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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI. B. R. BASKARAN & SMT. BEENA PILLAI
per the DTAA with Korea foreign tax credit available to assessee is Rs.33,86,167/- being the actual taxes withheld by Korea. 13. He referred to pages 101-105 of paper book wherein the relevant clauses of the respective treaties have been placed. 14. Ld.AR thus prayed that, entire credit claimed by assessee in the return of income is to be allowed to assessee for the year under consideration. 15. On the contrary, Ld.CIT.DR submitted that, the decision of Hon’ble Karnataka High Court in case of Wipro Ltd (supra) is on a different issue wherein Hon’ble Court considered FTC against income exempt under section 10A/10AA of the Act. Whereas, in the present facts, income on which taxes are withheld in respective countries are taxable in India. And therefore facts in present assessee is distinguishable with that in case of Wipro Ltd (supra). He also submitted that, alternatively the issue may be remanded to Ld.AO to re-examine in the light of the additional ground raised
by assessee before Ld.CIT(A) to be considered.
16. We have perused submissions advanced by both sides in light of records placed before us.
17. For sake of convenience it is necessary to reproduce the relevant clauses of double taxation agreement with the countries in respect of which foreign tax credit has been claimed by assessee. India US DTAA
18. Article 25 of the Indo - US Double Taxation Agreement deals with Relief from double taxation. Clause 2(a) is the relevant provision. It reads as under:
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"2.(a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the United States, whether directly or by deduction. Such deduction shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States." (emphasis supplied) 19. A perusal of the aforesaid provision makes it clear that, if a resident Indian derives income, which may be taxed in United States, India shall allowed as a deduction from the tax on the income of the resident, an amount equal to the tax paid in United States of America, whether directly or by deduction. The conditions mandated in the treaty is that if any "income derived" and "tax paid in United States of America on such income", then tax relief/credit shall be granted in India on tax paid in United States of America. India Japan DTAA 20. Article 23(2) of India Japan DTAA deals with elimination of double taxation. Clause 2(a) is the relevant provision. It reads as under: “2. Double taxation shall be avoided in the case of India as follows : (a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in Japan, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Japanese tax paid in Japan, whether directly or by deduction. Such deduction in either case shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable, as the case may be, to the income which may be taxed in Japan. Further, where such resident is a company by which surtax is payable in India, the deduction in respect of income-tax paid in Japan shall be allowed in the first instance from income-tax payable by the company in India and as to the balance, if any, from surtax payable by it in India.” (emphasis supplied) India Germany DTAA
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Article 23(2) of India Germany DTAA deals with elimination of double taxation. Clause 2 is the relevant provision. It reads as under: “2. Tax shall be determined in the case of a resident of the Republic of India as follows : Where a resident of the Republic of India derives income or owns capital which, in accordance with the provisions of this Agreement, may be taxed in the Federal Republic of Germany, the Republic of India shall allow as a deduction from the tax on such income of that resident an amount equal to the income-tax paid in the Federal Republic of Germany, whether directly or by deduction, and as a deduction from the tax on such capital of that resident an amount equal to the capital tax paid in the Federal Republic of Germany. Such deduction in either case shall not, however, exceed that part of the income-tax or capital tax (as computed before the deduction is given) which is attributable, as the case may be, to the income or the capital which may be taxed in the Federal Republic of Germany.” (emphasis supplied) 22. All these clauses are identically worded as Article 25(2)(a) of India US DTAA. 23. Relevant clauses for elimination of double taxation in the treaties under consideration states that, foreign tax credit shall not exceed the part of the income tax as computed before the deduction is given, "which is attributable as the case may be, to the income which may be taxed in that other State". We also note that, these clauses uses the expression 'income', which essentially means 'income' embedded in the gross receipt, and not the 'gross receipt' itself. We therefore do not agree with the computation adopted by Ld.AO. 24. In all the above clauses, for eliminating double taxation of doubly taxable income in the hands of assessee, it would be necessary to establish the taxes paid by assessee in USA, Japan,
Page 12 of 21 & 2465/Bang/2017 and Germany. The condition stipulated is very clear that FTC is available on taxes paid in these countries. India- Korea DTAA 25. We note that Ld.AR relied on Article 24(3), whereas, in India Korea DTAA, Article 23 deals with Elimination of double taxation. Clause (a)(i) is the relevant provision, that reads as under:
“Double taxation shall be eliminated as follows: (i) In India: where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Korea, India shall allow as a deduction from the tax on the income of that resident, an amount equal to the tax paid in Korea. Such deduction shall not, however, exceed that portion of the tax as computed before the deduction is given, which is attributable, as the case may be, to the income which may be taxed in India. (emphasis supplied) 26. On perusal of the said Article, we find that, in India FTC is available to the taxes paid in Korea and such credit shall not exceed the taxes payable in India on doubly taxed income. Thus there is a difference in FTC available to assessee on taxes paid in USA, Japan and Germany vis-s-vis Korea.
