TMI Blog2021 (3) TMI 343X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of taxes paid in non-tax treaty partner jurisdictions as well. As regards dividend taxes paid abroad, the assessee has not addressed any specific arguments in respect of the same, and it, therefore, appears that the assessee has not proceeded on the basis that if the assessee is to be allowed any foreign tax credits in respect of the taxes paid abroad in respect of the profits of its PEs, the same fate must follow for the taxes paid abroad on the dividend. For the detailed reasons set out above, we have rejected these claims. In this view of the matter, and in the absence of any other specific arguments, this claim of the assessee is also dismissed as devoid of legal merits. We answer the first question that we had identified for our adjudication, i.e., whether or not the assessee is eligible for foreign tax credits for taxes paid in treaty partner jurisdictions, in non-treaty partner jurisdictions, and in respect of foreign dividends, we answer the same in negative, and against the taxpayer. These claims for the foreign tax credits are thus dismissed. Claim for deduction in respect of taxes paid abroad - whether or not the assessee is eligible for a deduction bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f course and normal practice. Just because the coordinate benches have subconsciously taken a stand that seems to be condoning, and in a way legitimizing, a contrary perception, even if that be so, we cannot, particularly after taking a closer look at the situation, follow the same course. When such huge national revenues, involving thousands of crores, are involved in this macro issue, we cannot afford to be superficial, or perfunctory, in our approach. On a separate note, nevertheless, we do uphold the claim of the assessee that these taxes paid abroad will be allowed as a deduction in the computation of the business income of the assessee. - ITA No.: 869/Mum/2018 - - - Dated:- 4-3-2021 - Pramod Kumar, Vice President, And, Vikas Awasthy Judicial Member For the Appellant : C Naresh For the Respondent : Sanjay Singh ORDER PER PRAMOD KUMAR, VP: 1. One of the interesting questions that have come up for our adjudication, in this case, is whether an Indian taxpayer can claim refunds from the Government of India of taxes paid by the said taxpayer outside India, i.e., the foreign Governments, in respect of the income taxes paid abroad on income earned in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting refund due to the appellant bank, the learned Deputy Commissioner of Income Tax -2(1)(1) [hereinafter referred to as DCIT ] has erred in not granting the credit of: a) Income tax paid by the branches of the appellant bank, located outside India, under section 90 of the Income Tax Act, 1961 [hereinafter referred to as the Act ] amounting to ₹ 165,96,87,349; b) Income tax paid by the branches of the appellant bank outside India, under section 91 of the Act, amounting to ₹ 15,79,80.943; c) TDS, on dividend income received from foreign associates of the bank, amounting to ₹ 87,54,656 and the Hon ble CIT(A) erred in confirming the said disallowance. The learned CIT(A) be directed to allow the credit for the aforesaid taxes paid outside India, under section 90 and 91, and enhance the refund due to the appellant bank accordingly. 1B: Without prejudice to Ground 1A above, assuming without accepting that your honours are of the opinion that the credit for taxes paid outside India aggregating to ₹ 182,64,22,948 is not allowable under section 90n and 91 of the Act, as the case may be, while computing the refund due, then appellant bank prays th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid abroad. The assessee is not satisfied. The claim of the assessee is that the taxes so paid by the assessee to the overseas tax jurisdictions, where the related profits are earned, should be given due credit in the computation of refund due to the assessee, and, accordingly, the income tax paid by the assessee to foreign tax jurisdictions should be refunded to the assessee by the Indian tax authorities. This claim was rejected by the Assessing Officer by observing as follows: The claim of the assessee have been perused but not found allowable. As per section 90 of the Income Tax Act, 1961, relief of taxes paid in foreign countries is given against the income tax chargeable under Income Tax Act, 1961 and hence it does not say that the tax paid n foreign countries would be refunded in the cases where income tax chargeable under Income Tax Act, 1961, is NIL. Therefore, the claim of the assessee to refund taxes paid in foreign countries is hereby rejected. 7. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) rejected the claim of the assessee and observed as follows: However, even if the claim of the assessee is to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me benefit. If the contracting country agrees to extend the said benefit, then the assessee gets the relief. In another scenario, though the said income is exempt in this country, by virtue of the agreement, the amount of tax paid in the other country could be given credit to the assessee. Thus for the payment of Income-tax in the foreign jurisdiction, the assessee gets the benefit of its credit in this country. From the above said Para it can be clearly seen that the relief is in respect of grant of relief and credit for the taxes paid in other country. This read with the Para 33 of the said order makes it clear that the credit or the relief which is available is in respect of Indian Income-tax payable and it would not be open to take the credit of such taxes paid outside India if there are no Indian Income-tax payable by the assessee. The provisions of section 90(1)(a)(ii) cannot be interpreted to mean grant of refund to the assessee of taxes paid by such assessee outside India by the Indian authorities under the situations when there are no tax is payable by the assessee in India, in this view of the matter, it is held that the reliance placed by the assessee on the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [(2013) 29 taxmann.com 250 (Bombay)]. All that subject to tax in India means, according to the learned counsel, is that the income in question should be subjected to Indian tax laws whether or not there is any actual liability to tax, and that clearly is the situation before us. It was put to the learned counsel that liable to tax and subject to tax are two different terms used in the tax treaties, and in the light of his hypothesis, will there be the line of demarcation between liable to tax and subject to tax , he did not have anything to say. When asked whether he does indeed pray that the taxes paid abroad contributed in the respective national exchequers should be refunded by the Indian tax administration and from the Indian exchequer, he does confirm that prayer. Learned counsel for the assessee then takes us through the related tax treaty provisions and justifies the interpretation that he is canvassing. We