SH. ADITYA KHANNA,NEW DELHI vs. ITO (INTERNATIONAL TAXATION), NEW DELHI

The learned assessing officer rejected the contention of the assessee. The learned AO noted that the provisions of section 90 (2) of the income tax act provides for granting credit for only taxes covered therein. He further noted that in the United States the federal income taxes are imposed by the internal revenue code and therefore the treaty applies only to federal income tax paid in United States of America. He therefore stated that the credit of taxes paid abroad can only be allowed in respect of such Federal taxes and in state taxes or other taxes like alternate minimum tax are not covered under the scope of article 2 of the DTAA . Accordingly the credit of such taxes paid abroad is not required to be allowed. He further noted that the argument that the provisions of section 91 of the act should be read along with the provisions of section 90 also stands on a feeble legs. He stated that provisions of section 90 and 91 stands on a totally different premises. According to him section 90 deals with the situation wherein India has an agreement with the foreign countries/ specified territories whereas the provisions of section 91 deals with the situation where no agreement exits between India and other countries. Therefore according to him, provisions of one section cannot be read into the other. He also noted that instant case is that there exist an agreement between India and USA, provisions of section 90 would apply which in turn referred to the treaty and as per the treaty only federal income taxes paid in United States of America is covered for the tax credit. He further rejected the reliance placed by the assessee on the decision of the coordinate bench in 135 TTJ (Mumbai) 1 holding that in that particular decision the assessee has claimed credit of taxes paid abroad u/s 90 and had also claimed deduction of such taxes paid abroad under section 37 of the income tax act. He further noted that the coordinate bench held that such a claim was not tenable since this would result in double and unintended benefit to the assessee. He further noted that the coordinate bench has held that state taxes paid in United States of America would be covered under section 40 (a) (ii) in addition to the federal taxes and hence would not be allowed as a deduction. He therefore noted that the facts of that decision are quite distinct to the facts of the assessee‟s case. Accordingly he held that assessee is only entitled to proportionate credit of federal taxes paid in United States of America against the Indian income tax liability. Therefore he noted that total tax paid by the assessee is of INR 3669423/– and proportionately for 224 days the assessee would be entitled to the tax credit of only Rs. 2251920/–. Accordingly he accepted the returned income of the assessee at INR 8626410/– however granted the credit of the foreign taxes paid to the extent of only Rs. 2251920/–. Accordingly the assessment order u/s 143 (3) of the act was passed on 26/3/2014.

Aggrieved, assessee preferred an appeal before THE COMMISSIONER OF INCOME TAX (APPEALS) – 43, New Delhi. The learned CIT – A did not accept claim of the assessee for the following reasons:- a. The provisions of section 91 (1) of the income tax act applies only in case of a person who is a „resident‟ in India. As the assessee is not a resident in India but „not ordinarily resident‟ in India. The statute being very clear section 91 is not for an individual who claims the status of „not ordinarily resident‟ in India. b. The provisions of section 91 of the act apply only in case of country with which there is no agreement u/s 90 for the relief for avoidance of the double taxation. There exist an agreement between India and United States of America and therefore the provision of section 91 does not apply for this reason also. c. The reliance placed by the assessee on the decision of the Tata Sons Ltd of coordinate bench was also found by him to be misplaced as that decision was rendered with respect to the person who was „resident‟ in India whereas in the present case the appellant is „not ordinarily resident‟ in India d. He also rejected the alternative claim of the assessee that if the state taxes are not allowed for tax credit then it should also be excluded from the salary income earned by the assessee from United States of America. The reasons for rejection of the same was that the amount of state taxes paid by the assessee in the foreign country was application of the income and if such argument is accepted then assessee is also required to be allowed the benefit of income tax paid by it on its income. He further considered the provisions of section 198 of the income tax act and stated that the deduction claimed by the assessee of the state and local taxes made in United States of America clearly out of the purview of section 198 which is only for the purpose of deduction mentioned in chapter XVII of the act. Accordingly the appeal of the assessee before him failed and therefore assessee is in appeal before us.

