ZOHO CORPORATION PRIVATE LIMITED,KANCHEEPURAM vs. DCIT CORPORATE CIRCLE 3(2), CHENNAI

Page - 5 - of 21 in the case of Kerala Lines Limited 74 taxaman 3 Madras, sundaram industries limited. The Ld. DR argued that the decision of Hon’ble Bombay High Court in the case of Reliance Infrastructure limited 76 taxman.com 256 relied upon by the appellant as also by the Hon’ble Ahmadabad tribunal in its ruling in the case of Virmati Software and Telecommunication Ltd 145 taxman.com134 was distinguished since the same failed to consider its own earlier decisions in Lubrizol India Ltd as well as the law pronounced by Hon’ble Apex Court in Smith Kline and French(India) Limited supra. 6.0 We have heard rival submissions in the light of material available on records. At the outset, we deem it necessary to reproduce the relevant part of the statute seminal to the controversy of allowance of foreign tax credit to the assessee over and above the one eligible u/s 90 / 91 of act. Thus section 90 of the act provides as under:- “….1[90. Agreement with foreign countries or specified territories.—(1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,— (a) for the granting of relief in respect of— (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may Page - 6 - of 21 be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. 2[(2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X A of the Act shall apply to the assessee even if such provisions are not beneficial to him.] (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. 430 1[(4) An assessee, not being a resident, to whom an agreement referred to in sub- section (1) applies, shall not be entitled to claim any relief under such agreement unless 2[a certificate of his being a resident] in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.] 3[(5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed.] Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company. Explanation 2.—For the purposes of this section, ―specified territory‖ means any area outside India which may be notified as such by the Central Government. 4[Explanation 3.—For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force.] 5[Explanation 4.—For the removal of doubts, it is hereby declared that where any term used in an agreement entered into under sub-section (1) is defined under the said agreement, the said term shall have the same meaning as assigned to it in the agreement; and where the term is not defined in the said agreement, but defined in the Act, it shall have the same meaning as assigned to it in the Act and explanation, if any, given to it by the Central Government.] 6.1 Further section 91 of the act reads as under:- “….91. Countries with which no agreement exists.—(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

Page - 7 - of 21 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. (2) If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by him— (a) of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or (b) of a sum calculated on that income at the Indian rate of tax; whichever is less. (3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under section 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included 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 2*** 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 3[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 the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country; 433 (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….” 6.2 Similarly relevant provisions of section 40(a)(ii) reads as under:- “….40. Amounts not deductible.—Notwithstanding anything to the contrary in 3[section 30 to 38], the following amounts shall not be deducted in computing the income chargeable under the head ―Profits and gains of business or profession‖,— ------------------------- --------------------- (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. 5[Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum

Page - 8 - of 21 eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.] 221 1[Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;]…”

6.3 Lastly the provisions of section 37(1) of the IT act provides as under:- “…..37. General.—(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 1*** and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ―Profits and gains of business or profession. 2[ 3[Explanation 1.]—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] 4[Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.] 5* * * * * 6[(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.] 7* * * * * 8* * * * * 9* * * * * 38….” 7.0 Upon careful consideration of the controversy at hand, it is noted that the entire issue revolves around the claim of the assessee in respect of taxes paid by it on its overseas income paid in overseas jurisdiction. It is the case of the assessee that the amount of Rs.4,59,49,268/- paid by it in overseas jurisdiction and which could not be claimed by it within the purview of section 90 and 91 of the act deserves to be allowed u/s 37(1) Page - 9 - of 21 of the act. The Ld. Counsel for the assessee holds the view that the prohibition placed u/s 40(a)(ii) of the act is only for that component of foreign taxes paid which is eligible for claim u/s 90 and 91 of the act. Thus according to the Ld. Counsel for the assessee the component of tax not eligible or rather ineligible for claim u/s 90 and 91 is not hit by mischief of section 40(a)(ii) of the act and hence can be claimed u/s 37(1). The Ld. Counsel of the assessee subscribed to the view that its case is therefore not hit by mischief of section 40(a)(ii) of the act as well as that the decision of Hon’ble Ahmadabad tribunal in the case of Virmati Software and Telecommunication Ltd 145 taxman.com134 based upon the decision of Hon’ble Bombay High Court in the case Reliance Infrastructure Ltd. (2016), while ignoring its own decision in case of Elite Core Technologies Pvt. Ltd, supra supports its claim. 7.1 Hon’ble Apex Court has, in several judicial pronouncements concerning interpretation of statute, postulated that wherever the provisions of statute are unambiguously clear and do not offer divergent meanings, no case of their interpretation is required to be made. This brings us to the question of analysis and applicability of various statutory provisions seminal to the controversy at hand. Section 90 and 91 of the act have been brought on the statute with the solitary objective of preventing double taxation of income of a taxpayer who has both

