2017 (4) TMI 1035 - HC - Income Tax

Revision u/s 263 - Dividend income taxability - benefits of the Indo Oman DTAA - whether AO s order was erroneous in law and prejudicial to the revenue? - Held that - assessee is also justified in complaining that the CIT could not have branded the AO s order as erroneous in the facts and circumstances of this case. As noticed previously, in the earlier years, the AO had finalized the scrutiny assessment, considered the impact of Articles 11 and 25 of the Indo Omani DTAA, and issued pointed queries on the issue of dividends earned. He had also considered whether a PE had earned dividend income. In such circumstances, the CIT could not have stated that another view rendered the AO s plausible view erroneous. Clarification has to be regarded as conclusive; if the tax authorities had any doubts, they could not have proceeded to elevate them into findings, but rather addressed them to Omani authorities- if not directly, then through Indian diplomatic channels. In not doing so, but proceeding to interpret the laws and certificate of Omani authorities, the revenue, especially the Commissioner fell into error. As far as the submission of the revenue, that the assessee did not have a Permanent Establishment in Oman is concerned, this court is of opinion that admittedly, for about 5 years, i.e 2002 to 2006, a common order was made under Article 26 (2) (b) of the Income Tax Law of Oman. That order first included dividend income (in the total income determined) and thereafter granted deduction. For later years as well, assessments were made similarly. The ITAT also noticed as follows Up to the tax year 2011 dividend has been first included in the total income and thereafter deduction has been granted. The facts mentioned above clearly establish that the Assessee Society is entitled to getting credit for the deemed dividend tax by virtue of the provisions of DTAA read with Section 90 of the Income Tax Act, 1961 together with the clarifications issued by the Sultanate of Oman and the assessment made under the Omani Laws. In view of the above it is respectfully submitted that on merits also Assessee Society is entitled for the tax credit which has been rightly allowed by the Assessing Officer and, therefore, the Ld. PCIT has completely erred in giving directions to the Assessing Officer under Section 263 to withdraw the said tax credit. These findings are, in this court s opinion, in consonance with logic and reason and do not call for interference. Both questions of law are answered in favour of the assessee.

Summary

Issues Involved:
1. Whether the ITAT erred in holding that the AO's order was not erroneous in law and prejudicial to the revenue.
2. Whether the ITAT erred in deciding that dividend income was taxable but exempt under Omani law to entitle the assessee to the benefits of the Indo Oman DTAA.

Issue-wise Detailed Analysis:

1. Whether the ITAT erred in holding that the AO's order was not erroneous in law and prejudicial to the revenue:

The High Court addressed the CIT's interpretation of "tax incentive" under Article 25 of the DTAA. The CIT argued that the term "tax incentive" was undefined in the DTAA and should be interpreted according to Indian law, which defines it as a deduction from otherwise taxable income. The CIT also revisited the issue of the Permanent Establishment (PE) and concluded that the assessee's branch in Oman was only auxiliary and preparatory, not a business entity.

The court referred to the precedent set in CIT v. Ashish Rajpal, emphasizing that the CIT could not issue directions on issues not covered in the show cause notice. The court also cited Commissioner of Income Tax v. Gabriel India, stating that the CIT could not substitute his judgment for that of the AO unless the AO's decision was erroneous. The AO had previously considered the DTAA provisions, issued queries on dividend income, and considered the Omani authorities' explanations. Therefore, the CIT's view that the assessment orders were erroneous was not sustainable in law.

2. Whether the ITAT erred in deciding that dividend income was taxable but exempt under Omani law to entitle the assessee to the benefits of the Indo Oman DTAA:

The court examined whether the dividend income was taxable or exempt under Omani law and whether the assessee was entitled to the benefits of Article 25 (2) of the DTAA. The court noted that the Omani Ministry of Finance had clarified that the exemption under Article 8 (bis) was to promote economic development and attract investments. The ITAT concluded that this clarification was conclusive and that the Indian tax authorities could not reinterpret Omani law.

The court also addressed the revenue's argument that the assessee did not have a PE in Oman. The court noted that for several years, the Omani tax authorities had treated the assessee's branch as a PE and included dividend income in the total income before granting a deduction. The ITAT's findings were consistent with logic and reason, and the court found no basis for interference.

Conclusion:

Both questions of law were answered in favor of the assessee. The appeals were dismissed, affirming the ITAT's decision that the AO's order was not erroneous or prejudicial to the revenue and that the assessee was entitled to the benefits of the Indo Oman DTAA.