The learned authorised representative submitted that the issue under consideration is squarely covered in favour of the assessee by the order of the honourable Karnataka High Court in case of Wipro Ltd vs Deputy Commissioner Of Income Tax (2016) 382 ITR 179 wherein the court has held that even in the absence of agreement u/s 90 of the act, the benefit conferred under section 91 of the act is to be extended to the income tax paid in foreign jurisdiction. He further submitted that the similar view has also been taken by the coordinate bench in case of DCIT vs Tata Sons Ltd (2011) 135 TTJ – 1. He extensively read para number 20 of the order of the coordinate bench. He further submitted that the above decision has been further followed by the coordinate bench in the case of the Tata Sons Ltd vs Deputy Commissioner Of Income Tax In ITA number 4978/ME/2004 dated 23/02/2011 in para number 5. He further referred to the decision of the coordinate bench in Rajeev I Modi vs The Deputy Commissioner Of Income Tax, in ITA number 1285/AHD/2014 where the decision of the coordinate bench was followed and in paragraph number 5 it has been held that assessee is also eligible for the credit for the state taxes paid in the United States of America. Therefore relying upon the above decision he submitted that the issue is squarely covered in favour of the assessee and the assessee should be allowed the credit of state as well as federal taxes under the provisions of section 91 of The Income Tax Act. He further submitted that the order of the learned CIT – A suffers from severe infirmity in considering that the provisions of section 91 could not be made applicable to a person who is „not ordinarily resident‟ in India. He submitted that the provisions of subsection (30) of subsection 2 of the act defines the „non- resident‟ and on conjoint reading of the provisions of section 6 it is clear that the residential status of „not ordinarily resident‟ falls within the definition of a „resident‟ and only for the purposes of section 92, 93 and 168 of the act the said residential status is included in the definition of resident. He further submitted that the provisions of section 5 of the act deals with the scope of the income of an assessee which also show that it primarily deals with only 2 classes of the residential status of an assessee being a resident or a non-resident. He therefore submitted that a resident assessee has been divided into 2 subclasses being a „resident ordinarily resident‟ [ ROR] and „resident but not ordinarily resident [ RNOR]. He further submitted that the only difference in the incidence of income tax on a „resident ordinarily resident‟ assessee and on the „resident not ordinarily resident‟ assessee is in respect of foreign income which is liable to be included in the income of a „resident ordinarily resident‟ assessee and is required to be excluded from the income of a „resident but not ordinarily resident‟ assessee, unless it is derived from business controlled and profession setup in India. Therefore he submitted that a „resident but not ordinarily resident‟ in India is also to be considered as a „resident‟. Therefore, he submitted that for the purpose of applicability of section 91 of the income tax act the residential status of „not ordinarily resident‟ has to be read under the definition of a „resident‟ and thus the provisions of section 91 will be applicable in the case of the assessee. Therefore, he submitted that the order of the lower authorities suffers from severe infirmities.

The learned departmental representative relied upon the orders of the lower authorities. He reiterated findings of the learned assessing officer and the learned CIT – A to state that the credit for state taxes is not granted to the assessee. He further submitted that the definition of „resident‟ and „resident but not ordinarily resident‟ and „non-resident‟ have different meanings and they cannot be clubbed together for any other purposes other than the purpose provided by the law. He therefore submitted that the provisions of section 91 of the income tax act do not apply to a person who is a „resident but not ordinarily resident‟ in India. Even otherwise he submitted that the provision of the section 91 excludes the countries with which the India has double taxation avoidance agreement. He therefore submitted that the order of the learned assessing officer and the learned CIT – A deserves to be upheld.

We have carefully considered the rival contentions and perused the orders of the lower authorities. Admittedly in the case the assessee is a „resident but not ordinarily resident‟ assessee. The assessee has claimed the credit for taxes paid of federal as well as state income tax in United States of America. Therefore the following 2 questions arise before us:- a. whether the assessee can claim tax relief u/s 91 of the income tax act with respect to the federal tax and state income tax or not. b. Whether the assessee who is not a „resident‟ but „resident and not ordinarily resident‟ can also claim relief/ deduction u/s 91 of the act or not.

