAT ONE HAS TO KEEP IN MIND. AS STATED ABOVE, ELIM INATION OF DOUBLE TAXATION IS DONE ALSO THROUGH EXEMPTION METHOD OR CREDIT METHOD . IN INDIA, ALL THE TAX TREATIES ARE NEGOTIATED FOR ELIMINATION OF DOUB LE TAXATION BY FOLLOWING CREDIT METHOD WHICH IS EVIDENT FROM VARIOUS TREATIE S ENTERED INTO BY THE INDIAN GOVERNMENT. 84. NOW, LET US ANALYSE THE IMPORTANT PHRASES / EXPRESS IONS USED IN THE VARIOUS ARTICLES, WHICH IS THE SUBJECT MATTER OF DI SPUTE BEFORE US VIZ. MAY BE TAXED , MAY ALSO BE TAXED AND SHALL BE TAXED ONLY . UNDER THE MODEL CONVENTION, WHEREVER THE PHRASE SHALL BE TAXED ONLY IS USED, IT CONNOTES THAT ONE CONTRACTING STATE HAS THE RIGHT TO TAX TO THE EXCLUSION OF THE OTHER CONTRACTING STATE. THIS EXPRESSION IS USED IN AN AR TICLE WHERE INCOME IS TO BE TAXED ONLY BY THE STATE OF RESIDENT AND THE SAME IN COME HAS TO BE EXEMPT FROM TAXATION BY THE COUNTRY OF SOURCE. SOME OF THE EXAMPLES WHICH CAN BE CITED HERE ARE ARTICLES (OF MODEL CONVENTION) 8(1), 8(2), 12(1), 13(3), 13(5), 15(2), 18, 19(1), 19(2), 21(1), 22(3), 22(4), ETC. IN SOME SITUATION, A SECONDARY RIGHT IS GIVEN TO A STATE OF SOURCE GENER ALLY TO TAX THE INCOME AT A LOWER TAX RATE BUT ON A GROSS BASIS, HERE THE EXPRE SSION USED GENERALLY IS MAY ALSO BE TAXED , FOR E.G., ARTICLE 10(2), 11(2), ETC. THERE ARE CE RTAIN INCOMES WHICH ARE SHALL BE TAXABLE ONLY IN THE CONTRACTING STATE UNL ESS . THIS EXPRESSION PROVIDES THAT EXCLUSIVE TAXING RIGH TS ARE GIVEN TO THE FIRST STATE, HOWEVER, IF CERTAIN CONDITIONS ARE FULFILLED , THE SAME INCOME MAY BE TAXED IN THE SECOND STATE. HERE THE CLASSICAL EXAMP LE IS ARTICLE7(1), 14(1) AND 15(1). LIKEWISE, THE PHRASE MAY BE TAXED GIVES NONEXCLUSIVE TAXING ESSAR OIL LIMITED 87 RIGHT WHICH ENABLES BOTH THE STATES TO HAVE OPTION TO EXERCISE THE RIGHT WITH OR WITHOUT LIMITATIONS. THE PHRASE MAY ALSO BE TAXED ALSO GIVES BOTH THE STATES THE OPTION TO RIGHT TO TAX. UNDER BOTH THE S ITUATIONS, THE CREDIT OF TAXES IS GIVEN UNDER THE TREATY. IF THE PHRASE MAY BE TAXED IS TO BE INTERPRETED IN THE MANNER THAT COUNTRY OF SOURCE HA S THE EXCLUSIVE RIGHT TO TAX TO THE EXCLUSION OF THE COUNTRY OF RESIDENT THE N PROBABLY PHRASE USED IN SUCH A SITUATION WOULD HAVE BEEN SHALL BE TAXABLE ONLY IN THE OTHER CONTRACTING STATE I.E., THE COUNTRY OF SOURCE. THIS CAN BE VIEWED FR OM ANOTHER ANGLE ALSO THAT WHEREVER THE PHRASE USED IS SHALL BE TAXABLE ONLY THEN THE COUNTRY OF RESIDENT HAS A RIGHT TO TAX AND WHEREVER THE PHRASE MAY BE TAXED IS USED, ONLY COUNTRY OF SOURCE CAN TAX. PERHAPS, IF THIS WOULD HAVE BEEN THE INTERPRETATION, THEN THERE WOULD REMA IN NO CONFLICT BETWEEN THE TAX JURISDICTIONS AND THERE WAS NO UTILITY OF P ROVIDING ANY CREDIT OF TAX. THE LATER INTERPRETATION COMPLETELY UNDERMINES THE RESIDENT RULE OF TAX WHICH IS A FUNDAMENTAL ASPECT OF INTERNATIONAL TAXATION W HICH PERMEATES IN ALL THE TAX TREATY NEGOTIATIONS. THAT IS THE REASON WHY IN THE DTAAS SHALL BE TAXABLE ONLY IS NEVER USED WHILE GIVING THE TAX RIGHT TO THE CO UNTRY OF SOURCE AND IT IS ONLY USED IN THE CONTEXT OF TAXING RIGHT TO THE STATE OF RESIDENCE. THE PHRASE MAY BE TAXED GIVES THE TAXING RIGHT TO THE SOURCE COUNTRY, HOWEVER, THIS DOES NOT IN ANY MANNER DELIMITS THE R IGHT OF TAX OR EXTINGUISHES THE RIGHT TO TAX OF THE COUNTRY OF RES IDENT WHICH ALONE HAS A MANDATE TO TAX THE GLOBAL INCOME OF ITS RESIDENT UN DER THE DOMESTIC LAW. THIS IS FOLLOWED MOSTLY ALL OVER THE WORLD. THIS FU NDAMENTAL ASPECT AS DISCUSSED ABOVE HAS BEEN TIME AND AGAIN OPINED AND LAID EMPHASIS BY OECD COMMENTARIES, U.N. MODEL COMMENTARIES VARIOUS EMINE NT JURISTS LIKE KLAUS VOGEL, PHILIP BAKER, WHICH HAS BEEN DISCUSSED IN EA RLIER PART OF OUR FINDINGS. THE INTERNATIONAL VIEW HAD BEEN THAT THE PHRASE MAY BE TAXED CANNOT BE INTERPRETED IN THE MANNER THAT THE COUNTRY OF RESID ENT IS LEFT WITH NO RIGHT TO TAX ITS RESIDENT. HOWEVER, WE REITERATE HERE THAT T HESE INTERNATIONAL CONVENTIONS OR VIEWS DO NOT HAVE A BINDING PRECEDEN CE BUT HAVE A GREAT PERSUASIVE VALUE IN UNDERSTANDING THE VARIOUS CONCE PTS WHICH ARE BASED ON ESSAR OIL LIMITED 88 UNDERSTANDING THE INTERNATIONAL LAW AND THE NEGOTIA TION OF THE TREATY. WHEN THE MODEL CONVENTION OF THE TREATY OR THE OECD MODE L HAS BEEN MADE THE BASIS OF AGREEMENT ( WHICH HERE IN THIS CASE BOTH T HE TREATIES, OMAN AND QATAR ARE BASED ON OECD MODEL), THEN THE COMMENTARI ES GIVEN UNDER THESE CONVENTIONS ACTS AS AN EXTERNAL AID AND A GUIDING F ACTOR. IT IS ASSUMED THAT NEGOTIATING PARTIES HAVE UNDERSTOOD THE VARIOUS EXP RESSIONS USED IN THE TREATY IN THE MANNER PROVIDED BY THESE COMMENTARIES AND INTERNATIONAL CONVENTIONS. IN THE PRESENT CASE, BOTH THE TREATIES , OMAN DTAA AND QATAR DTAA ARE BASED ON MODEL CONVENTION, HENCE THE VIEWS EXPRESSED HAS A GREAT PERSUASIVE VALUE. THAT IS WHY THE HON'BLE SU PREME COURT IN AZADI BACHAO ANDOLAN (SUPRA) HAS REFERRED TO AND PLACED R ELIANCE ON VARIOUS INTERNATIONAL COMMENTARIES AND VIEWS EXPRESSED BY O ECD, KLAUS VOGEL, PHILIP BAKER, LORD MCNAIR AND OTHER FOREIGN COURT DECISIONS. THE HON'BLE SUPREME COURT HAD NO INHIBITION ON RELYING ON THESE VIEWS BECAUSE THEY REFLECT THE CONCEPT PREVAILING UNDER THE INTERNATIO NAL LAW. 85. INDEPENDENT OF THE INTERNATIONAL VIEWS, IN THE CONT EXT OF INDIA, NOW THE POSITION AS TO WHAT IS MEANT BY THE PHRASE MAY BE TAXED HAS BEEN EXPLAINED AND CLARIFIED BY THE GOVERNMENT OF INDIA IN A VERY CLEAR TERMS IN THE NOTIFICATION ISSUED IN EXERCISE OF STATUTORY PO WER AUTHORISED BY THE ACT AND THIS VIEW EXPRESSED BY THE GOVERNMENT OF INDIA WHICH IS ONE OF THE CONTRACTING PARTIES IN THE TREATY, CLINCHES THE ENT IRE CONTROVERSY. 