Page - 10 - of 21 domestic as well as overseas income. Thus, the law postulates that when a taxpayer earns overseas income and is exposed to taxes in foreign tax jurisdiction, then it is liable to get credit for such taxes paid in overseas jurisdiction while submitting his final tax liabilities in the domestic tax jurisdictions. The idea is to avoid double taxation of the same income. Section 90 and 91 of the act prescribe in exquisite details as to how and how much of the taxes paid in foreign tax jurisdiction would be available to the taxpayers. It is noteworthy that the quantum of deduction available is defined in the impugned sections. There is nothing in the act that provides that the excess amounts of taxes paid in foreign tax jurisdiction and which could not be claimed under Section 90 and 91, would be available for deduction under any other statute of the Income tax act 1961. 7.2 As far as section 40(a)(ii) of the act is concerned it places an unequivocal, clear and candid embargo upon claim of deduction of amounts of money defined therein, while computing income chargeable under the head profits and gains of business of profession. For the purposes of brevity it is clarified that the head of income under context is “profits and gains of business of profession”. Sub- clause (ii) Clause(a) of section 40 categorically provides that “any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed

Page - 11 - of 21 at a proportion of, or otherwise on the basis of, any such profits or gains”, would not be available for any deduction while calculating income chargeable under the head profits and gains of business of profession of an assessee. The argument of the assessee that the component of foreign tax paid do not fall in the purview of section 40(a)(ii) is far from satisfactory. The Ld. Counsel for the assessee informed that section 2(43) of the act defines tax as a “tax in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date 8[and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA]”. Thus it has been argued that the word tax pertains to only domestic income tax calculated as per the provisions of the income tax act and would not include taxes calculated in foreign tax jurisdiction. 7.3 The argument propounded by the Ld. Counsel of the assessee are not found to be satisfactory for the very reason that section 2 of the act begins with a clause “in this act, unless the context otherwise requires”, and which goes on to indicate that the definition is to be Page - 12 - of 21 understood in the context of the situation. The clear, unambiguous legislative intent appearing from insertion of provisions of 40(a)(ii) is that any sum paid by a tax payer on account of any amount of money, be it be any rate or tax levied on the profits or gains of any business or profession would not be allowed as a deduction. It is an undisputed fact of the case that the amounts of foreign taxes claimed as the deduction by the assessee are in respect of taxed levied on its component of income earned in foreign tax jurisdiction and hence the same cannot be allowed under the provisions of section 40(a)(ii). It is pertinent to note that explanation 1 to section 40(a)(ii) excludes amounts of monies eligible for relief u/s 90 and 91 of the act. Now what cannot be claimed u/s 90 and 91 does not becomes automatically allowable u/s 40(a)(ii). 7.4 Assuming that a taxpayer is allowed to claim the ineligible part of foreign taxes paid which could not be claimed by it u/s 90 and 91 of the act under section 37 of the act, that proposition alone would defeat the purpose of providing graded allowance prescribed in section 90 / 91. It is pertinent to note that the scheme of allowance mentioned u/s 90 and 91 of the act is a part of a sovereign agreement between the Government of India and other governments, arrived at after detailed and prolonged discussions / deliberations. The taxing rights of each contracting

