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TMI Blog2012 (4) TMI 193X X X X Extracts X X X X X X X X Extracts X X X X ..... , Residence based taxation is followed in India rendering residents to be taxed on their global income, and non-residents to be taxed only on income sourced inside the country. Therefore, assessee is liable to be taxed on its global income – Decided against the assessee. Validity of reopening of assessment beyond 4 years from the end of relevant A.Y – excessive deduction u/s 80HHC & 80HHB – assessee contending change of opinion – Held that:- As per Explanation (2)(c)(iv) to section 147, if excessive loss, depreciation allowance or any other allowance under the act has been computed, it shall be deemed to be an escapement of income. In present case, indirect expenses attributable to the exported trading goods were understated. There was no discussion about deduction u/s 80HHC & 80HHB in assessment order and even there was no working of attributable indirect expenses in Form No. 10CCAC which was vital element for computation of deduction available to the assessee which has not been furnished by the assessee. Therefore, there was a reasonable belief that income has escaped assessment. Further, existence of belief can be challenged by assessee but not the sufficiency of the reasons to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountries. 3. The main issue involved in all these appeals is regarding the taxability in India of income earned in a foreign country by the assessee who is a resident of India. In the assessment year 2000-01, the assessee has also challenged the reopening of assessment u/s 147 /148 of the Income-tax Act. The grounds of appeal in ITA No.1293/Del/2009 for assessment year 2000- 01 read as under :- "1. That on the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) - XIX ("CIT (Appeals)") has erred in confirming the action of the Additional Commissioner of Income Tax, Range- 16, New Delhi ("Assessing Officer") 148 of the Income Tax Act, 1961 ("Act") that the reopening of assessment was in accordance with the provisions of Section 147 /148 of the Income-tax Act, 1961 ("Act"). 1.1 That on the facts of the case and in law, the Learned CIT (Appeals) has erred in rejecting the plea of the appellant that all the primary facts necessary for assessment were fully and truly disclosed during the course of the original assessment proceedings. 1.2 That on the facts of the case and in law, the Learned CIT (Appeals) has erred in upholding the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laring income at Rs. 17,86,33,080/- under the normal provisions of the Income-tax Act and Rs. 19,11,37,820/- computed as 30% of the book profits under the provisions of section 115JA. Subsequently, the return was revised on 05.03.2002. The case was selected for scrutiny and the order u/s 143(3) passed on 12.03.2003 determining the income at Rs. 21,28,33,925/- under normal provisions of the Act which was higher than the 30% of the book profit as per the provisions of section 115JA which worked out at Rs. 20,44,03,265/-. Against that order, the assessee had preferred the appeal. CIT (A) passed the order u/s 250 on 23.07.2003 and deleted certain additions and income was assessed at Rs. 17,51,57,580/- under normal provisions and Rs. 19,31,00,360/- under section 115JA of the Act after appeal effect. Subsequently, a notice u/s 148 was issued for reassessment. In response to that notice, assessee filed the return on 30.04.2007. Assessee also requested the Assessing Officer to communicate the reasons for reopening. Assessing Officer furnished the reasons for reopening. These reasons for reopening were (i) incorrect allowance of deduction in respect of export profit Rs. 12,04,607/-; and (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd truly. The reopening is after four years, therefore, the assessment was not liable to be reopened unless there was a failure on the part of the assessee to disclose the primary facts and Ld. AR also relied on the following case laws :- ( i ) ICICI Bank Ltd. v. Rao Anr . - 268 ITR 203 (Bom.); ( ii ) Ajay Oxycholoride Floorings v. Iyer, ACIT Ors. - 155 Taxman 306 (Bom.); ( iii ) Hindustan Lever Ltd. v. ACIT Ors. - 268 ITR 332 (Bom.); ( iv ) ACIT v. Vindhya Telelinks Ltd. - 107 TTJ 149 (Jab.)(TM); and ( v ) CIT v. Shri Tirath Ram Ahuja (HUF) - 306 ITR 173 (Delhi). Ld. AR also relied on the following decisions where reopening was held to be invalid on the basis of change of opinion :- ( i ) Idea Cellular Ltd. v. DCIT Ors. - 215 CTR 288 (Bom); ( ii ) Garden Silk Mills Pvt. Ltd. v. DCIT - 237 ITR 668, (Guj.); ( iii ) CIT v. Kelvinator of India Ltd. - 256 ITR 1 (Del)(FB); ( iv ) CIT v. Bhanji Lavji - 79 ITR 582 (SC); ( v ) Ballarpur Paper and Straw Board Mills Ltd. v. CIT - 101 ITR 55 (Cal); ( vi ) Sita World Travel (India) Ltd. v. CIT Anr. - 140 Taxman 381 (Del); ( vii ) Phool Chand Bajrang Lal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing engaged in the business of full range of consultancy, design and engineering services in all fields of telecommunication in India as well as abroad. The original return of income was filed on 29.11.2000 declaring income at Rs. 17,86,33,080/- under normal provisions of IT Act and Rs. 19,11,37,820 u/s 115J. In revised return filed on 05-03-2002, income declared was Rs. 17,51,57,580 under normal provisions