With respect to the 1st issue that whether the benefit conferred u/s 91 of the income tax act has to be extended to the income tax paid in foreign jurisdictions pertaining to the federal tax and state tax or not, question has been answered by the honourable Karnataka High Court in case of Wipro Ltd vs Deputy Commissioner Of Income Tax [382 ITR 179] wherein it has been held as under:- “66. The said provision provides for deduction of the tax paid in any country from the Indian Income-tax payable by him 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 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 the intention of Parliament is very clear. The Income-tax in relation to any country includes Income-tax paid in any part of the country or a local authority. It applies to cases where in a federal structure a citizen is made to pay federal Income-tax and also the State income tax. The Income-tax in relation to any country includes Income-tax paid not only to the Federal Government of that country, but also any Income-tax charged by any part of that country meaning a State or a local authority, and the assessee would be entitled to the relief of double taxation benefit with respect to the latter payment also. Therefore, even in the absence of an agreement under section 90 of the Act, by virtue of the statutory provision, the benefit conferred Page | 10 under section 91 of the Act is extended to the Income-tax paid in foreign jurisdictions. India has entered into an agreement with the federal Page No : 0219 country and not with any State within that country. In order to extend the benefit of this, relief or avoidance of double taxation, the aforesaid Explanation explicitly makes it clear that Income-tax in relation to any country includes the Income- tax paid to the Government of any part of that country or a local authority in that country. Therefore, even though, India has not entered into any agreement with the State of a country and if the assessee has paid Income-tax to that State, the Income-tax paid in relation to that State is also eligible for being given credit to the assessee in India. Therefore, the argument that in the absence of an agreement between India and the State, the benefit of section 90 is not available to the assessee is ex-facie illegal and requires to be set aside. [ Underline supplied by us ] 12. Futher coordinate bench in case of Assessment year: 2010-11 in Dr. Rajiv I. Modi Vs. The Deputy Commissioner of Income-tax (OSD) .......................Respondent Range-1, Ahmedabad has also dealt with similar question and held as under :- “5. The issue as to whether state taxes on income paid by the assessee in the USA are eligible for tax credit is no longer res integra. The Co-ordinate Bench of this Tribunal in the case of Tata Sons Ltd vs. DCIT [(2011) 10 taxmann.com 87 (Mum)], speaking through one of us, i.e. AM, has decided the issue in favour of the tax payer. While doing so, the Tribunal observed as follows:-

In the original hearing, the assessee had not pressed the ground of appeal seeking credit in respect of state income tax paid in United States, Page | 11 but had claimed deduction in respect of the same under section 37(1). The reason, for not pressing this ground of appeal, was stated to be that the assessee was content with CIT(A)‟s having granted the deduction in respect of these taxes, as the claim for tax credit was anyway not admissible in terms of the Indo US tax treaty. The Assessing Officer was also in appeal before us in respect of the deduction having been granted by the CIT(A). For the detailed reasons set out in our order dated 24t h November, 2010, we upheld the grievance of the Assessing Officer and held that deductions in respect of any income tax paid abroad, whether state or federal, were not admissible. One of the arguments before us was that at least deduction in respect of US and Canada state income taxes should be allowed, since the US and Canada state income tax payments did not entitle the assessee to any tax credit, and either an income tax payment is to be allowed as deduction or it is to be taken into account for giving tax credit. We were also taken through the provisions of India-USA Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion [ 187 ITR (Statute) 102 - hereinafter referred to as „Indo US tax treaty], to show that the tax credits under the India US tax treaty are restricted to credits in respect of federal income tax paid in the United States. It was also submitted that under the India Canada Double Taxation Avoidance Agreement, tax credits are admissible only in respect of tax paid under the „Income Tax Act of Canada‟ whereas state income taxes are levied under separate provincial legislations. It could not, according to the learned counsel, result in a situation in which an income tax payment cannot have any tax implication – neither as a charge on income, nor as an allocation of income. While rejecting these arguments, and allowing the appeal of the Assessing Officer on this issue, we had, inter alia, observed as follows:

