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2) On the facts and in the circumstances of the case and as per Law, the Ld.CIT(A) erred in directing the A.O. to exclude the 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 Establishment in Oman and Qatar and as the income from the aforesaid Branch in 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 ignoring 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 includes all the income: -

10. The net profit from Oman and Qatar was thus worked out at ` 2,30,42,431, after setting-off of the losses of Qatar. 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 Assessing 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 total income. In response, the assessee submitted that it has established a branch in Oman and Qatar from where it had entered into contracts with the Government 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 respective countries even though the result of all the activities was consolidated in India. Both the Essar Oil Limited countries Oman and Qatar have income tax laws and the income earned by the assessee in these countries were taxable under their respective income tax laws. These branches have been filing their return of income in respect of business activities carried out there and were assessed 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 entered into Double Taxation Avoidance Agreement (for short "DTAA") which came into effect from 1st April 1998. It was submitted by the assessee that prior to the said DTAA, the assessee was adding the profits earned from 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 view of Article-7. Similarly, in case of Qatar also, the DTAA came into effect from 1st April 2001 and since then the assessee has been excluding the income earned from Qatar for tax in India in view of Article-7. A detail reasoning and explanation was given as to why in view of Article-7, the income which has been offered for tax in the other contracting State i.e., Oman and Qatar, the same cannot be held to be taxable in India. In support, reliance was placed on the decision of Karnataka High Court in CIT v/s R.M. Muthaiah, [1993] 202 ITR 508 (Kar.), wherein in the context of Indo-Malaysian treaty, it was held that income specified in Articles-6 and 7, relating to the P.E. were outside the purview of taxation in India. Drawing the similarity between the Article-7 of Oman and Qatar and Article-7 of Malaysian treaty, it was submitted that if the income has been taxed in the contracting State, then the same cannot be taxed in India. Besides this, reliance was also placed on the judgment of Hon'ble Supreme Court in CIT v/s P.V.A.L. Kulandagan Chettiar, [2004] 267 ITR 654 (SC) wherein the view taken by the Karnataka High Court 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.

DECISION:-

49. We have given our anxious consideration to the entire gamut of arguments placed before us by both the sides. The genesis of the controversy in ground no.2 and 3, arises from the fact 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 same was that the assessee has also been filing the return of income in the respective 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 Article-7(1) of the DTAA. The Assessing Officer held that the income from Oman and Qatar is also assessable in India and has to be added to the total income in India. Accordingly, he has also given credit of taxes paid at ` 50,40,215, in Oman. The assessee's contentions mainly have been that by virtue of Article-7(1) of the Indo-Oman DTAA, once the taxes have been paid in the source country (i.e., Oman), the same profit cannot be taxed in the country of resident i.e., in India. The main reliance in this regard was placed on the phrase used in Essar Oil Limited the Article-7(1) "may be taxed in other contracting State", which, according to the assessee, means that the country of residence 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 decision of the Hon'ble Supreme Court in P.V.A.L. Kulandagan Chettiar (supra).

50. The second issue arose with respect to long term capital 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 included in the income of the assessee. Reliance was placed on Article-15(1) of the Indo-Oman DTAA and Article-13(1) of Indo-Qatar DTAA. Here also, the assessee has raised the same contention that once the capital gain is taxable as per the domestic law of Oman and Qatar, then there is no requirement under the respective DTAAs to offer the same in India. Here also, the phrase used in the said Articles is "may be taxed in other contracting State".