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TMI Blog2017 (1) TMI 720X X X X Extracts X X X X X X X X Extracts X X X X ..... countries i.e. source country and resident country. 2.2. The learned CIT(A) has erred in not considering actual profitability of the projects while computing the Foreign Tax Credit in respect of doubly taxed income on the basis that the appellant is not maintaining separate accounting in respect of each project. 3. The learned CIT(A) has erred in holding that as the appellant is allowed deduction under section 37 of the Act in respect of the foreign tax for which the set off of credit has not been granted, only that amount has to be allowed as MAT credit which has been adjusted against the tax payable in India. In the facts of the case and law, disallowance of Foreign Tax Credit is irrelevant for computing the allowable MAT credit. 3.1. The learned CIT(A) has erred in holding that MAT credit being allowed to be carried forward should be restricted to the extent of Rs. 86,571/- only (in respect of Foreign Tax Credit) and not entire Foreign Tax Credit of Rs. 11,12,907/-. 3. All these grounds are somewhat interconnected, and we will, therefore, take up all these grounds together. 4. Briefly stated, the relevant material facts are like this. The assessee before us, a wholly own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended by the assessee that "the tax credit is available in respect of 'profit or income' which is taxed in both the countries as a result of resident country will allow tax credit which should not exceed the tax of Indian tax". It was also pointed out that none of these tax treaties prescribe the manner, as adopted by the Assessing Officer, of deriving the net income, or, for that purpose, any metjod of computing the net income. It was also submitted that the related article state that tax credit will be available for "profit or income" which has been subjected to tax in both the countries, and that the profit, in this context, denotes income less all related allowable expenditure. The assessee the briefly set out the well settled principles governing interpretation of tax treaties and contended that "entire receipt should be considered as doubly taxed, looking to the intention and scheme of the tax treaties". None of these submissions impressed the Assessing Officer. The only change he made in his computation of admissible tax credit was that instead of net receipts of Rs. 79,45,607, he adopted the gross receipts at Rs. 90,58,514. The mechanism of computing the foreign tax credit, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngapore: - "Where a resident of India derives income which, in, accordance with the provisions of this Agreement may be taxed in Singapore, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Singapore tax paid, whether directly or by deduction. Where the income is a dividend paid by a company which is a resident of Singapore to a company which is a resident of India and which owns directly or indirectly not less than 25 per cent of the share capital of the company paying the dividend, the deduction shall take into account the Singapore tax paid in respect of the profits out of which the dividend is paid. Such deduction in either case shall not, however, exceed that part of the tax (as computed before the deduction is given) which is attributable of the income which may be faxed in Singapore." Para 2 of Article 23 - Elimination of double taxation of DTAA between India and Indonesia: - "The amount of Indonesian fax payable, under the laws of Indonesia and in accordance with the provisions of this Agreement, whether directly or by deduction, by a resident of India, in respect of profits or income arising in Indonesia, which have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been incurred in the current year as all expenses were incurred during the phases of development and the same have been charged in earlier year. The submission is not acceptable when the company is taking of several projects at a time and it is not keeping separate accounting in respect of each product project and the profitability is not worked out in respect of each project or product the global profitability has to be adopted for computing the proportionate profit. In view of these facts and circumstances the contentions of the appellant cannot be accepted. The working of foreign tax credit adopted by the AO is therefore, in order and the same is upheld. 5. The assessee is not satisfied and is in second appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. We find that there are two aspects of the matter, on which there is apparently no meeting ground between the stand of the assessee and the stand of the revenue authorities, and which, therefore, need to be decided by us- first, the manner in which the quantum of income eligible which is requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compute such income. However, quite clearly, as the expression used is 'income', which essentially implied 'income' embedded in the gross receipt, and not the 'gross receipt' itself. This approach is reflected in the UN Model Convention Commentary as well, which, in turn, follows the approach in OECD Model Convention Commentary in this regard. UN Model Convention Commentary (2011 update @ page 333) states that "Normally the basis of calculation of income tax is total net income, i.e. gross income less allowable deductions. Therefore, it is the gross income derived from the source state less any allowable deductions (specific or proportional) connected with such income which is to be exempted". It is, therefore, not really the right approach to take into account the gross receipts, as was contended by the assessee, for the purpose of computing admissible tax credit. The case before us is, however, somewhat unique in the sense that the main business is carried on in India and only some isolated transactions have taken place in Singapore and Indonesia. So far as the first two transactions are concerned, these are only for release of margin money and addition of a separate user- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the same in the year of consideration. 3,161,369 - 3,161,369 PT Tech Mahindra Indonesia AMC for Software PT Tech Mahindra had awarded Annual Maintenance Contract for the software to the appellant. The appellant has a dedicated team which manages AMC and warranty projects. The cost for the same is apportioned and deducted from the gross receipts of the appellant. 574,060 149,251 424,809 Total 9,058,514 8,909,263 9. We see no infirmities in this computation showing the element of income embedded in the receipts which have been taxed abroad as well. These details were duly furnished to the Assessing Officer vide letter dated 20th March 2013, a copy of which was also placed before us at pages 69 onward of the paper-book. On a perusal of these details, we find that as far as release of retention money of Rs. 53,23,085, released after validation of software by IBM Singapore, is concerned, we find that it is uncontroverted claim of the assessee that entire related expenses have been incurred in the earlier years as the software supply was completed in financial year 2006-07. There cannot obviously be any incr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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. 10. We have noted that 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. What is, therefore, to be computed next is the tax attributable to the income which is so taxed in both the tax jurisdictions. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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