2023 (7) TMI 998 - HC - Income Tax

Double taxation - claim tax credit on dividend income received from its Thai subsidiary - interpretation of Article 23 of the Indo-Thai DTAA - HELD THAT - We agree with the Tribunal, that the respondent/assessee was entitled to claim tax credit on dividend income received from its Thai subsidiary, in respect of Thai Tax Payable , which it would have to pay, but for the exemption accorded to it under the provisions of Section 34 of the Investment Promotion Act. If the exemption available u/s 34 of the Investment Promotion Act had not kicked in, the dividend income would have suffered tax at the rate of 10% under Section 70 of the Thai Revenue Code. The appellant/revenue's appeals are based on the proposition that tax credit as claimed, could not be extended to the respondent/assessee, because it had not paid tax in Thailand, i.e., that benefit under Article 23 of the Indo-Thai DTAA could only be extended in a situation where the tax had actually been paid. In view of the rationale provided by us hereinabove, this argument is completely misconceived. The concept of tax sparing is embedded in several DTAAs which have been executed by India, such as with France, Jordan and Oman, apart from Thailand. Insofar as the Indo-Thailand DTAA is concerned, credit for tax sparing works for residents of Thailand, as well as India. This is a mechanism which is engrafted in DTAAs to incentivize investment for economic development. Interdiction of such provisions would, in our view, be detrimental to the larger public interest. Thus, for the foregoing reasons, we are disinclined to interfere with the impugned order passed by the Tribunal. No substantial question of law arises for our consideration.

Summary

Issues Involved:
1. Eligibility for tax credit under Article 23 of the Double Taxation Avoidance Agreement (DTAA) between India and Thailand.
2. Interpretation of "tax sparing" provisions in the DTAA.
3. Applicability of Thai statutory exemptions to the respondent/assessee.

Summary:

Issue 1: Eligibility for Tax Credit under Article 23 of the DTAA
The respondent/assessee claimed tax credit for tax that would have been payable in Thailand on dividends received from its Thai subsidiary, but for the statutory exemption in Thailand. The appellant/revenue argued that since the tax was not actually paid, the credit could not be claimed. The Tribunal ruled in favor of the respondent/assessee, allowing the tax credit based on the concept of "tax sparing" embedded in Article 23 of the Indo-Thai DTAA. The High Court upheld this decision, noting that the DTAA's provisions take precedence over domestic laws in case of conflict, as per Section 90(2) of the Indian Income Tax Act.

Issue 2: Interpretation of "Tax Sparing" Provisions in the DTAA
The High Court examined Article 23 of the Indo-Thai DTAA, which allows tax credit for taxes that would have been payable but for exemptions granted to promote economic development. The court noted that Paragraph 3 of Article 23 includes a deeming fiction, treating exempted taxes as "Thai tax payable." This provision aims to incentivize investments by granting tax credits for notional taxes. The court emphasized that the meaning of "tax payable" must be derived from the DTAA's definitions, not ordinary interpretations.

Issue 3: Applicability of Thai Statutory Exemptions
The respondent/assessee's Thai subsidiary was granted an exemption from corporate income tax under Section 34 of the Investment Promotion Act. The High Court found that this exemption applied to dividends distributed by the subsidiary. The court rejected the appellant/revenue's argument that the Tribunal should have remanded the matter to the Assessing Officer (AO) for further examination. The court held that since the DTAA specifically mentioned the relevant Thai laws, no additional proof was required.

Conclusion:
The High Court dismissed the appellant/revenue's appeals, affirming the Tribunal's decision that the respondent/assessee was entitled to tax credit under the "tax sparing" provisions of the Indo-Thai DTAA. The court concluded that no substantial question of law arose for consideration and emphasized that such provisions are designed to promote economic development by incentivizing investments.