86. THE FUNDAMENTAL PRINCIPLE OF INTERPRETATION IN INTE RNATIONAL LAW HAS BEEN CODIFIED IN ARTICLES31 TO 34 OF THE VIENNA CO NVENTION ON THE LAW ON TREATIES (VCLT). ARTICLE31 PROVIDES THAT A TREATY MUST BE INTERPRETED IN GOOD FAITH WITH THE ORDINARY MEANING TO BE GIVEN TO THE TERMS OF THE TREATY IN THE CONTEXT AND IN THE LIGHT OF ITS OBJECT AND P URPOSE. ARTICLE 31(4) PROVIDES THAT A SPECIAL MEANING BE GIVEN TO A TERM IF IT IS ESTABLISHED THAT THE PARTIES SO INTENDED. FOR THE SAKE OF READY REFE RENCE, ARTICLES 31 AND 32 OF THE VCLT ARE REPRODUCED BELOW: ESSAR OIL LIMITED 89 ARTICLE31 1. A TREATY SHALL BE INTERPRETED IN GOOD FAITH IN ACCO RDANCE WITH THE ORDINARY MEANING TO BE GIVEN TO THE TERMS OF THE TR EATY IN THEIR CONTEXT AND IN THE LIGHT OF ITS OBJECT AND PURPOSE. 2. THE CONTEXT FOR THE PURPOSE OF THE TREATY SHALL COM PROMISE, IN ADDITION TO THE TEXT, INCLUDING ITS PREAMBLE AND AN NEXES. (A) ANY AGREEMENT RELATING TO THE TREATY WHICH WAS MADE BETWEEN ALL THE PARTIES IN CONNECTION WITH THE CONC LUSION OF THE TREATY; (B) ANY INSTRUMENT WHICH WAS MADE BY ONE OR MORE PARTIE S IN CONNECTION WITH THE CONCLUSION OF THE TREATY AND ACCEPTED BY THE OTHER PARTIES AS AN INSTRUMENT RELATED TO TH E TREATY. 3. THERE SHOULD BE TAKEN INTO ACCOUNT, TOGETHER WITH T HE CONTEXT. (A) ANY SUBSEQUENT AGREEMENT BETWEEN THE PARTIES REGARD ING THE INTERPRETATION OF THE TREATY OR THE APPLICATION OF ITS PROVISIONS; (B) ANY SUBSEQUENT PRACTICE IN THE APPLICATION OF THE T REATY WHICH ESTABLISHES THE AGREEMENT OF THE PARTIES REGA RDING ITS INTERPRETATION; (C) ANY RELEVANT RULES OF INTERNATIONAL LAW APPLICABLE IN THE RELATIONS BETWEEN THE PARTIES. 4. A SPECIAL MEANING SHALL BE GIVEN TO A TERM IF IT IS ESTABLISHED THAT THE PARTIES SO INTENDED. ARTICLE 32 : SUPPLEMENTARY MEANS OF INTERPRETATION RECOURSE MAY BE HAD TO SUPPLEMENTARY MEANS OF INTER PRETATION, INCLUDING THE PREPARATORY WORK OF THE TREATY AND TH E CIRCUMSTANCES OF ITS CONCLUSION, IN ORDER TO CONFIRM THE MEANING RES ULTING FROM THE APPLICATION OF ARTICLE 31, OR TO DETERMINE THE MEAN ING WHEN THE INTERPRETATION ACCORDING TO ARTICLE 31: (A) LEAVE THE MEANING AMBIGUOUS OR OBSCURE; OR ESSAR OIL LIMITED 90 (B) LEADS TO A RESULT THAT IS MANIFESTLY ABSURD OR UNRE ASONABLE. 87. THUS, HUGE EMPHASIS HAS BEEN LAID DOWN AS TO WHAT I S THE INTENTION OF THE PARTIES AND THE INTERPRETATION GIVEN BY THEM. O NCE WE ARE AWARE AS TO WHAT IS THE INTENTION OF THE GOVERNMENT OF INDIA, W E CANNOT OVER LOOK SUCH AN INTENTION AND TAKE RECOURSE TO SOME INDEPENDENT INTERPRETATION. THUS, THE PHRASE MAY BE TAXED HAS TO BE UNDERSTOOD IN A WAY TO MEAN THAT THE COUNTRY OF SOURCE HAS A RIGHT TO TAX WITHOUT DENUDI NG THE RIGHT OF TAX TO THE COUNTRY OF RESIDENT. CONCLUSION : 88. WE SUMMARISE OUR CONCLUSION AS UNDER: I) THE RATIO OF ALL THE JUDGMENTS RENDERED BY THE HON BLE HIGH COURTS, AS DISCUSSED HEREIN ABOVE AND CONFIRMED BY THE HONBLE SUPREME COURT SPECIFICALLY IN THE CASE OF TURQUOISE INVESTMENT (SUPRA), ON THE INTERPRETATION OF THE EXPRESSION M AY BE TAXED, THAT ONCE THE TAX IS PAYABLE OR PAID IN THE COUNTRY OF SOURCE, THEN COUNTRY OF RESIDENCE IS DENIED OF THE RIGHT TO LEVY TAX ON SUCH INCOME OR THE SAID INCOME CANNOT BE INCLUDED I N RETURN OF INCOME FILED IN INDIA, WOULD NO LONGER APPLY AFTER THE INSERTION OF PROVISION OF SUB-SECTION (3) OF SECTION 90 W.E.F. 1 ST APRIL, 2004, I.E. ASSESSMENT YEAR 2004-05. THE SAID PROVISION HA S CONFERRED UPON THE CENTRAL GOVERNMENT A POWER TO ISSUE NOTIFI CATION, ASSIGNING MEANING TO THE TERMS USED IN THE DTAA, WH ICH HAS NEITHER BEEN DEFINED UNDER THE ACT NOR IN THE AGREE MENT PROVIDED THAT SUCH A MEANING SHOULD NOT BE INCONSIS TENT WITH THE PROVISIONS OF THE ACT OR AGREEMENT. IN PURSUANC E OF SUCH A STATUTORY EMPOWERMENT, CENTRAL GOVT. HAS ISSUED A N OTIFICATION ON 28TH AUGUST, 2008, CLEARLY SPECIFYING THAT WHERE THE DTAA ENTERED INTO BY THE CENTRAL GOVT. WITH THE GOVT. OF ANY OTHER COUNTRY PROVIDES THAT ANY INCOME OF A RESIDENT OF I NDIA MAY BE TAXED IN THE OTHER COUNTRY, SUCH INCOME SHALL BE I NCLUDED IN HIS TOTAL INCOME CHARGEABLE TO TAX IN INDIA IN ACCORDAN CE WITH THE PROVISIONS OF THE INCOME TAX ACT, 1961 AND RELIEF S HALL BE GRANTED IN ACCORDANCE WITH THE METHOD FOR ELIMINATI ON OR AVOIDANCE OF DOUBLE TAXATION PROVIDED IN SUCH AGREE MENT. THIS MEANING ASSIGNED TO THE TERM MAY BE TAXED HAS CHA NGED ITS COMPLEXION; ESSAR OIL LIMITED 91 II) THE NOTIFICATION DATED 28 TH AUGUST 2008, REFLECTS A PARTICULAR INTENT AND OBJECTIVE OF THE GOVERNMENT OF INDIA, AS UNDERSTOOD DURING THE COURSE OF NEGOTIATIONS LEADING TO FORMAL IZATION OF TREATY. THEREFORE, SUCH A NOTIFICATION HAS TO BE RE CKONED AS CLARIFICATORY IN NATURE AND HENCE INTERPRETATION GIVEN BY GOVT. OF INDIA THROUGH THIS NOTIFICATION WILL BE EFFECTIV E FROM 1 ST APRIL 2004, I.E., FROM THE DATE WHEN PROVISION OF SECTIO N 90(3) WAS BROUGHT IN THE STATUTE, GIVING A LEGAL FRAME WORK F OR CLARIFYING THE INTENT OF ONE OF THE NEGOTIATING PARTIES; III) THE PHRASE MAY BE TAXED IS NOT APPEARING IN THE STATUTE, BUT IT IS APPEARING IN THE AGREEMENT AND THEREFORE, THE IN TERPRETATION AS UNDERSTOOD AND INTENDED BY THE NEGOTIATING PARTI ES SHOULD BE ADOPTED. HERE ONE OF THE PARTIES I.E., GOVERNMENT O F INDIA HAS CLEARLY SPECIFIED THE INTENT AND THE OBJECT OF THIS PHRASE. IF PHRASE IS USED IN A STATUTE, THEN ANY INTERPRETATIO N GIVEN BY THE HIGH COURT OR THE SUPREME COURT IS BINDING ON ALL T HE SUBORDINATE COURTS AND HAS TO BE RECKONED AS LAW OF THE LAND. HOWEVER, THE MEANING ASSIGNED BY GOVERNMENT OF INDI A FOR A PHRASE OR TERM USED IN THE AGREEMENT THROUGH NOTIFI CATION WILL PREVAIL