TMI Blog2021 (1) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... treaties under consideration states that, foreign tax credit shall not 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 . We also note that, these clauses uses the expression 'income', which essentially means 'income' embedded in the gross receipt, and not the 'gross receipt' itself. We therefore do not agree with the computation adopted by Ld.AO. For eliminating double taxation of doubly taxable income in the hands of assessee, it would be necessary to establish the taxes paid by assessee in USA, Japan, and Germany. The condition stipulated is very clear that FTC is available on taxes paid in these countries. India- Korea DTAA - On perusal of the said Article, we find that, in India FTC is available to the taxes paid in Korea and such credit shall not exceed the taxes payable in India on doubly taxed income. Thus there is a difference in FTC available to assessee on taxes paid in USA, Japan and Germany vis-s-vis Korea. In the present facts of the case, respective treaty countries withheld taxes against income from the sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abulated by assessee for assessment year 2013-14 reproduced hereinabove. Our observations for assessment year 2013-14 in allowing tax credit to assessee is applied mutatis mutandis for year under consideration. Insofar as Taiwan is concerned, section 91 also interprets computation of foreign tax credit to assessee in the similar manner. Section 91 contemplates the situation where there is no agreement between the Central Government and the other country concerned for the grant of relief in respect of income which has suffered taxation in both the countries or for the avoidance of double taxation of the same income. This section lays down its own conditions for and extent of the relief contemplated to be given to an assessee. The first condition is that the assessee should be a resident in India as per term defined in Section 6 of the Act. The second condition is that the income which has accrued or arisen outside India to such resident in India should not be deemed to accrue or arise to him in India. The third condition is that such resident-assessee should have paid income-tax on such income under the law in force in that country. Once these three conditions are fulfilled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout prejudice to the above, the Appellant ought to have been allowed a deduction of foreign taxes paid under section 37(1) read with section 40(a)(ii) of the Act to the extent relief of FTC is denied to the Appellant having regard to the ratio of the decision of the Hon'ble Bombay High Court in the case of Reliance Infrastructure Ltd. reported in 390 ITR 271. 5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered. Asst.Yr.2014-15 1. That the learned CIT[A] erred on facts and in law in restricting the claim of Foreign Tax Credit (FTC) to ₹ 71,11,538/- as against ₹ 2,36,78,371/- claimed by the Appellant. 2. That the Learned CT[A] erred in not granting the tax credit in full as claimed by the appellant having regard to the ratio of the decision of the Hon ble Karnataka High Court i.e. the jurisdictional High Court in the case of Wipro Limited reported in 382 ITR 179. 3. That the learned CIT[A] erred in restricting the foreign tax credit claimed by the appellant by applying a blanket formula to the entire income and granti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the rate of tax in India. He was of the opinion that assessee compared the effective rate of tax outside India on the basis of ratio of withheld tax 2 total receipts on which tax is withheld, whereas 4 effective rate in India the same has been computed on the basis of ratio of total tax payable to income on which tax is calculated. Ld.AO was of the opinion that the effective tax rate outside India was calculated by assessee on receipts whereas the effective tax rate payable in India was calculated on income. He was of the opinion that it is a mismatch there is difference of 9.9% between effective tax rate outside India on receipts and effective tax rate in India on income. Ld.AO was of the opinion that as per DTAA, relief has to be calculated based on deduction from tax on income of that resident and not the receipts. Ld.AO thus was of the opinion that effective rate of taxation by USA exceeded 100% of income, and hence, assessee is eligible for relief of ₹ 40,48,267/- under section 90, as it is the amount of tax paid in India in respect of receipt of ₹ 12,60,52,970/- from outside India. 5. Aggrieved by order of Ld.AO, assessee preferred appeal before Ld.CIT(A). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceed that part of the Income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States. (or Germany or Japan) 4.6 In case of USA/Germany/Japan. the restriction of credit of foreign tax available to a resident of India is determined by the words Income tax which is attributable to the income which may be taxed in the United States/Germany/Japan. So for the purpose of determining FTC available to the appellant it is important to work out the income of the appellant in relation to the receipts of royalty and license fee from these three countries. The approach of the appellant, that receipt and to be considered as income which is doubly taxed i.e. in India as well as in these three other countries, is not correct. Here it is important to note that if the argument of the appellant that receipt from foreign countries should he considered as income included in the income shown in the return of income in India is accepted then it would lead to a very anomalous situation as the income of the appellant would be 100% from foreign as there are no expenses but in India it will be having loss which would be as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . At an effective rate of tax of 32.44% on income of appellant in India, the corresponding tax on ₹ 1,51,16,823/- would be ₹ 49,04,653/- . So as against withheld tax of ₹ 1,46,68,133/- paid by the appellant in relation to receipts from USA/Germany/Japan, the appellant would get credit of foreign tax to the extent of ₹ 49,04,653/-. 4.9 As regards DTAA with Korea, the relevant words which need to be interpreted are: The credit shall not, however, exceed that proportion of Indian tax which the income from sources within Korea bears to the entire income subject to Indian tax. 4.10 In case of Korea the restriction of credit foreign tax available to a resident of India is determined by the proportion of Indian tax which the income from sources within Korea bears to the entire income subject to Indian tax. So, for the purpose of determining FTC available to the appellant it is important to work out this proportion. This proportion is worked out as follows: Total receipts of the appellant from Korea ₹ 2,30,55,146/- %age of business income to business receipts as in para 4.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese articles, India shall allow as deduction from the tax on income of the resident and an amount equal to income tax paid in USA, Japan, Germany whether directly or by deduction. He submitted that the said articles does not speak of any income tax been paid by the resident Indian under the Income tax Act, as a condition preceded and for claiming the said benefit. He also submitted that, these articles are in conformity with section 90 (1) (a) (ii) of the Act. 12. Ld.AR submitted that Article 24(3) of Indo Korea Treaty places limit for FTC having regard to the entire income subject to tax in India. It was thus submitted that assessee had derived total income of ₹ 12,94,29,350/-, out of which income derived from Korea amounts to ₹ 2,30,55,146/-. He submitted that as per the DTAA with Korea foreign tax credit available to assessee is ₹ 33,86,167/- being the actual taxes withheld by Korea. 13. He referred to pages 101-105 of paper book wherein the relevant clauses of the respective treaties have been placed. 14. Ld.AR thus prayed that, entire credit claimed by assessee in the return of income is to be allowed to assessee for the year under consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows : (a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in Japan, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Japanese tax paid in Japan, whether directly or by deduction. Such deduction in either case shall not, however, exceed that 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 Japan. Further, where such resident is a company by which surtax is payable in India, the deduction in respect of income-tax paid in Japan shall be allowed in the first instance from income-tax payable by the company in India and as to the balance, if any, from surtax payable by it in India. (emphasis supplied) India Germany DTAA 21. Article 23(2) of India Germany DTAA deals with elimination of double taxation. Clause 2 is the relevant provision. It reads as under: 2. Tax shall be determined in the case of a resident of the Republic of India as follows : Where a resident of the Republic of India derives income or owns capital which, in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be taxed in India. (emphasis supplied) 26. On perusal of the said Article, we find that, in India FTC is available to the taxes paid in Korea and such credit shall not exceed the taxes payable in India on doubly taxed income. Thus there is a difference in FTC available to assessee on taxes paid in USA, Japan and Germany vis-s-vis Korea. 