SAGE INTERNATIONAL INC.,USA vs. ACIT, CIRCLE INT. TAXATION 3(1)(2), DELHI

ORDER

PER KUL BHARAT, JUDICIAL MEMBER :

“1 That the final assessment order passed by the Ld. Assessing Officer ('Ld. AO') u/s 143(3) r.w.S. 144C(13) of the Act dated 15th July, 2022 is bad in law and on the facts of the assessee's case.

2. That the Ld. DRP and consequently the Ld. AO have grossly erred in law and in facts in giving/upholding contradictory findings in so far as they have held the assessee to be a non-resident company which does not fall within the Place of Effective Management (POEM) Rules, there by denying the credit of Foreign Tax, while at the same time taxing the income of the assessee company which is wholly earned outside India (USA), in India.

are without prejudice to one another.

9. The appellant craves leave to add, amend, alter, change vary or substitute any of the aforesaid grounds or raise an additional ground if it becomes necessary to do so in the interest of justice.”

3. Facts giving rise to the present appeal are that the assessee filed its return of income for the year under consideration on 30.10.2018 declaring total income at INR 1,16,81,110/-. The case was selected for limited scrutiny 2 | P a g e for the reason “Double Taxation relief u/s 90/91”. Thereafter, a draft assessment order was passed u/s 143(3) of the Act on 28.09.2021 whereby the claim of the assessee regarding foreign tax credit amounting to INR 28,73,223/- was rejected. Against this, the assessee filed its objection before Ld. Dispute Resolution Panel (“DRP”). Ld.DRP also did not accept the objections of the assessee and rejected the claim of the assessee. Thereafter, the AO passed the impugned assessment order thereby, disallowing the claim of the assessee regarding foreign tax credit.

4. Aggrieved against this, the assessee preferred appeal before this Tribunal.

6. Ld. Counsel for the assessee vehemently argued that authorities below were not justified in not granting the foreign tax credit amounting to INR 28,73,223/-. The assessee is a company and is a wholly owned subsidiary of Sage Metals Private Limited (“SMPL”), a company incorporated in India. The assessee, Sage International Inc. (“SII”), acts as an extended arm of SMPL, in US to help in the storage, marketing distribution and collection of products supplied by SMPL from India and deals in the products manufactured by SMPL for the customers in the US. Before the AO, it was stated that the assessee company a foreign company domiciled in USA and accordingly the income should be taxable in USA based on sourced income. It was stated that SII on the basis of place of effective management rules introduced by Finance Act, 2016. It was deemed to be resident in India and the income was liable to be taxed in India. The AO after considering this contention and submissions of the assessee, rejected its claim regarding foreign tax credit and also initiated penalty proceedings u/s 270A of the Act. Further, Ld. Counsel for the assessee reiterated the submissions as made before the lower authorities and submitted that the assessee is a company, incorporated in US in the year 1999, domiciled in USA and only US sourced income which is taxable in USA and has been so taxed in US. There has never been any income earned by the assessee outside USA and no income has been brought to tax by the Revenue right from 1999 till date in India. The assessee does not have any income other than US sourced income. During the year under consideration, the assessee company suo-moto treated itself as resident in India by applying the place of Effective Management (POEM) rules as per section 6(3)(ii) of the Act. He further reiterated the submissions dated 24.02.2023. For the sake of clarity, the submissions are reproduced as under:-

Brief Facts of the Assessee The assessee company 'Sage International Inc. (hereinafter referred to as 'SII / the Company') is incorporated in USA and is a wholly owned subsidiary (WOS) of Sage Metals Private Limited (hereinafter referred to as 'Sage India') (now amalgamated with Gluhend India Private Limited w.e.f. 13.03.2018). The Company was incorporated in July 1999 under the laws of the state of Illinois, USA with a registered office at 3391, E Eberhardt St, Oscoda, Twp, Michigan, 48750, USA. SII deals/trade in the products manufactured by Sage India for the customers in the US. The objective of the assessee company is to purchase/import the goods from Sage India and sell such goods to the customers in U.S. SII collects the goods exported by Sage India to the US at the US port and then undertakes their storage, marketing, distribution in USA only. Residential Status and Taxability of SII as per the provision of Income Tax Act The assessee company is a foreign company domiciled in USA and accordingly its incomes are taxable in the USA as per US domestic law based on source taxation rule by virtue of its incorporation. Thus, the assessee company since its incorporation had been paying tax only in USA in earlier years. However, in AY 2018-19, SII was deemed to be resident in India and the income of SII also became liable to be taxed in India based on place of effective management (POEM) as a result of introduction of the POEM provisions vide see 6(3)(ii) of the Income Tax Act effective from A Y 2017-18 which provide as follows: "A company is said to be a resident in India in any previous year, if- (i) it is an Indian company; or (ii) its place of effective management, in that year, is in India. Explanation.-For the purposes of this clause "place of effective management" means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made. " For the year under assessment all the board meetings of the assessee have been held in India and all the key commercial decisions related to the business of SII have been taken in India by key managerial persons situated in India. The table of key decision maker of the company is furnished below as also specified in Para 5.4 of the assessment order. (Refer Pg. No. 10-11 of the ITAT Appeal Set)

S. Name Address of KMP Responsibility of KMP No.

Further, section 9 of the Act defines income that shall be deemed to accrue or arise in India. In the present case, sub clause (i) which pertains to the taxability due to business connection is relevant, reproduced as follows: "9.(1) The following incomes shall be deemed to accrue or arise in India:- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India" On perusal and analysis of the above, any income arising to a non- resident which is received or deemed to be received or accrues or arises or is deemed to be accrue or arise outside India will not in any case be taxable in India, without a business connection in India. It is submitted, that the assessee company is incorporated in the Unites States of America (USA) and has earned the business income in USA only, which was offered for tax in India due to the introduction of POEM provisions u/s 6(3)(ii) of the I. T. Act, suo moto by the assessee. The assessee does not have any operations in the territory of India. A copy of the NO PE deceleration is enclosed at Pg. No.134 of PB. Thus, if the assessee is being treated as a non-resident by the Ld. AO then no income sourced outside India is liable to be taxed in India in-purview of section 4,5 & 9 of the Income Tax Act at the threshold. Your honour's attention is invited to a recent notification no. 119/2021 issued by the Central Board of Direct taxes (CBDT) dated 11th October, 2021 (Refer Pg. No. 177-178 of PB) which dispenses with the "Requirement of Furnishing the return of income by a non-resident not being a company or a foreign company". The notification clarifies, that if a foreign company does not earn any income in India, during the previous year, other than a specified income, then the foreign company is exempted to file the ITR for the relevant previous year.

Though, the said notification is applicable for the AY 2021-22 and onwards, whereas, the year under consideration is AY 2018-19, the intention of the CBDT is clear, that if a non-resident, not being a company or a foreign company does not have income sourced in India, then the such a non-resident is not liable to furnish the income tax return u/s 139 of the Act. Based on the above, it is hereby submitted that in the present case if the assessee's residential status is that of a non-resident as held by ld. AO , then all its income sourced outside India is neither liable to tax in India nor is such non-resident required to file a ITR in India. Therefore, the finding given by the Ld. AO/DRP is contradicting one that on one side determined the status of the assessee as non-resident and on other side taxing all the foreign sourced income of the assessee in India and not allowing the foreign tax credit as claimed by the assessee. Thus, any compliance done by such a non-resident in the previous years should not be used against him to fasten an untoward tax liability on him. Basis of Charge to Tax - India USA DTAA - Article 7 Article 7 of the DT AA states, the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment (Article 5) situated therein. Relevant extract of Article 7 of India US DT AA is reproduced herein below for your reference. Article 7 - "The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in tile other Contracting State through a permanent establishment situated therein." The aforesaid Article provides that if the income earned by the recipient is in the nature of business income, then it shall be taxable only in the state of their residence (i.e. USA in the instant case). However, it may also be taxed in the other state (i.e. India) if such person. has any permanent 10 | P a g e establishment in India. In the instant case, it is undisputed that, SII has no PE in India. Refer No-PE Declaration at Pg. No. 134 of PB. Therefore, it's income will be taxed only in USA. Hence, from the, above facts and on perusal of provision of Income Tax Act and DTAA, it is clear that the assessee being the non- resident as also determined by the Ld. AO with income sourced entirely outside India i.e. USA, cannot be held to be liable to be taxed in India as per the provisions of Income Tax Act and the DTAA. Thus, no tax liability is liable to be fastened on the assessee. In the alternate, it is prayed that the taxes paid by the assessee in India due to the deeming fiction of POEM are liable to be refunded, based on his residential status being determined as a non- resident by the Ld. AO., it is respectfully submitted. GROUND NO.4 - THAT THE LD. DRP AND CONSEQUENTLY THE LD. AO HAVE GROSSLY ERRED IN LAW AND IN FACTS, IN REJECTING THE CLAIM OF ALLOWING FOREIGN TAX CREDIT (FTC) OF RS. 28,73,223/- ON WHOLLY ILLEGAL, ERRONEOUS AND UNTENABLE GROUNDS IN LAW AND ON FACTS OF THE ASSESSEE'S CASE. • Applying the supremacy of Article 4(3) of India USA DTAA over Income Tax provision which are erroneous and against the principle of law. It is hereby submitted that the Ld. AO erred in law and in the facts of the assessee's case in rejecting the Foreign Tax Credit (FTC) by relying on the Art 4(3) read with Art 4(1) of India USA DTAA, without considering the provisions of the Income Tax Act and the rules thereunder. Relevant Extract of Article 4 of the India USA DTAA is as below. "4(1) For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that 4(3) Where, by reason of paragraph 1, a company is a resident of both Contracting States, such company shall be considered to be outside the 11 | P a g e scope of this Convention except for purposes of paragraph 2 of Article 10 (Dividends), Article 26 (Non-Discrimination), Article 27 (Mutual Agreement Procedure), Article 28 (Exchange of Information and Administrative Assistance) and Article 30 (Entry into Force). " In this respect, it is submitted that it is a trite law that the provision of Act shall apply to the assessee to the extent they are more beneficial to the assessee [See 90(2) of IT Act]. Relevant extract of the See 90(2) of the Act "90 (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 tire 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. " Therefore, as per See 90(2), where the government has entered into agreement with the Government of any country outside India for granting relief of tax, the provisions of this Act shall apply to the extent they are more beneficial to the assessee. Rule 128(1) of the Income Tax Rules, 1962 provides that Foreign Tax Credit is allowable in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India. Since, during the year under consideration the assessee company has offered all the income earned in USA to tax in India as depicted in the computation of income (Enclosed at Pg. No. 114 of PB) and not disputed by Id. AO, therefore, the company shall be eligible to claim the benefit of foreign tax paid in accordance with Rule 128 of the Income Tax Rules. As per the provisions of domestic law as the assessee has complied with all the conditions for claiming FTC under Rule 128 namely corresponding income offered to tax in India, claim of FTC in Form 67 etc. (Enclosed at Pg. No. 115-116 of PB). Your honour would appreciate that, the DTAA is a relief giving convention and assessee can avail it if it is beneficial to the assessee. 12 | P a g e A tax treaty does not impose tax - it is a shield, not a sword. A Double Tax A voidance Agreement between two sovereign states, is a mechanism used to provide relief from double taxation based on the domestic taxation laws of the contracting states. The charge to tax is created by the domestic taxation laws of each state. It is an accepted principle that standalone provisions in a tax treaty do not give the power to a source contracting state to impose tax on an income which is otherwise taxable only in the state of residence. On the other hand, once an income is taxable in the source state, the treaty provisions are referred to determine whether the treaty has any beneficial provisions, that allow for the country of residence to claim sole taxing rights or allow for the country of source to limit its right to tax. Essentially, the domestic law in the form of the Income Tax Act is the one and only law to that creates a charge to tax when the income is sourced in India. A DTAA can only act as a shield against double taxation; it cannot wield the sword and bring within the ambit of taxation an income which is not otherwise taxable under the domestic law of the source state. Reliance is placed on the ruling of Karnataka High Court, of Commissioner of Income-tax vs R.M. Muthaiah [1993] 67 Taxman 222 (KAR.), where it was held that "The effect of an 'Agreement' entered into by virtue of section 90 would be: (i) if no tax liability is imposed under this Act, the question of resorting to the agreement would not arise; no provision of the agreement can possibly fasten a tax liability where the liability is not imposed by the Act; (ii) if a tax liability is imposed by the Act, the agreement may be resorted to for negativing or reducing it; (iii) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the appellate authorities and the Court. " Accordingly, it is submitted, that if a charge to tax in India is not imposed on a receipt sourced in India, under the domestic Indian Income tax Act, 13 | P a g e then the same cannot be brought to tax in India through the DTAA that India has with the other contracting state. Thus, the Ld. AO rejecting the claim of Foreign Tax Credit (FTC) by relying on the DTAA provision, is bad in law, since it was not opted for by the assessee, as the provisions of the Act being more beneficial to the assessee. Therefore, rejecting the FTC credit of the assessee by applying the supremacy of Article 4(3) of India USA DTAA over Income Tax provisions are erroneous, illegal and against the principle of law, which are prayed not to be upheld. • Erroneous interpretation of the application of the Place of Effective Management (POEM) Provision - Sec 6 (3)(ii) It is respectfully submitted that the Ld. AOIDRP had erred in law by determining that application of the Place of Effective Management (POEM) is not available at the choice of the assessee. (Refer Para 8.2 of the Final Assessment order). Relevant extract of the order is as below. "The fact that is emphasized here is tit at the change of tax residency based on criteria of place of effective management is not available at the choice of the assessee company. Therefore, the assessee company's status in India will continue to be a non-resident like other earlier years. Hence, the foreign tax credit of taxed paid in USA shall not be provided to the assessee. " It is submitted that when any provision or rule introduced in the Income Tax Act, then it is the duty of the assessee to adhere to such provisions and declare the income considering the impact of such provisions with proper disclosures in return of income. The assessee is not expected to wait for the revenue authorities to assess the income of the assessee as per the provisions of law. Similarly the provision of POEM were introduced in Income Tax Law through See 6(3)(ii) which deems the assessee as resident in India based on placed of effective management in India. Thus making voluntary compliance of law and declaring itself as resident cannot be used against the assessee by invoking the argument that it is not open 14 | P a g e to the assessee to choose residential status based on effective management, it is respectfully submitted. Therefore, alleging that the applying the change of tax residency based on the criteria of POEM is not available at the choice of the assessee is totally erroneous and against the principle of law, thus prayed not to be upheld. • Not following the specific guidelines dated 22nd June 2018 (notification 29/2018) notified pursuant to POEM which specifically allows the Foreign Tax Credit (FTC) It is respectfully submitted that the Ld. AOIDRP has erred in law and on facts for not considering the notification dated 22nd June 2018 (Notification No. 29/2018) (Refer Pg. No. 172-176 of PB) issued by the CBDT while rejecting the Foreign Tax Credit (FTC) claimed by the assessee which specifically allows the credit of FTC in the cases where Place of Effective Management (POEM) applies. It is respectfully submitted that, in the cases where the Place of Effective Management (POEM) applies to a foreign company, the CBDT vide its notification dated 22nd June 2018 has issued in exercise of its powers conferred by the sub section (1) of section 115JH of the Act, a circular that specifically allows for Foreign Tax Credit (FTC) to be claimed by the foreign companies which become resident in India due to the introduction of the Place of Effective Management (POEM) provisions as per the section 6(3)(ii) of the Income Tax Act. The language of the notification, overrides the provisions of the Income Tax Act including the provisions of the Act relating to the computation of total income and provides special provisions in relation to avoidance of tax applying with exceptions, modifications and adoptions, as maybe applicable to foreign companies which are deemed as resident as per the provision of see 6(3)(ii) of the Act i.e. due to applicability of POEM. As per the clause (xiii) of the above notification, a foreign company to whom POEM applies shall be entitled to relief or deduction of taxes paid in accordance with the provisions of section 90 & 91 of the Act. Relevant 15 | P a g e extract of notification dated 22nd June 2018 is reproduced herein below for your reference. "A. in a case where a foreign company is said to be resident in India on account of its Place of Effective Management (hereinafter referred to as PoEM) being in India under sub-section (3) of section 6 of the Act in any previous year and such foreign company has not been resident in India in any of the previous years preceding the said previous year, then, notwithstanding any thing contained in the Act, the provisions of the Act relating to the computation of total income, treatment of unabsorbed depreciation, set off or carry forward and set off of losses, collection and recovery and special provisions relating to avoidance of tax shall apply to the foreign company for the said previous year with exceptions, modifications and adaptations specified here under: …………… (xiii) The foreign company shall be ell titled to relief or deduction of taxes paid in accordance with the provisions of section 90 or section 91 of tile Act. In this respect, reliance is placed the judicial pronouncements of the Hon'ble Supreme Court in the case of CIT v. Shahzada Nand & Sons[1966] 60 ITR 392 (sq, Union of India v. India Fisheries (P.) Ltd. AIR 1966 SC 35 and State of Gujarat v. Patel Ramjibhai AIR 1979 SC 1098 which have laid down that, when there is conflict between a general and special provision, the latter shall prevail or the general provisions must yield to the special provisions. It is further submitted that the deeming provisions of POEM create an artificial dual residency which is not created as per the provisions of the DTAA. Thus, a unilateral Indian domestic law deeming provision which is introduced to prevent double non taxation, beyond that which is envisaged by the DT AA, cannot be and should not be used to create unjust double taxation of a tax compliant assessee. Your honours will appreciate that the POEM provisions have no intent to disallow the credit of foreign tax 16 | P a g e payment made in the source country, as per CBDT vide its notification dated 22nd June 2018 which laid down the principles that are to apply when a foreign company is said to be resident in India due to the attraction of POEM Rules. The provisions expressly allow for the benefit of credit of foreign tax payment. Considering the above facts and judicial pronouncements, the rejection of the Foreign Tax Credit by Ld. AO by not following the CBDT notification dated 22nd June 2018 which specifically allows the benefit of Foreign Credit Tax to the foreign company which is deemed to be resident in India as per the provision of section 6(3)(ii) of the Act is erroneous and bad in law and prayed not to be upheld. It is further submitted that in addition to the above finding of the Ld. AO, the Hon'ble DRP in Para 4.9 & 4.10 rejected the FTC Credit by holding that assessee has not been able to prove that it has a POEM in India and no proof has been given by the assessee that the directors were present in India on the date of meeting. It is submitted that Hon'ble DRP specifically directed the assessee to submit minutes of board meetings held by the assessee in India, which was furnished before the DRP (as well as Ld. AO. at the time of assessment). However the proof of the directors present in India though available with the assessee in the form of passports and details of travel journey as per the official website of USA, was not asked by Ld. DRP. Thus the basis on which Hon'ble DRP rejected the residential status of the assessee and consequent FTC claim, is not correct on the facts of the case of the assessee. GROUND NO.5 - WITHOUT PREJUDICE TO GROUND NO.2 TO 4, THE LD. DRP/AO HAVE GROSSLY ERRED IN LAW AND ON FACTS, IN DISALLOWING THE FOREIGN TAX CREDIT (FTC) CLAIMED BY THE ASSESSEE SUCH THAT IT RESULTS IN CASE OF DOUBLE TAXATION WHICH IS AGAINST THE PRINCIPLES OF TAXATION.