are thus urged to uphold the plea of the assessee. Learned Departmental Representative submits that he has already filed a written note in support of his stand, and he would seek to rely upon the same. He nevertheless makes brief submissions supporting the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax, and, therefore, the case falls under Section 90(1)(a)(ii). It is then pointed out that 10A was held to be in the nature of exemption and, therefore, it cannot be said that the said income was not liable to tax, but then, in the light of the subsequent judgment of Hon ble Supreme Court in the case of CIT Vs Yokogawa India Ltd [(2017) 77 taxmann.com 41 (SC)], section 10A is required to be treated as deduction and not as an exemption, and thus the decision of Hon ble Karnataka High Court ceases to be good in law. It is then pointed out that even going by the interpretation canvassed by Hon ble Karnataka High Court, such a refund is permissible as a result of relaxation in the nature of treaty that India can enter under section 90(1)(a)(ii) but then this statutory came into effect from 1st April 2004 and all the related tax treaties were entered into by India well before that date. This decision cannot, therefore, have any impact of the tax treaties which were entered into prior to that date. Learned Departmental Representative subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits is only ₹ 191.39 crores as the foreign profits of ₹ 635.19 crore are set off against the same. It is submitted that such double jeopardy will be absolutely unjust and inequitable to the assessee. We are, in effect, once again urged to direct the Assessing Officer to refund the taxes paid by the assessee abroad. Our analysis on the first issue for consideration 10. Let us now deal with the specific claims made by the assessee. The incomes earned by the assessee outside India, and taxes paid by the assessee in the respective jurisdiction are as follows: Sl No. Tax jurisdiction / concerned Income as per tax laws of the respective jurisdiction Taxes paid in the respective tax jurisdiction 1 United Kingdom 164,83,03,346 42,85,58,870 2 Singapore 148,75,29,708 24,27,31,477 3 United States of America 134,29,98,097 43,57,35,733 4 Japan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income and chargeable gains, owned by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with the provisions of this Convention shall be deemed to arise from sources in that other Contracting State. [Emphasis, by underlining, supplied by us] 12. The scheme of Article 24(2) is like this. The first important point is that the tax credits being granted is subject to the provisions of the domestic law, which, however, shall not affect the general principles under this treaty provision. However, as the domestic law provisions in this regard, introduced vide rule 128 of the Income Tax Rules 1962, have come into effect only with effect from 1st April 2017, that rider is wholly academic in the present context. The second important point is that the income in question, in respect of which foreign tax credit is to be given, must have been subjected to tax in both the jurisdictions, i.e., United Kingdom as also in India. And third point is that if the income in question has been subjected to tax in both the jurisdictions, i.e. UK and India, only so much of tax credit is given as is proportionate to the income so doubly taxed vis- -vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stating the definition as an individual who is present in the UAE for a period or periods aggregating totalling in aggregate at least 183 days in the calendar year concerned, and a company, which is incorporated in UAE and which is managed and controlled wholly in UAE . Quite clearly, therefore, the expression liable to tax is no longer used in this treaty and, the actual taxation of an income ceases to be relevant for this purpose. In any event, what this decision holds is that the actual taxation of an income is not availing the treaty benefits in general, because the term liable to tax , as appearing in the definition of a resident, refers to a locality related attachment leading to residence type taxation, and not the taxation per se. However, the entitlement of tax credits uses the expression of the related income having been subjected to tax in both the tax jurisdictions, and that is the pre-condition for being granted foreign tax credits. Liable to tax is one thing, and subjected to tax is another. When we are to compare a tax treaty with, say, a building or a residential unit, if liable to tax is the key to open the main door, i.e., entitle someone to the tax tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a resident either in its hands or in the hands of its beneficiaries . What essentially follows from this discussion is that so far income being subjected to tax in a particular jurisdiction is concerned, that requirement can be met when income tax is actually levied in respect of the said income in the jurisdiction in question, and, to this extent, we are in respectful agreement with the views so expressed in the said ruling. We may, in this regard, refer to a judicial precedent from the United Kingdom which has, in extended and profound discussions, taken note of judicial precedents from the other part of the world- including India, as also of the academic literature and the IFA and OECD reports, and analyzed this issue in great detail. In the case of Paul Wiser Vs The Commissioners [(2012) UK FTT 501 (TC)], explaining the connotations of expression subject to tax , the United Kingdom First Tier Tribunal has observed as follows: 24. An Australian case, Emanuel v Federal Commissioner of Taxation [1968] HCA 57, concerned the Australia/UK double tax treaty. At the relevant time, the rate of Australian withholding tax on domestic source dividends was 30%. Under the treaty, how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing in the tax net, proviso (b) speaks of actual taxation. 27. The distinction between liable to tax and subject to tax has been the topic of some debate within the international tax community. This debate has been alluded to in a number of academic commentaries. Ms McCarthy referred me to one, from the Canadian Tax Journal (1996) Vol 44, No 2, 408 entitled A Resident of a Contracting State for Tax Treaty Purposes: A Case Comment on Crown Forest Industries by a number of contributors led by David A Ward of Canada, and including, from the UK, Dr John Avery Jones. The focus of the article is on the case in the Supreme Court of Canada of The Queen v Crown Forest Industries Limited et al., 95 DTC 5389 (SCC) a case on whether a Bahamian corporation carrying on business in the US and with a place of management there was a resident of the US within the US/Canada double tax treaty. In that case, the Supreme court of Canada concluded that in interpreting the term resident of a contracting state in that treaty the expression liable to tax required the person in question to be subject to as comprehensive a liability to taxation as is imposed by a State. That analysis arguably ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the commentary. 