TMI Blog2017 (1) TMI 720X X X X Extracts X X X X X X X X Extracts X X X X ..... nd as reproduced earlier, is accepted. The tax credit for both the jurisdictions is to be computed separately but in a similar manner, as is provided in the respective treaties. So far as the tax credit in respect of Indonesian receipts is concerned, as noted above and in view of article 23(1) of the applicable tax treaty, it cannot “exceed the part of the income tax as computed before the deduction is given, which is attributable as the case may be, to the income which may be taxed in that other State”. The income tax is, therefore, required to be computed on proportionate basis The tax has been paid, in this case, on book profits. To the best of our understanding, and particularly in the absence of any other method having been pointed out to us, only way in which be so done is by apportioning the actual tax paid under MAT provisions (i.e. ₹ 54,13,417), in the same ratio as double taxed profit to the overall profits i.e. 35,86,178:4,77,79,403. The amount of tax credit in respect of this income thus comes to ₹ 4,06,315, as against the actual deduction of tax aggregating to ₹ 5,71,878. The tax credit claim is thus admissible to this extent. As for the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned CIT(A) has erred in holding that as the appellant is allowed deduction under section 37 of the Act in respect of the foreign tax for which the set off of credit has not been granted, only that amount has to be allowed as MAT credit which has been adjusted against the tax payable in India. In the facts of the case and law, disallowance of Foreign Tax Credit is irrelevant for computing the allowable MAT credit. 3.1. The learned CIT(A) has erred in holding that MAT credit being allowed to be carried forward should be restricted to the extent of ₹ 86,571/- only (in respect of Foreign Tax Credit) and not entire Foreign Tax Credit of ₹ 11,12,907/-. 3. All these grounds are somewhat interconnected, and we will, therefore, take up all these grounds together. 4. Briefly stated, the relevant material facts are like this. The assessee before us, a wholly owned subsidiary of a US based company by the name of Elitecore Technologies Inc, is a company engaged in the business of software developments and products. During the relevant previous year, the assessee did not have any income taxable under the normal provisions of the Act, though the book profits taxe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f these tax treaties prescribe the manner, as adopted by the Assessing Officer, of deriving the net income, or, for that purpose, any metjod of computing the net income. It was also submitted that the related article state that tax credit will be available for profit or income which has been subjected to tax in both the countries, and that the profit, in this context, denotes income less all related allowable expenditure. The assessee the briefly set out the well settled principles governing interpretation of tax treaties and contended that entire receipt should be considered as doubly taxed, looking to the intention and scheme of the tax treaties . None of these submissions impressed the Assessing Officer. The only change he made in his computation of admissible tax credit was that instead of net receipts of ₹ 79,45,607, he adopted the gross receipts at ₹ 90,58,514. The mechanism of computing the foreign tax credit, however, remained the same. The admissible tax credit was thus marginally enhanced, and it was finally computed at ₹ 86,571. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. While confirming the stand of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apore tax paid, whether directly or by deduction. Where the income is a dividend paid by a company which is a resident of Singapore to a company which is a resident of India and which owns directly or indirectly not less than 25 per cent of the share capital of the company paying the dividend, the deduction shall take into account the Singapore tax paid in respect of the profits out of which the dividend is paid. Such deduction in either case shall not, however, exceed that part of the tax (as computed before the deduction is given) which is attributable of the income which may be faxed in Singapore. Para 2 of Article 23 - Elimination of double taxation of DTAA between India and Indonesia: - The amount of Indonesian fax payable, under the laws of Indonesia and in accordance with the provisions of this Agreement, whether directly or by deduction, by a resident of India, in respect of profits or income arising in Indonesia, which have been subjected to fax both in India and in Indonesia, shall be allowed as a credit against the Indian tax payable in respect of such profits or income provided that such credit shall not exceed the Indian tax (as computed before allowing any s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it is not keeping separate accounting in respect of each product project and the profitability is not worked out in respect of each project or product the global profitability has to be adopted for computing the proportionate profit. In view of these facts and circumstances the contentions of the appellant cannot be accepted. The working of foreign tax credit adopted by the AO is therefore, in order and the same is upheld. 5. The assessee is not satisfied and is in second appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. We find that there are two aspects of the matter, on which there is apparently no meeting ground between the stand of the assessee and the stand of the revenue authorities, and which, therefore, need to be decided by us- first, the manner in which the quantum of income eligible which is required to be treated as taxed in both the countries, and second, the manner in which the eligible tax credit is to be computed. Before we address ourselves to these aspects, let us take a look at the relevant provisions in the related tax tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Model Convention Commentary as well, which, in turn, follows the approach in OECD Model Convention Commentary in this regard. UN Model Convention Commentary (2011 update @ page 333) states that Normally the basis of calculation of income tax is total net income, i.e. gross income less allowable deductions. Therefore, it is the gross income derived from the source state less any allowable deductions (specific or proportional) connected with such income which is to be exempted . It is, therefore, not really the right approach to take into account the gross receipts, as was contended by the assessee, for the purpose of computing admissible tax credit. The case before us is, however, somewhat unique in the sense that the main business is carried on in India and only some isolated transactions have taken place in Singapore and Indonesia. So far as the first two transactions are concerned, these are only for release of margin money and addition of a separate user- things which donot require any activity on the part of the assessee. In a way, therefore, these earnings are, so far as the present year is concerned, are passive earnings, and no part of the costs incurred in India can be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant in FY 2005-06. The payment received is for the increase in the number of users in accordance with the terms of the agreement dated 17th February, 2006. The appellant did not have to incur any cost for the same in the year of consideration. 3,161,369 - 3,161,369 PT Tech Mahindra Indonesia AMC for Software PT Tech Mahindra had awarded Annual Maintenance Contract for the software to the appellant. The appellant has a dedicated team which manages AMC and warranty projects. The cost for the same is apportioned and deducted from the gross receipts of the appellant. 574,060 149,251 424,809 Total 9,058,514 8,909,263 9. We see no infirmities in this computation showing the element of income embedded in the receipts which have been t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied in some situations, such as when business operations are somewhat evenly or even in a significant manner, spread over the residence and source jurisdiction, but that s not the case here. Right now, we are dealing with a situation in which a major portion of income, by release of retention money as also by addition of an additional user by the customer, is a somewhat passive income, even though in the nature of business receipt, and as such, to that extent, allocation of all the expenses incurred by the assessee, in respect of such earnings, will not be justified. As regards the income from maintenance contracts, the relates costs have already been allocated and the Assessing Officer has not pointed out any infirmity in the same. In this view of the matter, quantification of income for the purpose of computing admissible tax credit, as done by the assessee and as reproduced earlier, is accepted. 10. We have noted that the tax credit for both the jurisdictions is to be computed separately but in a similar manner, as is provided in the respective treaties. So far as the tax credit in respect of Indonesian receipts is concerned, as noted above and in view of article 23(1) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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