TMI Blog2015 (6) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... s and gains to which the provisions of section 10A apply “shall not be included in the total income of the assessee”. However, after the amendment w.e.f. A.Y. 2001-02 the profits and gains to which the provisions of section 10A apply are not excluded from total income and instead “a deduction of such profits and gains…..” shall be allowed from the total income of the assessee”. It means “total income” must first be determined from which deduction u/s 10A shall be allowed. After amendment by Finance Act, 2000 w.e.f. 1-4-2001 deduction u/s 10A being from the total income leads to the conclusion that there is charge of income tax in India also on the income that has been subjected to tax in Japan. The tax liability of the assessee is equal to the tax payable in India at normal rates. Accordingly assessee qualifies for tax relief under para 2a of Article 23 of Double Tax Avoidance Convention between India and Japan as applicable to the assessment years under consideration. Since here we are concerned with the treatment to be given to the resident of India in relation to taxes paid in Japan., the same is covered by Paragraph 2 of Article 23 and not by paragraph 3 of Article 23 which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration the fact that the aforesaid order under section 154 of the Act, was passed by the AO in view of a Grievances Petition filed by the appellant before the CIT-6, Mumbai, vide letter dt.29.12.2007. 5. The Id. CIT(A) erred in not taking into consideration the fact that the impugned application under section 154 was filed by the appellant before the AO as a request of the AO in his letter dt. 29.4.2008. 6. The Id CIT(A) erred in holding the claim of the appellant in respect of credit for foreign TDS as a debatable issue, when this issue had never been touched or dealt with by the AO. 7. The Id CIT(A) erred in not appreciating that as per section 199 of the Act, any TDS shall be treated as a payment of tax on behalf of the taxdeductee, viz. the appellant in the present case and the AO is dutybound to consider the claim for credit in respect of TDS in the assessment order. 8. The Id CIT(A) erred in rejecting the claim of the appellant in respect of credit for foreign TDS. 9. All the aforesaid Grounds of Appeal are without prejudice to one another. 3. The grounds raised by the assessee in A.Y. 2004-05 read as under:- 1. The learned (ld) CIT(A)-XIV, Mumbai, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed to appreciate that there were two different issues involved in the appeal before him, the one, whether the issue under consideration was a debatable one and the other, whether on merits, the appellant was entitled to the credit in respect of foreign TDS. 6. The ld CIT(A) failed to appreciate that even if the action of the AO under section 154 was justified, the claim of the appellant regarding credit for foreign IDS was required to be adjudicated upon, on merits, which the CIT(A) did not do. 7. The ld CIT(A) failed to notice that similar orders passed by the AO under section 154 of the Act, denying the claim of the appellant regarding credit for foreign TDS, were held to be debatable by his predecessor for the AYs 2003-04 and 2004-05, in the case of the appellant. 5. In all these appeals, the assessee is aggrieved for not giving credit of tax deducted at Japan in respect of its income which had also brought in the tax net in India. The assessee is also aggrieved by the action of the lower authorities for holding that there was no mistake in the order passed u/s 143(1) and 143(3) of the Act for assessment years 2003-04 and 2004-05 insofar as there was an omission o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich has been urged on behalf of the assessee that the AO has while reopening the assessment ex facia proceeded on the erroneous premise that s. 10B is a provision in the nature of an exemption. Plainly, s. 10B as it stands is not a provision in the nature of an exemption but provides for a deduction . 9. The ld. A.R. further highlighted the following observations of the Hon ble Bombay High Court negating the contention on the ground that section 10B was not a provision in the nature of an exemption but only provided for a deduction:- 'The AO was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee were eligible under s. 10B. Three units had returned a profit during the course of the assessment year, while the Crab Stick Unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be reopened is contrary to the plain language of s. 10B. 10. He further re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan 263 ITR 706 (SC) wherein Hon'ble Supreme Court has in Para 73 cited with approval the following observations of the Federal Court in the case of John N. Gladden v. Her Majesty the Queen 85 DTC 5188: Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basis object of the treaty might be defeated or frustrated in so far as the particular item under consideration is concerned. 13. At Para 70 of the judgment Hon'ble Supreme Court quoted from the commentary of Phillip Baker on Article 4 of the DECD Double Tax Convention: It seems clear that a person does not have to be actually paying tax to be liable to tax - otherwise a person who had deductible losses or allowances, which reduced his tax bill to zero would find himself unable to enjoy the benefits of the convention. It also seems clear that a person who would otherwise be subject to comprehensive taxing but who enjoys a specific exemption from tax is neverthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicit by the exchange of letter between Government of India and Government of Japan as would be seen from the letter dated 07.03.1989 addressed to Mr. Fijiro Noda, ambassador of Japan to India by Mr. G.N. Gupta, Chairman CBDT and replied on the same date by Mr. Fijiro Noda to Mr. G. N. Gupta. This correspondence is placed at page 51 to 53 of the assessee s compilation. 17. As per the ld. A.R. it should be treated to have paid tax in India without giving effect to the provision of section 10A for the reason also of Article 24 of Double Taxation Avoidance Convention between India and Japan. Paragraph 3 of Article 24 is as under: 3. Except where the provisions of Article 9, paragraph 8 of Article 11, or paragraph 7 of Article 12, apply interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned Contracting State. As per the ld. A.R. Article 24 of the Convention envisages parity of tax liability between the residents of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contention of the ld. A.R. was that the decision to allow credit for foreign tax was given in the assessment framed u/s 143(3), therefore, it was not a debatable issue. With respect to merit of assessee s claim for rebate of foreign tax, he relied on the same submission as narrated above. 