32. In its reference to Article 18 of the Model on the taxation of pensions, the commentary refers to the possible mismatches that can arise where the contracting states may have different rules regarding pensions. It refers particularly to the position where one contracting state regards a deduction for pension contributions essentially as a deferral of tax on the part of the employment income that is saved towards retirement, and the other state, in which the individual becomes resident, does not tax pension benefits. In such cases the commentary refers to examples of provisions which States are free to agree bilaterally. One such possible provision, which the commentary cites as an example of a provision allowing source taxation of pension payments only where the state of residence does not tax those payments is as follows: However, such pensions and other similar remuneration may also be taxed in the Contracting State in which they arise if these payments are not subject to tax in the other Contracting State under the ordinary rules of its tax law. This is therefore an example of the expression subject to tax being used to draw a distinction bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income being subject to tax; the position would have been covered by the mere reference to the individual being a resident of Israel. 36. It follows that I do not accept Mr Weiser s arguments on the proper meaning to be given to Art XI(2). Nor do I accept that the terms of Art XI are ambiguous or anything other than clear and, adopting Mr Weiser s phraseology, transparent. 37. Ms McCarthy referred me to certain references from HMRC s International Tax Manual to illustrate the long-standing published view of the phrase subject to tax . Paragraph 332210 of that manual was first published on HMRC s website on 29 December 2006. It reads: INTM332210 DT applications and claims Subject to tax Background The expression subject to tax usually means that the person must actually pay tax on the income in their country of residence. However, a person is still regarded as subject to tax if, for example, he or she does not pay tax because their income is sufficiently small that it is covered by personal allowances that are available to set against liability to tax in the other country. A person is not regarded as subject to tax if the income in question is exempted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is a specific reference in clause 2(a) of Article 24 to the amount of tax payable, - whether directly or by deduction. But with regard to the Indian tax there is no reference to tax exemption or concession in the hands of a resident in India. There is only a reference to the Indian tax payable and it can mean only the tax liability arising out of the assessment of the amount of royalty in India. What is subjected to tax in both the countries is ₹ 9,48,647 and so the assessee is entitled to the credit on the Singapore tax of ₹ 3,79,459, i.e., tax calculated at 40 per cent on the sum of ₹ 9,48,647. Though it has to be limited to an amount not exceeding that portion of Indian tax which such income bears, i.e., the doubly taxed income of ₹ 9,48,647 bears to the entire income chargeable to Indian tax, as the Indian income-tax at 50 per cent comes to ₹ 4,74,323, the ceiling is not applicable in this case. The assessee is thus entitled to a credit of ₹ 3,79,459 being the Singapore tax paid on the income subjected to tax in both countries. 12. In this connection it is useful to refer to section 91 which provides for relief in respect of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is subjected to tax again in India, then, the provisions of section 91 of the Act would come into operation and the assessee can claim appropriate relief on the doubly taxed income. . . . [Emphasis supplied] 14. It may be seen that the Court has used the expression doubly taxed to mean that the income taxed outside India is subjected to tax again in India. The view taken is that the same income should have been subjected to tax in both countries. In the circumstances of this case, we hold that the CIT(A) was justified in confirming the order passed by the Assessing Officer allowing the D.I.T. relief on the Singapore tax on net amount of royalty subjected to tax in India. This ground of appeal is accordingly decided against the assessee. 18. In view of the above discussions, we are of the considered view that the income earned by the assessee in the United Kingdom cannot be said to have been subjected to tax in India . While it did indeed suffer taxation in the United Kingdom, as the assessee did not have any taxable income in India, and as this income was offset against the losses incurred by the assessee outside of UK, the income so earned in UK was never subjected to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of tax payable by the assessee in India. 21. Article 24(2) makes it clear that credit will be available against the Indian tax payable in respect of such income, but in amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax . Essentially, therefore, the foreign tax credit is available only against the Indian tax payable on such income. As a corollary to this position, when Indian tax payable in respect of such income is nil, there cannot be any foreign tax credit against available to the assessee. Even if such an income is a positive figure, say x amount, and the proportionate tax payable on such income is less than x , say y amount, the foreign tax credit will be restricted to y amount only. To illustrate, let us assume an assessee earns ₹ 1,00,000 in UK whereas his total global income taxable in India is ₹ 10,00,000, and pays 50% tax thereon in the UK, whereas tax rate payable by the assessee in India in respect of such income is only 30%. In this case, whereas the assessee will pay ₹ 50,000 as tax in the UK, the admissible tax credit will only be ₹ 30,000 even tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le taxation, under the exemption method, which hardly finds application in the Indian tax treaties or under the domestic law, once an income is taxed in the source jurisdiction, it is excluded from the scope of taxation in residence jurisdiction. Once doubly taxed income itself is excluded from the scope of taxable income, which eliminates double taxation of an income. The second method of relieving this double taxation of income is the credit method, and it is in this context that foreign tax credits are relevant. In Prof Brian J Arnold and Prof Michael J McIntyre, in their book International Tax Primer [Second Edition, ISBN 90-411-8898-3, published by Kluwer Law International, The Netherlands, @ page 36], describe this method, inter alia, as under: Under the credit method, foreign taxes paid by a resident taxpayer on foreign-sourced income generally reduce the domestic taxes payable by the amount of