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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI N V VASUDEVAN & MS. PADMAVATHY S
IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI N V VASUDEVAN, VICE PRESIDENT AND MS. PADMAVATHY S, ACCOUNTANT MEMBER
ITA No.986/Bang/2019
Assessment year : 2014-15
Invendis Technologies India Private Vs. The Asst. Commissioner of Income- Limited, tax , No.191, CASA BLANCA Circle-3(1)(1), BOOHSBC Layout, Bengaluru. BTM 2nd Stage Bengaluru - 560068 PAN AABCI7831B APPELLANT RESPONDENT
Assessee by : Smt. Tanmayee Rajkumar Advocate Revenue by : Shri Priyadarshi Mishra Addl. CIT
Date of hearing : 05.04.2022 Date of Pronouncement : 27.04.2022
O R D E R Per Padmavathy S, Accountant Member
This is an appeal against the order of the Commissioner of Income Tax (Appeals) - 3 Bengaluru passed u/s. 250 of the Income Tax Act (the Act) dated 12/03/2019 for the assessment year 2014-15
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Brief facts of the case
The assessee is Private Limited Company engaged in the business of manufacturing of Telecommunication products and software development services. The assessee filed the return of income for the assessment year 2014-15 on 28/11/2014 by declaring an income of Rs.3,07,86,870. The case was selected for scrutiny and notice under section 143(2) was issued to assessee on 28/08/2015. The assessee had business operation in India as well as in foreign country viz., Ghana. As per the details furnished during the assessment proceedings the assessee had a total receipt of Rs. 21,59,99,223 for the year under consideration. Out of this total receipts the assessee had initially submitted to the AO that Rs.12,95,91,404 was from Ghana. During the proceedings before the CIT(A) this was corrected to Rs.15,99,37,226 based on the revised submission by the assessee which the AO gave effect to by way of a remand report. In respect of the receipt from Ghana, the payer had deducted at source on the receipts of Rs.15,99,37,226 amounting to Rs.1,05,36,759. In the computation of income the assessee has claimed the tax paid/deducted at Ghana of Rs.1,05,36,759 as deduction under Section 91 of the Income Tax Act, 1961 (Act).
An assessee being a resident, it shall be allowed a credit for the amount of foreign tax paid by him by way of deduction as per the provisions of section 91 of the Act r.w.r 128 of the Income Tax Rules
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1962. It will be worthwhile to reproduce the relevant provisions of section 91 here in order to understand how the deduction u/s.91 is computed which is the subject matter of appeal
“91. (1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.
******* Explanation.—In this section,—
(i) the expression "Indian income-tax" means income-tax charged in accordance with the provisions of this Act;
(ii) the expression "Indian rate of tax" means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this Chapter, by the total income;
(iii) the expression "rate of tax of the said country" means income- tax and super-tax actually paid in the said country in accordance with the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in
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the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country;
(iv) the expression "income-tax" in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country.”
Section 91 makes provision for grant of unilateral relief by the Government of India in respect of incomes which had suffered taxes both in India and in the country with which there is no agreement for double taxation relief for avoidance of double taxation. The key elements while computing the deduction u/s.91 are (i) Doubly taxed income (ii) Effective Indian rate of tax and (iii) Effective rate of tax of Ghana (other country). Deduction u/s.91 (1) is allowed from the Indian income-tax payable by the Assessee which is calculated by applying on the doubly taxed income, the Indian rate of tax or the rate of tax of the said country (Ghana in the present case), whichever is the lower.
The assessee has in the computation reproduced below has calculated - (i) Indian rate of tax of income considered by dividing Indian income tax by the total income. (No dispute except that surcharge and education cess should also be included as part of the rate of tax)
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(ii) The rate of tax of Ghana was taken as the same rate at which the payer has deducted at source. (iii) The rate of tax in Ghana being lower than the Indian rate of tax, claimed tax credit for the entire tax deducted at source.
Thus, in the computation an amount of Rs.1,05,36,759 was claimed as a deduction u/s.91 of the Act as per the computation below
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The AO questioned the way assessee computed effective tax rate in Ghana which is arrived at by dividing the tax deducted on gross receipts i.e. the rate at which tax is deducted at source by the payer. According to the AO when the Indian rate of tax is arrived at after considering the expenses, the same logic should be applied for arriving at the tax rate of Ghana. The AO therefore proceeded to re-compute the deduction u/s.91 whereby he restricted the deduction to Rs.73,30,582. The AO excluded the ‘other income’ for the purpose of re-computing the deduction. The relevant extract of the AO’s order is as given below
“3.1. In computation of income statement the assessee company had claimed a relief of Rs.1,05,36,759. During the course of assessment proceedings the assessee company submitted the details of the transactions on which the assessee company was claiming the relief.
