TMI Blog2007 (6) TMI 277X X X X Extracts X X X X X X X X Extracts X X X X ..... Just because the assessee may, in AO's perception, claim treaty protection in a subsequent year, the treaty provisions cannot be thrust on the assessee this year as well. In this view of the matter, the assessee was indeed eligible to claim taxation on worldwide basis, disregard the scheme of taxability under the India Japan tax treaty, and, in effect, claim deduction of loss incurred by the PE in Japan. The CIT(A) was thus justified in his conclusion to the effect that losses of assessee's PE in Japan are to be taken into account while computing assessee's total income liable to tax in India. When the assessee makes profits in the subsequent years, and whether or not the assessee recaptures loss in the subsequent years, its entire PE income remains outside the scope of 'total income' u/s 5 of the Act. In effect, therefore, the loss of the PE abroad is deducted twice. This position may be unintended or even undesirable, as evident from the global concern to neutralise such dual benefits in the international taxation, but that is an inevitable corollary to the legal position existing now. Thus, we approve the conclusion arrived at by the learned CIT(A). Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction from the income which is taxable in India". It was on the basis of this reasoning that the AO disallowed the loss of Japan office amounting to Rs. 53,96,061 and "added to total income as well as book profit under s. 115JB". Aggrieved by the stand so taken by the AO, the assessee carried the matter in appeal before the CIT(A). In appeal, the CIT(A) held that "the company is resident in India and its global income/loss is taxable in India only". "In view of that", according to the CIT(A), "the loss arising to Japan office should be allowed as deduction while computing the income of the appellant for the year". The AO is aggrieved of the relief so given by the CIT(A) and is in appeal before us. 4. Shri K. Srinivasan, learned Departmental Representative, submits that in terms of the provisions of the India Japan DTAA (India Japan tax treaty, in short), the profits and losses of the Japanese PEs of Indian companies are subject to taxation in Japan only. It is contended that following this broad principle, as enshrined in art. 7, any income accruing or arising to an Indian assessee's PE in Japan is excluded from the total income of Indian company, as is exigible to tax in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o interfere in the matter. In rejoinder, learned Departmental Representative merely reiterated his arguments. 5. In order to properly appreciate the controversy requiring our adjudication, in our considered view, it is necessary to appreciate the position prevailing before the judgments of Hon'ble Karnataka High Court, in the case of CIT vs. R.M. Muthaiah (1993) 110 CTR (Kar) 153 : (1993) 202 ITR 508 (Kar) and of Madras High Court in the case of CIT vs. SRM Firm Ors. (1994) 120 CTR (Mad) 427 : (1994) 208 ITR 400 (Mad) were delivered, which have now been specifically approved by the Hon'ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC), and the impact of these decisions on the same. 6. Until the decisions in the cases of Muthaia and SRM Firm, and till these decisions had the seal of approval of the Hon'ble Supreme Court in Azadi Bachao Andolan's case, a school of thought existed that in terms of the provisions of the Indian IT Act, 1961, all the resident assessees were taxable in India on their worldwide income. The basis of this school of thought was this. Sec. 5(1) of the Act categorically provides that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for tax credit in respect of taxes paid in Japan to the extent of Indian income-tax liability in respect of the said income. Therefore, even under the India Japan tax treaty, it was not the income of Indian PE in Japan which is exempted from tax in India, but only a credit in respect of tax paid in Japan in respect of such an income which is available for adjustment while computing Indian income-tax liability. Viewed in this perspective, the stand of the AO is not even in the interest of the Revenue anyway. In case this stand was to be followed by the AO vis-a-vis the profits earned by Japanese PE, the revenue loss would be inevitable. As the effective tax rate in India on the assessee was approx. 40 per cent in the relevant year, which, according to the AO, was not leviable in respect of Japanese sourced income. However, in case the corporation tax rate in Japan was less in the relevant period, which is say 30 per cent, there will be a loss of revenue to that extent of 10 per cent. The reason is that as per this method, entire income, including income of the PE in Japan, is to be taxed in India but while computing the tax payable, however, credit is also to be given to the exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te school of thought which has also now found judicial acceptance before higher judicial authorities. While dealing with India Malaysia DTAA, Hon'ble Karnataka High Court in the case of CIT vs. R.M. Muthaia and Hon'ble Madras High Court in the case of CIT vs. SRM Firm Ors., have held that when it is provided that tax may be charged in a particular State in respect of the specified income it is implied that tax will not be charged by the other State. In the case of Muthaia, it was held that since India Malaysia tax treaty recognized that right to tax certain incomes belonged to Malaysia, this fact, by itself, acted as a bar on the powers of Government of India to tax the same income. Hon'ble High Court observed that "this bar would operate on ss. 4 and 5 of the IT Act, 1961". According to the Hon'ble High Court, the question of tax credit would only be relevant when the same income, in terms of the provisions of the tax treaty, is to be taxed twice. In the case of SRM Firm, Hon'ble Madras High Court has held that "the contention on behalf of the Revenue that wherever the enabling words such as 'may be taxed' are used, there is no prohibition or embargo upon the authorities exercis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct shall apply to the extent these are more beneficial to that assessee". Sec. 90 only grants relief; it does not impose any liability. Even without such provisions, Courts in US and Germany, as indeed in other parts of the world, have held that a treaty cannot act to the disadvantage to the taxpayer. In other words, therefore, merely because India has entered into a DTAA with a foreign country, the assessee cannot be denied the taxability under the scheme of the Indian IT Act. The scheme of the DTAA cannot, therefore, be thrust upon the assessee. In this particular case, it is obviously to the advantage of the assessee that he is taxed in India on the basis of his worldwide income, which includes losses incurred abroad, and not to invoke the provisions of the India Japan tax treaty. The provisions of the Indian IT Act must, therefore, apply to that extent. Then comes the objection of the Revenue that in the event of the assessee not opting for treatment on the basis of India Japan tax treaty this year, he will be shut out from availing the benefits of the said treaty in the subsequent years. We see no support for this proposition. Under the IT Act, every year is an independent uni ..... X X X X Extracts X X X X X X X X Extracts X X X X
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