and Rs. 19,00,95,167 u/s 115J. In order u/s 143(3) dated 12-03-2003, total income was determined at Rs. 21,28,33,925 under normal provisions and Rs. 20,44,03,265 u/s 115J. CIT(A) vide his order dated 23-07-2003 deleted certain disallowances made by AO and in appeal effect order, income was computed at Rs. 17,51,57,580 under normal provisions and Rs. 19,31,00,360 u/s 115J. Vide notice u/s 148 dated 30-03-2007, reassessment proceedings were initiated. In response, assessee filed return on 30-04-2007. Reasons for re-opening were communicated to assessee on 06-07-2007. These have been reproduced by CIT(A) on page 4 para 13 of his order and in brief are as below:- ( i ) Incorrect allowance of deduction u/s 80 HHC - Rs. 31,28,849 ( ii ) Incorrect claim of deduction u/s 80 HHB -R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eans costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover. It was seen that the assessee has not worked out indirect cost in this manner. 5.3 For claim of deduction u/s 80HHB, the contention of assessee is that shortfall in credit of foreign project reserve account has been made good in the subsequent year. This argument is of no help because assessee has to meet with prescribed requirements during the period under consideration. Clearly, AO has wrongly allowed claim u/s 80HHB during assessment u/s 143(3). 5.4 On both the grounds of 80HHC and 80HHB, the AO has allowed deductions in original assessment u/s 143(3) by wrongly applying the provisions of relevant law. In such a situation, it can not be said that the AO has subsequently initiated re-opening proceeding on the basis of change of opinion. Change of opinion comes to rescue of assessee only when AO has taken one of the permissible views during original assessment. A wrong application of law--can not be held as permissible view and that can always be changed for correct appreciation of law. It has been held so in case of Som Dutt Builders (P) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position has been held by various courts including the following :- ( i ) Indo-Aden Salt Manufacturing and Trading Co. v. CIT 159 ITR 624 (SC) ( ii ) ITO v. Lakhmani Mewal Das 103 ITR 437 (SC) ( iii ) Malegaon Electricity Co. P. Ltd. v. CIT 78 ITR 466 (SC) The Explanation (e) for the purposes of sub-section 80HHC(3) defines the indirect cost as follows :- "indirect costs means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover" The assessee had not worked out interest cost in this manner. Further, the assessee has claimed deduction u/s 80HHB for Rs. 32,08,02,147/-. The assessee has credited to foreign project reserve account of Rs. 32 crores only. The provisions of section 80HHB (3) provides such conditions which are to be fulfilled for claiming the deduction under this section. The first condition is maintaining separate books of account in respect of profits and gains derived from the business of the execution of the foreign projects or as the case may be or of the work forming part of the foreign project undertaken by the assessee. The other condition is furnishing a certificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e totality of facts and circumstances of the case, we sustain the order of the CIT (A) on the issue of reopening of the assessment. 7. In the ground no.2, the issue raised by the assessee is regarding confirming the action of Assessing Officer and extending the scope of enquiry during the course of reassessment proceedings by including the grounds not covered in the reassessment notice issued u/s 148 of the Income-tax Act which the assessee claimed has attained finality during the regular assessment. 8. We have heard both the sides on the issue and after hearing both the sides, we find that the Hon'ble Bombay High Court in the case of CIT v. Jet Airways (I) Ltd. in ITA No.1714 of 2009 and 1526 of 2008 has held that Assessing Officer can also assess other items of income which come to his notice during the reassessment proceedings. The Explanation 3 to section 147 inserted by the Finance (No.2) Act, 2009, w.e.f. 1.4.1989 provides that for the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional reserves in the current years book in which assessment is framed. Reliance is placed upon Supreme Court decision in the case of CIT v. Modi Spinning Weaving Mills Co. Ltd. with the Circular No.189 dated 30th January, 1976 to substantiate that under the Act, where genuine deficiencies have been made good, deduction is to be allowed. Further, it is an incentive provision and such provisions should be interpreted liberally. It is also submitted that the Assessing Officer while passing the assessment order under section 147 read with section 143(3) should have taken into account the subsequent development of making good the deficiency in the next year. The same was intimated to him vide letter dated October 17, 2007. On that basis, the assessee prayed for allowing the claim of the assessee in toto. For this, learned AR also relied on the decision of Hon'ble Delhi High Court in the case of Continental Construction Co. Ltd. v. UOI - [1990] 185 ITR 230 (Del.) and in written submissions it was submitted that the Hon'ble High Court has held as under :- "In our opinion, it will be extremely unfair not to give the benefit to the petitioner under section 80HHB. The peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of