9911796707
TMI Blog2023 (7) TMI 998X X X X Extracts X X X X X X X X Extracts X X X X ..... position was also adopted before the Tribunal. 3. Accordingly, as was the case before the Tribunal, we will be adverting to the facts, as obtained in AY 2010-11. 4. Before we proceed further, we may indicate that the broad issue which arose for consideration before the statutory authorities [including the Tribunal] and us, concerns the following: 4.1 The respondent/assessee claims that it is eligible for tax credit qua tax which, though payable in the country from where the income emanated, was not paid because of the statutory regime operating in that country. 4.2 The respondent/assessee, in seeking tax credit qua tax payable [though not paid], has sought to place reliance on Article 23 of the Double Taxation Avoidance Agreement [in short, "DTAA"] obtaining between India and Thailand. 4.3 It is the respondent/assessee's stand that it ought to be given tax credit qua the tax which it was spared from paying, on income by way of dividend, received from its subsidiary in Thailand, in consonance with the provisions of Article 23 of the Indo-Thai DTAA. Thus, the issue at hand centres around the concept of "tax sparing", which is embedded in several DTAAs arrived at between Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concept which is embedded in several DTAAs, including the subject IndoThai DTAA, it was entitled to tax credit at the rate of 10%, on the dividend income received from the Thai subsidiary. 12. It is in this backdrop that the aforementioned appeals came to be lodged before this court. Submissions of Counsel 13. In support the appellant/revenue's case, submissions were advanced by Mr Kunal Sharma, learned senior standing counsel, while on behalf of the respondent/assessee, submissions were made by Mr Ved Jain, Advocate. 14. Mr Sharma's arguments can, broadly, be paraphrased as follows: (i) The AO had rightly declined tax credit. The respondent/assessee's stand that in view of Article 23 of the Indo-Thai DTAA, it could get tax benefit concerning tax which it had not, infact, paid, was flawed. (ii) The CIT(A) correctly noted that paragraph 6 of the promotion certificate issued to the Thai subsidiary, based on which a claim was made that dividend distributed did not suffer tax in Thailand, did not, as a matter of fact, refer to dividend. (iii) The Tribunal took a view that to obtain benefit under Article 23(2) of the Indo-Thai DTAA, it was not necessary that the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as those who reside in Thailand. [See Article 23(2) and Article 23(3) alongside Article 23(4) and Article 23(5) of the Indo-Thai DTAA]. (iii) The Thai subsidiary of the respondent/assessee was granted exemption from corporate income tax vis-a-vis its net profit under Section 31 of Investment Promotion Act B.E. 2520 (1997) [in short, "Investment Promotion Act"]. Besides this, the dividend distributed by the respondent/assessee's Thai subsidiary is also exempted from tax under the provision of 34 of the Investment Promotion Act. (iv) Section 70 of the Revenue Code B.E. 2481 (1938) of Thailand [in short, "Thai Revenue Code"] levies tax at the rate of 10% on companies incorporated under foreign law, qua assessable income which emanates from, or is received in Thailand. (v) Tax could only be levied, as per the Indo-Thai DTAA, on the dividend distributed by the Thai company, in Thailand. [See Article 101 of the Indo-Thai DTAA.] (vi) Since the dividend income received by the respondent/assessee has been offered to tax in India, at a higher rate i.e., 30% (exclusive of surcharge and cess), the respondent/assessee is entitled to tax credit at the rate of 10%, in accordance with Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, by a resident of Thailand, in respect of profits or income arising in India, which has been subjected to tax both in India and Thailand, shall be allowed as a credit against Thai tax payable in respect of such profits or income provided that such credit shall not exceed the Thai tax (as computed before allowing any such credit) which is appropriate to the profits or income arising in India. 5. For the purposes of the credit referred to in paragraph 4, the term "Indian tax payable" shall be deemed to include any amount which would have been payable as Indian tax for any assessment year but for an exemption or reduction of tax granted for that year or any part thereof by the special incentive measures under the provisions of the Income-tax Act, 1961 (43 of 1961), which are designed to promote economic development, or which may be introduced hereafter in modification of, or in addition to the existing provisions for promoting economic development in India. 6. Where under this Convention a resident of a Contracting State is exempt from tax in that Contracting State in respect of income derived from the other Contracting State, then the first-mentioned Contracting State may, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development in Thailand. 