In the present facts of the case, respective treaty countries withheld taxes against income from the source state at a particular rate. Article 25 of Indo U.S Treaty, Article 23 (2) of Indo-Japan Treaty and the Indo-Germany Treaty, allows FTC in India to the extent of tax paid in these countries, whereas, Article 23 of Indo-Korea Treaty allows FTC which shall not tax payable on such doubly taxable income in India.
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We note that authorities below failed to understand the treaty provisions applicable in present facts with these countries regarding granting of FTC to assessee. On perusal of treaty provisions, we are of the view, that assessee is eligible for FTC in full, amounting to taxes paid in USA, Japan and Germany. We draw support from decision of Hon’ble Karnataka High Court in case of Wipro(supra). 28.1. Only in case of Korea, FTC is limited to taxes payable on such doubly taxed income in India, before any deduction. In other words, FTC is limited to or taxes paid in Korea or India, whichever is less. 30. Ld.AO is therefore directed to grant FTC in respect of taxes paid in USA, Japan and Germany. In case of taxes paid in Korea, FTC will be tax actually paid in Korea or payable in India on such doubly taxable income, which ever is lower. Accordingly, Ground No.1-3 raised by assessee stands allowed for statistical purposes. 31. As we have allowed Grounds 1-3, Ground No.4 need not be adjudicated as it is an alternative plea raised by assessee. In the result appeal filed by assessee allowed for assessment year 2013-14 for statistical pruposes.
Assessemnt Year 2014-15: 32. In assessment year 2014-15 assessee had earned income from Taiwan. Assessee also has earned income during the year under consideration from Japan, Korea, Germany and USA. 33. Ld.CIT(A) for asst. year 2014-15 decided as under:
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4.5. The dispute is regarding interpretation of following words in relation to DTAA with USA/Germany/Japan: “Such deduction shall not, however, exceed that part of the Income- tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States.” (or Germany or Japan) 4.6 In case of USA/Germany/Japan. the restriction of credit of foreign tax available to a resident of India is determined by the words Income tax which is attributable to the income which may be taxed in the United States/Germany/Japan. So for the purpose of determining FTC available to the appellant it is important to work out the income of the appellant in relation to the receipts of royalty and license fee from these three countries. The approach of the appellant, that receipt and to be considered as income which is doubly taxed i.e. in India as well as in these three other countries, is not correct. Here it is important to note that if the argument of the appellant that receipt from foreign countries should he considered as income included in the income shown in the return of income in India is accepted then it would lead to a very anomalous situation as the income of the appellant would be 100% from foreign as there are no expenses but in India it will be having loss which would be as follows: Total receipts of the business Rs.55,50,20,701/- Less Foreign Receipts Rs.16,76,47,793/- Balance receipts of' the business Rs.38,73,72,908/- Total expenditure claimed in computation Rs.48,90,94,200/- of income Business Loss Rs.10,17,21,292/- Such an approach of the appellant can thus not he accepted. Since actual details of expenditure in relation 10 these foreign receipts are not available. so the method its adopted by the AO is fund to be very reasonable, although with slight modification as as discussed follows: 4.7. Since the issue is regarding income for the purposes of Income-Tax Act, for working out income in comparison to receipt the income as reflected by the appellant in its computation of income, being Rs.10.53,76,580/-, should have been adopted. Adoption of income as returned by the appellant in its income tax returns would result in its business income of Rs.6,92,91,570/- as against Rs.5,85,50,654/- as determined by the AO. This is worked out as follows: Income c as per return of income Rs.10,53,76,580/- Less other income Rs.3,60,85,011/- Business income Rs.6,92,91,569/- ......(i) Total receipts of the business Rs.55,50,20,701/- ......(ii) Percentage of business income to business receipts = (i) x 100/(ii) =12.48% Effective rate of tax in India = Tax payable/Total income = 3,58,17,499/10,53,76,580 = 33.99% 4.8. Thus the income of the appellant in comparison to its receipt is 12.48%. On the basis of the same, the income of the appellant from Page 15 of 21 & 2465/Bang/2017
USA/Germany/Japan would be Rs.11,63,94.860/- from USA/Germany/Japan would be Rs.1,45,26,078/-. At an effective rate of tax of 33.99% on income of appellant in India, the corresponding tax on Rs.1,45,26,078/- would be Rs.49,37.414/- . So as against withheld tax of Rs.1,59,66,837/- paid by the appellant in relation to receipts from USA/Germany/Japan, the appellant would get credit of foreign tax to the extent of Rs.49,37,414/-. 4.9 As regards DTAA with Korea, the relevant words which need to be interpreted are: "The credit shall not, however, exceed that proportion of Indian tax which the income from sources within Korea bears to the entire income subject to Indian tax.” 4.10 In case of Korea the restriction of credit foreign tax available to a resident of India is determined by the proportion of Indian tax which the income from sources within Korea bears to the entire income subject to Indian tax. So, for the purpose of determining FTC available to the appellant it is important to work out this proportion. This proportion is worked out as follows: Total receipts of the appellant from Korea Rs.4,43,12,245/- %age of business income to business receipts as in para 4.7 12.48% Income of the appellant from Korea (included in total income as in the income tax return filed) @12.48% of the receipts Rs.8,66,198/- Total income subject to Indian Tax Rs.10,53,76,580/- Ratio of income from Korea to total income subject to Indian Tax 5.248% Total tax on the income subject to Indian Tax Rs.3,58,17,499/- The tax paid in Korea for which credit can he claimed- 5.248% of Rs.3,58,17,499/- Rs.18,79,704/-
4.11. So as against withheld tax of Rs.63,71,659/- paid by the appellant in relation to receipts from Korea. the appellant would get credit of foreign tax to the extent of Rs.I8,79,704/-. 4.12. As regards FTC in relation to receipts from Taiwan, the calculation of allowable FTC as per Section 91 of the Act would be as follows: Total receipts or the appellant from Taiwan Rs.69,40,688/- %age of business income to business receipts as in para 4.7 12.48% Income of the appellant from Taiwan (included in total income as in the income tax return filed @12.48% of the receipts Rs.8,66,198/-
%age of business income to business receipts as in para 4.7 12.48%
Page 16 of 21 & 2465/Bang/2017 Total income subject to Indian Tax Rs.10,53,76,580/- Total tax on the income subject Indian Tax Rs.3,58,17,499/- Average rate of Tax in India 33.99% The tax paid in Taiwan for Which credit can be claimed- 33.99% of Rs.8,66,198/- Rs.2,94,420/- 4.13. So as against withheld tax of Rs.13,39,875/- paid by the appellant in relation to receipts from Taiwan. the appellant would get credit of foreign tax to the extent of Rs.2,94,420/-. 4.14. Considering above. total credit available to the appellant in relation to foreign taxes paid by it works out to Rs.71,11,538/- (Rs.18,79,704+ Rs.49,37,414 – Rs.2,94,420) as against credit of Rs.56,99,733/- allowed by AO. 4.15. The appellant has relied upon the decision of jurisdictional High Court in the case of Wipro Ltd. (Supra), however a perusal of the same shows that the question of law involved in the said case was totally different. The issue of computation of FTC, as in the case under consideration, was never before the High Court. The relevant question of law before the Hon’ble High Court was as follows: “Whether the Tribunal was right in holding that credit for income tax paid in a country outside India in relation to income eligible for deduction u/s10A would not be available u/s90(1)(a)?” “Whether the appellate authorities were correct in revising the finding of the AO that the credit for taxes paid in foreign countries being income which falls u/s 10A of the Act does not fall part of the total income to the extent of 90% for which deduction is allowable as it falls under Chapter III and does not therefore partake the nature of total income chargeable to tax as per provisos of section 4 of the Act and therefore not entitled to?”
