Taxpublishers.in - InterestingDecision/Flash_139.htm - Tax Publishers Your Tax Solution Hub

Share via Whatsapp 191 Views


Tax Publishers Tata Consultancy Services Ltd. v. Addl. CIT [IT(TP)A No. 3262/Mum/2017, dt. 11-11-2020] : 2020 TaxPub(DT) 4691 (Mum-Trib) 1. State tax paid overseas whether allowable as a deductible expenditure and is not hit by section 40(a)(ii)? 2. Claim of foreign tax credit paid overseas whether it is available even if income is exempt under the act especially under section 10A/10AA etc. *Facts:* 1. Assessee in the business of IT Services had paid cantonal/state taxes in US and Canada these were claimed as expenditure against the income of the respective country which was included in the computation of income. The same was disallowed under section 40(a)(ii). On higher appeal -- 2. Assessees claim of foreign taxes was rejected by lower authorities citing that the incomes which were earned were exempt under section 10A/10AA so they were ineligible to avail tax credit as the income itself was not doubly taxable due to tax reliefs being granted. On higher appeal - Held in favour of the assessee that -- 1. The meaning of taxes under section 2(43) only refers to Central/Federal taxes. State taxes are not covered under the said definition, so State taxes paid abroad is available as a deductible expenditure on earning such income in India. The explanation in section 40(a)(ii) is inserted only to clarify that one cannot claim tax credit of the foreign taxes and also claim the same as an expenditure and exists only to obviate a double benefit/deduction. Section 2(43) defines the term taxes paid under the Income tax act as under -- 2. In this Act, unless the context otherwise requires, -- (43) "tax" in relation to the assessment year commencing on the 1-4-1965, 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 [and in relation to the assessment year commencing on the 1-4-2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA] Section 40(a)(ii) reads as under -- 40. Notwithstanding anything to the contrary in section 30 to the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession" -- (a) In the case of any assessee -- (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 and gains. [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 eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.] [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]." *Relied on:* Reliance Infrastructure Ltd. v. CIT (2017) 390 ITR 271 (Bom) : 2016 TaxPub(DT) 5153 (Bom-HC) and the order of the Tribunal in assessee's own case for assessment year 2009-10 (ITA No. 5713/M/2016) 2. As regards credit of foreign taxes under section 90(1)(a)(ii) which were denied citing that the said incomes were not taxable due to relief under section 10A/10AA, it was held that each country DTAA has to be seen in separation. USA, Hungary, Denmark, Norway, Oman, Saudi Arabia, Taiwan do not restrict granting of tax credit even if the income was exempt in a state by virtue of other fiscal/economic reasons. Canadian treaty does not permit tax credit if the income is not subjected to tax in India. So country wise DTAA wise LOB - Limitation of Benefits Article 25 needs to be seen and lower authorities were instructed to grant credit to assessee accordingly. In respect of non-DTAA countries there was no Limitation of benefits clause in the Income Tax Act which restricts the grant of tax credit so will need to be allowed. "The Court observed, though, income tax is chargeable under the Act, it is open to the Parliament to grant exemption under the Act from payment of tax for any specified period, normally, to incentivize the assessee the to carry on manufacturing activities or providing services. The Court thereafter referring to the treaty provisions with USA held that it is not the requirement of law that the assessee before he claims credit under the Indo-US convention or under the provision of the Act must pay tax in India on such income. The Court observed, as per the embargo placed in the DTAA, the assessee is entitled to such tax credit only in respect of that income which is taxed in USA. In similar context, the Court also referred to the tax treaty with Canada where the provisions does not allow credit for tax paid in Canada if the income is not subjected to tax in India. With regard to country's with which India does not have any agreement for avoidance of double taxation, the Court observed that as per section 91 of the Act, the assessee would be eligible to avail tax credit. Thus, on a careful reading of the aforesaid judgment of the Hon'ble Karnataka High Court, it becomes clear that where the respective tax treaty provides for benefit for foreign tax paid even in respect of income on which the assessee has not paid tax in India, still, it would be eligible for tax credit under section 90 of the Act. Like Article 25 of the Indo-USA treaty, treaties with various other countries such as Indo-Denmark, Indo-Hungary, Indo-Norway, Indo-Oman, Indo-US, Indo-Saudi Arabia, Indo- Taiwan also have similar provision providing for benefit of foreign tax credit even in respect of income not subjected to tax in India. However, Indo-Canada and Indo-Finland treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Therefore, the foreign tax credit would be available to the assessee in all cases except the foreign tax paid in Finland and Canada". *Relied on:* Wipro Ltd. (2016) 382 ITR 179 (Karn.) : 2016 TaxPub(DT) 0327 (Karn-HC) and assessee's own case for earlier assessment year.