AT LEAST FROM THE ASSESSMENT YEAR 200405. BECAUSE, WHILE INTERPRETING THE TREATY, THE INTENTION OF THE PARTIES TO THE AGREEMENT HAS TO BE GIVEN PRIMACY AND HAS TO BE UND ERSTOOD IN THAT MANNER ONLY. THEREFORE, THE NOTIFICATION IS NO T CONTRARY TO THE PROVISIONS OF THE ACT. CONSEQUENTLY, THE EARLIE R JUDGMENTS RENDERED IN ASSESSEES CASE PRIOR TO ASSESSMENT YEA R 200405, WILL NOT HAVE BINDING PRECEDENCE IN THIS YEAR OR SU BSEQUENT YEARS; AND IV) THUS, THE BUSINESS INCOME FROM P.E. IN OMAN AND QAT AR AND ALSO THE CAPITAL GAIN FROM SALE OF ASSETS IN THESE COUNT RIES WILL BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE IN IND IA AND CREDIT OF TAXES PAID THERE WILL BE GIVEN AS PER THE RELEVA NT ARTICLE OF THE DTAA. 89. BEFORE PARTING, WE MAY CLARIFY THAT ALL THE JUDICIA L PRONOUNCEMENTS CITED BY THE LEARNED REPRESENTATIVES OF BOTH THE SI DES AND THE RELEVANT PORTION OF COMMENTARIES REFERRED TO IN SUPPORT OF T HEIR RESPECTIVE STAND HAVE BEEN CONSIDERED AND DELIBERATED UPON BY US WHILE AR RIVING AT OUR CONCLUSIONS. SOME OF THEM, HOWEVER, ARE NOT SPECIFI CALLY MENTIONED OR DISCUSSED IN THE ORDER AS THE SAME HAV EBEEN FOUND TO BE NOT DIRECTLY ESSAR OIL LIMITED 92 RELEVANT TO THE ISSUE OR THE PROPOSITION THEREIN IS FOUND TO BE REPETITIVE IN NATURE WHICH HAS ALREADY BEEN CONSIDERED BY US. WE TAKE THIS OPPORTUNITY TO PLACE ON RECORD OUR APPRECIATION FOR THE ASSISTANCE PROVIDED BY THE LEARNED REPRESENTATIVES OF BOTH THE SIDES BY MAKING ELABORA TE SUBMISSIONS WHICH HAS HELPED US TO ANALYSE THE LEGAL POSITION EMANATING F ROM THE INTERPRETATION OF THE RELEVANT PROVISIONS OF THE DOMESTIC LAW AS WELL AS THE RELEVANT TAX TREATIES AND APPLY THE SAME ON THE FACTS OF THE CAS ES BEFORE US. FINALLY, IN VIEW OF OUR AFORESAID FINDINGS, GROUND NO.2 AND 4, AS RAISED BY THE REVENUE, ARE TREATED AS ALLOWED AND FINDING OF LEARNED COMMI SSIONER (APPEALS) IS, ACCORDINGLY, REVERSED. 90. IN GROUND NO.4, THE REVENUE HAS CHALLENGED ALLOWANC E OF PROPORTIONATE INTEREST ON THE INVESTMENT MADE IN JE TTY IN THE RATIO OF SURPLUS FUNDS TO THE BORROWED FUNDS AS ON 31 ST MARCH 1997. 91. FACTS IN BRIEF : THE ASSESSEE, IN ITS COMPUTATION OF INCOME, HAS CLAIMED DEDUCTION OF INTEREST OF ` 8,45,98,332. ON BEING REQUIRED BY THE ASSESSING OFFICER TO JUSTIFY THE CLAIM OF INTEREST RELATING TO PURCHASE OF JETTY AS REVENUE EXPENDITURE, THE ASSESSEE HAD SUBMITTED THAT IT HAD PURCHASED THE JETTY FOR THE PURPOSE OF HIS BUSINESS WHICH WAS CAPITALIZED IN THE BOOKS AND DEPRECIATION WAS CLAIMED AND ALLOWED BY THE DEP ARTMENT IN THE EARLIER YEARS. THE PURCHASE CONSIDERATION WAS PAID PARTLY O UT OF OWN FUNDS AND PARTLY OUT OF LOAN TAKEN FOR THE PURCHASE OF REFINE RY. IN THE BOOKS OF ACCOUNT, THE INTEREST OF LOAN HAS BEEN PUT AS AN EXPENDITURE INCURRED DURING THE CONSTRUCTION AS THE REFINERY WAS UNDER CONSTRUCTION . SINCE THE JETTY WAS AN INDEPENDENT ASSET AND ITS COMMERCIAL USE WAS STARTE D, THEREFORE, THE ASSESSEE HAS CLAIMED DEPRECIATION AS WELL AS INTERE ST ON LOAN WHICH WAS UTILISED FOR PURCHASE OF JETTY. THE BREAKUP OF OWN FUNDS AND LOAN FUND WAS ALSO GIVEN ALONG WITH THE WORKING OF THE INTEREST W HICH HAS BEEN INCORPORATED BY THE ASSESSING OFFICER AT PAGES15 A ND 16 OF THE ORDER. THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTENTIO N ON VARIOUS GROUND AND THE MOST IMPORTANT WAS THAT THE ASSESSEE HAS NOT UT ILISED THE LOAN AMOUNT ESSAR OIL LIMITED 93 FOR THE PURPOSE OF PURCHASE OF ASSETS AND INTEREST EXPENDITURE HAS BEEN CLAIMED ON ESTIMATE BASIS. THE INTEREST CANNOT BE A LLOWED ON ASSUMPTION THAT CERTAIN PERCENTAGE OF PROPORTION OF LOAN MIGHT HAVE BEEN UTILISED FOR MAKING PAYMENTS TOWARDS COST OF THE JETTY PARTICULA RLY WHEN OWN FUNDS WERE AVAILABLE FOR THE PAYMENT. THERE IS NO NEXUS BETWEE N THE FUNDS BORROWED AND PAYMENTS MADE FOR ACQUIRING THE ASSET. HE FURTH ER OBSERVED THAT SIMILAR DISALLOWANCES WERE MADE BY THE ASSESSING OFFICER IN THE ASSESSMENT YEARS 200304 AND 200304 AND THE MATTER IS SUBJUDICE BEF ORE THE TRIBUNAL AS THE REVENUE HAS NOT ACCEPTED THE LEARNED COMMISSIONER ( APPEALS)S ORDER. 92. THE LEARNED COMMISSIONER (APPEALS), FOLLOWING THE O RDER OF HIS PREDECESSOR IN THE ASSESSMENT YEAR 200203, HELD TH AT WHERE BOTH THE ASSESSING OFFICER AND THE ASSESSEE CANNOT IDENTIFY THE SOURCE OF PURCHASE, THE BEST COURSE IS TO CALCULATE THE AMOUNT OF INTER EST IN THE RATIO OF BORROWED FUNDS TO OWN FUNDS AND ONLY THE PROPORTIONATE INTER EST SO ARRIVED IS TO BE ALLOWED AS DEDUCTION UNDER SECTION 36(1)(III). ACCO RDINGLY, THE ASSESSING OFFICER WAS DIRECTED TO ALLOW THE CLAIM ON PROPORTI ONATE BASIS IN THE RATIO OF OWN FUNDS TO BORROWED FUNDS AS ON 31 ST MARCH 1997. 93. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT WHERE THE INTEREST EXPENDITURE HAS BEEN CAPITALIZED IN THE BOOKS OF ACCOUNT AND THE DIRECT NEXUS OF OWN FUNDS AND LOAN FOUND CO ULD NOT BE WORKED OUT, THE INTEREST CLAIMED ON PROPORTIONATE BASIS CANNOT BE ALLOWED BECAUSE THERE BEING NO DIRECT NEXUS BETWEEN THE LOAN FUNDS AND TH E UTILIZATION. HE RELIED UPON THE DECISION OF THE BOMBAY HIGH COURT IN CIT V /S RELIANCE UTILITIES AND POWER LTD. [2009] 331 ITR 340 (BOM.) FOR THE PROPOS ITION THAT IF THE INTEREST FREE FUNDS ARE AVAILABLE FOR THE PURPOSE OF INVESTM ENT, THEN PRESUMPTION IS THAT THE SAME HAS BEEN MADE FROM THE INTEREST FREE FUNDS AND NOT FROM THE LOAN AMOUNT. SIMILAR LOGIC SHOULD BE APPLIED HERE A LSO. 94. BEFORE US, THE LEARNED SR. COUNSEL, MR. DASTUR, SUB MITTED THAT, FIRST OF ALL, THIS ISSUE HAS COME UP FOR CONSIDERATION BEFOR E THE TRIBUNAL IN THE ESSAR OIL LIMITED 94 ASSESSMENT YEAR 200203, WHEREIN THE PROPORTIONATE