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As per the details submitted the assessee company had made sales of Rs.12,95,91,404* (against which there was withholding of tax in Ghana of Rs.1,05,36,759 as per assessee company the effective rate worked out to 8.13% of receipts as against taxes paid in India at 18.5% (MAT paid). Hence the assessee company had claimed relief of Rs.1,05,36,759.
3.2. On verification it is found that while calculating tax rate in Ghana the assessee company had calculated the same on Gross receipts while tax paid in India was on income not receipts. Hence after reducing other income (Rs.44,17,852 ) from its profits in P&L account the effective profit rate works out to 30.58% i.e. [(Rs.7,04,63,271- Rs.44,17,852) / Rs.21,95,91,404]. Hence in respect of foreign receipts on which taxes are withheld of Rs.12,95,91,404, the profit works out to Rs.3,96,24,766 i.e. (Rs.12,95,91,404 * 30.58%). And the effective rate of tax works out to 26.59% i.e. (Rs.1,05,36,759 / Rs.3,96,24,766). Hence the assessee company will be eligible for deduction at 18.5% of Rs. 3,96,24,766 which works out to Rs.73,30,582 and the balance of Rs.32,06,177 is disallowed and brought to tax”. * (this has to be read as Rs.15,99,37,226 admitted by the AO) 7. The AO modified the disallowance to Rs.14,89,609 based on the revised Ghana receipts submitted by the assessee at Rs.15,99,37,226. The manner in which the AO has computed the allowable deduction u/s.91 is given in a tabular form below for ease of understanding Particulars Deduction u/s.91(1) Total revenue/ income: Total turnover - (A) 21,59,99,223 Other income - (B) -- Net profit before extraordinary items - (c) 6,60,45,419
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Foreign income: Foreign turnover - (D) 15,99,37,226 Expenses incurred on foreign turnover – (E) --
Net profit % on total turnover – (G) (C/(A+B)) 30.58%
NP% on foreign income – (H) H = G 30.58%
Profit on foreign turnover (I) = (H) * (D) 4,89,03,514 Tax: TDS deducted by Ghana – (J) 1,05,36,759 Effective rate of tax on Ghana income – (K) = (J)/(I) 21.55% Effective Indian tax rate – (L) 18.50% Effective rate of tax on which foreign tax credit is 18.50% allowable – (M) = (lesser of) (K) or (L) Tax credit allowed / allowable – (N) = (M) * (I) 90,47,150 Tax credit disallowed – (O) = (J) – (N) 14,89,609
Aggrieved the assessee filed an appeal before the CIT(A) contending the computation of tax credit by the AO on net income from Ghana and also the exclusion of ‘other income’ from total revenue. For the purpose of computing the effective rate outside India, the CIT(A) held that it should be on the net income i.e. after considering the expenses incurred for making such sales outside India. The CIT(A) relied on various judicial pronouncements in this regard. On the issue of including ‘other income’ for computing effective rate of tax outside India, the CIT(A) held that the none of the expenses debited to the P&L could be said to be incurred in relation to ‘other income’ credited to the P&L and hence while computing the net profit
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ratio other income needs to be excluded. In effect the CIT(A) confirmed the manner in which the assessing officer computer the relief u/s.91 and directed the AO to recomputed the relief based on the revised sales figures submitted by the assessee.
Aggrieved by the order of the CIT(A) the assessee is an appeal before The Tribunal. Section 91 r.w.r 128 allows the assessee, to claim a deduction from the Indian income-tax payable in respect of incomes which had suffered taxes both in India and in the country with which there is no agreement for double taxation relief for avoidance of double taxation. The deductions is calculate by applying the lower of ‘effective Indian rate of tax’ or ‘effective rate of tax of other country’ (Ghana) on ‘such doubly taxed income’. The issues raised by the assessee before us through various grounds are as under
(i) Effective Indian rate of tax – The AO / CIT(A) has excluded surcharge and education cess which is contended as not correct in the light of decision of the Supreme Court in CIT vs K Srinivasan 1972 AIR 491
(ii) Effective rate of tax in Ghana – The AO/CIT(A) has excluded ‘Other Income’ while arriving at the net profit ratio based on which net profit on Ghana receipt is computed
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(iii) Doubly taxed income – Applying the net profit % of the assessee on the Ghana receipts ignoring the details of actual expenses of Ghana submitted to arrive at the income that is doubly taxed
The Ld AR made the following submissions before us
(i) The word ‘income’ has been subject matter of judicial interpretation and Judiciary has given wide meaning to the term income. In view of the principles laid down by courts in various judicial proceedings, the entire receipt shall be considered as income within the meaning as envisaged in explanation (iii) of section 91 of the Act.