Page - 13 - of 21 nations are deliberated at length before a DTAA is signed which forms the basis of procedure of deduction prescribed u/s 90 / 91 of the act. 7.5 The argument propounded by to the Ld. Counsel of the assessee regarding eligibility of its claim u/s 37(1) thus gets squarely hit by the mischief of section 40(a)(ii) and does not come to its rescue given a clear prohibition. It is therefore seen that the position of the statute on the subject of allowance of claim of taxes paid in foreign tax jurisdiction u/s 40(a)(ii) is clear in as much as it is categorically provided that no allowance can be made. As observed earlier in the order, Hon’ble Apex Court has ruled and also reiterated in several of its decisions that when the provisions of a statute are unambiguously clear no different interpretation is to be adopted. 7.6 Coming to the issue of available judicial pronouncements on the matter, it is seen that the Ld. Counsel for the assessee has primarily relied upon the Hon’ble Ahmadabad tribunal in the case of Virmati Software and Telecommunication Ltd 145 taxman.com134. It was submitted that Hon’ble Ahmadabad tribunal followed the decision of Hon’ble Bombay High Court in the case Reliance Infrastructure Ltd. (2016) while ignoring its own decision in case of Elite Core Technologies Pvt. Ltd supra. Perusal of decision of Hon’ble Ahmadabad tribunal in the case of Virmati Software and Telecommunication Ltd supra shows that Page - 14 - of 21 the same is distinguishable in as much as the dispute before the Hon’ble Coordinate Bench, evident from para 15.1 of the order, was as to “..Whether rate of tax in foreign country needs to be determined after considering the gross receipts or the net receipts of the profits embedded in such gross receipts..”. Relying upon its earlier order in assessee’s case for AY-2012-13, it was, confirming the action of the Ld.AO, concluded that “..it is only the profit which should be considered while determining the tax in the foreign country and the same to be compared the tax India…” . 7.7 We have noted that the Hon'ble Madras High Court in CIT Vs Kerala Lines Ltd. (1994) 74 Taxman 3 (Madras) while holding that the payment made by the assessee in foreign ports as income tax, has observed at para No. 4, that ",.. taxes paid by the assessee could, at best, be considered as an application of profits earned by the assessee and division thereof between the assessee and the foreign port authorities and the payment made by the assessee cannot be treated as having expended for earning profit.". Consequently in the light of ratio laid down by Hon’ble Jurisdictional High Court the claim of the assessee for deduction u/s 37(1) of foreign tax payment would become ineligible. 7.8 The decision of the Hon’ble Bombay High Court in the case of Reliance Infrastructure Ltd. Vs. CIT (76 taxman.com 256 Bom. (2010)

Page - 15 - of 21 supra also does not supports the case of the assessee. Firstly Section 40(a)(ii) of the Income Tax Act, 1961 and Section 10(4) of the income Tax Act, 1922 contain the same wording with regard to disallowance of tax or rate. Relevant portion of the 1922 Act reads as “any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains”. Now when the law contained in Section 40(a) (ii) of the 1961 act and Section 10(4) of the 1922 Act being similar, the Hon'ble Bombay High Court in the case relied upon by the assessee ought to have considered the principles laid down by the judiciary with regard to Section 10(4) of the 1922 Act and Section 40(a)(ii) of the 1961 Act. Instead, it is humbly observed that the Hon'ble Court took the words contained in the definition of 'tax' as in section 2(43) in a restrictive manner and analyzed disjointedly, section 40(a)(ii), its explanations and the circular (no. 14 of 2006 dated 28.12.2006) issued by the Board. 7.9 We have also noted the decision of the Hon'ble Bombay High Court in the case of 'Lubrizol India Ltd. Vs. CIT (1991) 54 Taxman 363 (Bombay)' wherein at para no.10 it has observed that ".. it is significant to note that the word tax' is used in conjunction with the words 'any rate or tax' The word 'any' goes with the rate and tax. The expression is further