ALLOWANCE OF EXPENDITURE HAS BEEN UPHELD. HE DREW OUR ATTENTION TO PARA18 AND 21 OF THE SAID ORDER AND SUBMITTED THAT IDENTICAL ISSUE H AS BEEN DEALT WITH BY THE TRIBUNAL. REPLYING ON THE ARGUMENTS RAISED BY THE L EARNED DEPARTMENTAL REPRESENTATIVE, HE SUBMITTED THAT THE DECISION ON R ELIANCE UTILITIES AND POWER LTD. (SUPRA), CANNOT BE FOLLOWED AS THAT WAS THE CASE OF INVESTMENT. IN THE PRESENT CASE, THE ISSUE RELATES TO EXPENDITU RE AND THERE CANNOT BE A PRESUMPTION THAT THE ASSESSEE MUST HAVE UTILISED TH E ENTIRE SURPLUS FUNDS / OWN FUNDS FOR THE PURPOSE OF EXPENDITURE WHICH IS O THERWISE ALLOWABLE. IF IT IS INTERMINGLING OF FUNDS, THEN DISCRETION IS OF T HE ASSESSEE. HERE, THE ASSESSEE HAS CHOSEN A MIDDLE PATH AND THIS IS THE M OST EQUITABLE WAY. HE ALSO RELIED UPON THE DECISION OF THE HON'BLE SUPREM E COURT IN SUTLEJ COTTON MILLS LTD. V/S CIT, [1991] 187 ITR 182 (SC) AND SPE CIFIC ATTENTION WAS DRAWN AT PAGE185. 95. AFTER CAREFULLY CONSIDERING THE RIVAL SUBMISSIONS A ND THE ORDERS OF THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APP EALS), WE FIND THAT THERE IS NO DISTINCTION OF FACTS FROM THE EARLIER Y EARS AND, THEREFORE, THE FINDINGS GIVEN BY THE TRIBUNAL WOULD BE DIRECTLY AP PLICABLE IN THE PRESENT CASE ALSO. IT HAS ALSO BEEN POINTED OUT BY THE LEAR NED SR. COUNSEL THAT IN THE APPEAL FILED BEFORE THE HIGH COURT AGAINST THE TRIB UNAL ORDER FOR THE ASSESSMENT YEAR 200203, THIS ISSUE WAS NOT RAISED BEFORE THE HIGH COURT. THIS, INTERALIA, MEANS THAT THE REVENUE HAS ACCEPT ED THE TRIBUNAL ORDER ON THIS ISSUE. THUS, RESPECTFULLY FOLLOWING THE EARLIE R YEARS PRECEDENCE WHICH IS BASED ON THE SAME FACTS, WE DO NOT FIND ANY REASON TO DEVIATE FROM SUCH FINDINGS. ACCORDINGLY, THE ORDER OF THE LEARNED COM MISSIONER (APPEALS) ON THIS SCORE IS AFFIRMED AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 96. GROUND NO.5, RAISED BY THE REVENUE RELATES TO ALLOW ANCE OF ASSESSEES CONTENTION BY THE LEARNED COMMISSIONER (APPEALS) TH AT INTEREST RECEIVED FROM SUPPLIER M/S. ESSAR STEELS LTD. OF ` 1,48,62,816, AND FROM EMPLOYEES AMOUNTING TO ` 33,906, IS DIRECTLY LINKED WITH SETTING UP OF REFI NERY AND, ESSAR OIL LIMITED 95 HENCE, THE SAME IS CAPITALISED AND ADJUSTED AGAINST THE COST OF THE PROJECT INSTEAD OF TREATING IT UNDER THE HEAD INCOME FROM OTHER SOURCES AS DONE BY THE ASSESSING OFFICER. 97. FACTS IN BRIEF : DURING THE PREVIOUS YEAR, THE ASSESSEE HAS EARNE D INTEREST OF ` 3,87,01,230, ON ACCOUNT OF MARGIN DEPOSITS, EXCESS ADVANCE TO SUPPLIER AND LOAN TO THE EMPLOYEES. THE ASSESSEE HA S CLAIMED THAT THESE INTERESTS INCOME IS A PART OF RECOVERIES MADE AGAIN ST THE EXPENDITURE DURING THE CONSTRUCTION OF THE REFINERY PROJECT AND, THERE FORE, THE SAME HAS NOT BEEN CONSIDERED IN THE PROFIT & LOSS ACCOUNT. THE A SSESSEE HAS REDUCED THE COST OF THE REFINERY PROJECT BY THIS AMOUNT. THE AS SESSING OFFICER, HOWEVER, HAS TREATED THE INTEREST FROM SUPPLIER AND INTEREST FROM EMPLOYEE UNDER THE HEAD INCOME FROM OTHER SOURCES AS THEY ARE INEXTRICABLY LINKED WITH THE REFINERY PROJECT. THE FACTS WHICH WERE PLACED BEFOR E THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS), WERE THAT T HE ASSESSEE, FOR THE PURPOSE OF SETTINGUP OF ITS REFINERY, REQUIRED STE EL AND OTHER EQUIPMENT. IN ORDER TO PURCHASE THE STEEL, IT HAD GIVEN ADVANCE T O ESSAR STEELS LTD. AGAINST WHICH THEY WERE RECEIVED SUPPLIES OF STEELS. THE AS SESSEE HAS ALSO PLACED ORDER FOR THE EQUIPMENT FROM MAN INDUSTRIES AND FOR THIS PURPOSE, REQUIRED ESSAR STEELS LTD. TO SUPPLY STEEL TO MAN INDUSTRIES AND ADJUST THE PAYMENTS FOR THE ADVANCE MADE BY THE ASSESSEE TO THEM. SUBSE QUENTLY, IT WAS NOTICED THAT ESSAR STEELS LTD. HAD SUPPLIED STEEL TO MAN IN DUSTRIES FAR MORE THAN WHAT WAS REQUIRED BY THEM FOR MAKING AVAILABLE THE EQUIPMENT FOR THE ASSESSEE. ESSAR STEELS LTD. ADJUSTED THE ADVANCE AG AINST THE EXCESS SUPPLY OF STEEL TO THE MAN INDUSTRIES. ACCORDINGLY, THE AS SESSEE DEMANDED INTEREST FROM ESSAR STEELS LTD. ON THE AMOUNT OF ADVANCE THE Y HAD ADJUSTED AGAINST THE EXCESS STEEL SUPPLIED TO MAN INDUSTRIES. THIS I NTEREST WORKS OUT AT ` 1,48,62,816. 98. BEFORE THE LEARNED COMMISSIONER (APPEALS), AFTER EX PLAINING THE ENTIRE NATURE OF TRANSACTION, IT WAS ARGUED THAT THE ENTIR E TRANSACTION WAS DIRECTLY RELATED TO SETTING UP OF REFINERY PROJECT DUE TO WH ICH THEY HAVE REDUCED THE ESSAR OIL LIMITED 96 INTEREST INCOME FROM COST OF THE PROJECT. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN CIT V/S BO KARO STEELS LTD. [1999] 236 ITR 0315 (SC). THE LEARNED COMMISSIONER (APPEAL S), AFTER APPRECIATING THE CONTENTIONS RAISED BY THE ASSESSEE AND THE FACT S OF THE CASE, OBSERVED AND HELD AS UNDER: 8.2 I HAVE PERUSED THE FACTS OF THE CASE AND I FIN D THAT THE TRANSACTION WITH M/S. MAN INDUSTRIES AS WELL AS ESS AR STEEL LTD. WERE DIRECTLY RELATED TO SETTING UP OF THE REFINERY. THE ADVANCES WERE ALSO GIVEN TO M/S. ESSAR STEEL LTD. FOR SUPPLY OF TH STE EL FOR SETTING UP THE REFINERY. THESE ADVANCES WERE DIVERTED BY ESSAR STE EL LTD. FOR PURPOSES OTHER THAN THAT OF THE APPELLANT. CONSEQUE NTLY, INTEREST HAVE BEEN EARNED BY THE APPELLANT. IT IS A FACT THAT THE ADVANCES WERE MADE IN CONNECTION WITH SETTING UP OF THE REFINERY. IT I S ALSO A FACT THAT ADVANCES WERE ADJUSTED AGAINST EXCESS SUPPLY OF THE STEEL TO M/S. MAN INDUSTRIES WHICH WAS TO SUPPLY EQUIPMENT TO APPELLA NT FOR SETTING UP OF REFINERY. THEREFORE THE ENTIRE CHAIN OF TRANSACTION IS DIRECTLY RELATED TO SETTING UP OF REFINERY. THE RATIO LAID DOWN BY HON BLE SUPREME COURT IN THE CASE OF BOKARO STEEL LTD. IS THEREFORE APPLICAB LE TO THE FACTS OF THE CASE. THE INTEREST INCOME EVEN THOUGH INCLUDED IN T HE PROFIT AND LOSS ACCOUNT IS REQUIRED TO BE CAPITALIZED AND ADJUSTED AGAINST THE COST OF THE PROJECT. THE ASSESSING OFFICER IS DIRECTLY ACCO RDINGLY. 