2019 (1) TMI 1357 - AT - Income Tax

Disallowance of relief claimed u/s 90 - tax paid in Thailand by its subsidiary, from whom assessee received dividend which was offered for taxation as per provisions of Indian I.T. Act - Assessee is an Indian company and has 100% holding in its subsidiary, situated in Thailand - tax sparing credit - Taxability of dividend income under Thailand Revenue Code - DTAA between India and Thailand - Held that - From co-joint reading of taxability of dividend income under Thailand Revenue Code, which has been exempted as per Investment Promotion Act, it is clear that exemption is available to assessee on dividend received from its subsidiary in Thailand, which would have been otherwise taxable as per Thailand Revenue Code @ 10%. Meaning thereby, assessee was not liable to pay any tax in Thailand by virtue of exemption granted as per Investment Promotion Act, and therefore assessee would be entitled to credit of such taxes deemed to have been payable in Thailand under article 23 (3) of DTAA between India and Thailand. From records placed before us, it is noted that assessee has sought credit at 10% on dividend received by it from its Thailand subsidiary, which is the tax that would have been otherwise payable by assessee in Thailand as per section 70bis of Thailand Revenue Code. The tax paid by assessee on dividend income in India is at 30%, which is more than tax payable in Thailand and therefore, we do not find any violation of requirements of Paragraph 2 of Article 23 of DTAA between India and Thailand. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of tax credit claimed under Section 90 of the Income Tax Act.
2. Interpretation of Article 23(3) of the Double Tax Avoidance Agreement (DTAA) between India and Thailand.
3. Applicability of the tax sparing credit under the DTAA.

Detailed Analysis:

1. Disallowance of Tax Credit Claimed under Section 90 of the Income Tax Act:
The assessee filed returns declaring total income and claimed relief under Section 90 of the Income Tax Act, 1961, for tax paid in Thailand by its subsidiary. The Assessing Officer (AO) disallowed the relief on the grounds that the tax on dividends was exempt in Thailand under the Investment Promotion Act, and thus, no actual tax was paid in Thailand. Consequently, the AO contended that the question of double taxation did not arise, and the relief claimed under Section 90 was denied.

2. Interpretation of Article 23(3) of the DTAA between India and Thailand:
The assessee argued that Article 23(3) of the DTAA between India and Thailand allows for tax credit on income that would have been payable as Thai tax but for an exemption under the Investment Promotion Act. The CIT(A) confirmed the AO’s decision, stating that the promotion certificate did not reference any deemed payment of tax on dividends distributed by the Thailand company to the non-resident holding company (assessee).

3. Applicability of the Tax Sparing Credit under the DTAA:
The Tribunal analyzed the relevant provisions of the DTAA and the Income Tax Act, 1961. It was noted that Article 23(3) provides for a tax sparing credit, acknowledging that tax sparing credits are essential for developing countries to ensure that incentives offered to foreign investors yield results. The Tribunal referred to the commentary on the OECD and UN Model Conventions, which support the concept of tax sparing credits to avoid the siphoning off of tax relief by higher taxes in the capital-exporting country.

Findings:

Taxability of Dividend Income under Thailand Revenue Code:
The Tribunal examined the Thailand Revenue Code and the Investment Promotion Act, noting that dividend income received by the assessee was taxable in Thailand but exempt under the Investment Promotion Act. The Tribunal concluded that the exemption granted under the Investment Promotion Act qualifies for tax sparing credit under Article 23(3) of the DTAA.

Credit for Deemed Taxes:
The Tribunal found that the assessee was entitled to claim credit for the deemed taxes that would have been payable in Thailand but for the exemption. The tax rate applicable in Thailand was 10%, and the tax paid by the assessee in India on the dividend income was 30%, which is more than the tax that would have been payable in Thailand.

Conclusion:
The Tribunal allowed the appeal, granting the tax credit claimed by the assessee under Section 90 of the Income Tax Act and Article 23(3) of the DTAA between India and Thailand. The decision was applied consistently for the assessment years 2010-11 to 2013-14, allowing the tax credit at 10% on the dividend income received from the Thailand subsidiary.

Order:
The appeals filed by the assessee for the assessment years 2010-11 to 2013-14 were allowed, and the tax credit claimed against the dividend received from the Thailand company was granted. The order was pronounced in the open court on 24/01/2019.