By Geeta Jani | Dhishat B. Mehta
Chartered Accountants
15 [2019] 111 taxmann.com 42 (Mum.) Tata Consultancy Services Ltd. vs. ACIT [IT Appeal No. 5713 of 2016 & IT (TP)
Appeal No. 5823 (Mum.) of 2016] A.Y.: 2009-10 Date of order: 30th October, 2019
Article 25 of India-USA DTAA, Article 23 of
India-Canada DTAA and similar provisions in various other DTAAs – If a DTAA
provides for credit of foreign tax paid even in respect of income on which tax
was not paid in India, tax credit u/s 90(1)(a)(ii) would be available –
However, if a DTAA provides for credit u/s 90(1)(a)(i) it would be available
only if tax is also paid in India
FACTS
The assessee was an
Indian company engaged in the business of export of software and providing
consultancy services. It had branches in various tax jurisdictions in which it
had paid tax on profits of branches. Under sections 90 and 91 of the Act, the assessee
claimed credit for tax paid in these jurisdictions. To support its claim, the
assessee furnished statements of tax paid in each jurisdiction. The assessee
contended that the tax paid in those jurisdictions was eligible for deduction
from tax payable in India in terms of the applicable DTAAs as well as u/s 91 of
the Act.
After examining the
claim of the assessee and verifying the details, the AO allowed tax credit in
respect of tax paid on income which was taxed abroad and also in India but
restricted the credit to the rate of tax payable in India. However, where
income was taxed abroad but was exempted in India, he did not grant credit,
either u/s 90 or u/s 91.
In appeal, relying
on the decision in Wipro Ltd. vs. DCIT [2015] 62 taxmann.com 26 (Kar.),
CIT(A) trifurcated foreign tax credit into three parts, namely, tax paid in
USA, tax paid in other DTAA countries and tax paid in non-DTAA countries. He
directed the AO to allow tax credit in respect of tax paid in USA even on
income which was exempt from tax in India u/s 10A/10AA. In respect of tax paid
in other DTAA and non-DTAA countries, he held that no tax credit will be
available in respect of income which was exempt from tax in India u/s 10A/10AA.
HELD
- Relying on
the decision in Wipro Ltd. vs. DCIT [2015] 62 taxmann.com 26 (Kar.),
CIT(A) restricted foreign tax credit only in respect of tax paid in USA even
though income was exempt u/s 10A/10AA on the premise that the decision granted
benefit only in case of India-USA DTAA.
- However, the Karnataka High Court had held
that section 90(1)(a)(ii) applies where the income is chargeable1 to tax under the Act and also in the other
country. Though tax is chargeable under the Act, the Parliament may exempt the
income from payment of tax to incentivise the assessee.
- In the context of the India-USA DTAA2
, the Court held that it did not require that to claim credit the assessee must
have paid tax in India on such income. The Court also mentioned that the
India-Canada DTAA3 allows
credit for tax paid in Canada only if income is subjected to tax in India.
- A careful reading of the said decision shows
that if a DTAA provides credit for foreign tax paid even in respect of income
on which the assessee has not paid tax in India, it would qualify for tax credit
u/s 90. DTAAs between India and Denmark, Hungary, Norway, Oman, US, Saudi
Arabia, Taiwan have provisions similar to Article 25 of the India-USA DTAA
providing for credit of foreign tax even in respect of income not subjected to
tax in India.
- However, DTAAs with Canada and Finland
provide for credit of foreign tax only if income is subjected to tax in both
the countries.
- Therefore, the assessee was
entitled to credit for tax paid in case of all countries other than tax paid in
Finland and Canada.
____________________________________________________________________________________
1 Section 90(1)(a)(i) of the Act requires that
tax should have been paid in both the jurisdictions
2 Article 25(2)(a) of India-USA DTAA
3 Article 23(3)(a) of India-Canada DTAA