(ii) The net profit ratio method as adopted by the AO for computation of foreign tax credit has not been prescribed by section 90/91 of the Act.
(iii) Wherever the legislature intended to provide a method of computation it has specifically provided for the same, e.g. Section 14A has prescribed a method to determine the disallowance in respect of expenditure incurred for earning exempt income.
(iv) In the absence of any method described or intended to be prescribed the assessing officer’s action of arbitrarily applying the net profit ratio for computation of foreign tax credit u/s. 91 of the Act is unjustified and unsustainable under the law.
(v) The effective rate of tax paid in Ghana should be computed by dividing the tax paid in Ghana by income assessed Ghana.
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(vi) The expression ‘income assessed in foreign country’ would clearly in the context in which it is used mean subject to tax in the foreign country and the amount on which tax is deducted at source in the absence of any assessment should be considered as the income assessed in Ghana
(vii) The other income shown in the P&L account is mainly in connection with the business. For the purpose of computing the book profits u/s.115JB the other income is included as part of net profit. Since the Indian effective rate of tax is arrived at including the other income, for the purpose of computing the effective tax rate of Ghana assessing officer is not justified in not including the same
(viii) Considering the effective rate of tax at 18.5% excluding surcharge and cess is not correct in the light of the decision of the Supreme Court in the case of CIT vs K Srinivasan (supra).
The Ld DR supported the decision of the lower authorities.
We heard the rival submissions and perused the materials on record. The expression ‘such doubly taxed income’ has reference to the foreign income which is again being subjected to tax by its inclusion in computation of income under the Indian law. In other words, the expression ‘such doubly taxed income’ has reference to the tax which the foreign income bears once again the burden of the Indian Income-tax Act by its being included in the total income chargeable u/s.4 of the Act. Hence the assessee’s claim that the relief to be allowed for the entire tax paid in Ghana on the basis that gross is
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receipt is doubly taxed cannot be accepted without going into the details of how much of such income is doubly taxed.
In this case the gross receipts from Ghana is Rs.15,99,37,226 and the doubly taxed income out of this would be net of expenses. The Ld. AR during course of hearing submitted that the assessee had produced the details of expenses pertaining to Ghana (page 172 of Paper Book) before the CIT(A). We, however notice that the correctness of these expenses in order to consider it for arriving at the net Ghana income was not examined by the lower authorities. The Ld AR as an alternate plea submitted that if the method adopted by AO i.e. applying the same net profit ratio of total income in India to the income from Ghana can be considered provided instead of remitting the issue back to the AO/CIT(A). However the Ld AR prayed that the ‘other income’ should be included for the purpose of arriving at the net profit ratio of total income in India. This, the Ld AR conceded, would be a reasonable method to arrive at the ‘doubly taxed income’ in the absence of any other better method. The Ld AR also brought to our attention that the net income of Ghana is used for arriving at the ‘effective rate of tax in Ghana’ and the exclusion of ‘other income’ as done by the AO/CIT(A) is having a two-fold impact on the computation of deduction u/s.91 of the Act.
We notice that the AO has excluded ‘other income’ for the limited purpose of computing the net profit ratio to be used for arriving
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at the net income of Ghana. The net income of Ghana is also considered as the basis for arriving at the ‘rate of tax of Ghana’ as can be seen from the manner in which the AO has computed the disallowance of deduction (para 7 above). The effective tax rate of India (MAT) with which the comparison is done includes the ‘other income’. The AO/CIT(A) have justified the exclusion of ‘other income’ on the basis that no expenditure is incurred towards earning the ‘other income’. From the perusal of the break-up of ‘other income’ (page 28 of paper book) it is clear that these incomes are earned in the course of the business and the assessee has incurred various expenses in connection with earning income in the course of business. The assessee has included the ‘other income’ as part of the business income while computing the book profits u/s.115JB and the computation is accepted by the AO thereby confirming that the ‘other income’ as part of the business income of the assessee. Considering the facts and on merits, we are of the view that exclusion of ‘other income’ in only one leg of the computing net income and effective rate of tax in Ghana is not the right approach. The comparison of the rate thus computed with the Indian rate of tax will not be correct in the interest of justice.
