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2021 (1) TMI 1106 - AT - Income TaxForeign tax credit available - Eliminating double taxation of doubly taxable income in the hands of assessee - difference in FTC available to assessee on taxes paid in USA Japan and Germany vis-s-vis Korea - HELD THAT - India US DTAA - A perusal of the aforesaid provision makes it clear that if a resident Indian derives income which may be taxed in United States India shall allowed as a deduction from the tax on the income of the resident an amount equal to the tax paid in United States of America whether directly or by deduction. The conditions mandated in the treaty is that if any income derived and tax paid in United States of America on such income then tax relief/credit shall be granted in India on tax paid in United States of America. India Japan DTAA - Article 23(2) of India Japan DTAA deals with elimination of double taxation. India Germany DTAA - All these clauses are identically worded as Article 25(2)(a) of India US DTAA. Relevant clauses for elimination of double taxation in the 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 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. 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 2015 (10) TMI 826 - KARNATAKA HIGH COURT Only in case of Korea FTC is limited to taxes payable on such doubly taxed income in India before any deduction. In other words FTC is limited to or taxes paid in Korea or India whichever is less. AO is therefore directed to grant FTC in respect of taxes paid in USA Japan and Germany. In case of taxes paid in Korea FTC will be tax actually paid in Korea or payable in India on such doubly taxable income which ever is lower. Income earned income from Taiwan - 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. The said provision provides for deduction of tax paid in any country from the Indian Income tax payable by assessee of a sum calculated on such doubly taxed income even though there is no agreement under Section 90 for the relief or avoidance of double taxation. Explanation (iv) defines the expression income tax in relation to any country includes any excess profit tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country. Therefore even in the absence of an agreement under Section 90 of the Act by virtue of the statutory provision the benefit conferred under Section 91 of the Act is extended to the income tax paid in foreign jurisdictions. We have dealt with FTC available to assessee in respect of foreign taxes paid by assessee in Japan Korea Germany and USA. For year under consideration credit has to be computed in similar manner as has been tabulated 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 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. 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( 2015 (10) TMI 826 - KARNATAKA HIGH COURT In case of Korea FTC is limited to taxes payable on such doubly taxed income in India before any deduction. In other words FTC is limited to or taxes paid in Korea or India whichever is less. 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. AO is thus directed to compute FTC accordingly.
Issues Involved:
1. Restriction of Foreign Tax Credit (FTC) by the CIT(A). 2. Interpretation of Double Taxation Avoidance Agreements (DTAA) with USA, Japan, Germany, and Korea. 3. Application of Section 37(1) read with Section 40(a)(ii) of the Income Tax Act for deduction of foreign taxes paid. 4. Computation of FTC under Section 91 of the Income Tax Act for countries without DTAA (specifically Taiwan). Detailed Analysis: 1. Restriction of Foreign Tax Credit (FTC) by the CIT(A) The primary issue revolves around the restriction of the FTC claimed by the assessee. The CIT(A) limited the FTC to ?59,54,729/- for AY 2013-14 and ?71,11,538/- for AY 2014-15, against the claimed amounts of ?1,80,54,300/- and ?2,36,78,371/- respectively. The CIT(A) applied a formula based on the proportion of the income returned in India to the total income, rather than granting the full credit for the actual tax withheld. 2. Interpretation of Double Taxation Avoidance Agreements (DTAA) with USA, Japan, Germany, and Korea The interpretation of the DTAA provisions was crucial in determining the FTC. The relevant clauses from the treaties with the USA, Japan, Germany, and Korea were examined: - India-US DTAA (Article 25): Allows deduction from the tax on income of the resident an amount equal to the income-tax paid in the USA, provided it does not exceed the part of the income-tax attributable to the income taxed in the USA. - India-Japan DTAA (Article 23(2)): Similar to the US treaty, allows deduction from the tax on income of the resident an amount equal to the Japanese tax paid. - India-Germany DTAA (Article 23(2)): Also allows deduction from the tax on income of the resident an amount equal to the income-tax paid in Germany. - India-Korea DTAA (Article 23(a)(i)): Allows deduction from the tax on income of the resident an amount equal to the tax paid in Korea, but not exceeding the portion of the tax as computed before the deduction is given, which is attributable to the income taxed in Korea. The Tribunal noted that the clauses use the term 'income,' meaning the income embedded in the gross receipt, not the gross receipt itself. Thus, the assessee is eligible for FTC in full for taxes paid in the USA, Japan, and Germany, but for Korea, the FTC is limited to the lesser of the taxes paid in Korea or the taxes payable in India on the doubly taxed income. 3. Application of Section 37(1) read with Section 40(a)(ii) of the Income Tax Act for deduction of foreign taxes paid The assessee argued that if the FTC is denied, the foreign taxes paid should be allowed as a deduction under Section 37(1) read with Section 40(a)(ii) of the Act. However, since the Tribunal directed the AO to grant the FTC as per the treaties, this ground was not adjudicated. 4. Computation of FTC under Section 91 of the Income Tax Act for countries without DTAA (specifically Taiwan) For AY 2014-15, the assessee earned income from Taiwan, a country with which India does not have a DTAA. The FTC for taxes paid in Taiwan was to be computed under Section 91 of the Income Tax Act, which provides for a deduction from the Indian income-tax payable by the assessee of a sum calculated on the doubly taxed income at the Indian rate of tax or the rate of tax of the foreign country, whichever is lower. Conclusion: The Tribunal directed the AO to grant the FTC in full for taxes paid in the USA, Japan, and Germany. For Korea, the FTC is limited to the lesser of the taxes paid in Korea or the taxes payable in India on the doubly taxed income. For Taiwan, the FTC is to be computed as per Section 91 of the Income Tax Act. The appeals for both assessment years were allowed for statistical purposes, and the AO was directed to recompute the FTC accordingly. The alternative plea regarding the deduction of foreign taxes under Section 37(1) read with Section 40(a)(ii) was not adjudicated.
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