Article 23 of India-Indonesia DTAA, Article
25 of India-Singapore DTAA – Tax credit is to be allowed only to the extent the
corresponding foreign income has suffered tax in India.
Facts
The Taxpayer was a wholly owned subsidiary
of an American company. It was engaged in the business of software development.
Major portion of income arising to the Taxpayer was in the form of passive
income earned by way of release of retention money and income from maintenance
contract entered into with customer. During the relevant previous year, the
Taxpayer did not have any taxable income under the normal provisions of
the Act. However, its book profits were taxed under Minimum Alternate Tax (MAT)
provisions in section 115JB of the Act.
In the course of assessment, the AO noted
that the Taxpayer had claimed foreign tax credit. This credit was in respect of
the taxes withheld in Singapore and Indonesia. Referring to Article 23 of
India-Indonesia DTAA and Article 25 of India-Singapore DTAA, The Taxpayer had
claimed tax credit to the extent of the entire amount of tax withheld.
However, according to the AO the tax credit
was to be allowed only to the extent the corresponding income had suffered tax
in India. The extent to which income had suffered tax in India was to be computed
by taking ratio of gross foreign receipts to the overall turnover of the
Taxpayer and applying that ratio to the actual MAT liability (i.e., doubly
taxed income was considered after allocating all the expenses including the
expenses in relation to India sourced income in the ratio of foreign sourced
turnover to total turnover).
Held
– The
Tribunal observed that there are two aspects to be considered. First, the
quantum of income which is to be treated as taxed. Second, the manner in which
the eligible tax credit is to be computed.
– DTAAs
provide that foreign tax credit shall not exceed the income tax attributable to doubly taxed income.
– DTAAs
use the expression ‘income’ which essentially implies ‘income’ embedded in the
gross receipt, and not the ‘gross receipt’ itself. Even as per the UN Model
Commentary, the basis of calculation of income tax is total net income.
Therefore, it is the gross income derived from the source state less any
allowable deductions (specific or proportional) connected with such income
which is to be treated as doubly taxed income. Hence, considering the gross
receipts for computing admissible tax credit is not correct.
– In
the present case, there is a peculiar situation. A major portion of foreign
sourced income was passive income in nature.
– Hence,
to that extent, allocation of all the expenses incurred by the Taxpayer to such
earnings will not be justified. Moreover, profit element should be computed on
reasonable basis and not by taking into account the ratio of entire income to
entire turnover of the Taxpayer. The same could have been relevant if the
Taxpayer had not furnished a reasonable computation of income embedded in the
related receipts.
– However,
because of the aforementioned peculiar situation, this decision cannot be the
authority for the general proposition that only marginal or incremental costs
incurred in respect of foreign income should be taken into account and the
overheads cannot be allocated thereto.
– Thus
foreign tax credit is to be computed by apportioning actual tax paid under MAT
in the ratio of doubly taxed income to total profits.
– Tax
credit in respect of both Indonesia and Singapore should be computed separately
as is provided in respective DTAAs. The formula for limitation of tax credit under
Article 23(1) of India-Indonesia DTAA and Article 25(2) of India-Singapore DTAA
is broadly the same. The tax paid under MAT provisions should be apportioned to
income from Indonesia and Singapore respectively.
– Since
tax withheld in Indonesia was higher than the apportioned amount, the tax
credit was to be restricted to the apportioned amount.
– Since
tax withheld in Singapore was lower than the apportioned amount, tax credit for
entire withheld tax was available.