CIT v. Modi Spinning Weaving Mills Ltd. , cited supra, is also related to the development rebate. The circular issued by the Board cannot be extrapolated and applied to the provisions of deduction u/s 80HHB. The facts of Marg Construction and Assam Roller Flour Mills, cited supra, are also at variance to the facts of assessee's case, hence not applicable to the assessee's case. 12. We have heard both the sides on the issue. The provisions of section 80HHB categorically provides that deduction under this section shall be allowed to the extent of least of the following amounts :- ( a ) 50% of profit from such project; ( b ) Amount credited by the assessee to foreign project reserve account; ( c ) Amount brought in India in convertible foreign exchange. It is also a trite law that each assessment year is a separate independent assessment year and all the provisions of section have to be applied accordingly. The case law relied upon in the case of Continental Construction Ltd. v. UOI and Ors. , cited supra, was having a completely different set of facts. In that case, the assessee had adjudicated certain foreign projects under the agreements which were a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be treated as valid even though the imports were not covered by an irrevocable letter of credit but certain restrictions like selling the imported goods only to the Government or its agencies on specified rates or selling to non-Government parties only after obtaining requisite permission from the Government were also placed by the second Public Notice dated 22.02.1978. When the goods reached India they were confiscated by the customs authorities under the Customs Act and assessee was given an option either to pay reshipment expenses and fine or to pay for clearance of the goods. A personal penalty was imposed on the assessee. The assessee ought to pay the clearing charges as well as the penalty. The AO disallowed the deduction of penalty and interest thereon. The CIT (A) allowed the deduction of Rs. 4 lacs plus interest on the ground that expenditure incurred by the assessee not carrying on its business and the same was not expanded in respect of any infringement of the law and it was directed that ITO shall charge the tax on this amount when the same was refunded by the customs department. The Tribunal disallowed the claim of the assessee and held that the penalty was imposed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll evaluate the books of a/c and determine how much of expenditure, direct and indirect, is attributable to export activities of the assessee." In the assessee's case, there is no mention of maintenance of separate books of account in assessment order and Assessing Officer has not seized with such situation. In the case of Glaxo Smithkline Asia P. Ltd. v. ACIT , cited supra, the ITAT has held that only those administrative expenses will be apportioned in ratio of export turnover to total turnover, which have relation with export business. Thus, in that case also, the ITAT has advocated the method of apportionment in ratio of export turnover to total turnover. In view of these facts, the Assessing Officer has correctly worked out indirect expenses as per Explanation (e) to section 80HHC (3) and rightly denied the deduction u/s 80HHC. 16. We have heard both the sides and after hearing, we find no merits in the claim of the assessee. It has been held that Assessing Officer has to apply the law as laid down u/s 80HHC on the basis of evaluation of books of account and by determining regarding the expenditure, direct or indirect, attributable to the export activities of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween them in respect of income falling to be taxed in both jurisdictions. For this, Ld. AR relied on the decision of Union of India v. Azadi Bachao Andolan - 263 ITR 706 (SC). Ld. AR further pleaded that primary objective of the DTAA's entered into by India is avoidance of double taxation and not relief from double taxation. In this regard, the learned AR made a reference to the decision of ITAT in the case of Sivagami Holdings P. Ltd . v. ACIT - [2011] 10 ITR (Trib) 48 (Chennai) wherein the ITAT has held that the DTAA is entered into between the countries only for the limited purpose of avoiding the hardship of double taxation and if the income is not taxed in the Contracting State, the same should be taxed in India is an oversimplified statement on the whole regime of Double Taxation Avoidance Agreement. It is true that the prime motivating factor in developing the concept of Double Taxation Avoidance Agreement is the genuine hardship of the international assessee that the same amount of income became the subject of taxation both in the home state and in the Contracting State. It is to alleviate this burden of double taxation that the instrument of Double Taxation Avoidacn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l was upheld by the Hon'ble Supreme Court for different reasons. In this regard, reference was made to the judgment in the case of DCIT v. Mideast India Ltd. [2009] 28 SOT 395 (ITAT) wherein it has been observed as below :- "The learned DR has also contended that although the final operative decision of the Special Bench of ITAT has been upheld by the Hon'ble Supreme Court, the reasoning given by the Hon'ble Supreme Court while affirming the said