20. On the other hand, it was contended by the ld. D.R. that assessee s claim for foreign tax is governed by Article 23 of India Japan DTAA, wherein Article 23(2) provides that the deduction will not exceed that part of the income tax which is attributable to the income which may be taxed in Japan. As per the ld. D.R., it is clear from Article 23(2) that deduction shall not exceed that part of the income tax which is attributable to the income which is taxed in Japan. He further contended that when it comes to allowing the deduction, what is relevant is not the income attributable to Japan but to the part of income tax attributable to the income which may be taxed in Japan . As per the ld. D.R., the entire income of assessee carries the benefit of section 10A, and as such no tax has been paid in India on its income which is attributable to Japan, hence, the credit of foreign TDS cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time limit from the date of order passed u/s 143(1) of the Act. Even on merit, the ld. CIT(A) held that income which was taxed in Japan has not been taxed in India, therefore, there was no double taxation and the question of DTAA did not arise. 23. For A.Y. 2004-05, the assessee filed return of income on 30-10-2004 wherein foreign tax of ₹ 24,721,726/- was claimed. TDS certificates were filed on 12-1-2005 which was misplaced by the A.O. and subsequently photo copies were filed by the assessee. The A.O. passed order u/s 143(3) of the Act wherein no credit for foreign tax was given. Oral request was made by the assessee to the A.O. for giving credit and finally the assessee filed Grievance petition to CIT VI vide letter dated 29-12-2007. Thereafter at the instance of A.O. the assessee filed application u/s 154 of the Act on 29-4-2008. Order u/s 154 of the Act was passed by the A.O. on 29-7-2008 wherein he observed that the claim of foreign tax made by the assessee was a debatable issue, hence, it was not a mistake rectifiable u/s 154 of the Act. In an appeal filed before the ld. CIT(A), the ld. CIT(A) vide his order dated 20-5-2010, following the same reasoning given in A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Now we come to the merit of the disallowance made by the lower authorities on the plea that the income on which the assessee was charged tax in Japan was not chargeable to tax in India being exempt under the provision of section 10A of the Act and therefore assessee was not eligible to claim credit for the tax deducted in Japan. This view of the lower authorities are not in consonance with the provisions of section 10A as amended by Finance Act 2000 w.e.f. 1-4-2001 and do not take into account the sea change made in the provision after the aforesaid amendment. Prior to the amendment by Finance Act 2000, the Act provided that any profits and gains to which the provisions of section 10A apply shall not be included in the total income of the assessee . However, after the amendment w.e.f. A.Y. 2001-02 the profits and gains to which the provisions of section 10A apply are not excluded from total income and instead a deduction of such profits and gains .. shall be allowed from the total income of the assessee . It means total income must first be determined from which deduction u/s 10A shall be allowed. The expression 'total income' is defined in the provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that loss from section 10A unit cannot be adjusted against the profits of other section 10A units and has to be adjusted against taxable profits after allowing deduction u/s. 10A to the profits of each eligible 10A unit because the provisions of section 10A do not exempt any unit from taxation but only allow deduction from taxable income. It therefore follows that it cannot be said that the assessee s income which was charged to tax in Japan has not, by virtue of the provisions of section 10A, been taxed or exempted in India. 30. The Hon ble Karnataka High Court in the case of Stumpp, Schedule Somappa (P) Ltd. (supra) held that proceeds on the basis that a deduction does not alter the basic fact that the gross amount has been charged to tax. Accordingly Hon'ble Karnataka High Court further observes: If the contention for the appellants is to be accepted as correct then even) kind of deduction or allowance for expenses made in the computation of the total income under the IT Act would have to be treated as income not includible in the total income ... 31. The decision of Hon ble Supreme Court in the case of Azadi Bachao Andolan (supra) as discussed above is that it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of taxes the deductor assessee is deemed to have deducted and paid the tax on such sums. Revenue argued that the relevant amendment had been made in the provisions of section 40(a)(ia) but there was no similar amendment in the provisions of section 40(a)(i) applicable to the payments made to non-residents. In this manner the Revenue argued that MCI was not protected against the mischief of section 40(a)(i) and the payments made to MCJ were liable to be disallowed for non-deduction of tax at source. MCI argued that it was a case of discrimination and invoked the provisions of Article 24 of Double Tax Avoidance Convention between India and Japan. Hon'ble Bench referred to the decision of ITAT Pune in the case of Daimler Chrysler India Pvt. Ltd v. DCIT 120 IT) (Pun e) 803 and emphasized the following findings in that decision: In the remaining two situations, i.e. non-discrimination against payments made to the residents of the other Contracting State i.e. under Article 24(3), nondiscrimination against capital held by the residents of the other Contracting State i.e. under Article 24(4). It is not at all necessary that the assessees, in whose cases this non-discrimination is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 11, or paragraph 7 of Article 12, apply interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned Contracting State. Furthermore Article 24 of the Convention envisages parity of tax liability between the residents of India and Japan. By virtue of Paragraph 3c of Article 23 the resident of Japan obtains tax relief as if the Indian tax has not been reduced by the provisions of section 10A. On the same logic the tax relief to the resident of India should be calculated as if the Indian tax has not been reduced in his case by the provisions of section 10A. 35. In view of above discussion, we direct the A.O. to allow credit for foreign TDS against the tax levied on the corresponding income eligible for deduction u/s 10B of the Act in India for all the three years under consideration i.e. assessment years 2003-04, 2004-05 and 2005-06. We direct accordingly. 36. In the result, all the appeals are allowed in part. Order pron ..... X X X X Extracts X X X X X X X X Extracts X X X X
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