Section 90(1)(a)(i) read with Article 25(2) of India-US DTAA — Foreign tax credit is available only in respect of taxes paid on the double-taxed income – Foreign tax credit is allowable against the taxes paid under the Act, which would include surcharge and cess

Section 90(1)(a)(i) read with Article 25(2) of India-US DTAA — Foreign
tax credit is available only in respect of taxes paid on the double-taxed
income – Foreign tax credit is allowable against the taxes paid under the Act,
which would include surcharge and cess

FACTS

The assessee, an Indian company, had branches outside India. The
assessee paid foreign taxes on income earned by its branches outside India.
During the year under consideration, the assessee was assessed to minimum
alternate tax (MAT) u/s 115JB of the Income-tax Act, 1961 (the Act). The total
income earned during the year, consisted of certain export income which was
eligible for exemption u/s 10A of the Act under normal computation of tax.
However, as the assessee was assessed to tax under MAT, such export income was
also subjected to MAT in India.

However, the assessee claimed credit of the entire
amount of taxes paid outside India against the taxes payable under MAT,
including by way of surcharge and cess. However, the AO allowed credit only to
the extent of the taxes paid on the double-taxed income and such credit was
limited only against the base taxes paid under the base MAT rate of 10%, i.e.,
excluding the surcharge and cess.

Aggrieved, the assessee appealed before the CIT(A) who upheld the view
of the AO. The assessee then appealed before the Tribunal.

HELD

(i) Section 90(1)(a) of the Income-tax Act, 1961 requires India to grant
credit of taxes in respect of income which is doubly taxed. In other words,
credit is allowed on taxes paid outside India only if such income has been
included in the total income under the Act as well as under the laws of the
foreign country. Similar provisions are also contained in India’s DTAAs.
Accordingly, the assessee is entitled to credit only for the taxes which are
paid on the double-taxed income;

(ii) Though the assessee is eligible
for deduction u/s 10A of the Act in respect of some portion of its total
income, such deduction was only for normal tax purposes and not for MAT. Since
the entire income was subjected to tax under MAT, the assessee was entitled to
claim credit of taxes paid on such income against taxes payable under MAT;

(iii) The language of section 90 of the Act as well as foreign tax credit
article under the DTAA provides for relief in respect of double-taxed income.
This requires that income tax is to be charged only on the balance amount of
income. As a result, whatever is the amount of tax and surcharge on the
double-taxed income should be automatically excluded from the total tax
liability computed under the Act;

(iv) Perusal of section 90 of the Act and foreign tax credit Article 25
of the DTAA suggests that foreign tax credit should be allowed at the rate at
which the double-taxed income is subjected to tax under the Act (i.e.,
inclusive of surcharge and cess).