foreign tax. For example, if P pays a foreign tax of 10 on some foreign source income and otherwise would be subject to a domestic tax of 40 on that income, the foreign tax credit reduces the domestic tax from 40 to 30. Consequently, the credit method completely eliminates intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f advantage it derives from a lower rate of tax applied abroad, while warding off the disadvantages inherent in application of a higher rate of tax in the other contracting state [Emphasis, by underlining, is supplied by us] 24. In plain words, therefore, a foreign tax credit is a notional credit, for taxes paid in the foreign jurisdiction, in respect of the taxes so paid and it cannot, in any event, exceed the home jurisdiction tax liability for the resident tax-payer in respect of the said income. UN Model Convention Commentary, which specifically sets out and follows OECD Model Convention Commentary in this regard, observes that Article 23 B, based on the credit principle, follows the ordinary credit method: the State of residence (R) allows, as a deduction from its own tax on the income or capital of its resident, an amount equal to the tax paid in the other State E (or S) on the income derived from, or capital owned in, that other State E (or S), but the deduction is restricted to the appropriate proportion of its own tax . [Para 57, Article 23, UN Model Tax Convention Commentary, 2011]. On a similar note, Prof Michael Lang, in his book Introduction to the Law of Dou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be 10 (40 less 30). Her overall tax liability is 40 (30 Country A tax and 10 Country B tax), which is consistent with her residence country progressive tax rate. For this reason, the foreign tax credit method is viewed as consistent with capital export neutrality (see above at 2.2.1). Like the exemption method, the foreign tax credit method gives rise to substantial difficulties. Its apparent purpose is to maintain consistency with the residence country's progressive tax rate system. This is consistent with the residence country being in a better position than the source country to adjust overall tax liability according to a person's ability to pay taxes, i.e. according to the principle of equity. However, whether consistency with progressive taxation is maintained (and so consistency with capital export neutrality) depends on how the residence country treats the situation in which the foreign tax exceeds the tax liability in the residence country. Returning to the example of Beth, now presume that her Country B marginal tax rate is 20 per cent, so her Country B tax with respect to the Country A income is 20. This is less than the Country A tax of 30 and the ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax credit will exhaust Beth's Country B tax liability on that income but not reduce Beth's Country B tax on Country B source income. Beth pays 30 tax to Country A (on her Country A source income) and 20 tax to Country B (on her Country B source income). 26. In principle thus, there cannot be any occasion of refund of taxes paid in the source jurisdiction by the residence jurisdiction. Much as we researched, that is the only approach we could find so far as the operation of the credit system in the tax treaties is concerned. In other words, therefore, we could not find any academic support for the proposition that under the tax treaties, the taxes paid in the source jurisdiction could exceed the actual income tax payable in respect of the said income in the residence jurisdiction. On the first principles, therefore, under the bilateral tax treaty arrangements, which are dealt with under section 90 of Income Tax Act 1961, the scheme of eliminating double taxation under the credit method, in principle, for tax credits, in respect of taxes in source jurisdiction, in excess of the residence jurisdiction tax liability. Quite contrary to the proposition canvassed before us, a w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s foreign tax credit to be carried forward or back for offset. Many of them, however, do not have provisions for the carry-over of excess credits, which are then lost. [Emphasis, by underlining, is supplied by us] 27. Similar is the position taken by the Institute of Chartered Accountants of India, which, in the Study Material for International Tax- Practice at page 3.452, states as follows: Carry forward/carry back of excess Foreign Tax Credit A taxpayer cannot claim full FTC in India if the amount of income tax paid in the foreign Country is higher than the amount of income tax payable in India on that foreign source income. Some Countries allow carry forward/carry back of excess Foreign Tax Credit. Such option is not available in India and thus, result in adding to the cost of the taxpayer in India. [Emphasis, by underlining, is supplied by us] 28. Clearly, therefore, the scheme of tax credits, as evident from the international tax literature and model convention commentaries, do not envisage any situation in which the excess foreign tax credit can result in a situation in which a taxpayer can get refunds, from the exchequer of residence jurisdictions, in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility, in the realm of a contingent event. The taxation reliefs cannot be on the basis of possibilities. The second point is that one has to see the legal position in the year in which the double jeopardy actually hits the assessee. Rule 128 of the Income Tax Rules 1962, introduced with effect from 1st April 2017, specifically restricts the foreign tax credit in the manner and to the extent as specified therein [See rule 128(1)], and, therefore, so far as the assessment years 2017-18 onward are concerned, a taxpayer cannot even claim carry forward of the excess tax credits. It is well settled in law, and as provided in the relevant treaty article itself, foreign tax credits are admissible subject to the domestic law provisions inasmuch as these credits are subject to the provisions of the law regarding the allowance as a credit against Indian tax of tax paid in a territory outside India [Article 24(2)]. So far as the period prior to 1st April 2017 is concerned, without expressing any merits on the admissibility or otherwise, of carrying forward foreign tax credits, all we can say is that even for such a double disadvantage, the double disadvantage could at best arise in which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Wipro s case (supra). 