8.3 THE SECOND PART OF THIS GROUND IS TAXABILITY OF INTEREST OF RS.33,9061- RECEIVED FROM EMPLOYEES. THE ASSESSING OFFICER HAS NOT GIVEN ANY REASONS FOR TREATING THIS INTEREST AS INC OME UNDER THE HEAD INCOME FROM OTHER SOURCES. IN CONTRAST THE APPELLAN T HAS CLAIMED THAT ADVANCES WERE MADE TO EMPLOYEES ENGAGED IN SETTING UP OF REFINERY PROJECT. ANY INTEREST EARNED ON THIS ADVANCE IS INE XTRICABLY LINKED TO THE SETTING UP OF THE PROJECT AND NEEDS TO BE CAPIT ALISED. I AGREE WITH THE ARGUMENT OF THE APPELLANT THAT THE INTEREST IS RELATED TO THE SETTING UP OF REFINERY. I ALSO NOTICE THAT THE ASSESSING OF FICER HAS NOT GIVEN ANY SPECIFIC REASON FOR TAXING THE SAME AS INCOME. IT IS THEREFORE HELD ESSAR OIL LIMITED 97 THAT INTEREST RECEIVED FROM EMPLOYEES HAS TO BE CAP ITALIZED AGAINST REFINERY EXPENSES. THE ADDITION MADE IS, THEREFORE, DELETED. 99. THE LEARNED DEPARTMENTAL REPRESENTATIVE, RELYING UP ON THE OBSERVATIONS AND THE FINDINGS GIVEN BY THE ASSESSIN G OFFICER, SUBMITTED THAT THE ENTIRE TRANSACTIONS OF THE ASSESSEE ON WHICH IT HAS RECEIVED INTEREST, IT CANNOT BE SAID THAT IT IS DIRECTLY RELATED TO THE S ETTING UP OF REFINERY AND IS NOT INEXTRICABLY LINKED TO THE PROJECT. HE RELIED U PON THE DECISION OF THE HON'BLE SUPREME COURT IN BONGAIGAON REFINERY AND PE TROCHEMICALS LTD. V/S CIT, [2001] 251 ITR 0329 (SC), WHEREIN THE INTEREST INCOME OF PRE COMMENCEMENT PERIOD WAS HELD TO BE TAXABLE. 100. ON THE OTHER HAND, THE LEARNED SR. COUNSEL SUBMITTE D THAT THE ASSESSEE HAS NOT GIVEN ANY KIND OF A LOAN ON WHICH INTEREST HAS BEEN RECEIVED IN EXCESS BUT ADVANCE WAS GIVEN TO THE ESS AR STEELS LTD. FOR SUPPLY OF MATERIAL ON WHICH THE ASSESSEE HAS DEMANDED INTE REST. THUS, THE INTEREST INCOME HAS BEEN CAPITALISED IN THE BOOKS OF ACCOUNT AND THE SAME HAS BEEN REDUCED FROM THE COST. THIS WAS THE INTEGRAL PART O F THE SETTING UP OF THE REFINERY PROJECT AND IT IS INEXTRICABLY LINKED WITH THE SETTINGUP OF THE PROJECT. THE DECISION IN BOKARO STEELS LTD. (SUPRA) , WAS CLEARLY APPLICABLE. HE ALSO DISTINGUISHED THE DECISION IN BONGAIGAON REFIN ERY AND PETROCHEMICALS LTD. (SUPRA) AND SUBMITTED THAT IN THAT CASE INTERE ST PERTAINED TO INVESTMENTS. THEREFORE, THE SAID DECISION IS NOT AP PLICABLE AT ALL IN THE PRESENT CASE. 101. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS, PERUSED THE RELEVANT FINDINGS OF THE ASSESSING OFFICER AS WELL AS THE LEARNED COMMISSIONER (APPEALS) AND THE MATERIAL PLACED ON R ECORD. IT IS UNDISPUTED FACT THAT THE ADVANCES WERE MADE TO ESSAR STEEL LTD ., FOR SUPPLY OF STEELS FOR SETTINGUP OF REFINERY. THESE ADVANCES WERE DIVERTE D BY ESSAR STEELS LTD. TO MAN INDUSTRIES, WHICH IN TURN, SUPPLIED THE EQUIPME NTS TO THE ASSESSEE FOR SETTING UP THE SAME PROJECT. THE EXCESS SUPPLY OF S TEEL TO MAN INDUSTRIES ESSAR OIL LIMITED 98 AGAINST THE ADVANCE MADE BY THE ASSESSEE WAS DEMAND ED BY THE ASSESSEE TO BE COMPENSATED IN THE FORM OF INTEREST. THUS, TH E INTEREST WAS ON ACCOUNT OF EXCESS ADVANCE WHICH WAS PURELY FOR THE PURPOSE OF SETTINGUP OF REFINERY PROJECT. UNDER THESE FACTS, THE DECISION OF THE HON 'BLE SUPREME COURT IN BOKARO STEELS LTD. (SUPRA), WOULD BE APPLICABLE WHE REIN IT HAS BEEN HELD THAT IF THE INTEREST ON ADVANCE ARE DIRECTLY CONNECTED W ITH OR THE INCIDENTAL TO THE COMMENCEMENT OF THE PROJECT, THE SAME IS TO BE HELD AS CAPITAL RECEIPTS AND CAN BE ADJUSTED AGAINST THE COST OF THE PROJECT. AC CORDINGLY, WE DO NOT FIND ANY REASON TO DEVIATE FROM THE FINDINGS GIVEN BY TH E LEARNED COMMISSIONER (APPEALS) AND THE SAME IS AFFIRMED. SIMILARLY, DEPO SIT OF INTEREST OF ` 33,906, RECEIVED FROM EMPLOYEES, THE SAME IS ALSO R ELATED TO SETTING UP OF THE REFINERY AND THE DECISION OF THE BOKARO STEELS LTD. (SUPRA) IS ALSO APPLICABLE ON THE FACTS OF THE PRESENT ISSUE. CONSE QUENTLY, ON THIS SCORE ALSO, THE FINDINGS OF THE LEARNED COMMISSIONER (APPEALS) ARE AFFIRMED. GROUND NO.5 RAISED BY THE REVENUE IS THUS TREATED AS DISMI SSED. 102. GROUND NO.6 RELATES TO DELETION OF ADDITION OF ` 6,13,97,726, IN RESPECT OF INTEREST RECEIVED BY THE ASSESSEE FROM ESCROW AC COUNT AND ALLOWING OF CAPITALIZATION OF INTEREST IN THE REFINERY PROJECT. 103. BRIEF FACTS OF THE CASE, AS RECORDED BY THE LEARNED COMMISSIONER (APPEALS), ARE THAT THE ASSESSEE WAS IN THE PROCESS OF SETTINGUP OF A REFINERY AT JAMNAGAR FOR WHICH THEY REQUIRE FUNDS. IT HAD APPROACHED THE ICICI BANK AND OTHER BANKS FOR FUNDING THE PROJECT AND THE BANKS AGREED TO GRANT FUNDS BUT WITH A CONDITION THAT THE ASSESSEE WILL OPEN AN ESCROW ACCOUNT WHEREIN THE SALE PROCEEDS OF ITS ENERGY DIV ISION SHOULD BE DEPOSITED. THE FUNDS REQUIRED FROM THE BANKS WERE TO BE UTILIZ ED ONLY AFTER THESE AMOUNTS WERE DEPOSITED. THE FUNDS REQUIRED FROM THE BANKS WERE TO BE UTILIZED ONLY AFTER THESE AMOUNTS ARE DEPOSITED IN THE ESCROW ACCOUNT. THE AMOUNT SO DEPOSITED IN THE ESCROW ACCOUNT CAN BE UT ILIZED BY THE ASSESSEE ONLY AFTER PRIOR APPROVAL OF THE LENDER BANKS. IT W AS IN THIS PROCESS, THE ASSESSEE WHICH HAD DEPOSITED THE SALE PROCEEDS IN T HE ESCROW ACCOUNT, HAS ESSAR OIL LIMITED 99 EARNED INTEREST. IT WAS CLAIMED THAT THE ESCROW ACC OUNT WAS OPENED N ORDER TO GET THE FUNDS FROM THE BANK FOR WHICH THERE WAS A CONDITION THAT IT HAS TO DEPOSIT THE SALE RECEIPTS FROM THE ENERGY DIVISION AND, THEREFORE, IT HAS A DIRECT NEXUS WITH THE SETTINGUP OF THE REFINERY PR OJECT. THOUGH, IN THE BOOKS OF ACCOUNT, IT WAS IT WAS CREDITED TO THE