TMI Blog2010 (11) TMI 709X X X X Extracts X X X X X X X X Extracts X X X X ..... elief under the tax treaty - Decided against the assessee Regarding Administrative expense - in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010 -TMI - 78448 - BOMBAY HIGH COURT), even prior to assessment year 2008-09, when Rule 8D was not applicable, “the Assessing Officer has to enforce the provisions of sub-section (1) of section 14A, (and) for that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act - since the assessee has not incurred any expenses in earning this dividend income, no disallowance can be made under section 14A - Appeal is allowed for statistical purpose - IT Appeal No. 4776 (MUM.) of 2004 - - - Dated:- 24-11-2010 - N.V. Vasudevan, Judicial Member J. And Pramod Kumar, Accountant Member J. B. Senthil Kumar for the Appellant. Dinesh Vyas and B. Taraporewala for the Respondent. ORDER Pramod Kumar, Accountant Member. By way of this appeal, the appellant Assessing Officer has called into question correctness of Commissioner (Appeals) s order dated 29-3-2004, in the matter of assessment under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee also submitted that even though section 43B has no application in respect of payments of foreign taxes, and, therefore, the deduction in respect thereof need not be restricted to the actual payments during the relevant previous year, the assessee has claimed deduction only in respect of the amounts actually paid. In effect, thus, it was submitted that the assessee has claimed lesser deduction that the deduction admissible to the assessee. The assessee claimed deduction of taxes paid abroad as a normal business expenditure incurred to earn the income which has been offered to tax in India. 4. The Assessing Officer, however, was not impressed by the stand so taken by the assessee. He was of the view that Income-tax represents sovereign s share in the profits of the assessee, and whether Income-tax is paid in India or abroad, it is only an application of income and not a charge on income. The Assessing Officer was also of the view that under the scheme of the Act, the taxes paid abroad are eligible for admissible tax credit under the applicable double taxation avoidance agreement, if any, under section 90 of the Act, or for appropriate tax relief under section 91 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) of the Act, in favour of the assessee. Learned counsel also filed a list of judgments by which the issue is covered, and also filed copies of these judicial precedents. However, in response to bench s questions, he fairly admitted that these decisions have not taken into account Explanation 1 to section 40(a)(ii), inserted by Finance Act, 2006, and, that the reasoned order was passed well before this legislative amendment was brought about. We may mention that Explanation 1 to section 40(a)(ii) provides that, for the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91 . Learned counsel also fairly accepts that while Hon ble Bombay High Court s judgment was passed on 2-4-2004, the relevant Explanation to section 40(a)(ii) was inserted much later in 2006. He, however, hastens to add that there are decisions of this Tribunal, even after the said Explanation 1 was introduced, such as order dated 4-6-2007, for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change in law, according to the learned counsel, so far as deductibility of overseas Income-tax, other than taxes in respect of which relief under section 90 or section 91 is available. In substance thus, learned representatives agree that the question of deductibility of overseas Income-taxes is to be decided afresh, though earlier decisions will continue to fold field to the limited extent of admissibility of deduction under section 37(1) in respect of taxes paid abroad for which no relief is admissible under section 90 or 91 of the Act. Learned counsel also prays that in case we are to hold that the other Income-taxes paid abroad are not deductible in computation of income, we may direct the Assessing Officer to grant tax credit in respect of the same in computation of assessee s tax liability. Learned Departmental Representative, as also learned counsel for the assessee, then addressed us on the merits, and reiterated their respective stands. 6. We have given our careful consideration to the rival submissions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 7. Let us deal with some fundamentals first. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same as a purely territorial system. Most exemption systems are not of this kind and so are to be distinguished from territorial systems. Most countries using an exemption system adopt exemption with progression, under which the total tax on all income of a resident is calculated, and then the average rate of tax is applied to the income that does not enjoy the exemption. Exemption systems are also increasingly subject to various conditions to ensure satisfaction of the assumption underlying the system (that the income has been taxed in the source country at its ordinary rates). These conditions can consist of subject-to-tax tests (including the specification of tax rates) or selective application of exemption to foreign countries under domestic law or tax treaties. In particular, the exemption is usually not given where the source tax has been reduced or eliminated by a tax treaty. The result is that there are no countries asserting jurisdiction to tax worldwide income that give an exemption for all kinds of foreign income; where a country is referred to as an exemption country, this generally means that it provides some form of exemption to business income, dividends received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to use in domestic law. Whichever double tax relief system is adopted, some method of apportioning deductions between domestic and foreign income will be necessary. Where deductions allocated to foreign income exceed that income, the loss should not be available for use against domestic income. 