31. We may, at the outset, point out that the questions which came up for consideration before Hon ble Karnataka High Court, was whether the Tribunal was right in holding that credit for income tax paid in a country outside India in relation to an income eligible for deduction under section 10A would not be available under section 90(1)(a) . Their Lordships decided this issue in favour of the assessee and concluded that Merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax. The said exemption granted under the statute has the effect of suspending the collection of income tax for a period of 10 years. It does not make the said income not leviable to income tax. The said exemption granted under the statute stands revoked after a period of 10 years. Therefore, the case falls under Section 90(1)(a)(ii) . Whatever observations, relied upon by the learned counsel, have been made by Their Lordships are the observations made in this context, and, should, therefore, be construed as such only. As observed by Hon ble Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the global consensus, foreign tax credit cannot exceed the domestic tax liability- save and except for carry forward or carry back of the excess foreign tax credits. That proposition remains intact. A coordinate bench of this Tribunal, in the case of Maharashtra State Electricity Board vs. JCIT [(2002) 82 ITD 422 (Mum)], has, speaking through Shri M K Chaturvedi, the then Vice President, observed that Legal precedents are like statistics. If you manipulate them, you can prove anything. Each case depends on its own facts, and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect. Minutest differences on facts have swayed the judicial decisions one way or the other. In deciding such cases, one should avoid temptation as said by Cordozo, by matching the colour of one case against the colour of another . Let us, in this light, look at a very significant facet of the case, so far as relevant for our fact situation. As a simple look at the figures set out in the said decision would show, the amount of foreign tax credit claimed was substantially less than the Indian tax liability. For example, in the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here are certainly other aspects of decisions, which may be relevant and critical in different facets of foreign tax credit situations. Therefore, one has to take a conscious call about the binding nature of this judicial precedent outside of Hon ble Karnataka High Court jurisdiction. The second reason is that this judicial precedent is widely perceived to hold, even though wrongly so, that the full tax credit is required to be given in most of the treaty situations based on the wording of the treaties, going much beyond the tax credit proportionate to the related domestic tax liability- as is, by and large, scheme of Indian tax treaties, and further, this treatment may even result in a refund of taxes paid abroad. The matter being of wide ramifications not only on fundamentals on the scheme of tax treaties being given effect in India but also has a huge impact on the national exchequer, the matter deserves to be dealt with in some detail. Let us, in this background, examine the binding nature of this judicial precedent outside Hon ble Karnataka High Court s jurisdiction. While dealing with judicial precedents from non-jurisdictional High Courts, we may usefully take of observation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, inter alia, on the basis that, as held by Hon ble Supreme Court in the case of CIT Vs Vegetable Products Ltd (88 ITR 192), when two interpretations are possible, and one of the views is in favour of the assessee, the view in favour of the assessee, and a decision of Hon ble non-jurisdictional High Court is required to be treated at least as a possible view of the matter. This principle has, however, two major exceptions. It has been held that the rule of resolving ambiguities in favour of tax-payer does not apply to deductions, exemptions, and exceptions which are allowable only when plainly authorised. This exception, laid down in Littman vs. Barron 1952(2) AIR 393 and followed by apex Court in Mangalore Chemicals Fertilizers Ltd. vs. Dy. Commr. of CT (1992) Suppl. (1) SCC 21 and Novopan India Ltd. vs. CCE C 1994 (73) ELT 769 (SC), has been summed up in the words of Lord Lohen, in case of ambiguity, a taxing statute should be construed in favour of a tax-payer does not apply to a provision giving tax-payer relief in certain cases from a section clearly imposing liability . The rule of resolving ambiguity in favour of the assessee does not also apply where the interpretatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. One inconvenience is that the interpreter is likely to be required to cope with disorganized composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for very good reason. To get agreement, politic uncertainty is called for. . . The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being 'unconstrained by technical rules of English law, or by English legal precedent, but conducted on broad principles of general acceptation'. This echoes the optimistic dictum of Lord Widgery C. J. that the words 'are to be given their general meaning, general to lawyer and layman alike. . . the meaning of the diplomat rather than the lawyer'. (see Francis Bennion, Statutory Interpretation, page 461 (Butterworths, 1992, second edition) B: 91. In John N. Gladden v. Her Majesty the Queen 85 D.T.C. 5188 the principle of liberal interpretation of tax treaties was reiterated by the Federal Court, which observed : 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contains many principles of customary international law, and the principle of interpretation, of Article 31 of the Vienna Convention, provides a broad guideline as to what could be an appropriate manner of interpreting a treaty in the Indian context also. 61. This Court in Union of India v. Azadi Bachao Andoian [2003] 132 Taxman 373 ,approvingly noted Frank Bennion's observations that a treaty is really an indirect enactment, instead of a substantive legislation, and that drafting of treaties is notoriously sloppy, whereby inconveniences obtain. In this regard this Court further noted the dictum of Lord Widgery, C.J. that the words are to be given their general meaning, general to lawyer and layman alike.... The meaning of the diplomat rather than the lawyer. The broad principle of interpretation, with respect to treaties, and provisions therein, would be that ordinary meanings of words be given effect to, unless the context requires or otherwise. However, the fact that such treaties are drafted by diplomats, and not lawyers, leading to sloppiness in drafting also implies that care has to be taken to not render any word, phrase, or sentence redundant, especially where ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll. We would rather be guided by the obiters of the Hon ble Supreme Court. 