PROFIT & LOSS ACCOUNT BUT IN THE COMPUTATION OF INCOME THE SAME WAS CAPITALIZED. THE ASSESSING OFFICER HAS TREATED THE INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCE . THE LEARNED COMMISSIONER (APPEALS) ACCEPTED THE ASS ESSEES CONTENTION AND HELD THAT THE INTEREST RESULTING IN ESCROW ACCOUNT CAN BE CAPITALIZED AND BE ADJUSTED AGAINST THE EXPENDITURE ON SETTINGUP OF R EFINERY PROJECT. THE RELEVANT FINDINGS / OBSERVATIONS OF THE LEARNED COM MISSIONER (APPEALS), FOR THE SAKE OF READY REFERENCE, ARE REPRODUCED BELOW: 9.2 I HAVE PERUSED THE FACT OF THE CASE. IT APPEAR S THAT THE CONCEPT OF ESCROW ACCOUNT HAS NOT BEEN FULLY UNDERSTOOD BY THE A.O. THE WORD ESCROW MEANS AN AMOUNT OF MONEY OR PROPERTY GRANTED TO SOMEBODY, FOR A SHORT PERIOD AND ONLY RELEASED AFTER A SPECIF IC CONDITION HAVE BEEN MADE. IN THE INSTANT CASE THE AMOUNT DEPOSITED N THE ESCROW ACCOUNT WAS ESSENTIALLY A SECURITY IN THE BANKS IN ORDER TO EFFECT FINANCING OF THE JAMNAGAR PROJECT. IT WAS THEREFORE AKIN TO THE MARGIN MONEY THAT THE BANKS ORDINARILY REQUIRE FOR GRANTIN G LOANS. THE INTEREST EARNED THEREON IS DIRECTLY RELATED TO THE SETTING UP OF THE PROJECT. I ALSO NOTICE THAT THE ONLY GROUND ON WHIC H THE AO HAS TAXED THE INTEREST INCOME IS THAT THE APPELLANT HAS CREDI TED THE INTEREST TO ITS PROFIT AND LOSS ACCOUNT. THIS IS NOT IN ACCORDANCE WITH LAW. HONBLE SUPREME COURT OF INDIA HA HELD IN SEVERAL CASE THAT EXISTENCE OR ABSENCE OF ENTRIES III THE BOOKS OF ACCOUNT ARE NOT ESSENTIAL FOR TAXABILITY OF INCOME. THEREFORE THE ACTION OF THE A SSESSING OFFICER IS NOT IN ACCORDANCE WITH LAW. THE ASSESSING OFFICER HAS N OT GIVEN ANY REASON OTHER THAN ABOVE AS TO WHY INTEREST IS NOT TO BE CA PITALIZED. IN MY OPINION THE ESCROW ACCOUNT WAS OPENED BY THE APPELL ANT FOR GETTING FINANCE FRORN BANKS FOR SETTING UP THE REFINERY PRO JECT. THEREFORE INTEREST RESULTING FROM THE ESCROW ACCOUNT HAS GOT TO BE ADJUSTED ESSAR OIL LIMITED 100 AGAINST EXPENSES ON SETTING UP OF REFINERY PROJECT I.E., NEEDS TO BE CAPITALIZED. THE CLAIM OF THE APPELLANT IS CORRECT. THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITION AND ALLOW CAPITA LIZATION OF INTEREST IN THE REFINERY PROJECT. 104. THE LEARNED DEPARTMENTAL REPRESENTATIVE, RELYING UPON THE FINDINGS OF THE ASSESSING OFFICER, SUBMITTED THAT THE ASSESS ING OFFICER HAS GONE BY THE TREATMENT GIVEN BY THE ASSESSEE ITSELF IN THE B OOKS OF ACCOUNT. THE MONEY WHICH WAS RECEIVED FROM THE ENERGY DIVISION T O THE ESCROW ACCOUNT HAD YIELDED INTEREST AND THE SAME CANNOT BE HELD TO HAVE DIRECT NEXUS WITH THE SETTINGUP OF A REFINERY PROJECT. THEREFORE, IT CANNOT BE HELD THAT THE SECURITY PROVIDED HAS MARGIN MONEY IS INEXTRICABLY LINKED WITH THE SETTING UP OF THE REFINERY BUSINESS. 105. PER CONTRA, THE LEARNED SR. COUNSEL, MR. DASTUR, SUBMITTED THAT THE BASIC CONDITION FOR GRANTING OF LOAN BY THE BANK WA S THAT IT HAD TO OPEN AN ESCROW ACCOUNT IN WHICH SALE PROCEEDS OF ENERGY DIV ISION WAS TO BE DEPOSITED. BASED ON THESE DEPOSITS, FUNDS WERE RELE ASED FOR SETTING UP OF REFINERY PROJECT. THE INTEREST EARNED ON ESCROW DEP OSIT, THUS, HAS A DIRECT NEXUS WITH THE REFINERY PROJECT AND, THEREFORE, IT HAS RIGHTLY BEEN CAPITALIZED. FURTHER, ONCE THE CLAIM HAS BEEN LEGALLY MADE IN TH E RETURN OF INCOME, THE TREATMENT GIVEN IN THE BOOKS OF ACCOUNT WILL NOT MA KE A DIFFERENCE. THUS, THE LEARNED COMMISSIONER (APPEALS) HAS RIGHTLY ALLOWED THIS GROUND IN FAVOUR OF THE ASSESSEE. 106. AFTER CAREFULLY CONSIDERING THE RIVAL SUBMISSIONS A ND ALSO THE NATURE OF TRANSACTIONS WHICH IS NOT IN DISPUTE, WE FIND THAT THE REASONS AND FINDINGS GIVEN BY THE LEARNED COMMISSIONER (APPEALS) ARE LEG ALLY CORRECT. THE BASIC CONDITION FOR GRANT OF LOAN WAS THAT THE ASSESSEE H AS TO MAKE DEPOSITS IN THE ESCROW ACCOUNT AND BASED ON THESE DEPOSITS, THE ASS ESSEE WAS TO RECEIVE FUNDS FOR SETTINGUP OF ITS REFINERY PROJECT. IT CA N BE VERY WELL BE HELD THAT THE SAID DEPOSITS WERE DIRECTLY LINKED WITH THE PUR POSE OF THE ASSESSEES ESSAR OIL LIMITED 101 BUSINESS. ONCE THE INTEREST ACCRUED ON SUCH DEPOSIT S, THE ASSESSEE IN VIEW OF THE PRINCIPLE LAID DOWN IN THE BOKARO STEELS LTD . (SUPRA), CAN CAPITALIZE IT IN THE BOOKS OF ACCOUNT AND CAN ALSO REDUCE IT FROM THE COST OF THE PROJECT. THE FINDINGS RECORDED BY THE LEARNED COMMISSIONER ( APPEALS) THAT DEPOSIT IN THE ESCROW ACCOUNT WAS ESSENTIALLY A SECURITY TO TH E BANK IN ORDER TO EFFECT THE FINANCING THE REFINERY PROJECT AND IS AKIN TO M ARGIN MONEY THAT BANKS ORDINARILY REQUIRED FOR GRANTING OF LOANS IS ABSOLU TELY CORRECT AND, THEREFORE, ANY INTEREST EARNED THEREON IS ALSO DIRECTLY RELATE D TO THE BUSINESS. ACCORDINGLY, GROUND NO.6, RAISED BY THE REVENUE IS DISMISSED. 107. IN GROUND NO.7, THE REVENUE HAS CHALLENGED ALLOWANC E OF BAD DEBT OF ` 46,15,914, RELATED TO NIKO RESOURCES LTD. 108. THE ASSESSING OFFICER HAS DISALLOWED THE SAID CLAIM OF THE BAD DEBT ON THE GROUND THAT THE TRANSACTIONS RELATED TO FINANCI AL YEAR 200203 AND IN LESS THAN ONE YEAR TIME, THE AMOUNT RECEIVABLE FROM THE SAID PARTY COULD NOT HAVE BECOME BAD. 109. BEFORE THE LEARNED COMMISSIONER (APPEALS), THE ASSE SSEE SUBMITTED THAT THERE WAS A DISPUTE BETWEEN THE ASSESSEE AND N IKO RESOURCES ON THE TOTAL AMOUNT OF ` 1.80 CRORES AND BOTH THE PARTIES HAVE AGREED TO SE TTLE THE AMOUNT AT ` 61 LAKHS. THE BALANCE AMOUNT WAS WRITTEN OFF. IT W AS, THEREFORE, CONTENDED THAT THIS WAS A CASE WHERE THERE HAVE BEE N ACTUAL SETTLEMENT AND THE AMOUNT NOT RECEIVED HAS ACTUAL BECAME BAD AND T HE SAME WAS WRITTEN OFF IN THE BOOKS OF ACCOUNT. 