8. There are thus four methods in which relief can be granted to a taxpayer in the residence country in respect of Income-tax paid abroad. It is also important to bear in mind the fact that these four methods are mutually exclusive methods in the sense that each one of these methods, on standalone basis, is meant to grant requisite relief from double taxation of an income. Application of more than one of these methods, in a particular situation, can thus only result in granting relief greater than the double taxation itself. To sum up even at the cost of an element of repetition, these methods are as follows : In the first method, residence country follows pure territorial method of taxation and brings to tax only such incomes as are sourced in the residence jurisdiction itself. There is then no conflict between the source rule and the residence rule inasmuch as the residence rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. (2) Where a specified association in India has entered into an agreement with a specified association of any specified territory outside India under sub-section (1) and such agreement has been notified under that sub-section, for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. Explanation 1. For the removal of doubts, it is hereby declared that the charge of tax in respect of a company incorporated in the specified territory outside India at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such company. Explanation 2. For the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal. Explanation . In this section, (i) the expression Indian income-tax means income-tax charged in accordance with the provisions of this Act; (ii) the expression Indian rate of tax means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this Chapter, by the total income; (iii) the expression rate of tax of the said country means income-tax and super-tax actually paid in the said country in accordance with the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country; (iv) the expression income-tax in relation to any countr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partner country is practically treated as a separate basket of income and the double taxation relief, in respect of taxes paid in that treaty partner country, is restricted to the taxes actually levied in the home country in respect of the said income. It thus follows that the least relief available in respect of Income-tax paid abroad is if at all an assessee is also taxed in India in respect of the Income-taxed abroad, it is only to the extent the tax rate abroad falls short of Indian tax rate. There is no dispute that the assessee has claimed double taxation relief under the scheme of the Act - as set out in sections 90 and 91 of the Act. 11. The assessee, however, was not satisfied with the relief so granted by the Assessing Officer. He also claimed deduction, in computation of income from profits and gains from business and profession , in respect of taxes paid abroad. It is the case of the assessee that the taxes so paid abroad constituted expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, and, therefore, deductible under section 37(1) of the Act. It is this deduction which is now subject matter of core dispute before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is able to reduce his Indian Income-tax liability, in respect of other incomes, by being allowed deduction in respect of taxes paid abroad. Such a claim being accepted will lead to quite an incongruous result by any standard. 12. It is in the backdrop of the above claim for deduction that one has to take a look at section 40(a)(ii) and section 2(43) which are reproduced below for ready reference : Section 40 (a)(ii) Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession , (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. Explanation 1.** For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he coordinate benches since then. It has been noted in this order that there is no finding that local taxes (abroad) were assessed on a proportion of the profits i.e., consultancy fees received . When Commissioner sought a reference, under section 256(1), for esteemed views of Hon ble Bombay High Court and against this order on the question of deductibility of local taxes paid abroad, the Tribunal declined the reference and, inter alia, observed that the question is one of the facts , that the tax deducted is a local tax and not a tax on profits and that foreign tax is not covered by the provisions of section 40(a)(ii) . Hon ble High Court also declined Commissioner s prayer for reference under section 256(2) and the order of the Tribunal thus received finality. This decision has been consistently followed over the decades. However, in the lead decision cited before us, there is a categorical observation to the effect that the tax deducted is a local tax and not a tax on profits , whereas in the present case it is an undisputed position that the tax levied abroad, being Income-tax, is a tax on profits of the assessee - whether on presumptive basis or on the basis of actual p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age having regard to the object and purpose which the Legislature had in view in enacting that provision and in the context of the setting in which it occurs and that we cannot ignore the context and the collection of the provisions in which, appears, because, as pointed out by judge learned Hand in the most felicitous language : interpret .. .the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create ... One of the things which is clearly discernible from the above observations of Their Lordships is that while interpreting the statutes, one has to essentially bear in mind the context and underlying scheme of the legislation in which the words are set out. Keeping these discussions in mind, let us see the context in which expression tax is used in section 40(a)(ii) which provides that any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains cannot be allowed as a deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned to it by section 2(43), the word any used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Furthermore, the word tax as defined in section 2(43) of the Act is subject to unless the context otherwise requires . In view of the discussion above we hold that the word any tax herein refers to any kind of tax levied or leviable on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. 