decision is entirely different from the reasoning given by the Special Bench of the Tribunal. However, as rightly submitted by the learned counsel for the assessee, a perusal of the judgment of the Hon'ble Apex Court shows that there is nothing contained therein to indicate that the reasons given by the Special Bench of ITAT to come to a conclusion as it did were disapproved by the Hon'ble Supreme Court or the same were found to be inappropriate or incorrect ... .In our opinion, the decision of Special Bench of IT AT in the case of P.V.A.L. Kulandagan Chettiar ( supra ) thus still holds the field and the same being squarely on the point in issue involved in the present case and is binding on us, we respectfully follow the same and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommentary on Model Tax Convention has not been accepted by the Courts of India as having a precedent value. Referred to Ms. Pooja Bhatt v. DCIT [2008] 26 SOT 574 (lTAT) (pages 143-144 of Case Law Paper Book at Para 8 and 9) and CIT v. P. V.A.L. Kulangandan Chettiar [2004] 267 ITR 654 (SC) (Refer to page 672 of the judgment). The ruling of the Authority for Advance Ruling in the matter of S. Mohan v. DIT [2007] 294 ITR 177 (AAR) as adverted during the course of the hearing does not in any way support the contention of the Department since it has been observed in the ruling that the language of treaty provision in which the expression 'may be taxed' was used in Indo-Malaysia DTAA which was under consideration in the CIT v. P.V.A.L. Kulangandan Chettiar [2004] 2671TR 654 (SC) is not comparable to the language employed in Article 16(1) of Indo-Norway DTAA, which was the subject matter of the S. Mohan's ruling. It is further submitted that according to the provisions of Section 255 of the Act, where an earlier co-ordinate bench has taken a decision, subsequent bench cannot differ from such a decision of similar set of facts. In such cases, the matter has to be referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - "19. For the purpose of eliminating double taxation, the Convention establishes two categories of rules. First, Articles 6 to 21 determine, with regard to different classes of income, the respective rights to tax of the State of source or situs and of the State of residence, and Article 22 does the same with regard to capital. In the case of a number of items of income and capital, an exclusive right to tax is conferred on one of the Contracting States. The other Contracting State is thereby prevented from taxing those items and double taxation is avoided. As a rule, this exclusive right to tax is conferred on the State of residence. In the case of other items of income and capital, the right to tax is not an exclusive one. As regards two classes of income (dividends and interest), although both States are given the right to tax, the amount of tax that may be imposed in the State of source is limited. Second, insofar as these provisions confer on the State of source or situs a full or limited right to tax, the State of residence must allow relief ~ as to avoid double taxation; this is the purpose of Articles 23 A and 23 B. The Convention leaves it to the Contracting States to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployment in the private sector, exercised in that State, unless the employee is present therein for a period not exceeding 183 days in any twelve month period commencing or ending in the fiscal year concerned and certain conditions are met; and remuneration in respect of an employment exercised aboard a ship or aircraft operated internationally or aboard a boat, if the place of effective management of the enterprise is situated in that State (Article 15); - subject to certain conditions, remuneration and pensions paid in respect of government service (Article 19). 22. The following are the classes of income that may be subjected to limited taxation in the State of source: - dividends: provided the holding in respect of which the dividends are paid is not effectively connected with a permanent establishment in the State of source, that State must limit its tax to 5 per cent of the gross amount of the dividends, where the beneficial owner is a company that holds directly at least 25 per cent of the capital of the company paying the dividends, and to 15 per cent of their gross amount in other cases (Article 10); - interest: subject to the same proviso as in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning of Article 4. In such case, the State of residence (R) must give relief so as to avoid the double taxation. Paragraphs 1 and 2 of Article 23A and paragraph 1 of Article 23 B are designed to give the necessary relief." If a contracting state is to given exclusive right to tax a particular kind of income, then relevant article of convention uses the phrase 'shall be taxable only'. As a rule, such exclusive right is given to state of residence, though there are a few articles where exclusive right to tax is given to state of source also. This phrase precludes other contracting state from taxing that income. For item of income, where attribution of right to tax is not exclusive, the convention uses the phrase 'may be taxed'. Regarding 'dividend' and 'interest' income', primary right of taxation is given to state of residence, though this is not exclusive right as paragraph 1 of relevant articles 10 and 11 of model OECD convention uses the phrase "may be taxed'. At the same time, paragraph 2 of said articles uses phrase 'may also be taxed' and gives simultaneous taxing rights to state of source. Thus, for these two items of income, no state is given exclusive right to tax. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, this non-exclusive right of state of source does not extinguish inherent right of state of residence to tax global income of its resident. In a situation where state of residence had given up its such inherent right, the second sentence of article 7 would have used phrase 'shall be taxable only'. Now, in all DTAAs applicable in case of assessee, second sentence uses phrase 'may be taxed', therefore inherent right of India to tax global income of its resident is not lost. 20.3 The contention of the assessee is that since its foreign income is taxable in foreign countries, it can not be taxed in India. This contention of the assessee is fallacious in view of discussion above. Rather, the proper course on part of assessee would have been to claim credit of taxed paid in foreign countries because all relevant DTAA say that India shall relieve double taxation by giving credit of taxes paid in state of source. 20.4 Ld. DR submitted that the assessee has relied on various case laws as mentioned in its paper book which are as under :- CIT v Essar Oil (ITA. No. 135 of2008) Born. Ms Pooja Bhatt v DCIT 26 SOT 574 (Mum) DCIT v Mideast India Ltd. 28 SOT 395 (De) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee, it has been held that income arising in state where permanent establishment is situated can be taxed in that state only and state of residence is precluded from taxing such income. This view, it is humbly submitted, militates against the basics of DTAA and also not consistent with ratio of Hon'ble Supreme Court decision in CIT v. P.V.A.L. Kulandagan Chettiar case. In all cases relied upon by the assessee, the tax payers were resident of India and there was no situation of dual residence. India remained state of residence and therefore India had inherent right to tax global income of its residents. Therefore, it is most respectfully submitted that ratio of CIT v. P.V.A.L. Kulandagan Chettiar decision has not been correctly applied in these cases. 20.6 Ld. DR also relied upon ITO v Data Software Research Co. P Ltd. 2008- TIOL-09-ITAT-Mad (a copy of which has been furnished). It is submitted that in that case, facts were exactly the same as are in present case. Hon'ble ITA T has given its decision in para 4 page 3 of the order. Reliance is also placed in case of S. Mohan v DIT 294 ITR 177 (AAR), in which interpretation of phrase 'may be taxed' which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry person. The provisions of this section also provide that where by virtue of any provision of this Act income-tax is to be charged in respect of income of a period other than the previous year, notwithstanding shall be charged accordingly. Section 5 of the Income-tax Act defines the scope of the total income which read as under :- "5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which - ( a ) is received or is deemed to be received in India in such year by or on behalf of such person ; or ( b ) accrues or arises or is deemed to accrue or arise to him in India during such year ; or ( c ) accrues or arises to him outside India during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as to the other contracting state wherein the permanent establishment situated. Thus, the Article 7 provides that in such a situation, the state of the residents does not have exclusive right to tax but it has inherent right to tax such income. The article also provides that the state of the source has also right to tax the business income. It is a non-exclusive right in case there exist a permanent establishment. The phrase used "may be taxed". Therefore, the combined reading of the sentences of Article 7 of relevant DTAA means that the state of source has non-exclusive right to tax of business income attributable to permanent establishment. In view of this, such income may be taxed as per the domestic laws. This non-exclusive right of state of source does not extinguish the inherent right of state of residency to tax global income of its residents. In the circumstances, where the state of the residents of the taxpayer had given up its inherent right to tax the global income, in such situation, the phrase used in Article 7 of the DTAA is "shall be taxable only". Since all the DTAA applicable in the case of assessee the phrase used "may be taxed", therefore, inherent right of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been set up will determine the fiscal domicile. On the first issue, the view taken by the High Court is correct. We need not enter into an exercise in semantics as to whether the expression "may be" will mean allocation of power to tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid, no relief can be sought. Reading the Treaty in question as a whole when it is intended that even though it is possible for a resident in India to be taxed in terms of ss. 4 and 5, if he is deemed to be a resident of a Contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant. The Treaty will have to be interpreted as such and prevails over ss. 4 and 5 of the Act. Therefore, we are