27. In the present facts of the case, respective treaty countries withheld taxes against income from the source state at a particular rate. Article 25 of Indo U.S Treaty, Article 23 (2) of Indo-Japan Treaty and the Indo-Germany Treaty, allows FTC in India to the extent of tax paid in these countries, whereas, Article 23 of Indo-Korea Treaty allows FTC which shall not tax payable on such doubly taxable income in India. 28. We note that authorities below failed to understand the treaty provisions applicable in present facts with these countries regarding granting of FTC to assessee. On perusal of treaty provisions, we are of the view, that assessee is eligible for FTC in full, amounting to taxes paid in USA, Japan and Germany. We draw support from decision of Hon ble Karnataka High Court in case of Wipro(supra). 28.1. Only in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal receipts of the business ₹ 55,50,20,701/- Less Foreign Receipts ₹ 16,76,47,793/- Balance receipts of' the business ₹ 38,73,72,908/- Total expenditure claimed in computation ₹ 48,90,94,200/- of income Business Loss ₹ 10,17,21,292/- Such an approach of the appellant can thus not he accepted. Since actual details of expenditure in relation 10 these foreign receipts are not available. so the method its adopted by the AO is fund to be very reasonable, although with slight modification as as discussed follows: 4.7. Since the issue is regarding income for the purposes of Income-Tax Act, for working out income in comparison to receipt the income as reflected by the appellant in its computation of income, being ₹ 10.53,76,580/-, should have been adopted. Adoption of income as returned by the appellant in its income tax returns would result in its business income of ₹ 6,92,91,570/- as against ₹ 5,85,50,654/- as determined by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 8,66,198/- Total income subject to Indian Tax ₹ 10,53,76,580/- Ratio of income from Korea to total income subject to Indian Tax 5.248% Total tax on the income subject to Indian Tax ₹ 3,58,17,499/- The tax paid in Korea for which credit can he claimed- 5.248% of ₹ 3,58,17,499/- ₹ 18,79,704/- 4.11. So as against withheld tax of ₹ 63,71,659/- paid by the appellant in relation to receipts from Korea. the appellant would get credit of foreign tax to the extent of Rs.I8,79,704/-. 4.12. As regards FTC in relation to receipts from Taiwan, the calculation of allowable FTC as per Section 91 of the Act would be as follows: Total receipts or the appellant from Taiwan ₹ 69,40,688/- %age of business income to business receipts as in para 4.7 12.48% Income of the appellant from Taiwan (included in total income as in the income tax return filed @12.48% of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant assessment year), which would amount to ₹ 22,19,119/-. He thus submitted that, assessee is therefore for credit of entire taxes paid in Taiwan in India. 35. Both sides reiterated identical arguments for year under consideration in respect of foreign tax credit claimed by assessee. Both sides relied on submissions for assessment year 2013-14 reproduced hereinabove. We have perused submissions advanced by both sides in light of records placed before us. 36. We note that, India has not entered into double taxation avoidance agreement with Taiwan. Therefore, foreign tax credit available to assessee against taxes paid in Taiwan will be computed in accordance with section 91 of the Act. 37. Section 91 of the Act specifically deals with the said question. The aforesaid Section reads as under: 91. Countries with which no agreement exists: - (1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for and extent of the relief contemplated to be given to an assessee. The first condition is that the assessee should be a resident in India as per term defined in Section 6 of the Act. The second condition is that the income which has accrued or arisen outside India to such resident in India should not be deemed to accrue or arise to him in India. The third condition is that such resident-assessee should have paid income-tax on such income under the law in force in that country. Once these three conditions are fulfilled, such resident-assessee would be entitled to the deduction from the Indian income-tax, as is payable by him, of a sum calculated on the doubly taxed income at the Indian rate of tax or the rate of tax of the other country concerned, whichever is the lower. Thus, as per section 91 of the Act, in case of Tiwan, FTC is to be computed based on rate of tax applicable in India or Korea, whichever is less, on such doubly taxable income. 42. Based on above discussion, we are of the view that assessee is eligible for FTC in full, amounting to taxes paid in USA, Japan and Germany. We draw support from decision of Hon ble Karnataka High Court in case of Wipro(supra). ..... X X X X Extracts X X X X X X X X Extracts X X X X
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