110. THE LEARNED COMMISSIONER (APPEALS) ACCEPTED THE ASS ESSEES CONTENTIONS AFTER APPRECIATING THE FACT THAT THERE HAS BEEN SETTLEMENT BETWEEN THE TWO PARTIES AND THE AMOUNT WRITTEN OFF HAD ACTUALLY BECOME BAD. THE SAME HAS TO BE ALLOWED UNDER SECTION 36(1) (VII) R/W SECTION 36(2). 111. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDER OF THE ASSESSING OFFICER WHEREAS THE LEARNED SR. COUNSEL S UBMITTED THAT NOT ONLY ALL ESSAR OIL LIMITED 102 THE CONDITIONS OF THE BAD DEBTS STAND FULFILLED, BU T ALSO THE FACTUAL POSITION RECORDED BY THE LEARNED COMMISSIONER (APPEALS) THAT THERE HAS BEEN ACTUAL SETTLEMENT OF THE AMOUNT AND THE BALANCE AMOUNT HAS BECOME BAD DEBT BY THE DEPARTMENT. ONCE THAT IS SO, THE AMOUNT HAS TO BE ALLOWED AS BAD DEBT. 112. AFTER CAREFULLY CONSIDERING THE RELEVANT FINDINGS O F THE LEARNED COMMISSIONER (APPEALS), WE ARE OF THE OPINION THAT ONCE THE DISPUTE HAS BEEN SETTLED BETWEEN THE PARTIES AND THE BALANCE HA S NOT BEEN RECEIVED BY THE ASSESSEE, IT DEFINITELY HAS BECOME BAD IN THIS YEAR ONLY. ALL THE OTHER CONDITIONS LAID DOWN IN SECTION 36(1)(VII) AND 36(2 ) HAS BEEN FULFILLED AND THE CLAIM OF BAD DEBT HAS TO BE ALLOWED. THERE IS NO RE ASON TO DEVIATE FROM THE LEGAL AND FACTUAL FINDINGS GIVEN BY THE LEARNED COM MISSIONER (APPEALS) AND ACCORDINGLY THE SAME IS AFFIRMED. GROUND NO.7, IS T HUS, RAISED BY THE REVENUE IS DISMISSED. 113. IN THE RESULT, REVENUES APPEAL FOR THE ASSESSMENT YEAR 200405 IS TREATED AS PARTLY ALLOWED. 113. 0 6 !' 1 &( ) '*) 2004-05 1 #$ ! ' < ( =>? WE NOW TAKE UP ASSESSEES APPEAL IN ITA NO.2428/MUM./2007, FOR THE ASSESSMENT YEAR 200405 . 114. THE ONLY GROUND RAISED BY THE ASSESSEE RELATES TO D ISALLOWANCE OF BAD DEBT OF ` 19,60,441 AND ` 1,03,962, ON ACCOUNT OF ADVANCE GIVEN TO VARIOUS PARTIES AND EMPLOYEES RESPECTIVELY. 115. THE ASSESSEE HAS CLAIMED BAD DEBT ON ACCOUNT OF OLD BALANCE OF ` 1,03,962, RECOVERABLE FROM EMPLOYEES AND ADVANCES O F ` 19,60,441, GIVEN TO VARIOUS PARTIES. THE ASSESSING OFFICER HELD THAT THE ADVANCES MADE ARE NOT IN THE NATURE OF DEBT, THEREFORE, THE PROVISION S OF SECTION 36(2) AND 36(1)(VII) ARE NOT FULFILLED. ESSAR OIL LIMITED 103 116. BEFORE THE LEARNED COMMISSIONER (APPEALS), IT WAS A DMITTED THAT IF THE CLAIM OF BAD DEBT IS NOT ALLOWED, THEN LOOKING TO T HE FACTS OF THE CASE, THE SAME IS TO BE ALLOWED AS LOSS UNDER SECTION 37(1). THESE ADVANCES WERE GIVEN IN THE COURSE OF BUSINESS WHICH HAS BECOME IR RECOVERABLE. THE LEARNED COMMISSIONER (APPEALS) HELD THAT THE ASSESSING OFFI CER HAS RIGHTLY INVOKED SECTION 36(2) AS PROVISIONS OF SECTION 36(2) ARE AP PLICABLE AND THESE ARE NOT IN THE NATURE OF DEBT. HE ALSO ADMITTED THE FACT TH AT THE EXPENDITURE IN QUESTION HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY F OR THE PURPOSE OF BUSINESS UNDER SECTION 37(1). DESPITE THIS, HE HELD THAT UNDER SECTION 37(1), ONLY THOSE EXPENDITURE CAN BE ALLOWED WHICH ARE NOT IN THE NATURE DESCRIBED IN SECTIONS 30 TO 36. SINCE THE ASSESSEES CLAIM IS FOR A BAD DEBT WHICH CANNOT BE ALLOWED TO THE ASSESSEE UNDER SECTION 36( 1)(VII), SINCE SECTION 36(2) PROHIBITS THE ALLOWANCE IN THE FACTS OF THE A SSESSEES CASE AND THE CONDITIONS CONTAINED IN SECTION 36(2) CANNOT BE BY PASSED BY ALLOWING DEDUCTION UNDER SECTION 37(1). ACCORDINGLY, HE CONF IRMED THE DISALLOWANCE BOTH UNDER SECTION 37(1)(VII) AND 37(1). THE RELEVA NT OBSERVATIONS OF THE LEARNED COMMISSIONER (APPEALS) ARE REPRODUCED HEREI N BELOW: 10.3 I HAVE PERUSED THE FACTS OF THE CASE. I FIND THAT THE ASSESSING OFFICER HAS RIGHTLY INVOKED SECTION 36(2). HOWEVER THE A.O. HAS NOT CONSIDERED ALLOWABILITY OF EXPENSES U/S.37(1) WHICH THE APPELL ANT IS CLAIMING AS AN ALTERNATIVE. I AM SATISFIED THAT EXPENDITURE IN QUE STION IS INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS WARRANTING CONSIDERATION U LS.37(1) OF THE ACT.. HOWEVER, ANALYSIS OF SECTION 37(1) FOR ALLOWABILITY OF THIS EXPENDITURE IS NECESSARY. THE SECTION READS AS. UNDER: SECTION 37(1): ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATU RE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXP ENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE) LAID OUT OR EXPENDED WHOL LY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALL OWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION THE PHRASE NOT BEING EXPENDITURE OF THE NATURE DES CRIBED IN SECTION 30 TO 36 IS REQUIRED TO BE PROBED INTO. 10.4 FIRST, WE NEED TO BE CLEAR ABOUT THE NATURE OF THE EXPENDITURE INCURRED BY THE APPELLANT. IN THE FACTS OF THE APPE LLANTS CASE, AS I UNDERSTAND, THE CLAIM IS FOR A BAD DEBT WHICH CANNO T BE ALLOWED TO APPELLANT ESSAR OIL LIMITED 104 U/S 36(1)(VII) SINCE SECTION 36(2) PROHIBITS THE AL LOWANCE IN THE FACTS OF APPELLANTS CASE. YET, THE NATURE OF EXPENDITURE UN DER CONSIDERATION DOES NOT CHANGE BY VIRTUE OF THE FACT THAT IT CANNOT BE ALLO WED AS DEDUCTION. IT CONTINUES TO REMAIN A BAD DEBT. THE EXPRESS CONDITI ON CONTAINED IN SECTION 36(2) CANNOT BE BYPASSED BY ALLOWING DEDUCTION U/S. 37(1) WHERE THIS CONDITION SHALL GET AUTOMATICALLY WAIVED. THAT WOUL D AMOUNT TO VIOLATION OF THE WILL OF THE LEGISLATURE WHEN THE STATUTE SPECIF ICALLY GRANTS ALLOWANCE UNDER ANY OF THE SECTIONS 30 TO 36 SUBJECT TO CERTAIN EXP RESS OR IMPLIED CONDITIONS, SUCH CONDITIONS CANNOT BE NULLIFIED BY CLAIMING A D EDUCTION U/S 37(1), WHICH IS ONLY A RESIDUARY SECTION. RELIANCE IS PLACED UPON T HE FOLLOWING DECISION: 1. SUBODHCHANDRA V. CIT 24 ITR 566 2. CIT V. RAJARAM 237 ITR 628 3. RAYALOO V. CIT 26 ITR 265 4. TATASONS V. CIT 18 ITR 460 5. BIRLA V. CIT 44 ITR 847 10.5 IT IS ACCORDINGLY HELD THAT THE NATURE OF EXPE NDITURE INCURRED BY THE APPELLANT IS SAME AS SPECIFIED IN SECTION 36(1)(VII ) AND IN VIEW OF SPECIFIC EMBARGO IN SECTION 37(1) ON ALLOWING EXPENDITURE OF THE NATURE SPECIFIED IN ANY OF THE SECTION 30 TO 36, THE PARTICULAR EXPENDI TURE CANNOT BE ALLOWED U/S.37(1). THE GROUND OF APPEAL OF THE APPELLANT IS THEREFORE REJECTED. 