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2017 (1) TMI 720 - ITAT AHMEDABAD

2017 (1) TMI 720 - ITAT AHMEDABAD - TMI - Foreign tax credit - quantification of income for the purpose of computing admissible tax credit - selection of assessment year - treatment to release of retention money - Indo Singapore tax treaty - taxation in source country and resident country - profitability of the projects while computing the Foreign Tax Credit in respect of doubly taxed income - Held that:- Right now, we are dealing with a situation in which a major portion of income, by release o .....

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ion of income for the purpose of computing admissible tax credit, as done by the assessee and 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 .....

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ble 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 credit in respect of Singaporean receipts, while the formulae for limitation under article 25(2) of the Indo Singapore tax treaty remains broadly the same as it is provided that the credit shall not e .....

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was deducted at source in Singapore. The tax credit of ₹ 5,41,029 in respect of Singaporean receipts is thus clearly admissible. - As against tax credit claim of ₹ 11,12,907, the tax credit of ₹ 9,47,344 is thus indeed admissible. To this extent, the claim of the assessee is upheld. - Decided partly in favor of assessee. - ITA No. 623/Ahd/2015 - Dated:- 3-1-2017 - Pramod Kumar AM and S. S. Godara JM S.N. Soparkar for the appellant K. Madhusudan for the respondent ORDER Per .....

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it be so held now. 2. The learned CIT(A) erred in law and on facts in not allowing entire Foreign Tax Credit amounting to ₹ 11,12,907/- while calculating tax liability of the appellant. 2.1. The learned CIT(A) has erred in disregarding the fact that tax credit has been claimed on the income which has been taxed in both the countries i.e. source country and resident country. 2.2. The learned CIT(A) has erred in not considering actual profitability of the projects while computing the Foreig .....

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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 .....

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3,417. During the course of the scrutiny assessment proceedings, the Assessing Officer noted that the assessee has claimed a foreign tax credit of ₹ 11,12,907. This credit was in respect of the taxes withheld abroad, i.e. in Singapore and Indonesia. The assessee had received an amount of ₹ 47,02,0256, after deduction of tax at source @ 10% i.e. ₹ 5,41,029, from a Singapore based concern by the name of IBM Corporation. The assessee had also received amounts aggregating to ₹ .....

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to which income has suffered tax in India in respect of these receipts is to be computed by reference to the actual MAT liability being divided in the same ratio as the ratio of corresponding foreign receipts to the overall turnover of the assessee. The amount of eligible tax credit was thus worked out to ₹ 75,935. When the assessee was required to show cause as to why the foreign tax credit not be restricted to this amount, the assessee clarified that the gross receipts, which is what are .....

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he tax credit is available in respect of profit or income which is taxed in both the countries as a result of resident country will allow tax credit which should not exceed the tax of Indian tax . It was also pointed out that none of 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 .....

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sible 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 the Assessing Officer, learned CIT(A), inter alia, observed as follows: .....

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evant clauses of DTAA with Singapore and Indonesia, allowed only part of the tax paid as against full credit of foreign tax deducted claimed by the appellant. For this purpose he computed proportionate profit on the receipts from these countries and calculated the income which was being taxed again in India or the doubly taxed income. For calculating the credit of foreign fax deducted he calculated the tax payable on that proportionate income and allowed the credit off the proportionate tax out .....

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reaty. The treaties entered by foreign diplomats who are not experts in drafting and, hence, wherever there is anomaly harmonious interpretation would be warranted. On a careful consideration of all the facts and circumstances of the issue involved, it is noted that the provisions of DTAA and the provisions of section 90 of the Income Tax Act are very clear. For the sake of clarity the provisions of the relevant clauses of DTAA with Singapore and Indonesia are reproduced here under: - . Para 2 o .....

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hich 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 bet .....

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d before allowing any such credit) which is appropriate to the profits or income arising in Indonesia." Section 90 of the Income Tax Act provides that the relief in respect of the income on which taxes have been paid under the Indian income Tax Act and the income tax Act of the other country are to be governed by their agreement between the Indian government and that country, A perusal of the above clauses of DTAA with Indonesia and Singapore clearly show that the amount of fax payable in r .....

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or income arising in that country. Therefore, in my opinion the approach and method of giving the credit adopted by the AO in respect of the tax deducted in Indonesia and Singapore is justified and his in order. The submission of the appellant that the treaties are drafted by diplomats and politicians the interpretations should be done for helping the commercial relations is not acceptable. The provisions of the relevant clauses read with section 90 of the Income tax Act are very clear. In my o .....

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t margin of the enterprise has been seen for allowing the credit. The appellant has claimed that the transactions were renewal of software license and sale of software license on which no expenditure has been incurred in the current year as all expenses were incurred during the phases of development and the same have been charged in earlier year. The submission is not acceptable when the company is taking of several projects at a time and it is not keeping separate accounting in respect of each .....

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n 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 t .....

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income tax paid in that other State. Such deduction shall not, however, 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. ….. not relevant for our purposes India Singapore tax treaty ARTICLE 25- AVOIDANCE OF DOUBLE TAXATION 2. Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Singapore, India shall all .....

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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 to the income which may be taxed in Singapore. ……….. not relevant for our purposes 8. So far as the first issue that we have identified for adjudication, i.e. the manner in which the quantum of income eligible which is required to be treated as taxed in both the countries ,is concerned, there is no guidance available in the tre .....

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the UN 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, ther .....

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equire 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 allocated to earnings from Singapore and Indonesia. As regards earnings from maintenance contract, the assessee has allocated the costs on a proportionate basis and no defects are pointed out in the allocation so made by the assessee. However, there seems to be no logic in allocating a share, in .....

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when the income element cannot be worked out on some other reasonable basis on the facts of a particular case. So far as the facts of the present case are concerned, we have also noted that the assessee has, during the course of the assessment proceedings, given the working on the computation of income- a copy of which is placed at page 79 of the paper-book filed before us. This computation is as follows: Customer Name Country of customer Transaction Details Income (Rs.) Expense (Rs.) Net Profit .....

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5,323,085 PT Tech Mahindra Indonesia Sale of Incremental Software License PT Tech Mahindra had purchased software from the 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 .....

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also placed before us at pages 69 onward of the paper-book. On a perusal of these details, we find that as far as release of retention money of ₹ 53,23,085, released after validation of software by IBM Singapore, is concerned, we find that it is uncontroverted claim of the assessee that entire related expenses have been incurred in the earlier years as the software supply was completed in financial year 2006-07. There cannot obviously be any incremental cost at the point of time when rete .....

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this year. As regards receipt of ₹ 5,74,060, this is in respect of annual maintenance fees but then there is a dedicated team for this purpose and the costs relatable to this particular receipt have been computed by apportioning these costs. We see no infirmity in this computation either. In our considered view, therefore, the computation of income element, as given by the assesse, is fair and reasonable and, in any event, the Assessing Officer has not pointed out any specific infirmities .....

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ty for the general proposition that only marginal or incremental costs incurred in respect of foreign income should be taken into account and the overheads cannot be allocated thereto. As we have noted earlier, the allocation of proportional deductions can be justified 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 .....

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he 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 the applicable tax treaty, it cannot exc .....

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