17.4 Paragraph 3 of Article 23, thus, by employing a device of deeming fiction, includes in the expression "Thai Tax Payable" as adverted to paragraph 2 of the very same Article, that tax which would have been otherwise payable, but for an exemption or reduction of tax granted for that year or any part thereof, under the two statutory enactments referred to therein. Para 3 also alludes to the fact that the said statutes are designed to promote economic development in Thailand. Clearly, the provision is configured to incentivize investments in Thailand, by granting tax credit for that amount which, otherwise, would have been payable as tax to the Thai state, but was not paid due to exemption or reduction granted under the said enactments. 17.5 Paragraph 4 and Para 5 of Article of 23 are a mirror image of Paragraphs 2 and 3 of the very same Article. Para 4 enables a resident of Thailand to claim tax credit with respect to "Indian Tax Payable", while paragraph 5, like paragraph 3, introduces a deeming fiction with regard to the "Indian Tax Payable". The only difference being that insofar as exemption or reduction of tax granted in the year in issue or any pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idence State. Rather than benefitting the tax payer, the incentive benefits the residence State's revenue authorities (always provided that, as usual, the amount of tax collected by the source State is lower, at least on account of the reduction, than the residence State's tax). The tax incentive is thus cancelled out. That effect can be avoided by the residence State calculating the credit as if the tax in the source State remained at the unreduced level ('credit for notional tax', 'tax sparing' or 'tax matching credit') (no. 72 OECD MC Comm. on Article 23). A credit for notional taxes is typically granted in tax treaties concluded between developed and developing countries. Many developing countries insist on the inclusion of a tax sparing provision during tax treaty negotiations in order be able to attract foreign direct investment and promote economic growth by granting tax incentives. Some countries are willing to grant a tax sparing provision to allow their resident enterprises to compete in the source State under nearly the same conditions as other investors. Tax sparing conditions come close to facilitating capital import neutrality. ...." 22. Having examined the scope o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exigibility of dividend income to tax and its exemption, being subject matter of foreign law, to the AO, does not impress us. 25. The other argument advanced on behalf of the appellant/revenue, that paragraph 53 of the Promotion Certificate issued by the Board of Investment does not advert to dividend income, does not impress us either. A bare perusal of the document shows that the said certificate has been issued under the provisions of Investment Promotion Act, which as noticed hereinabove, is referred to Article 23 (3) of the Indo-Thai DTAA. Paragraph 5 of the Promotion Certificate, in no uncertain terms, inter alia, states that the under Section 314, paragraph 1 of the Investment Promotion Act, the promoted person shall be granted exemption from corporate income tax levied on net profits earned from promoted activity. Notably, Paragraph 65 states that under Section 34, dividend distributed from the promoted activity to which exemption from corporate tax is granted under Section 31, shall also be exempt from inclusion of tax calculations throughout the period in which the promoted person remains exempt from corporate income tax payments. Dividends are distributable profits, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate, the tax shall not exceed- (a) 15 per cent of the gross amount of dividends, in a case where the company paying the dividends is engaged in an industrial undertaking and the beneficial owner of the dividends is a company of the other Contracting State owning at least 10 per cent of the voting shares of the company paying the dividends ; (b) in the case not covered by sub-paragraph (a) above, 20 per cent of the gross amount of dividends if the company paying the dividends is engaged in an industrial undertaking or if the beneficial owner of the dividends is a company of the other Contracting State owning at least 25 per cent of the voting shares of the company paying the dividends. 3. (a) The term "dividends" as used in this article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares according to the taxation laws of the Contracting State of which the company making the distribution is a resident. (b) In this article, the term "industrial undertaking" means an undertaking falling under any of the classes mentioned below : (i) manufacturing, assembl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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