38. Viewed thus and following the path shown by Hon ble Supreme Court, what is to be essentially seen is whether the interpretation being assigned by the learned counsel, i.e., seeking a refund of taxes paid in the UK from Indian tax authorities, could be said to be a correct meaning in the light of the context of the treaty terms and in the light of its object and purpose, or in the light of the principles based on which tax treaties are required to be interpreted. Unless that is so, the condition laid down under Article 31(1) of Vienna Convention, which has been quoted, with approval, by Hon ble Supreme Court in the landmark judgments in the cases of Azadi Bachao Andolan (supra) and Ram Jethmalani (supra), as also the observations made by the Hon ble Supreme Court with respect to principles of tax treaty interpretations will not be satisfied. It is also important to bear in mind the fact that these expressions being terms employed in the tax treaties, requiring interpretation in the context of the tax treaties, the principles of interpretations of these terms are not the same as the interpretation of st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e consistently referred to, and relied upon, Vienna Convention on Law of Treaties (VCLT), e.g. in the case of Azadi Bachao Andolan (supra). Elaborating upon the principles governing interpretation of tax treaties, Lord Denning, in Bulmer Ltd. v. S.A. Bollinger [1972] 2 AER 1226, has observed that . The treaty . is quite unlike any of the enactments we have been accustomed It lays down general principles. It expresses aims and purposes .. what are English Courts to do when they are faced with a problem of interpretation? They must follow the European pattern. No longer must they examine the words in meticulous detail. No longer must they argue about the precise grammatical sense. They must look to the purpose or intent Echoing these views and justifying his departure from the plain meaning of the words used in the treaty, Goulding J. in IRC v. Exxon Corpn. [1982] STC 356 at page 359, observed that In coming to the conclusion, I bear in mind that the words of the Convention are not those of a regular Parliamentary draughtsman but a text agreed on by negotiations between the two contracting Governments. Although I am thus constrained to do violence to the language of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a deduction from the tax on the income of that resident an amount equal to the Singapore 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 to the income which may be taxed in Singapore. 42. In addition to the discussions earlier in the context of foreign tax credit claim for taxes paid by the assessee in the UK, it is clear that in this case also the foreign tax credit is restricted to the Indian tax attributable to the income which has been taxed in Singapore. Learned counsel fairly agrees that so far as the year before us is concerned, no part of the said income has been taxed in India inasmuch the total income of the assessee was a negative figure. There is no question of any admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 underlying philosophy of the source rule on gross basis, which prescribes taxation of certain incomes on gross basis in the source country, is that irrespective of actual overall profits and losses in earning those incomes, the assessee must pay a certain amount of tax, at a negotiated lower rate though, in the country in which the income in question is earned. It is also noteworthy that the heading of Article 25 is Elimination of double taxation but then there has to be double taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the CIT(A) on this issue and uphold the stand taken by the Assessing Officer. 46. As for the learned counsel s plea that this decision is no longer good law in the light of Hon ble Karnataka High Court s decision in Wipro s case (supra), all we can say is that the issue before Hon ble Karnataka High Court was materially different, that the decision of a non-jurisdictional High Court is not binding in all the situations, and that, whether the related foreign tax credit can be given in this fact situation or not, no such credit, for the detailed reasons earlier, such credit, in this case, will result in a situation in which taxes paid to the US Exchequer will have to be refunded by the Indian Exchequer- something, for the detailed reasons set out earlier, clearly impermissible, and, of course, unintended, under the scheme of the tax treaties. 47. The foreign tax credit claim of ₹ 134.29 crores, being taxes paid in the USA, is also thus rejected. 48. So far as foreign tax credit claim of ₹ 115.31 crores, being taxes paid in respect of profits earned by the branch offices of the assessee in Japan, are concerned, the relevant tax treaty provisions in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of profits earned by the Belgian branch of the assessee bank. 52. So far as this claim of the assessee is concerned, we find that the related tax treaty provision under the India Belgium Double Taxation Avoidance Agreement [(1997) 228 ITR (Stat) 79; Indo Belgian tax treaty, in short] is as follows: ARTICLE 23- ELIMINATION OF DOUBLE TAXATION 1. The laws in force in either of the Contracting States will continue to govern the assessment and taxation of income in the respective Contracting States except where express provision to the contrary is made in this Agreement. 2. In the case of India, double taxation shall be avoided as follows:- (a) Where a resident of India derives income which, in accordance with the provisions of the Agreement, may be taxed in Belgium, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in Belgium whether directly or by deduction. Such deduction shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in Belgium. Further, where such resident is a company by which surtax is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at resident, an amount equal to the tax paid in Kenya. Such deduction shall not, however, exceed that portion of the tax as computed before the deduction is given, which is attributable, as the case may be, to the income which may be taxed in Kenya. (b) Where in accordance with any provision of the Agreement income derived by a resident of India is exempt from tax in India, India may nevertheless, in calculating the amount of tax on the remaining income of such resident, take into account the exempted income. 57. Once again, in addition to the discussions earlier in the context of foreign tax credit claim for taxes paid by the assessee in UK, it is clear that in this case also the foreign tax credit is restricted to the Indian tax attributable to the income which has been taxed in Kenya. Learned counsel fairly agrees that so far as the year before us is concerned, no part of the said income has been taxed in India inasmuch the total income of the assessee was a negative figure. There is no question of any admissible foreign tax credit in this year. In any event, any such foreign tax credit, on the facts of this case, will result in a refund of taxes paid to the Kenyan exchequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is concerned, we find that the related tax treaty provision under the India France Double Taxation Avoidance Agreement [(1994) 209 ITR (Stat) 130; Indo French tax treaty, in short], is as follows: ARTICLE 25- ELIMINATION OF DOUBLE TAXATION 1. Double taxation shall be avoided in the following manner: In the case of India: (a) Where a resident of India derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in France, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in