By Mayur B. Nayak, Tarunkumar G. Singhal, Anil D. Doshi, Chartered Accountants
In September, 2017 we dealt with various
methods of elimination of double taxation and salient feature of the Foreign
Tax Credit Rules in this column. This article covers some of the practical
issues that may arise in claiming FTC1.
Q.1 Rule 128(1) provides
that “An assessee, being a resident shall be allowed a credit for the amount
of any foreign tax paid by him in a country or specified territory outside
India, by way of deduction or otherwise, in the year in which the income
corresponding to such tax has been offered to tax or assessed to tax in India,
in the manner and to the extent as specified in this rule:
Issue for consideration
What do you mean by
the words “deduction or otherwise”? What proof one needs to submit for claiming
the credit?
A.1 An assessee can pay
taxes either by way of withholding tax (WHT) (i.e. Tax Deducted at Source, TDS,
e.g. in case of salaries, professional fees etc.) or by way of an advance tax
or self assessment tax. WHT/TDS would be regarded as payment by deduction
whereas any other method of payment would be regarded as payment of taxes
“otherwise”.
The assessee
needs to submit an acknowledgement of online payment or bank counter
foil or challan for payment of tax or proof of tax deducted at source, as the
case may be, along with his FTC claim in form 67 before the due date of filing
Income-tax return.
_____________________________________________________________
1 Recently
BCAS had organised a workshop on FTC which was addressed by CA. P. V.
Srinivasan and CA. Himanshu Parekh. Several issues were discussed at that
workshop. This article covers some of the important issues discussed therein as
well as some other issues that may arise in claiming FTC. Views expressed in
this article are of authors of this column only and have not been endorsed by
the workshop speakers.
Readers
are also advised to read the Article published in the August 2015 issue of the
BCAJ on “Issues in claiming Foreign Tax Credit in India”.
Q.2 Sub-rule (4) of Rule 128
of FTC provides that no credit under sub-rule (1) shall be available in respect
of any amount of foreign tax or part thereof which is disputed in any manner by
the assessee.
Issue for consideration
Whether credit shall
be available if the dispute is initiated by the revenue authorities in source
country? Whether issuance of Show Cause Notice (SCN) by revenue authorities to
challenge the rate of withholding in source country be said to be the
initiation of dispute by the revenue authority?
A.2 Once the tax is in
dispute (whether the dispute is initiated by the assessee or the tax official),
the credit may be denied and/or postponed to the year of settlement of such
dispute. Issuance of SCN is a matter prone to dispute and therefore credit may
be denied. However, in genuine cases one can approach CBDT to provide relief
u/s. 119 of the Income-tax Act, 1961 (the Act).
Q.3 Rule 128(1) provides
that FTC is allowable in the year in which the income corresponding to such tax
has been offered to tax or assessed to tax in India.
Issue for consideration
At what point in time
the income needs to be offered – Whether method of accounting is relevant or
provisions of DTAA are relevant?
A.3 DTAA provisions do not
provide for computation of income. Computation of income is always left to the
provisions of domestic tax laws. Assessee is subject to computational
provisions as per the local laws. Also the method of accounting should be as
per the provisions of the domestic tax laws. For instance, in India, the
assessee is supposed to compute his income as per the method of accounting
prescribed in section 145 of the Act read with the Income Computation and
Disclosure Standards2 .
The provision for
claiming FTC is very clear and that is FTC will be available in the year in
which the corresponding income is offered for taxation in India.
Q.4 Sub-rule 7 of Rule 128 provides that “if
foreign tax credit available against the tax payable under the
provisions of section 115JB or 115JC exceeds the amount of tax credit available
against the normal provisions, then while computing the amount of credit u/s.
115JAA or section 115JD in respect of the taxes paid u/s. 115JB or section
115JC, as the case may be, such excess shall be ignored.”
There are three limbs
in this sub-rule
i) foreign tax credit
available
ii) tax payable under the
provisions of section 115JB or 115JC
iii) The amount of tax credit
available against the normal provisions.
From the provisions,
it can be seen that one has to work out whether there is an excess of (i) over
(iii). If yes, then such an excess has to be ignored while computing credit
u/s. 115JAA or section 115JD in respect of the taxes paid u/s. 115JB or section
115JC. However, sections 115JAA and 115JD nowhere suggest that foreign tax
credit is not the tax paid under MAT.
