2021 (3) TMI 343 - AT - Income Tax

Claim for refund of the taxes paid abroad, by the Indian tax authorities - Indian taxpayer refunds claims from the Government of India - 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 respective tax jurisdictions - making a contribution to, say, the US Exchequer because an income was earned there, and claiming that the Indian Treasury refunds the said tax because the aggregate of overall taxable income, from all the operations worldwide- including India, is in negative, i.e., a loss figure - India is a major Indian bank, with several branches abroad - a few in the treaty partner jurisdictions, i.e., the countries with which India has entered into Double Taxation Avoidance Agreements under section 90, and remaining in the non-treaty partner jurisdictions. HELD THAT - No part of the income earned abroad had actually suffered tax in India, relief under section 91 is not admissible in respect of the same. We, therefore, reject the foreign tax credit claim in respect 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 being taxes paid abroad on its income in the respective tax jurisdiction in respect of which the assessee has not been granted any tax credit? - HELD THAT - We find that this issue is squarely covered, in favour of the assessee, by a judgment of Hon ble jurisdictional High Court, in the case of Reliance Infrastructure Limited 2016 (12) TMI 1293 - BOMBAY HIGH COURT - 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. Conclusion - The assessee is declined the foreign tax credits and, accordingly, we hold that the assessee is not entitled to seek a refund of that money from the Indian tax exchequer. As we hold so, we may add that in the present case, our entire focus was on whether these foreign tax credits could be allowed even when such tax credits lead to a situation in which taxes paid abroad could be refunded in India, but that must not be construed to mean that, as a corollary to our decision, these foreign tax credits would have been allowed, even if there is no domestic tax liability in respect of the related income in India if it was not to result in such a refund situation A full tax credit, which goes beyond eliminating double taxation of an income, actually ends up subsidizing the foreign exchequer, to the extent that the taxes paid to the foreign exchequer are allowed to discharge exclusive domestic tax liability, rather than eliminating double taxation of an income, and that is the reason that even in the solitary full credit situation visualized in the Indian tax treaties, in the Indo Namibia tax treaty (supra), it s one-way traffic inasmuch as while India, as a relatively developed nation, offers, under article 23(2), full credit for taxes paid in Namibia, whereas, in contrast, Namibia, as a developing nation, offers, under article 23(1), proportionate credit for taxes paid in India. It reinforces our understanding that the full foreign tax credits cannot be inferred to be permissible as a matter of 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.

Summary

Issues Involved:
1. Refund of taxes paid abroad by Indian tax authorities.
2. Deduction of taxes paid abroad in the computation of business income.

Issue-Wise Detailed Analysis:

1. Refund of Taxes Paid Abroad by Indian Tax Authorities:

The primary issue was whether an Indian taxpayer could claim refunds from the Government of India for taxes paid to foreign governments on income earned abroad. The taxpayer, a major Indian bank with branches in various countries, sought refunds for taxes paid in treaty partner jurisdictions (?165.96 crores), non-treaty partner jurisdictions (?15.79 crores), and on foreign dividends (?87.54 lakhs). The Assessing Officer and CIT(A) both denied the refund, stating that Section 90 of the Income Tax Act does not provide for refunds if the Indian tax liability is NIL. The Tribunal upheld this view, emphasizing that foreign tax credits are only available to the extent of Indian tax payable on the same income. Since the taxpayer had a net loss in India, no Indian tax was payable, and thus no foreign tax credit could be granted. The Tribunal also rejected the taxpayer's argument based on the Wipro Ltd. case, clarifying that the Wipro decision did not address the refund of taxes paid abroad when there is no Indian tax liability.

2. Deduction of Taxes Paid Abroad in the Computation of Business Income:

The taxpayer alternatively sought a deduction for taxes paid abroad in the computation of its business income. This issue was addressed by referencing the Reliance Infrastructure Ltd. case, where the Bombay High Court held that taxes paid abroad are not covered by Section 40(a)(ii) of the Income Tax Act, which disallows deduction of income tax paid under the Act. The Tribunal followed this precedent, allowing the deduction of taxes paid abroad in computing the taxpayer's business income. However, the matter was remitted to the Assessing Officer for factual verification to ensure that the taxes paid abroad were not eligible for foreign tax credit under Sections 90 or 91 of the Income Tax Act.

Conclusion:

The Tribunal denied the taxpayer's claim for refunds of taxes paid abroad due to the absence of Indian tax liability. However, it allowed the deduction of these taxes in the computation of business income, subject to factual verification by the Assessing Officer. The appeal was partly allowed for statistical purposes.