2017-TII-08-SC-TP

PR CIT Vs TOSHIBA INDIA PVT LTD: SUPREME COURT OF INDIA (Dated: April 21, 2017)

Income Tax - AMP expenses - Brightline Test - condonation of delay - Most Appropriate Method - Transactional Net Margin Method (TNMM).

The assessee company had employed TNMM as the most appropriate mode for reflecting its international transactions and determining its arms length price vis-à-vis business/transactions with the AE. The TPO and subsequently the AO accepted the other parts of the exercise but observed that AMP expenses to the tune of Rs.45,27,63,518/- including discounts were incurred. The AO added Rs.40.14 Crores on this aspect. Upon appeal, the Tribunal noticed the subsequent discussion of the relevant principles applicable to deal with AMP expenses in ALP determination by a Bench of this Court in Sony Ericsson Mobile Communications India Pvt. Ltd. v. Commissioner of Income Tax - III and held that the bright line test espoused by the Revenue was inapplicable. As a result, the Tribunal set aside the additions made by the lower authorities. High Court upheld Tribunal's order.

Having heard the parties, the Supreme Court condoned the delay and granted leave to Revenue's petition.

Revenue's SLP admitted

2017-TII-18-HC-DEL-INTL

PR CIT Vs KRISHAK BHARATI COOPERATIVE LTD: DELHI HIGH COURT (Dated: April 21, 2017)

Income Tax - Section 263 - India-Oman DTAA - Articles 8, 11 & 25

Keywords - branch office - dividend income - erroneous - multi state co-operative society - permanent establishment - prejudicial to revenue

The assessee is a multi state co-operative society registered in India. It entered into a JV with Oman Oil Company to form the Oman Fertilizer Company SAOC (OMIFCO), a registered company in Oman under the Omani Laws. The assessee is 25% shareholder in the JV, which manufactures fertilizers. The assessee established a branch office in Oman to oversee its investments in OMIFCO. The branch office is independently registered as company under the Omani laws. It claims Permanent Establishment (PE) status in Oman in terms of Article 25 of the DTAA between India and Oman. That branch office maintains its own books of account and files, returns of income under the local income tax law of Oman. The assessee filed its return which was selected for scrutiny and notices were issued along with detailed questionnaires. The assessment was completed u/s 143 (3). Whilst completing the assessment, the AO allowed tax credit for a sum of Rs. 41.53 crores in respect of the dividend income of Rs. 134.41 crores received by the assessee from OMIFCO. That dividend income was simultaneously brought to the charge of tax in the assessment as per the Indian tax laws. Under the Omani Tax laws, exemption was granted to dividend income by virtue of the amendments made in the Omani Tax Laws with effect from the year 2000. The AO allowed credit for the said tax which would have been payable in Oman but for the exemption granted. After completion of assessment, the PCIT issued a SCN u/s 263. The assessee resisted the notice contending that the specific issue relating to allowing tax credit for the deemed tax paid on dividend income in Oman, was allowed at the time of original assessment, after considering the detailed reply filed before the AO. The revisional Commissioner rejected all of the assessee's submissions. The PCIT did not confine himself to the particular issue referred to in the SCN issued by him u/s 263 but also ordered in regard to a new issue. The CIT issued directions to the AO regarding the following issues: (i) Tax credit on dividend is not allowable (ii) Profits pertaining to undistributed dividend should be brought to charge of tax (iii) The AO was also to frame a view with regard to the default of not furnishing complete and true income or particulars of income on the part of the Assessee. The assessee appealed to the ITAT contending that the AO's order was neither erroneous nor prejudicial to the revenue and was in fact based on a consistent view taken for several previous years, with respect to the applicability of provisions of the DTAA. It was also contended that having regard to the law applicable to Section 263, the CIT could not have travelled beyond the show cause notice and the issues covered by it. The Tribunal held that order passed by PCIT was without jurisdiction and not sustainable in law.

Having heard the parties, the High Court held that,

Whether it would meet the mandate of Section 263 if opportunity of being heard is granted to assessee after setting aside the assessment order - NO: HC

+ the first question which this court addresses itself to is the order u/s 263 as to the issues which were not covered by the show cause notice issued to the assessee. On this Ashish Rajpal is categorical. It was held in CIT Vs. Ashish Rajpal that: "..... It is the requirement of Section 263 that the assessee must have an opportunity of being heard in respect of those errors which the Commissioner proposes to revise. To accord an opportunity after setting aside the assessment order, would in our view not meet the mandate of Section 263 of the Act. If such an interpretation is accepted it would make light of the finality accorded to an assessment order which cannot be reopened unless due adherence is made to the conditionalities incorporated in the provisions of the Act in respect of such powers vested in the Revenue."

Whether order passed by the AO can be termed as erroneous when AO had considered the impact of relevant articles of DTAA, issued pointed queries in that behalf and otherwise dealt with the issue in detail - NO: HC

+ the 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.

Whether in case of doubts relating to implementation of provisions of a DTAA, Revenue should address them to the concerned authorities of the other country rather than recording a finding on the same - YES: HC

Whether as per the amended Article 8 of India-Oman DTAA, dividend distributed by all companies, including the tax exempt companies would be exempt from payment of income tax in the hands of the recipients and Indian Investors can obtain relief in India under Article 25 (4) DTAA - YES: HC

+ the second question was concerned with whether the ITAT err 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 assessee's contented that under Article 25 (2) of the treaty, it is entitled to benefit of whatever was the tax treatment it received in Oman. Article 25 (4) further clarifies one eventuality, i.e. if dividend is not taxed as a result of incentive for economic development of Oman. The Tribunal noticed- in this court's opinion, correctly- that the expression "incentive" is neither defined in the Omani Tax Laws nor in the Income Tax Act, 1961. Due to this, a clarification was given by the Omani Ministry of Finance, stating that ".....As per the newly introduced Article 8 (bis) of the Company Income Tax Law, dividend distributed by all companies, including the tax exempt companies would be exempt from payment of income tax in the hands of the recipients. We confirm that tax would be payable on dividend income earned by the Permanent Establishments of the Indian Investors, as it would form part of their gross income under Article 8, if not for the tax exemption provided under Article 8 (bis) . As the introduction of Article 8 (bis) is to promote economic development in Oman, the Indian Investors should be able to obtain relief in India under Article 25 (4) of the Agreement for Avoidance of Double Taxation in India......". In view of the above, it is held that the said 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 PE 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. The opening para of this order reads: "We refer to the returns of income and determine the taxable income as under: Kribhco Muscat is a permanent establishment supported by M/s. Krishak Bharati Cooperative Limited, a multi- state cooperative society registered in India. As per the accounts, Kribhco-Muscat is in receipt of dividend income from Omifco, a joint stock company registered in Oman, and that dividend income is connected with the investment of Kribhco-Muscat. The dividend income is, however, exempt from tax in accordance with Article 8 (bis) (1) of the Company Income Tax Law. The tax exemption on dividend is granted with the objective of promoting economic development within Oman by attracting investments." That order first included dividend income (in the total income determined) and thereafter granted deduction. For later years as well, assessments were made similarly.

Revenue's appeal dismissed