France, whether directly or by deduction; and as a deduction from the tax on the capital of that resident an amount equal to the capital tax paid in France. Such deduction in either case shall not, however, exceed that part of the income-tax or capital tax (as computed before the deduction is given) which is attributable, as the case may be, to the income or the capital which may be taxed in France. Further, where such resident is a company by which surtax is payable in India, the deduction in respect of income-tax paid in France shall be allowed in the first instance from income-tax payab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable by him of a sum calculated on such doubly taxed income (emphasis supplied) 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 . A plain reading of this statutory provision shows that double taxation of an income is a condition precedent for this relief because the relief is granted only with respect to such doubly taxed income , and when there is no income which has been taxed doubly, there is no question relief being granted under section 91(1). Learned counsel s reliance on the judgment of Hon ble Karnataka High Court, in the case of Wipro (supra), is of no avail inasmuch as all that this decision holds is that even though India has not entered into any agreement with the State of a Country and if the assessee has paid income tax to that State, the income tax paid in relation to that State is also eligible for being given credit to the assessee in India but then the issue is not the admissibility of foreign tax credit but the quantum of the tax credit. No doubt foreign tax credit is admissible in principle, but the quantum of this credit, in the present case, is nil inasmuch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. The Indian tax is reduced by the amount of tax paid by the assessee in the foreign country on such doubly taxed income. In a given case, the foreign income that has gone into computation may be much more than the income which actually suffered double taxation. The intention of the Legislature is not to exempt from tax the whole foreign income which hasgone into computation ; not also that the whole of the tax paid by an assessee in a foreign country be deducted from out of income-tax payable by him in India. Unilateral relief is granted to a person resident in India in respect of his income which accrued or arose outside India in countries with which no agreement for double taxation exists under section 90 of the Act to the extent his foreign income suffers double taxation in India. The relief granted by section 91 of the Act is different from and independent of relief by way of the reduction of income by operation of section 80RRA of the Act. For granting relief under section 91 of the Act, the test is what is the income of the assessee which is being doubly taxed. Relief is available only in respect of such income which is doubly taxed by allowing deduction of tax on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. Respectfully we agree with this test. For the above reasons, we answer the question in the negative, that is, in favour of the Revenue and against the assessee. 71. On a similar note, Hon ble Rajasthan High Court, in the case of Dr R N Jhanji (supra), has observed as follows: 8. We shall first refer to the Supreme Court decision in K.V. AL. M. Ramanathan Chettiar's case (supra) which is the sheet anchor of the argument of the learned counsel for the assessee. This decision was rendered in relation to section 49D of the Indian Income-tax Act, 1922 ('the 1922 Act') corresponding to section 91(1) of the Income-tax Act, 1961. It may be mentioned at the outset that there was no provision corresponding to section 80RRA of the 1961 Act in the 1922 Act, taut section 49D was amended by the Indian Income-tax (Amendment) Act, 1953 and it is with reference to the provisions of section 49D as in existence prior to and after the amendment that the case was decided. Prior to the 1953 amendment, section 49D provided for double taxation relief by giving a deduction from the Indian income-tax payable of a sum equal to one-half of such Indian income-tax or to one-half of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not to the full amount received by the assessee from the foreign employer. It is reasonable to assume that in enacting section 80RRA, the Legislature intended to grant relief under section 91 with reference to the amount of foreign income doubly taxed in accordance with the provisions of the Act and not with reference to the full amount which did not bear tax in this country. . . .The Legislature only intended to prevent double taxation but not to provide an additional benefit in respect of foreign income which is not subjected to tax in this country, . . We are unable to agree that the majority judgment of the Supreme Court in Ramanathan Chettiar's case [1973] 88 ITR 169, supports the assessee's claim for deduction of tax treating the entire income as doubly taxed income ignoring the fact that one-half of such income was not subjected to tax at all in this country. (p. 694) With respect we concur with this view. No other decision on the point was cited at the bar. 11. As a result of the above discussion, we hold that the Tribunal was not justified in holding that the assessee is entitled to relief under section 91(1) of the full amount of tax paid on the total f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have considered the rival submissions. So far as the question relating to the Tribunal not following its order in the case of the applicant itself for A.Y. 1979-80, we find that there is a justification for the same. This is so as the decision of this Court in S. Inder Singh Gill (supra) was noted by the Tribunal on an identical issue while passing the order for the subject assessment year. Thus, the Tribunal had not erred in not following its order for A.Y. 1979-80. In fact, the decisions of this Court in South East Asia Shipping Co. (supra) and Tata Sons Ltd. (supra), which are being relied upon in preference to Inder Singh Gill (supra) cannot be accepted as both the orders being relied upon by the applicant was rendered not at the final hearing but on applications under Section 256(2) of the Act and at the stage of admission under Section 260A of the Act. This unlike the judgment rendered in a Reference by this Court in S. Inder Singh Gill (supra). Moreover, the decision in South East Asia Shipping Co. (supra) is not available in its entirety. Therefore, it would not be safe to rely upon it as all facts and on what consideration of law, it was rendered is not known. Simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the Revenue. (l) We would have answered the question posed for our consideration by following the decision of this Court in S. Inder Singh Gill (supra). However, we notice that the decision of this Court in S. Inder Singh Gill (supra) was rendered under the Indian Income Tax Act, 1922 and not under the Act. We further note that just as Section 