Issue for consideration
Can Rule 128 override
provisions of section 115JAA/JD?
A.4 Before we proceed to
answer the question, let us understand with the help of an example, the provisions
of denial of carry forward of the excess FTC in case of MAT or AMT provisions.
________________________________________________________-
2 Some
of the ICDSs have been struck down by the Delhi High Court in
Chamber of Tax Consultants vs. Union of India [2017] 87 taxmann.com 92.
|
Particulars
|
Amount in Rupees
|
|
Tax as per normal provisions of the Act
|
1000
|
|
MAT payable as per section 115JB
|
1500
|
|
Foreign Tax Credit
|
1200
|
|
Excess credit against MAT due to FTC Not allowed to be
carried forward
|
200
|
FTC Rules are framed
under delegated powers and hence cannot override provisions of Act.
The Delhi High Court
in case of National Stock Exchange Member vs. Union of India (UOI) and Ors.
on 7th November, 2005 (Delhi HC) listed following order of hierarchy
in India:
“In our country this
hierarchy is as follows:-
(1) The Constitution of India.
(2)Statutory Law, which may be either Parliamentary Law or law made
by the State Legislature.
(3) Delegated legislation which may be in the form of rules,
regulations etc. made under the Act.
(4) Administrative instructions which may be in the form of GOs,
Circulars etc.”
In case of Ispat
Industries Ltd. vs. Commissioner of Customs, Mumbai (29th September
2006) the Supreme Court held that “if there is any conflict between the
provisions of the Act and the provisions of the Rules, the former will prevail.”
Q.5 Some countries follow
financial year which is different from the Indian financial year (i.e. April to
March). For example, USA follows calendar year. Therefore, though the income
will accrue and be chargeable to tax in India the effective rate at which tax
is payable in source country is not determinable at the time of filing of
return in India.
To illustrate, the
effective rate of tax in respect of income accruing to Mr. B from USA in
calendar year 2017 will be determined only post 31st December 2017
and therefore for there will be problem is applying effective rate of tax for
claiming FTC in India, in respect of income from 1st Jan. 2017 to 31st
March 2017, the return for which will be due on 31st July 2017.
Issue for consideration
How would the
statement in Form 67 be filed in such case and how credit for tax payable in
source country be availed?
A.5 In the above case, the
credit of taxes on the income earned during Jan – Mar 2017 would be calculated
considering the taxes paid before the filing of return. The calculation of
effective tax rate would take into account the taxes deducted at source and
advance taxes paid up to date of filing income-tax return in India. However, in
most of cases the effective tax rate would change especially where there is
other income or income where the tax is not deducted at source. In such
scenario, revised Form No. 67 and revised Income tax return has to be filed by
the assessee calculating the final effective tax rate.
Q.6 It is a settled
position that where there is a DTAA the taxes covered under the said DTAA would
be allowed as a credit. And where there is no DTAA, unilateral credit of
income-tax paid in the foreign country will be allowed as credit u/s. 91 of the
Act. Clause (iv) of Explanation to section 91 of the Act defines the term
“income-tax” as follows: – “the expression income tax in relation to any
country includes any excess profit tax or business profit tax charged on the
profits by the government of any part of that country or a local authority
in that country”.(emphasis supplied). What do we mean by the term “any
part of that country or a local authority”? Does that mean income tax levied by
the state government or prefecture would be allowed as a credit u/s. 91 of the
Act?
A.6 In the USA, income-tax
is levied by both, the central government (Federal income-tax) and state
government (state-tax). However, the India-US tax treaty covers only Federal
tax. Therefore a question arises whether an assessee can claim credit of state
taxes in India? In the case of Tata Sons [2011] 43 SOT 27, the Mumbai
Tribunal held that as per provisions of section 90(2) of the Act, the assessee
is entitled to opt for the beneficial provisions between a tax treaty and the
domestic tax law. Since section 91 is more beneficial, assessee can claim
credit of state income tax. Relevant excerpt from the Ruling is reproduced here
in below:
“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.”