of the view that the High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court. The contention put forth by the learned Attorney General that capital gains is not income and, therefore, is not covered by the Treaty cannot be accepted at all because for purposes of the Act capital gains is always treated as income arising out of immovable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m, a country can tax a person whether resident or non-resident, only on income sourced inside the country. Had all the countries in the world following source based taxation system then the problem of double taxation would not have arisen. However, under the resident based system, there arises a situation of double taxation because countries where the taxpayer is a resident then it will have to pay tax on its global income. To avoid the double taxation, two rules are devised in the DTAA's, i.e., one is by way of providing Distributive Rules under which taxing rights allocated between contracting state with respect to various kinds of income; and the second rule is to put state of residence under an obligation to give either credit for taxes paid in the source state or to exempt the income which is taxed in source state. These two rules have also been explained in para 19 of OECD Commentary which reads as under :- "19. For the purpose of eliminating double taxation, the Convention establishes two categories of rules. First, Articles 6 to 21 determine, with regard to different classes of Income, the respective rights to tax of the State of source or situs and of the State of reside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from agriculture or forestry), gains from the alienation of such property, and capital representing it (Article 6 and paragraph 1 of Articles 13 and 22); - profits of a permanent establishment situated in that State, gains from the alienation of such a permanent establishment, and capital representing movable property forming part of the business property of such a permanent establishment (Article 7 and paragraph 2 of Articles 13 and 22); an exception is made, however, if the permanent establishment is maintained for the purposes of international shipping, inland waterways transport, and international air transport (cf. paragraph 23 below); - income from the activities of artistes and sportsmen exercised in that State, irrespective of whether such income accrues to the artiste or sportsman himself or to another person (Article 17); - directors' fees paid by a company that is a resident of that State (Article 16); - remuneration in respect of an employment in the private sector, exercised in that State, unless the employee is present therein for a period not exceeding 183 days in any twelve month period commencing or ending in the fiscal year concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , then relevant article of convention uses the phrase "shall be taxed only". As a rule, such exclusive right is given to state of residence, though there are a few articles where exclusive right to tax is given to state of source. The phrase "shall be taxed only" precludes other contracting state from taxing that income. In the cases, where distribution of right to tax is not exclusive, the convention uses the phrase "may be taxed". In such Model of Convention, the use of the phrase "may be taxed" does not give exclusive right of taxation to state of residence. As per these Model of Convention, the word "may be taxed" and "may also be taxed" gives simultaneous taxing rights to state of source . If, in the DTAA, an item of income is "may be taxed" in state of source and nothing is mentioned about taxing right of state of residence in convention itself, then state of residence is not precluded from taxing such income and can tax such income using inherent right of state of residence to tax such global income of its resident. Only in the case of phrase "shall be taxed only" used, then only the state of residence is precluded from taxing it. In such cases, where the phrase "may be tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. Thus, the facts of that case are completely at variance to the facts of assessee's case. 21.3 In the case of CIT v. S.R.M. Firm Others - 208 ITR 400, the subject matter was taxability and computation of income depending upon the agreement entered into between the Government of India and Government of Malaysia for avoidance of double taxation. Income from Rubber Estate in Malaysia and there was no separate establishment maintained in India in respect of the rubber estate in Malaysia. Thus, facts of that case are also at variance to the facts of assessee's case. 21.4 In the case of L.G. Cable v. DDIT (International Taxation) reported in 314 ITR (AT) 301 (Delhi), the facts are different. In that case, the assessee was a non-resident company of Korea. The assessee (non-resident) entered into two contracts with Power Grid Corporation of India, one for onshore excavation of fibre optics project and second for offshore supply of equipment. The income for onshore was offered for tax. The contract for offshore supply of equipment was carried out in Korea. The bill of lading was issued in Korea in favour of Power Grid Corporation of India. The payments were remitted dir ..... X X X X Extracts X X X X X X X X Extracts X X X X
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