16. Hon ble Bombay High Court s judgment Lubrizol India Ltd. (supra) which holds that the meaning of expression tax cannot be restricted to the definition of tax was delivered on 11-7-1990, and, to that extent, Tribunal s decision dated 23-10-1984, in assessee s own case for the assessment year 1976-77 and which has been followed in all other assessment years, is no longer good law. None of the subsequent decisions of the Tribunal, which merely followed the said order, had an occasion to deal with the law so laid down by Their Lordships. It needs hardly be stated that mere rejection of reference by the Hon ble High Court does not amount to approv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of tax treaties which are entered into under section 90, tax credits, in respect of taxes paid abroad, are restricted to assessee s domestic tax liability in respect of the subject income as was held by this Tribunal in the case of Jt. CIT v. Digital Equipments India Ltd. [2005] 94 ITD 340 (Mum.). If we are to hold that the assessee is entitled to deduction of tax paid abroad, in addition of admissibility of tax relief under section 90 or section 91, it will result in a situation that on one hand double taxation of an income will be eliminated by ensuring that the assessee s total Income-tax liability does not exceed Income-tax liability in India or Income-tax liability abroad - whichever is greater, and, on the other hand, the assessees domestic tax liability will also be reduced by tax liability in respect of income decreased due to deduction of taxes. Such a benefit to the assessee is not only contrary to the scheme of the Act and contrary to the fundamental principles of international taxation, it also ends up making double taxation relief a mechanism to reduce domestic tax liability in India - something which is most incongruous. In our considered view, an interpretat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we are unable to appreciate any basis whatsoever for the CIT(A) s conclusion that the taxes paid in the US, in the instant case, are to be credited to the assessee s account and are to be refunded to the appellant, in case he has no Income-tax liability in respect of that income in India. As for the Commissioner (Appeals) s observation, referring to payment of income-tax in the United States on an income and returning a loss in respect of that income in India, to the effect that this is an absurd situation and was not visualized by the Treaty , it cannot but stem from his inability to take note of the fact that certain incomes (e.g., royalties, fees for technical or included services, interest, dividends etc.), are taxed on gross basis in the source country but are only be taxed on net basis, as is the inherent scheme of income-tax legislation normally, in the country of which the assessee is resident. In such situations, it is quite possible that while an assessee pays tax in the source country which is on gross basis, he actually ends up incurring loss when all the admissible deductions, in respect of that earning, are taken into account. There is nothing absurd about it. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the income on which Income-tax is paid in US. 19. In view of the aforesaid judicial precedent, and being in considered agreement with the same, we reject this alternate claim of the assessee. 20. Learned counsel has also contended that in any event, we must allow deduction in respect of state Income-taxes paid in USA and Canada as relief is not admissible in respect of the same in respective tax treaties. We have been taken through India USA tax treaty to point out that tax credits are admissible only in respect of Income-tax levied by the federal Government and not by the State Governments. It is contended that since no relief is admissible in respect of state taxes under section 90 or section 91, these taxes will continue to be tax deductible, and to that extent, decisions of the coordinate benches will hold good. We are unable to see legally sustainable merits in this submission either. Apart from the fact that such a claim of deduction is clearly contrary to the law laid down by Hon ble jurisdictional High Court in Lubrizol India Ltd. s case (supra), there is another independent reason to reject this claim as well. The reason is this. It is only elementary that tax trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, the provisions of section 91 will apply to state Income-taxes as well. The state Income-tax is also, therefore, covered by Explanation 1 to section 40(a)(ii), and deduction cannot be allowed in respect of the same. Finally, in view of Hon ble Bombay High Court s judgment in S. Inder Sing Gill s case (supra), Income-tax abroad cannot be allowed as a deduction in computation of income and this judgment does not discriminate between federal and state taxes either. Interestingly, state Income-taxes paid in USA, subject to certain limitations, are deductible in computation of income for the purposes of computing federal tax liability in USA, but that factor cannot influence deductibility of these taxes, particularly in the light of the provisions of Explanation 1 to section 40(a)(ii) and in the light of Hon ble Bombay High Court s judgment in S. Inder Singh Gill s case (supra), in computation of business income under Indian Income-tax Act. For all these reasons, we are unable to uphold the plea of the assessee seeking deduction of at least state Income-tax paid in USA. 21. In view of the above discussions, and for the detailed reasons set out above, we uphold the grievance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come under the Act . Their Lordships have, however, added that The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record . Learned Departmental Representative submits that in view of this binding judicial precedent, we may remit the matter to the file of the Assessing Officer for fresh adjudication in accordance with the law and, inter alia, above observations of Hon ble jurisdictional High Court. Learned counsel does not dispute the said legal position, but adds that since the assessee has not incurred any expenses in earning this dividend income, no disallowance can be made under section 14A. Learned Departmental Representative does not see any need of joining the issue on this aspect of the matter, and submits that the matter is examined afresh by the Assessing Officer, it is open to the assessee to take all these contentions before him. 27. We have heard the rival submissions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 28. Having perused th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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