The ratio of the
above decision will apply in relation to any other country where besides
central or federal income-tax, states also have power to levy income-tax.
However, section 91
covers only income-tax and therefore any other indirect tax such as VAT,
Turnover Tax etc. will not be available for credit. However, Bombay High Court
in the case of K.E.C International Ltd (2000) 256 ITR 354 held that such
indirect taxes are allowed to be deducted as business expenditure without
attracting provisions of section 40(a)(ii) of the Act for disallowance.
Q.7 Co. “A” incorporated in
Singapore is considered to be a tax resident of India u/s. 6 of the Act as its
Place Of Effective Management (POEM) is situated in India. Company “A” has
royalty income from the USA on which tax has been withheld in USA. Can Company
“A” claim credit of withholding tax in USA in India? Which treaty would be
applicable – India-USA, India-Singapore or Singapore-USA?
A.7 Since Co. “A” is
considered to be a tax resident of India, it would be taxed on its world-wide
income, including royalty income from USA. Therefore, Co. “A” can claim credit
of withholding tax in USA under provisions of the India-USA tax treaty. Even
Article 4 of a tax treaty considers residence based on POEM.
Q.8 As per the FTC Rules,
the credit shall be available against the amount of tax, surcharge and cess
payable under the Act but not in respect of any sum payable by way of interest,
fee or penalty. However, it is not clear that whether interest or penalty paid
in foreign jurisdiction will be allowed as credit. Can one argue that interest
and penalty is at par with tax paid, especially the interest element?
A.8 It seems difficult to
consider interest or penalty at par with income-tax and claim credit. At best
one may try to claim them as business deduction. However, such a claim is
fraught with possibility of litigation.
Q.9 Certain income which may
be exempt in a foreign country may be taxable in India. However, if the DTAA
provides for tax sparing clause, then credit for foreign taxes spared will be
available on deemed payment basis. However, the FTC Rules provide only for the
ordinary credit. How can one reconcile this dichotomy?
A.9 Income-tax Rules cannot
override provisions of the Act (Please refer to answer to Q.4 supra). FTC
Rules restricts the credit of foreign taxes by providing only one mode of
credit and i.e. Ordinary Credit; whereas many tax treaties provide for full
credit or tax sparing method. In case, where tax treaty is applicable, the
assessee will be eligible to opt for treaty provisions (being more beneficial) and
claim credit of foreign taxes on deemed basis. The practical difficulty would
be putting up claim in Form 67 which does not contain any details regarding tax
sparing. The assessee can lodge claim by filing a manual request.
Q.10 How does one compare the
tax rate applicable in India on a foreign sourced income as in India income
from all sources is grouped together and taxed based on applicable slab (for
individuals and HUFs)? Also there may be a situation that there is a loss from
one source or country and profit from another source or a country? Whether one
needs to aggregate income from all sources and different countries or is to be
computed separately vis-à-vis each source and each country?
In the above
situation what would be the correct method to avail the credit – on the basis
of a) lower/lowest slab rate; b) higher/highest slab rate; and c) average rate?
A.10 In this case, two views
are possible. According to one view, one may compare the foreign source income
with the highest slab rate on the premise that it is open to assessee to take a
beneficial tax provision while claiming a foreign tax credit. As per the other
view, one may aggregate income from all sources, arrive at an average rate of
tax, then compare the same with the foreign tax rate and claim credit of lower
of the two.
As far as source by
source computation of income is concerned, it is interesting to note the
observation of the Supreme Court in case of K. V. A. L. M. Ramanathan
Chettiar vs. CIT [1973] 88 ITR 169. In this case, assessee had earned
business profits from rubber plantation in Malaysia amounting to Rs. 2,22,532/-
and had a business loss in India of Rs. 68,568/- and other income of Rs.
39,142/-. The AO allowed double taxation relief on a sum of Rs. 1,92,816/-
(2,22,532+39,142-68,568). However, Commissioner allowed relief only on Rs.
1,53,674/- (i.e. 2,22,532-68,568) stating that only net business profits
suffered double taxation. Even ITAT and High Court concurred with this view.
However, the Supreme
Court ruled in favour of the assessee and held that such source by source
computation is not envisaged in the Income-tax Act, 1922.