117. BEFORE US, THE LEARNED SR. COUNSEL SUBMITTED THAT O NCE IT HAS BEEN ACCEPTED BY THE LEARNED COMMISSIONER (APPEALS) THAT THIS EXPENDITURE INCURRED IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, THE SAME CAN BE ALLOWED AS BUSINESS LOSS ALSO. ONCE THESE ADVANC ES WERE GIVEN DURING THE COURSE OF BUSINESS, THEN NONRECOVERY OF AMOUNTS CA N BE ALLOWED AS BUSINESS EXPENDITURE OR AS BUSINESS LOSS. THESE FAC TS HAVE NOT BEEN APPRECIATED EITHER BY THE ASSESSING OFFICER OR BY T HE LEARNED COMMISSIONER (APPEALS). 118. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTH ER HAND, STRONGLY RELIED UPON THE FINDINGS OF THE LEARNED COMMISSIONE R (APPEALS). 119. WE HAVE CAREFULLY CONSIDERED THE CONTENTIONS OF THE RIVAL PARTIES. ON A PERUSAL OF THE ASSESSMENT ORDER AS WELL AS THE ORDE R PASSED BY THE LEARNED COMMISSIONER (APPEALS), WE FIND THAT THE NATURE OF ADVANCE GIVEN TO VARIOUS EMPLOYEES IS NOT CLEAR. ONCE IT HAS BEEN ACCEPTED T HAT THE CONDITIONS LAID DOWN IN SECTION 36(2) ARE NOT FULFILLED, THEN IT HA S TO BE EXAMINED FROM THE ANGLE, WHETHER IT IS A BUSINESS EXPENDITURE OR BUSI NESS LOSS. ONCE IT IS NOT IN ESSAR OIL LIMITED 105 DISPUTE THAT THESE ADVANCES WERE MADE DURING THE CO URSE OF CARRYING ON THE BUSINESS, THE NONRECOVERABILITY OF SUCH AMOUNTS HA VE TO BE ALLOWED AS BUSINESS LOSS. SINCE THE FACTS ARE NOT CLEAR BEFORE US, THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT THIS ISSUE NEEDS TO BE RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR EXAMINATION AFRESH. CONSEQUE NTLY, WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMMISSIONER ( APPEALS) AND RESTORE THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER AND DIRECT HIM TO EXAMINE THE NATURE OF ADVANCE AND WHETHER SUCH IRRECOVERABL E AMOUNTS WERE ADVANCED DURING THE COURSE OF BUSINESS AND WHETHER IT CAN BE ALLOWED AS BUSINESS LOSS. THIS GROUND IS, THUS, TREATED AS ALL OWED FOR STATISTICAL PURPOSES. 120. 0 6 &( )0 1 &( ) '*) 2004-05 1 @ 1 ABC # !' < ( => ? 120. IN THE RESULT, ASSESSEES APPEAL FOR THE ASSES SMENT YEAR 200405 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. WE NOW TAKE UP REVENUES APPEAL IN ITA NO.1000/MUM. /2009, FOR THE ASSESSMENT YEAR 200506. 121. AT THE OUTSET, BOTH THE PARTIES HAVE ADMITTED THAT GROUND NO.1 IS SIMILAR TO GROUND NO.1 RAISED BY THE REVENUE IN THE APPEAL FOR THE ASSESSMENT YEAR 200405 AND GROUND NO.3, IS SIMILAR TO GROUND NO.6, RAISED BY THE REVENUE IN THE APPEAL FOR THE ASSESSMENT YEA R 200405. 122. AFTER CAREFULLY CONSIDERING THE ENTIRE FACTS, WE FI ND THAT GROUND NO.1, IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEAR S, AS HAVE BEEN HELD BY US IN REVENUES APPEAL FOR THE ASSESSMENT YEAR 2004 05. ESSAR OIL LIMITED 106 123. ACCORDINGLY, WE HOLD THAT IN VIEW OF OUR FINDINGS G IVEN IN THE ASSESSMENT YEAR 200405, GROUND NO.1, RAISED BY THE REVENUE IS DISMISSED. 124. GROUND NO.3, IS SIMILAR TO GROUND NO.6 RAISED IN TH E ASSESSMENT YEAR 200405 AND IN VIEW OF THE FINDINGS GIVEN THEREIN. GROUND NO.3, IS TREATED AS DISMISSED. 125. IN GROUND NO.2, THE REVENUE HAS CHALLENGED THE ALLO WANCE OF ASSESSEES CLAIM OF DEPRECIATION. 126. BEFORE US, BOTH THE PARTIES ADMITTED THAT THIS ISSU E IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 199394. THE LEARNED COMMISSIONER ( APPEALS) HAS RECORDED A FINDING THAT THE ASSESSING OFFICER HAS R ECOMPUTED THE DEPRECIATION CLAIMED BY THE ASSESSEE ON THE BASIS O F THE FINDINGS GIVEN IN THE ASSESSMENT YEAR 199394 AND THE TRIBUNAL HAS DECIDE D THE ISSUE IN FAVOUR OF THE ASSESSEE. AFTER RECORDING THIS FACT, THE LEA RNED COMMISSIONER (APPEALS) HAS DIRECTED THE ASSESSING OFFICER TO COM PUTE AND ALLOW DEPRECIATION FOLLOWING THE DECISION OF THE TRIBUNAL GIVEN IN THE ASSESSMENT YEAR 200304 IN ASSESSEES OWN CASE. 127. THUS, RESPECTFULLY FOLLOWING THE SAID DECISION OF T HE TRIBUNAL GIVEN IN THE ASSESSMENT YEAR 199394, WE AFFIRM THE FINDINGS OF THE LEARNED COMMISSIONER (APPEALS) DIRECTING THE ASSESSING OFFI CER THAT HE SHOULD ALLOW DEPRECIATION FOLLOWING THE ORDER OF THE TRIBUNAL FO R ASSESSMENT YEAR 1993 94. GROUND NO.2, RAISED BY THE REVENUE IS, THUS, DI SMISSED. 128. 0 6 !' 1 &( ) '*) 2005-06 1 0 ( => ? 128. IN THE RESULT, REVENUES APPEAL FOR THE ASSESS MENT YEAR 200506 IS TREATED AS DISMISSED. ESSAR OIL LIMITED 107 129. &( )E $!'F, !' 1 &( ) '*) 2004-05 1 #$ !' < ( => ? &( )0 1 &( ) '*) 2004-05 1 @1 ABC # !' < ( => ' ' ' ' !' 1 &( ) '*) 2005-06 1 0 ( => ? 129. TO SUM UP, REVENUES APPEAL FOR THE ASSESSME NT YEAR 200405 IS TREATED PARTLY ALLOWED; ASSESSEES APPEAL FOR THE A SSESSMENT YEAR 200405 IS ALLOWED FOR STATISTICAL PURPOSES AND REVENUES A PPEAL FOR THE ASSESSMENT YEAR 200506 IS DISMISSED. $ 1 4* G H (6 28 TH AUGUST 2013 4 1 ? ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH AUGUST 2013 SD/- . .. . . .. . ! ! ! ! P.M. JAGTAP ACCOUNTANT MEMBER SD/- # # # # $% $% $% $% & ! & ! & ! & ! AMIT SHUKLA JUDICIAL MEMBER MUMBAI, H ( H ( H ( H ( DATED: 28 TH AUGUST 2013 $ 1 -&#I JI* / COPY OF THE ORDER FORWARDED TO : (1) &( )0 / THE ASSESSEE; (2) !' / THE REVENUE; (3) K () / THE CIT(A); (4) K / THE CIT, MUMBAI CITY CONCERNED; (5) I'N -&&( , , / THE DR, ITAT, MUMBAI; (6) O) P / GUARD FILE. .I -& / TRUE COPY $( / BY ORDER - . QR / PRADEEP J. CHOWDHURY '0S &( Q' / SR. PRIVATE SECRETARY A / = / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI