Indian Kanoon - Search engine for Indian Law

20. We note that in his impugned order passed u/s. 263 of the I.T. Act, the Ld. PCIT has given directions to the AO on another issue which did not find any mention in the show cause notice issued. The Ld. PCIT has directed the AO to add the amount of undistributed dividend from Omani Company as reflected in the Profit and Loss Account of the PE of the assessee in Oman. We have already recorded a finding that the Ld. PCIT has no jurisdiction whatsoever to issue any directions with regard to any issue on which no show cause notice was issued and on that account even the order of the ld. PCIT gets vitiated. Coming to the merits, from the factual position discussed, as aforesaid, it is seen that the annual accounts of the PE are prepared in accordance with the International Financial Reporting Standards (IFRS). As per IFRS-28 the share of PE in the profit / loss in OMIFCO at 25% has to be accounted as income in the Profit and Loss account of the PE even though such income received is only to the extent of dividend declared and distributed. Out of the total distributable profit, OMIFCO is required to transfer a specified amount to reserves under the Omani law and only the remaining profits are distributed to the shareholders. Therefore, even under the Omani Tax Laws, the PE offers for taxation only the dividend income actually received and not the total share of the PE in the profits of OMIFCO. On the other hand, books of account of the assessee in India are required to be prepared in consonance with the Indian Accounting Standards. Obviously, the undistributed share of profit reflected in the books of P.E. cannot be said to partake the character of income under the provisions of the Income Tax Act. It is settled position that accounting entries are not determinative of taxability under the Income Tax Act and further only the real income can be brought to the charge of tax. In the present case even the undistributed profits reflected in the books of the P.E. are not brought to the charge of tax under the Omani Tax Laws. In our view having regard to the above mentioned facts the said income by assuming undistributed profit cannot be taxed under the I.T. Act. Therefore, on merits also the directions issued by the learned PCIT on this issue are not justified and the same are hereby vacated.

13. It was argued that the assessee does not fulfill the conditions of Article 5 of the DTAA. The assessee does not carry on business through any permanent establishment situated or performs in Oman independent personal services from its fixed base situated there. Moreover, the investment made by the assessee in OMIFCO is the decision of the KRIBHCO-India and was done through its own funds and likely even before KRIBHCO-Muscat came into existence. Thus the dividend paid from such investment cannot be 'effectively connected' with the KRIBHCO-Muscat, as is contended by it. It is highlighted that the branch office carries no effective work and in fact functions as a mail receiving and forwarding unit which also remits the dividends received. The learned counsel urged that ITAT was wrong in law in holding the revenue had accepted the position that the branch office of the assessee constituted Permanent Establishment (PE) in Oman in terms of Article 25 of the Indo-Omani DTAA. The CIT had not observed this and clearly stated that the income is not connected to it as the role of a PE is only preparatory and auxiliary as is evident from the final accounts of the assessee as there are no tangible expenses which could indicate activities of any kind so as to justify the role of an income earning unit; it had only one employee working.

The Assessee has submitted that it has filed its return for the year ended 31-3-2006 under Oman's Income Tax Law for its branch namely KRIBHCO Musket Branch PE. Reference has further been made to Article 8 (bis) under Oman's Income Tax Law. A copy of the Assessment Order as made in Oman for its PE has been filed to support its contention that the dividend income has been exempted in Oman in accordance with Article 8 (bis) of Income 'fax Law of Oman. The Assessee's claim of tax sparing @ 30 as per the Royal Decree No. 68/2000 read with Royal Decree No. 48/81 under Company's Income Tax Law, appears to be justified. The credit for Rs.6,00,49m,920 as deemed tax paid under DTAA in addition to the prepaid taxes as claimed in Return of income is allowed."

17. The assessee, by virtue of being a joint venture partner in OMIFCO received during the year, dividend US$30.2325 equivalent to Indian `143,83,99,800. The dividend was received by the Permanent Establishment (PE) namely the Branch Office of the assessee. The dividend was received in Oman and was deposited in the bank account maintained by the (PE) branch office, with Bank of Baroda, London, on 21.08.2009, 04.01.2010 and 16.03.2010. Later the dividend was remitted through banking channel into the State Bank of India, NOIDA, INDUSIND Bank, Nehru Place, and ICICI Bank, New Delhi, account of the assessee. It is submitted that dividend is 43.51% of the equity share capital held by the assessee in the JV. The Director's Report of OMIFCO, Oman, and the Minutes of 12th Annual General Meeting of OMIFCO, Oman, held on 10th March 2010 in support of the amount of dividend declared by OMIFCIO were shown to the AO and were part of the record. The dividend income of `143,83,99,800 was included in the profit taken as starting point of computation. The dividend income from OMIFCO is included under the Schedule 7 - "Other Revenue"