Relevant extract of
the decision which is very relevant, is reproduced herein below for ready
reference:
“The income from
each head u/s. 6 (the reference is to Income-tax Act, 1922) is not under the
Act subjected to tax separately, unless the legislature has used words to
indicate a comparison of similar incomes but it is the total income which is
computed and assessed as such, in respect of which tax relief is given for the
inclusion of the foreign income on which tax had been paid according to the law
in force in that country. The scheme of the Act is that although income is
classified under different heads and the income under each head is separately
computed in accordance with the provisions dealing with that particular head of
income, the income which is the subject matter of tax under the Act is one
income which is the total income. The income tax is only one tax levied on the
aggregate of the income classified and chargeable under the different heads; it
is not a collection of distinct taxes levied separately on each head of income.
In other words, assessment to income-tax is one whole and not group of assessments
for different heads or items of income. In order, therefore, to decide whether
the assessee is entitled to double taxation relief in respect of any income,
the consideration that the income has been derived under a particular head
would not have much relevance.”
From the above
discussion, it appears that one need to aggregate income from all sources and
find out effective rate of tax in India which then needs to be compared with
the rate at which income is taxed in the foreign jurisdiction and the lower of
the two shall be allowed as foreign tax credit.
However, specific
language of section 90(2) which gives an assessee right to choose the
beneficial provisions between a tax treaty and the Act, may lead us to a
different result.
As far as aggregation
of income from different countries is concerned, it is interesting to consider
the observations of the Bombay High Court in the case of Bombay Burmah Trading
– 259 ITR 423. In this case the assessee had business income from the Tanzania
branch and loss from Malaysia branch. The AO wanted to consider FTC based on
net foreign income (i.e. setting off of loss from Malaysia against income from
Tanzania). However, the High Court ruled in favour of the assessee stating that
income from each country needs to be considered separately and that they cannot
be aggregated for claiming FTC in India.
The Honourable High
Court in this case in the context of section 91 held that “If one analyses
section 91(1) with the Explanation, it is clear that the scheme of the said
section deals with granting of relief calculated on the income country wise
and not on the basis of aggregation or amalgamation of income from all foreign
countries” (Emphasis supplied).
Though the above
decision is in the context of section 91 (i.e. unilateral tax credit), one can
apply this analogy to a bilateral treaty situation also, as the method of
granting tax credit is within the purview of the domestic tax laws. In this
context, it is interesting to go through the provisions of section 90 of the
Act. Relevant extract of the said section is as follows:
“90. Agreement with foreign countries
(1) ] The Central
Government may enter into an agreement with the Govsernment of any country
outside India-
(a) for the granting
of relief in respect of income on which have been paid both income- tax under
this Act and income- tax in that country, or
(b) for the avoidance
of double taxation of income under this Act and under the corresponding law
in force in that country,…… (Emphasis supplied)
From the above
provisions, it is clear that the foreign tax credit is to be granted vis-à-vis
each country as per the specific agreement with that country.
Q.11 Whether credit for the
income tax paid in source country on the basis of presumptive basis (i.e. in
the nature of fixed amount irrespective of income) be available against the
income tax payable in India?
A.11 In case of a country
where no tax treaty exists, the credit will be available u/s. 91, as long as
income has suffered taxation in the source country. However, in case where
India has signed a tax treaty, the FTC will be subject to the provisions of the
concerned tax treaty. Almost all treaties invariably provide that relief from
double taxation will be available only in respect of those incomes which have
been taxed in accordance of the provisions of that agreement. Even though
treaties provide only distributive rights of taxation, maximum rate of tax in
the source state is prescribed in respect of some types of income, e.g.
dividends, interest, royalties and fees for technical services. As long as
presumptive taxation does not increase the respective threshold, the credit
should be available. For example, if the treaty provides that rate of tax on
royalty should not exceed 10% in the state of source, but the assessee has
suffered 15% withholding tax under the domestic tax law of the source state,
then the credit in the residence state may be either denied or restricted to
10%.
Q.12 How does one compute FTC
in case where in a source country (e.g. USA) joint returns are filed by the
taxpayer, whereas in India concept of joint return in not applicable?