It is hereby submitted that as per the fundamental rule of taxation, unless otherwise expressly provided, an income cannot be taxed twice. It is submitted that there is no intention of the law to tax the income twice, therefore in the case where the income is taxed twice, section 90 and 91 of the Income Tax Act come into the force and provide relief of such doubly taxed income, as per the DTAA. Relevant extract of the section 90 & 91 of the Act is refer below for your reference. "90. (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" '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. Further, in the cases where POEM applies the notification dated 22nd June 2018 specifically allows the Foreign Tax Credit as explained above to eliminate a situation of double taxation. Therefore, based on the above, it can be said that there is no intention of the law to tax the same income twice. It is submitted that even if the contention of the AO is accepted that the convention of the DTAA is not applicable to the assessee company as per the article 4(3) of the India USA DTAA since the assessee become the dual resident as per the Article 4( I) of the India USA DTAA, then also the income of the assessee cannot be taxed twice i.e. under the local law of USA and again as per POEM in India. Clause (xiii) of notification no. 29/2018 dated 22.06.2018 provides that the foreign company shall be entitled to relief or deduction of taxes paid in accordance with See 90 or 91 of the Act. Your honor would appreciate that section 91 applies to the cases where there is no agreement 'exist between the countries. When the POEM rule provides the benefit of FTC with the countries with no agreement, it cannot provide for the denial of FTC credit for the countries with which there exists an agreement. This is not the intention of law it is respectfully submitted. However, in the instant case the Ld. AO had rejected the Foreign Tax Credit to the assessee without considering the fact, that the income pertaining to the foreign tax credit which has already suffered tax in the USA is also offered to tax in India. A copy of the extract of the US Tax Return reflecting the income offered in USA and tax paid therein is enclosed at Pg. No. 124-129 of PB and the copy of bank statement of tax paid in USA enclosed at Pg. No. 130-133 of PB. Therefore, rejecting the Foreign Tax Credit in India on one hand and taxing the same income in India on the other would lead to the situation of gross double taxation which is against the principles of taxation. In support of the above, reliance is placed the following judicial precedents for your kind perusal. Honble High Court of Delhi in the case of Interglobe Enterprises Pvt Ltd. v. PCIT[2023-TIOL-165-HC-Delhi-ITJ has held that "17. Undisputedly, if the records for the Assessment Year 2014-15 are recalled, it would reveal that the sum of Rs. 1,51,67,868/-, received on account of interest on income tax, was assessed as income for the Previous Year 2013-14 relevant to the Assessment Year 2014-15. However, as stated above, the said amount was brought to tax by the Income Tax 19 | P a g e Authority in the Assessment Year 2012-13. Clearly, the same amount cannot be taxed twice over.

Order pronounced in the open Court on 10th April, 2023.