Having so held that deduction in respect of state income tax paid is not admissible, when we took up the appeal of the assessee and noticed that the assessee has not pressed grievance against tax credit in respect of state income tax paid in USA and Canada, for the stated reason that the same is not admissible in terms of the Indo US and Indo Canada tax treaty provisions, we deemed it appropriate to once again hear the parties on this issue. In our considered view, it is indeed an incongruous position that payment of state income taxes in US and Canada are not allowed deduction as these are treated as in the nature of taxes on income, in terms of the provisions of domestic tax law in India, and these payments are also not being taken into account for granting credit for taxes paid abroad by the assessee, as only federal income tax is eligible for tax credit in terms of the Indo US and Indo Canada tax treaty. If this approach is adopted, the assessee does not get a deduction for state taxes so paid abroad, nor does he get the tax credit for the same, and if these two propositions are correct, there is clearly an inherent contradiction in these propositions on tax treatment for state income taxes paid abroad. There cannot obviously be a tax payment which is neither treated as admissible expenditure, because it is treated as an income tax, nor is it taken into account for tax credits, because it is not to be treated as income tax. However, as we have observed in our order on the cross appeal, extracts from which are reproduced in the preceding paragraph, it is incorrect to proceed on the assumption that state income tax paid in USA, or for that purpose paid in Canada, cannot be taken into account for the purposes of computing admissible tax credits. It is so for the elementary reason that the provisions of a tax treaty, based on which tax credits are said to be inadmissible, cannot be pressed into service to decline a benefit to the assessee which is otherwise available to him, even in the absence of such a tax treaty, under the provisions of the Income Tax Act.

Even as we have held that, in principle, state income taxes paid in USA are eligible for being taken into account for the purpose of computing admissible tax credit under Section 91, we are alive to the fact that Section 91 refers to a situation in which the assessee has paid tax “in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation” and that there is indeed an agreement under section 90 with United States of America, as also with Canada. If we adopt a literal interpretation of this provision, and bearing in mind the undisputed position that tax credit provisions under section 91 are more beneficial to the assessee vis-à-vis the tax credit provisions in related tax treaties inasmuch as while section 91 permits credit for all income taxes paid abroad – whether state or federal, relevant tax treaties permit credits in respect of only federal taxes, it will result in a situation that an assessee will be worse off as a result of the provisions of tax treaties. That certainly is not permissible under the scheme of the Income Tax Act. Circular 621 dated 19-12-1991 [(1992) 195 ITR (Statutes) 154] issued by the Central Board of Direct Taxes, which is binding on the Assessing Officer under section 119(2) of the Act, inter alia , observes that “Since the tax treaties are intended to grant relief and not put residents of a Contracting State at a disadvantage vis-a-vis other taxpayers, section 90 of the Income-tax Act has been amended to clarify any beneficial provision in the law will not be denied to a resident of a contracting country merely because corresponding provision in a tax treaty is less beneficial”. In the case before us, however, tax credit provisions in Indo US tax treaty are admittedly less advantageous to the assessee, but just because there is a tax treaty between India and USA, the benefits of the domestic law provisions are being declined to the assessee. That is an interpretation which leads to absurdity and calls for an interpretation harmonious with the scheme of the Income Tax Act. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act, as is also clear from the provisions of section 90(2) of the Act. Section 90(2) makes it clear that “where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax, or for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee” meaning thereby that the Act gets modified in regard to the assessee in so far as the agreement is concerned if it falls within the category stated therein. It would thus appear that the treaty override is only restricted to the extent it is beneficial to a taxpayer. In other words, the fact that a taxpayer is entitled to make a particular claim, in accordance with a tax treaty provisions, does not disentitle him to make the claim in accordance with the provisions of the Act. In this view of the matter, and further to the observations made by us in our order on the cross appeal, in our considered view, the provisions of Section 91 are to be treated as general in application and these provisions can yield to the treaty provisions only to the extent the provisions of the treaty are beneficial to the assessee; that is not the case so far as question of tax credits in respect of state income taxes paid in USA are concerned. Accordingly, even though the assessee is covered by the scope of India US and India Canada tax treaties, so far as tax credits in respect of taxes paid in these countries are concerned, the provisions of Section 91, being beneficial to the assessee, hold the field. As Section 91 does not discriminate between state and federal taxes, and in effect provides for both these types of income taxes to be taken into account for the purpose of tax credits against Indian income tax liability, the assessee is, in principle, entitled to tax credits in respect of the same. Of course, as is the scheme of tax credit envisaged in Section 91, tax credit in respect of foreign income tax is restricted to actual income tax liability in India, in respect of income on which taxes have been so paid abroad.”