Tax Publishers

Tata Consultancy Services Ltd. v. Addl. CIT [IT(TP)A No. 3262/Mum/2017, dt. 11-11-2020] : 2020 TaxPub(DT) 4691 (Mum-Trib)

1. State tax paid overseas whether allowable as a deductible expenditure and is not hit by section 40(a)(ii)?

2. Claim of foreign tax credit paid overseas whether it is available even if income is exempt under the act especially under section 10A/10AA etc.

Facts:

1. Assessee in the business of IT Services had paid cantonal/state taxes in US and Canada these were claimed as expenditure against the income of the respective country which was included in the computation of income. The same was disallowed under section 40(a)(ii). On higher appeal --

2. Assessees claim of foreign taxes was rejected by lower authorities citing that the incomes which were earned were exempt under section 10A/10AA so they were ineligible to avail tax credit as the income itself was not doubly taxable due to tax reliefs being granted. On higher appeal -

Held in favour of the assessee that --

1. The meaning of taxes under section 2(43) only refers to Central/Federal taxes. State taxes are not covered under the said definition, so State taxes paid abroad is available as a deductible expenditure on earning such income in India. The explanation in section 40(a)(ii) is inserted only to clarify that one cannot claim tax credit of the foreign taxes and also claim the same as an expenditure and exists only to obviate a double benefit/deduction. Section 2(43) defines the term taxes paid under the Income tax act as under --

2. In this Act, unless the context otherwise requires, --

(43) "tax" in relation to the assessment year commencing on the 1-4-1965, 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 [and in relation to the assessment year commencing on the 1-4-2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA]

Section 40(a)(ii) reads as under --

40. Notwithstanding anything to the contrary in section 30 to the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession" --

(a) In the case of any assessee --

(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 and gains.

[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 eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.]

[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]."

Relied on: Reliance Infrastructure Ltd. v. CIT (2017) 390 ITR 271 (Bom) : 2016 TaxPub(DT) 5153 (Bom-HC) and the order of the Tribunal in assessee's own case for assessment year 2009-10 (ITA No. 5713/M/2016)

2. As regards credit of foreign taxes under section 90(1)(a)(ii) which were denied citing that the said incomes were not taxable due to relief under section 10A/10AA, it was held that each country DTAA has to be seen in separation. USA, Hungary, Denmark, Norway, Oman, Saudi Arabia, Taiwan do not restrict granting of tax credit even if the income was exempt in a state by virtue of other fiscal/economic reasons. Canadian treaty does not permit tax credit if the income is not subjected to tax in India. So country wise DTAA wise LOB - Limitation of Benefits Article 25 needs to be seen and lower authorities were instructed to grant credit to assessee accordingly. In respect of non-DTAA countries there was no Limitation of benefits clause in the Income Tax Act which restricts the grant of tax credit so will need to be allowed.

"The Court observed, though, income tax is chargeable under the Act, it is open to the Parliament to grant exemption under the Act from payment of tax for any specified period, normally, to incentivize the assessee the to carry on manufacturing activities or providing services. The Court thereafter referring to the treaty provisions with USA held that it is not the requirement of law that the assessee before he claims credit under the Indo-US convention or under the provision of the Act must pay tax in India on such income. The Court observed, as per the embargo placed in the DTAA, the assessee is entitled to such tax credit only in respect of that income which is taxed in USA. In similar context, the Court also referred to the tax treaty with Canada where the provisions does not allow credit for tax paid in Canada if the income is not subjected to tax in India. With regard to country's with which India does not have any agreement for avoidance of double taxation, the Court observed that as per section 91 of the Act, the assessee would be eligible to avail tax credit. Thus, on a careful reading of the aforesaid judgment of the Hon'ble Karnataka High Court, it becomes clear that where the respective tax treaty provides for benefit for foreign tax paid even in respect of income on which the assessee has not paid tax in India, still, it would be eligible for tax credit under section 90 of the Act. Like Article 25 of the Indo-USA treaty, treaties with various other countries such as Indo-Denmark, Indo-Hungary, Indo-Norway, Indo-Oman, Indo-US, Indo-Saudi Arabia, Indo- Taiwan also have similar provision providing for benefit of foreign tax credit even in respect of income not subjected to tax in India. However, Indo-Canada and Indo-Finland treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Therefore, the foreign tax credit would be available to the assessee in all cases except the foreign tax paid in Finland and Canada".

Relied on: Wipro Ltd. (2016) 382 ITR 179 (Karn.) : 2016 TaxPub(DT) 0327 (Karn-HC) and assessee's own case for earlier assessment year.