The expression ‘Indian rate of tax’ has been defined as the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relied due under this Chapter by the total income.
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Indian Income Tax has been defined to mean income-tax charged in accordance with the provisions of this Act. In this case the Indian rate of tax has been arrived at by the assessee at Rs.20.01% i.e. 1,36,56,893/6,82,58,012. However the AO has arrived at the Indian rate of tax at 18.50%. This is because the AO adopted the rate of tax u/s.115JB of the Act on book profits because tax was paid for the relevant assessment year not under normal provisions of the Act but u/s.115JB of the Act on book profits (pages 233 to 235 of paper book) However the AO had considered the tax before surcharge (Rs.6,31,387) and Education cess (Rs.3,97,774) and arrived at a rate of 18.50% i.e.1,26,27,732 / 7,01,90,873. The issue of surcharge and cess being part of income tax is settled by the Supreme Court in the case of CIT vs K Srinivasan (supra) where the Honb’ble Supreme Court has clearly laid down that the words “income tax” would include surcharge and additional surcharge. Hence for the purpose of arriving at effective Indian rate of tax, surcharge and educational cess should be considered i.e. @ 20.01%
The expression ‘rate of tax of the said country’ means income- tax and super-tax actually paid in the said country in accordance with the corresponding laws in force in the said country after deduction of all relief due but before deduction of any relief due in the said country in respect of double taxation divided by the whole amount of income as assessed in the said country. Tax actually paid is Ghana is Rs.1,05,36,759. The assessee has not brought anything on record to
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show what is the income assessed in Ghana. The Ld AR during the course of the hearing submitted that the said details are not available with the assessee.
The Ld AR submitted the below table for the purpose of computing the effective rate of tax in Ghana and prayed that the same may be considered for the purpose of giving deduction u/s.91of the Act. Particulars Deduction u/s.91 Total revenue/ income: Total turnover - (A) 2,159,99,223 Other income - (B) 44,17,852 Net profit before extraordinary items - (c) 7,04,63,271
Foreign income: Foreign turnover - (D) 15,99,37,226 Expenses incurred on foreign turnover – (E) --
Net profit % on total turnover – (G) (C/(A+B)) 31.97%
NP% on foreign income – (H) H = G 31.97%
Profit on foreign turnover (I) = (H) * (D) 5,11,28,979
Tax: TDS deducted by Ghana – (J) 1,05,36,759 Effective rate of tax on Ghana income – (K) = 20.61% (J)/(I) Effective Indian tax rate – (L) 20.01% Effective rate of tax on which foreign tax credit is 20.01%
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allowable – (M) = (lesser of) (K) or (L) Tax credit allowed / allowable – (N) = (M) * (I) 1,02,30,909
We have in para 14 above held that for the purpose of computing the net profit ratio of total income of the assessee in India which is used as the basis for arriving at the net income of Ghana should include ‘other income’. We have also held that the ‘effective Indian rate of tax’ should include surcharge and education cess i.e. 20.01%. The calculation of deduction u/s.91 as done in the above table is in accordance with our views expressed in the foregoing paragraphs and is a reasonable basis of arriving at the effective rate of tax for Ghana. Hence we are of the considered view that it is reasonable to allow the deduction u/s.91 of the Act to the extent of Rs.1,02,30,909 to the assessee. The AO is therefore directed to recompute the income of the assessee accordingly.
In result the appeal of the assessee is partially allowed.
Order pronounced in court on 27th April, 2022
Sd/- Sd/- (N.V.VASUDEVAN) ( PADMAVATHY S) Vice President Accountant Member
Bangalore, Dated, 27th April, 2022 / vms /
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Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.
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Date of Dictation …………………………………… 2. Date on which the typed draft is placed before the dictating Member ……………………. 3. Date on which the approved draft comes to Sr.P.S .……………………………. 4. Date on which the fair order is placed before the dictating Member ……………….. 5. Date on which the fair order comes back to the Sr. P.S. ………………….. 6. Date of uploading the order on website…………………………….. 7. If not uploaded, furnish the reason for doing so ………………………….. 8. Date on which the file goes to the Bench Clerk ………………….. 9. Date on which order goes for Xerox & endorsement…………………………………… 10. Date on which the file goes to the Head Clerk ……………………. 11. The date on which the file goes to the Assistant Registrar for signature on the order ………………………………. 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order …………………………. 13. Date of Despatch of Order. ……………………………………………..