40(a)(ii) of the Act does not allow deduction on tax paid on profit and/or gain of business. The Indian Income Tax Act, 1922 Act also contains a similar provision in Section 10(4) thereof. However, the Indian Income Tax Act, 1922 contains no definition of tax as provided in Section 2(43) of the Act. Consequently, the tax paid on income/profits and gains of business/profession anywhere in the world would not be allowed as deduction for determining the profits/gains of the business under Section 10(4) of the Indian Income Tax Act, 1922. Therefore, on the state of the statutory provisions as found in the Indian Income Tax Act, 1922 the decision of this Court in S. Inder Singh Gill (supra) would be unexceptionable. However, the ratio of the aforesaid decision in S. Inder Singh Gill (supra) cannot be applied to the present facts in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax under the Act to mean also the tax which is eligible to the benefit of Sections 90 and 91 of the Act. However, this departure from the meaning of the word tax as defined in the Act is only restricted to the above and gives no license to widen the meaning of the word tax as defined in the Act to include all taxes on income/profits paid abroad. (o) Therefore, on the Explanation being inserted in Section 40(a)(ii) of the Act, the tax paid in Saudi Arabia on income which has accrued and/or arisen in India is not eligible to deduction under Section 91 of the Act. Therefore, not hit by Section 40(a)(ii) of the Act. Section 91 of the Act, itself excludes income which is deemed to accrue or arise in India. Thus, the benefit of the Explanation would now be available and on application of real income theory, the quantum of tax paid in Saudi Arabia, attributable to income arising or accruing in India would be reduced for the purposes of computing the income on which tax is payable in India. (p) It is not disputed before us that some part of the income on which the tax has been paid abroad is on the income accrued or arisen in India. Therefore, to the extent, the tax is paid abro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons in judicial precedents relied upon by the learned counsel for the assessee, and in the light of extracts from the impugned orders, the core issue, in our considered view, is whether or not the meaning of expression 'tax' appearing in section 40(a)(ii) must remain confined to a tax levied under the Indian Income-tax Act, 1961. As a matter of fact, Hon'ble Bombay High Court, in the case of Reliance Infrastructure Ltd. (supra), Their Lordships have gone to the extent of saying that but for definition of tax under section 2(43) We (Their Lordships) would have answered the question posed for our consideration by following the decision of this Court in Inder Singh Gill (supra) which was rendered in the context of the Income-tax Act, 1922, and added that the ratio of the aforesaid decision in Inder Singh Gill (supra) cannot be applied to the present facts in view of the fact that the Act (Income-tax Act, 1961) defines tax as income tax chargeable under the provisions of this Act In our humble and sincere understanding, given these facts, it is not really possible for us to ignore the question as to what is the impact of Section 2(43) on connotations of expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermined or computed in accordance with the provisions of the IT Act. Sec. 4 of the Surtax Act read with the definition of chargeable profits and the First Schedule make the position abundantly clear. We agree with the view taken by the High Courts of Calcutta [Molins (India) Ltd. v. CIT [1983] 144 ITR 317 (Cal) and Brooke Bond (India) Ltd. v. CIT [1992] 193 ITR 390 (Cal) : TC 15R.590], Bombay (in) Lubrizol (India) Ltd. v. CIT [1991] 187 ITR 25 (Bom) followed in several other decisions of that Court], Karnataka [CIT v. International Instruments Pvt. Ltd. [1983] 144 ITR 936 (Kar), Madras [Sundaram Industries Ltd. v. CIT [1986] 159 ITR 646 (Mad), Andhra Pradesh [Vazir Sultan Tobacco Co. Ltd. v. CIT [1988] 169 ITR 35 (AP)], Rajasthan [Associated Stone Industries Co. Ltd. v. CIT [1988] 170 ITR 653 (Raj)], Gujarat [S.L.M. Maneklal Industries Ltd. v. CIT [1988] 172 ITR 176 (Guj) followed in several cases thereafter], Allahabad [Himalayan Drug Co. Pvt. Ltd. v. CIT [1996] 218 ITR 346 (All)] and Punjab Haryana High Court [Highway Cycle Industries Ltd. v. CIT [1989] 178 ITR 601 (P H) : TC 17R.807]. 44. We are therefore of the considered view that the plea of the assessee does not me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or gains , and that its connotations cannot be treated as restricted to tax under the Income Tax Act. This argument, in the context of deduction in respect of tax outside Income-tax Act, 1961, has already met the approval of Hon'ble Supreme Court. The law laid down by Hon'ble Supreme Court binds all of us under Article 141 of the Constitution of India. Once we are aware about a particular position that Hon'ble Supreme Court has taken, it is not open to us to reach a conclusion which is, or can be perceived as, in defiance to the position taken by Hon'ble Supreme Court. Maybe, if the views expressed were by our jurisdictional High Court, or by any of Hon'ble High Courts after taking into account the views expressed by Hon'ble Supreme Court on that issue, things may have been little different, but that is not the case here. 78. Learned Departmental Representative s plea is only fit to be noted and rejected. It is relevant to note that this decision was rendered by a bench that did not fall in the jurisdiction of this Hon ble jurisdictional High Court, and, for that reason, strictly speaking, this Hon ble jurisdictional High Court judgment was not conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, we reject the plea of the learned Departmental Representative, uphold the plea of the assessee, and direct the Assessing Officer to allow the deductions in respect of taxes paid by the assessee abroad, in respect of which no foreign tax credit is granted to the assessee, in the light of the decision of Hon ble jurisdictional High Court in the case of Reliance Infrastructure decision (supra), and examine the matter be afresh in this light. To this extent, this plea of the assessee is upheld. Our conclusions on the second issue 79. The second question that we had identified for our adjudication, i.e. whether or not the learned CIT(A) was justified in upholding the action of the Assessing Officer in declining deduction, in the computation of business income, of ₹ 182,64,22,948 in respect of taxes so paid abroad, is thus answered in favour of the assessee in principle but the matter is remitted to the file of the Assessing Officer for limited factual verification. Concluding remarks 80. To sum up, the assessee is declined the foreign tax credits for ₹ 182,64,22,948, and, accordingly, we hold that the assessee is not entitled to seek a refund of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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