Sections 90 and 91, read with Article 24 of DTAA and section 37 of the Act – FTC cannot be granted in India in absence of tax liability in India – There is no provision in the Act for grant of refund in India of foreign tax paid abroad though non-creditable foreign tax can be claimed as business expenditure

The assessee is an Indian bank having branches globally1. It earns income from branches outside India and also dividend on shares of its foreign associate companies. It paid taxes on income in accordance with the domestic tax laws of the countries in which it earned income. Further, wherever applicable, it had also availed benefit under the DTAA of the respective country. Computation of global income of the assessee in India had resulted in net loss. In its return of income in India, the bank claimed refund of foreign tax paid abroad. Alternatively, it claimed deduction of foreign tax as business expenditure. Since no income tax was payable by the assessee in India, the A.O. denied the claim for refund of foreign tax2. In the appeal, the CIT(A) upheld the order of the A.O.

Being aggrieved, the assessee appealed before the Tribunal. Generally, Article 24 of a DTAA mentions the mechanism to grant foreign tax credit (‘FTC’). However, the language of Article 24 may vary between different DTAAs. The three variants considered by the Tribunal in the present case were the DTAAs with Namibia, the UK and the US. It also relied on the views expressed by several authors and also the decisions of Courts in foreign jurisdictions and reached similar conclusions in respect of all the three variants.

HELD

Refund in India of tax paid abroad
* Article 24(2) of the India-UK DTAA mentions the following conditions in respect of grant of FTC: (a) FTC should be subject to the domestic law of India; (b) Income in respect of which FTC can be given should have been ‘subjected to tax’ in both the jurisdictions, i.e., the UK and India; (c) Only so much of FTC in respect of doubly-taxed income should be given as is proportionate to income chargeable to tax in India.
* Income earned in the UK could not be subjected to tax in India since the assessee did not have taxable income in India due to loss after aggregation of income at an overall level.
* FTC was available only against Indian tax payable on doubly-taxed income. Since no Indian tax was payable in respect of foreign income, there was no doubly-taxed income. Therefore, no FTC was available to the assessee.
* Referring to several commentaries on international tax, the Tribunal concluded that under none of the DTAAs can the FTC for taxes paid in the source jurisdiction exceed the actual income tax payable in the residence jurisdiction in respect of such doubly-taxed income.
* The Tribunal also did not accept the contention of the assessee that there was double jeopardy because foreign income reduced its losses in India which, otherwise, could have been carried forward and set off against future income, and further, credit for FTC for foreign taxes paid on such income was also not granted against future incomes.
* The Tribunal held that such difficulty referred to as ‘double jeopardy’ (i.e., a taxpayer who but for foreign tax income could have enjoyed higher set-off) had not arisen in the current year though it may arise in subsequent years in which the assessee may enjoy restricted set-off. But such eventualities may also be contingent as losses may not effectively be set off within the permissible limit. Besides, FTC rules make the claim of FTC prescriptive and do not contemplate carry-forward of such tax credit to future years. The Tribunal, however, kept the issue open for adjudication in subsequent years. It distinguished the decision of the Karnataka High Court in the case of Wipro Ltd.3 on the ground that it was applicable only in a situation where the foreign source income was eligible for profit-linked deduction, but the taxpayer had sufficient taxable income against which it could claim FTC of foreign taxes paid on such income. However, the said decision was not an authority for granting refund of foreign taxes by the Indian exchequer. Even otherwise, since it was a ruling by a non-jurisdictional High Court, it may only have a persuasive effect, unlike the binding effect of a jurisdictional High Court.
* Section 91 grants FTC in respect of ‘doubly-taxed income’ arising in a non-treaty country. However, if there was no tax liability in India on account of loss at an overall level, the condition of ‘doubly-taxed income’ was not satisfied.

Business expense deduction for tax paid abroad
* Relying on the jurisdictional High Court decision in the case of Reliance Infrastructure Limited vs. CIT4, the Tribunal granted tax paid as a deduction by way of business expenditure.

Note: The Tribunal dealt with various principles of interpretation of tax treaty and domestic law. Readers may gainfully refer to the decision for detailed reading.

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1    Assessee had branches in several countries, including countries with which India had entered into DTAAs as well as countries with which India had not entered into a DTAA
2    For the relevant year, Rule 128 (Foreign tax credit rules) inserted with effect from 1st April, 2017 was not applicable