It is submitted that, total receipt from Taiwan was Rs.68,40,688/- and withholding tax paid by assessee in Tiwan was Rs.13,39,875/-. Ld.AR submitted that tax payable on the said receipts from Taiwan as per Indian Income tax is 32.44% (as was applicable during the relevant assessment year), which would amount to Rs.22,19,119/-. He thus submitted that, assessee is therefore for credit of entire taxes paid in Taiwan in India.
Both sides reiterated identical arguments for year under consideration in respect of foreign tax credit claimed by assessee.
Page 17 of 21 & 2465/Bang/2017 Both sides relied on submissions for assessment year 2013-14 reproduced hereinabove. We have perused submissions advanced by both sides in light of records placed before us.
We note that, India has not entered into double taxation avoidance agreement with Taiwan. Therefore, foreign tax credit available to assessee against taxes paid in Taiwan will be computed in accordance with section 91 of the Act.
Section 91 of the Act specifically deals with the said question. The aforesaid Section 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 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). . . . . (3). . . . . Explanation (i) ………….. (ii) …………. (iii) …………. (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.
The said provision provides for deduction of tax paid in any country from the Indian Income tax payable by assessee of a sum calculated on such doubly taxed income, even though there is no agreement under Section 90 for the relief or avoidance of double
Page 18 of 21 & 2465/Bang/2017 taxation. Explanation (iv) defines the expression income tax in relation to any country includes any excess profit 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. Therefore, even in the absence of an agreement under Section 90 of the Act, by virtue of the statutory provision, the benefit conferred under Section 91 of the Act is extended to the income tax paid in foreign jurisdictions.
In the preceding part of this order, we have dealt with FTC available to assessee in respect of foreign taxes paid by assessee in Japan, Korea, Germany and USA. For year under consideration credit has to be computed in similar manner as has been tabulated by assessee for assessment year 2013-14 reproduced hereinabove.
Our observations for assessment year 2013-14 in allowing tax credit to assessee is applied mutatis mutandis for year under consideration.
Insofar as Taiwan is concerned, section 91 also interprets computation of foreign tax credit to assessee in the similar manner. Section 91 contemplates the situation where there is no agreement between the Central Government and the other country concerned for the grant of relief in respect of income which has suffered taxation in both the countries or for the avoidance of double taxation of the same income. This section lays down its own conditions for and extent of the relief contemplated to be given to an assessee. The first condition is that the assessee should be a resident in India as per term defined in Section 6 of the Act. The second condition is that Page 19 of 21 & 2465/Bang/2017 the income which has accrued or arisen outside India to such resident in India should not be deemed to accrue or arise to him in India. The third condition is that such resident-assessee should have paid income-tax on such income under the law in force in that country. Once these three conditions are fulfilled, such resident-assessee would be entitled to the deduction from the Indian income-tax, as is payable by him, of a sum calculated on the doubly taxed income at the Indian rate of tax or the rate of tax of the other country concerned, whichever is the lower. Thus, as per section 91 of the Act, in case of Tiwan, FTC is to be computed based on rate of tax applicable in India or Korea, whichever is less, on such doubly taxable income.
Based on above discussion, we are of the view that assessee is eligible for FTC in full, amounting to taxes paid in USA, Japan and Germany. We draw support from decision of Hon’ble Karnataka High Court in case of Wipro(supra). 42.1. In case of Korea, FTC is limited to taxes payable on such doubly taxed income in India, before any deduction. In other words, FTC is limited to or taxes paid in Korea or India, whichever is less. In case of Tiwan, FTC is to be computed based on rate of tax applicable in India or Korea, whichever is less, on such doubly taxable income.
Ld.AO is thus directed to compute FTC as indicated in para 42-42.1.
Accordingly, ground No. 1-3 raised by assessee for statistical purposes.
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As we have allowed ground No.1-3, Ground No.4 need not be adjudicated as it is an alternative plea raised by assessee. In the result appeal filed by assessee allowed for assessment year 2014-15 for statistical purposes. Order pronounced in the open court on 13th Jan, 2021.