2017 (1) TMI 720 - AT - Income Tax

Foreign tax credit - quantification of income for the purpose of computing admissible tax credit - selection of assessment year - treatment to release of retention money - Indo Singapore tax treaty - taxation in source country and resident country - profitability of the projects while computing the Foreign Tax Credit in respect of doubly taxed income - Held that - Right now, we are dealing with a situation in which a major portion of income, by release of retention money as also by addition of an additional user by the customer, is a somewhat passive income, even though in the nature of business receipt, and as such, to that extent, allocation of all the expenses incurred by the assessee, in respect of such earnings, will not be justified. As regards the income from maintenance contracts, the relates costs have already been allocated and the Assessing Officer has not pointed out any infirmity in the same. In this view of the matter, quantification of income for the purpose of computing admissible tax credit, as done by the assessee and as reproduced earlier, is accepted. The tax credit for both the jurisdictions is to be computed separately but in a similar manner, as is provided in the respective treaties. So far as the tax credit in respect of Indonesian receipts is concerned, as noted above and in view of article 23(1) of the applicable tax treaty, it cannot 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 . The income tax is, therefore, required to be computed on proportionate basis The tax has been paid, in this case, on book profits. To the best of our understanding, and particularly in the absence of any other method having been pointed out to us, only way in which be so done is by apportioning the actual tax paid under MAT provisions (i.e. ₹ 54,13,417), in the same ratio as double taxed profit to the overall profits i.e. 35,86,178 4,77,79,403. The amount of tax credit in respect of this income thus comes to ₹ 4,06,315, as against the actual deduction of tax aggregating to ₹ 5,71,878. The tax credit claim is thus admissible to this extent. As for the tax credit in respect of Singaporean receipts, while the formulae for limitation under article 25(2) of the Indo Singapore tax treaty remains broadly the same as it is provided that the credit shall not exceed tax which is attributable to the income which may be taxed in Singapore but the first variable i.e. income taxed in both the countries would change. The figure of income taxed in Singapore as also India is 53,23,085. The MAT paid, relatable to this income, will be arrived at by dividing the same in the ratio 53,23,085 4,77,79,403 The amount of tax payable in respect of Singapore income, by the same formulae, works out to ₹ 6,03,107 which is clearly less than ₹ 5,41,029 which was deducted at source in Singapore. The tax credit of ₹ 5,41,029 in respect of Singaporean receipts is thus clearly admissible. As against tax credit claim of ₹ 11,12,907, the tax credit of ₹ 9,47,344 is thus indeed admissible. To this extent, the claim of the assessee is upheld. - Decided partly in favor of assessee.

Summary

Issues Involved:
1. Erroneous order by CIT(A).
2. Non-allowance of entire Foreign Tax Credit (FTC).
3. Disallowance of FTC in computing MAT credit.

Detailed Analysis:

1. Erroneous Order by CIT(A):
The appellant challenged the correctness of the CIT(A)'s order dated 31.12.2014, regarding the assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2009-10. The appellant argued that the order was erroneous and contrary to the provisions of law and facts, requiring suitable modification.

2. Non-Allowance of Entire Foreign Tax Credit (FTC):
The appellant contended that the CIT(A) erred in not allowing the entire FTC amounting to ?11,12,907/- while calculating the tax liability. The appellant claimed that the tax credit was on income taxed in both the source and resident countries. The CIT(A) disregarded the actual profitability of the projects and did not consider separate accounting for each project. The Assessing Officer allowed FTC only to the extent of income taxed in India, computing eligible tax credit by dividing the actual MAT liability in the ratio of foreign receipts to overall turnover. The appellant argued that the treaties should be interpreted liberally and that the entire receipt should be considered doubly taxed. However, the CIT(A) upheld the Assessing Officer's method, stating that the provisions of DTAA and section 90 of the Income Tax Act were clear and the credit should be proportionate to the profit or income arising in the other country.

3. Disallowance of FTC in Computing MAT Credit:
The CIT(A) held that only the amount adjusted against the tax payable in India should be allowed as MAT credit, restricting the carry-forward MAT credit to ?86,571/- instead of the entire FTC of ?11,12,907/-. The appellant argued that this disallowance was irrelevant for computing allowable MAT credit.

Judgment Analysis:

The tribunal identified two aspects for adjudication: the manner of computing the quantum of income taxed in both countries and the computation of eligible tax credit. The tribunal referred to the relevant provisions in the India-Indonesia and India-Singapore tax treaties, which state that the FTC shall not exceed the part of the income tax attributable to the income taxed in the other state. The tribunal noted that the treaties did not provide guidance on computing such income but emphasized that the term "income" implies net income, not gross receipts.

For the specific case, the tribunal found that the appellant's computation of income embedded in the receipts taxed abroad was fair and reasonable. The tribunal rejected the Assessing Officer's method of allocating overall costs proportionately to foreign earnings, as it lacked logic in this context. The tribunal accepted the appellant's computation showing the income element in the receipts, noting that the Assessing Officer had not pointed out any specific infirmities.

The tribunal computed the FTC for Indonesian and Singaporean receipts separately. For Indonesian receipts, the FTC was computed on a proportionate basis, resulting in an admissible tax credit of ?4,06,315. For Singaporean receipts, the FTC was computed similarly, resulting in an admissible tax credit of ?5,41,029. The total admissible FTC was thus ?9,47,344, as against the claimed ?11,12,907.

Conclusion:
The tribunal partly allowed the appeal, upholding the appellant's claim to the extent of ?9,47,344 FTC. The judgment emphasized the need for a reasonable basis in computing income and FTC, rejecting the proportional allocation method used by the Assessing Officer. The decision highlighted the importance of interpreting tax treaties in a manner consistent with their purpose and the specific facts of each case.