A.12 In such as case, the
taxpayer need to find out the effective or average rate in the country wherein
the joint return is filed, and then compare the same with an effective rate in
India, after including the respective share of income. FTC will be allowed for,
at the lower of the two rates.
Q.13 FTC rules are silent on
the methodology of allowing credit due to the difference in characterization of
income between India and other country. How does one classify income for FTC
purposes – As per provisions of the Act or DTAA or source country?
A.13 A situation may arise
where an Indian company deriving Fees for Technical Service (FTS) income from
UK pays 10 per cent withholding tax as per India-UK DTAA. However, as per the
AO, the said income is in the nature of business profits and in absence of PE,
the said income ought not to have been taxed in UK as FTS and therefore deny
FTC in respect of the said income. One of the solutions in such a case may be
invocation of provisions of Mutual Agreement Procedure by the assessee.
Similarly foreign
country may also deny credit of taxes paid in India which are in accordance
with the treaty provisions. Consider following examples:
(i) An Indian company may
withhold tax on payment of export commission u/s. 195 of the Act considering it
as Fees for Technical Services. However, the foreign country may consider that
payment as business income/profits in the hands of the recipient and thereby
deny the credit of taxes withheld by an Indian company. Even if the Indian
company has wrongly applied article on FTS under a tax treaty for withholding
of tax, the other government can deny the credit.
(ii) Payment for software,
which is considered as a royalty in India is most prone to litigation as most
countries consider software as goods and therefore apply the PE test.
Q.14 What are the
consequences if a tax payer forgets to upload Form 67? Whether consequence will
change if the same is furnished in the course of assessment before the AO?
A.14 Rule 128 (8) make it
mandatory to submit a statement of income from a country or specified territory
outside India offered for tax for the previous year and of foreign tax deducted
or paid on such income in Form No.67 and verified in the manner specified
therein.
CBDT issued a
Notification No. 9 dated 19th September, 2017 containing the
procedure for filing a Statement of income from country or specified territory
outside India and foreign tax credit. The said Notification has made it clear
that “all assesses who are required to file return of income electronically
u/s. 139(1) as per rule 12(3) of the Income tax rules 1962, are required to
prepare and submit form 67online along with the return of income if credit for
the amount of any foreign tax paid by the assessee in a country or specified
territory outside India, by way of deduction or otherwise, is claimed in the
year in which the income corresponding to such tax has been offered to tax or
assessed to tax in India.”
From the above it is
clear that as of now an assessee has no choice but to file form 67 online.
Failure to file form 67 may result into litigation. However, this requirement
being procedural in nature, Courts may take a lenient view of the matter.
Q.15 Under what circumstances
FTC can be denied?
A.15 In following
circumstances FTC may be denied:
(i) Non-compliance of any
documentation, procedure or condition of FTC rules;
(ii) Non payment of taxes
as per provisions of a tax treaty (Income characterisation issues – Refer
answer to Q.14)
(iii) Excess tax paid under
FATCA. The USA is levying 30% withholding tax on US sourced income, in case of
those entities who have failed to comply with provisions of FATCA. Such an
excess amount will not be eligible for FTC in India.
(iv) Excess taxes paid over
and above treaty rates, for example 20% tax paid u/s. 206AA of the Act for
non-compliance of PAN or other requirements.
(iv) Local body taxes, city
or church taxes, state level taxes or any other taxes not in the nature of
direct tax and taxes not covered by the bilateral tax treaty. For example,
Equalisation Levy by India. At best, they may be allowed as business
deductions. (Refer answer to Q.6)
Conclusion
Rule 128 (1) provides that FTC shall be
allowed to an assessee in the manner and to the extent as specified in this
rule. It is perfectly alright for rules to lay down the procedure or
method of claiming FTC. However, can they unilaterally limit the extent of
foreign tax credit dehors provisions of the bilateral tax treaty. Will such a
provision not make rules ultra-vires the Act?
The stringent requirement of online
submission of form 67 should be relaxed and the assessee should be allowed to submit
the same offline and/or even during the course of assessment proceedings. In
any case, the finality of the FTC is determined much later after submission of
the tax return in India.
FTCR have addressed several issues, yet many
have remained unaddressed. It would be desirable if government revisits
provisions of FTCR to make them more robust and comprehensive to reduce
litigations in days to come.