Page - 16 - of 21 qualified as a rate or tax levied on the profits and gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. If the word tax' is to be given the meaning assigned to it by section 2(43), the word 'any' used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Furthermore, the word tax defined in section 2(43) of the Act is subject to "unless the context otherwise requires" In view of the discussion above we hold that the word 'any' tax herein refers to any kind of tax levied or leviable on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. The above hypothesis of Hon’ble Bombay High Court find support in the ruling of the Hon'ble Supreme Court in 'Smith Kline & French (India) Ltd. Vs. CIT (1996) 85 Taxman 683 (SC)' wherein at para no. 7 of the order it has been observed that ".. Section 10(4) of the 1922 Act or section 40(a)(ii) of the present Act do not contain any words indicating that the profits and gains spoken of by them should be determined in accordance with the provisions of the Act. All they say is that it must be a rate or tax levied on the profits and gains of business or profession." 7.10 Further, the Hon'ble Madras High Court in 'Sundaram Industries Ltd. Vs. CIT (1986)' held at para no. 18 of its order that " it is true that the Page - 17 - of 21 word tax' has been defined in section 2(43) as already indicated. But having regard to the purpose and context in which that word is used in section 40 it is obvious that the words 'any rate or tax levied' must be read as 'any rate or any tax levied. The word 'any' will, therefore, qualify both rate' and tax' and once we hold that the word any' will qualify tax' also, then 'any tax' will necessarily take in taxes other taxes other than the tax under the 1961 Act also". In the light of above clear and candid rulings of the Hon’ble Jurisdictional High Court as well as the Hon’ble Supreme Court, it can be concluded that the order of Hon’ble Bombay High Court in the case of Reliance Industries supra does not come to the rescue of the assessee. 7.11 We have also noted that The Hon'ble ITAT, Ahmedabad in DCIT Vs. Elite Core Technologies Pvt. Ltd., has exhaustively discussed the above issue of allowability of foreign tax credit u/s 37(1) in great detail in its impugned order before reaching at its conclusion that the same is not permissible. While doing so it has distinguished the decision of the Hon'ble Bombay High Court in 'Reliance Infrastructure Ltd. Vs. CIT by observing at para no. 45, that "In any case, the Hon'ble Bombay High Court's judgement in the case of Reliance Infrastructure (supra) proceeds on a particular facts and a sort of concession by the revenue inasmuch as it was not the case of the revenue that context in which the expression

Page - 18 - of 21 tax' is used in section 40(a)(ii) requires a meaning different from the meaning assigned by section 2(43). This is evident from the observations made by Their Lordships to the effect that "we are conscious of the fact that Section 2 of the Act, while defining the various terms used in the Act, qualifies it by preceding the definition with the word "In this Act, unless the context otherwise requires" the meaning of the word "tax" as found in Section 2(43) of the Act would apply wherever it occurs in the Act. It is not even urged by the Revenue that the context of the Section 40(a)(ii) of the Act would require it to mean tax paid anywhere in the world and not only tax payable/ paid under the Act." That was not the situation before us. The very thrust of stand of the revenue was that the connotations of expression tax' in Section 40(a)(ii) must be taken in its contextual meaning which extends to any tax ascertainable with reference to the profits of the assesse as evident from the wordings of section which refer to "any rate or tax levied on the profits or gains of any business or profession or assessed at proportion of, or otherwise on the basis of, any such profits or gains, and that its connotations cannot be treated as restricted to tax under the Income Tax Act. This argument, in the context of deduction in respect of tax outside Income-tax Act, 1961, has already met the approval of Hon'ble Supreme Court. The law laid down by Hon'ble Supreme Court binds all of us under Article 141 of the Page - 19 - of 21 Constitution of India. Once we are aware about a particular position that Hon'ble Supreme Court has taken, it is not open to us to reach a conclusion which is, or can be perceived as, in defiance to the position taken by Hon'ble Supreme Court. May be, if the views expressed were by our jurisdictional High Court, or by any of Hon'ble High Courts after taking into account the views expressed by Hon'ble Supreme Court on that issue, things may have been little different, but that is not the case here." 8.0 Accordingly, after careful consideration of the facts of the case, contemporaneous statutory provisions, catena of judicial pronouncements referred by the rival parties, we are of the considered view that no case is made out in favour of the assessee to allow its claim of foreign taxes of Rs.4,59,49,268/- u/s 37(1) of the act. Thus, we are of the view that the order of the Ld. AO and its confirmation by the Ld. First Appellate Authority is based upon the correct understanding and appreciation of facts of the case, inter-alia, including statutory provisions and judicial pronouncements. The Order of the Ld. CIT(A) is confirmed and all the grounds of appeal raised by the assessee are dismissed.

Page - 20 - of 21 21 -: 9.0. In the result, the grounds of appeal raised by the assessee is dismissed. Order pronounced on 7th , February-2025 at Chennai. Sd/- Sd/- ( एबी टी. वकी) (अयिताभ शुक्ला) (ABY T VARKEY) (AMITABH SHUKLA) न्यानयक सदस्य / Judicial Member लेखा सदस्य /Accountant Member चेन्नई/Chennai, नदिांक/Dated: 7th , February-2025. KB/- आदेश की प्रतितिति अग्रेतिि/Copy to: 1. अिीिार्थी/Appellant 2. प्रत्यर्थी/Respondent 3. आयकर आयुक्त/CIT - Chennai 4. तिभागीय प्रतितिति/DR 5. गार्ड फाईि/GF

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