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TMI Blog2021 (3) TMI 343X X X X Extracts X X X X X X X X Extracts X X X X ..... ing abroad rather than a typical Indian public sector undertaking, and yet ironically, it has come up for adjudication in this case of a public sector undertaking. Be that as it may, whatever we decide in this case will be equally applicable to all similarly situated taxpayers and thus affect a large number of Indian taxpayers. The order impugned in this appeal is the order dated 30th November, 2017, passed by the learned Commissioner (Appeals) in the matter of order under section 250 r.w.s. 143(3) of the Income Tax Act, 1961, for the assessment year 2012-13. Issues requiring our adjudication in this appeal: 3. As we have noted in our opening observations, the questions that we are required to adjudicate upon in this appeal are of far-reaching ramifications, and the answers to these questions affect a large number of Indian corporates having business operations, through branches or other forms of permanent establishments (PEs), outside India. These questions, as learned representatives fairly agree, are as follows: (a) Whether or not, on the facts and in the circumstances of this case, learned CIT(A) was justified in upholding the action of the Assessing Officer, in declining r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k, 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. The assessee has also invested, as a shareholder, in two foreign banks, namely PT Bank Swadeshi (Indonesia) and Indo Zambia Bank Limited (Zambia). The assessee has earned business profits from its branches outside India, namely in UK, USA, France, Belgium, Kenya, Japan, Singapore, China, Hong Kong, Cambodia, and Jersey. During the relevant previous year, the assessee earned profits in these jurisdictions, and, in accordance with the domestic tax laws in the respective tax jurisdictions, the assessee bank paid income tax aggregating to Rs. 165.96 crores in treaty partner jurisdictions (on taxable income aggregating to Rs. 200.90 crores in these jurisdictions) and Rs. 15.79 crores in non-treaty partner jurisdictions (on taxable income aggregating to Rs. 635.19 crores in these jurisdictions), in addition to income tax amounting to Rs. 87,54,656 having been withheld from the foreign dividend income aggregating to Rs. 8,46,61,252 received by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, it is observed that the Hon'ble High Court in their order at para 33 have clearly observed that section 91 makes it clear that if a person is residing in India has paid tax in any country with which, there is no agreement u/s 90 for the relief or avoidance of double taxation, Income-tax if deducted or otherwise paid as per law in force in that country, then he shall be entitled to the deduction from the India 'Income-tax payable' by him in a sum computed on such doubly taxed income, at the Indian rate of tax or the rate of tax of the said country, whichever is lower of the Indian rate of tax, if both the rates are equal. From the observations as aforesaid at Para 33 of the order it can be noted that the entitlement to the deduction is from the Indian 'Income-tax payable'. It does not say anywhere that deduction or the refund would even be available when there is no tax payable in India. It is further seen from the same order of the Hon'ble High Court wherein at Para 39 they have observed as under. "Thirdly, in cases covered under section 90(1)(a)(ii) it is not a case of the income being subjected to tax or the assessee has paid tax on the income. This a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Wipro Ltd Vs DCIT [(2015) 62 taxmann.com 26 (Kar)] wherein it was held that even though income in question of the assessee was exempt from tax in India, the assessee was entitled to tax credit in respect of taxes paid abroad on the foreign income embedded therein. In effect, thus, the taxes one pays abroad, for all practical purposes, can indeed be refunded in India. It is further pointed out that this decision has been consistently followed by various coordinate benches of this Tribunal. It is also pointed out that actual taxation of an income is not the condition precedent for taking benefit of the tax treaty provisions in the other country. He has filed a decision of a coordinate bench of this Tribunal in the case of ADIT Vs Green Emirates Shipping & Travels [(2006) 200 ITD 203 (Mum)] in support of this proposition. Learned counsel then repeatedly states, even though after being conveyed our reservations of this averment, that it is an admitted position that the income of the foreign branches has been subjected to tax in both the treaty partner jurisdictions, and, therefore, the assessee cannot be denied credit for the taxes paid abroad. When asked how the said inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exercise of giving effect to the appellate order is to be carried out. On merits, it is submitted that the question of the foreign tax credit will only arise when there is any Indian tax payable by the assessee. When there is no Indian tax payable by the assessee, no credit can be granted in respect of the taxes paid abroad. Our attention is then invited to a decision of a coordinate bench in the case of JCIT Vs Digital Equipment India Pvt Ltd [(2004) 94 ITD 340 (Mum)] wherein it is held, vacating the relief granted by the CIT(A), that a foreign tax credit is to eliminate double taxation of an income and it can never exceed the actual tax liability in the residence jurisdiction. As regards the Wipro decision (supra) by Hon'ble Karnataka High Court, learned Departmental Representative submits that this decision overlooks, and does not even deal with, other Hon'ble High Court judgments in the case of CIT Vs M A Morris [(1994) 210 ITR 284 (AP)] and CIT Vs Dr R N Jhanji [(1990) 185 ITR 586 (Raj)]. On the first principles, this decision is clearly incorrect inasmuch as all the methods of eliminating the double taxation, i.e. exemption method, credit method or hybrid method, restrict th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-jurisdictional High Court, and on a materially different set of facts, and, therefore, does not bind us. For all these reasons, and relying upon the reasoning adopted by the learned CIT(A), he urges us to approve the order of the learned CIT(A) and decline to interfere in the matter. In a brief rejoinder, learned counsel for the assessee submits that the "CIT(A) had clearly held that appellant is entitled of relief of tax paid in a foreign country which was not granted when AO gave effect to the direction of ld. CIT(A)". It is thus submitted that the grounds raised clearly emanates and arise from the appeal effect order. Learned counsel then points out that learned Departmental Representative seeks to distinguish various decisions relied on by the bank on the contention that "in none of the cases, refunds were being claimed when the assessed income was a loss and no taxes were paid" but then this plea amounts to stipulating a new condition viz 'to be eligible for tax relief, the assessee should not have an assessable loss after set off foreign income' which is not prescribed in sec 90 or 91 of the Act or any of the DTAA applicable to appellant. He submits that the issue is wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of this Convention, whether directly or by deduction, by a resident of India, in respect of income from sources within the United Kingdom which has been subjected to tax both in India and the United Kingdom shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax. For the purposes of the credit referred to in this paragraph, where the resident of India is a company, by which surtax is payable, the credit to be allowed against Indian tax shall be allowed in the first instance against the income-tax payable by the company in India and, as to the balance, if any, against the surtax payable by it in India. ................... 6. Income which in accordance with provisions of this Convention is not to be subjected to tax in a Contracting State may be taken into account for calculating the rate of tax to be imposed in that Contracting State on other income. 7. For the purposes of paragraphs 1 and 2 of this Article profits, income and chargeable gains, owned by a resident of a Contracting State which may be taxed in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has relied upon a decision of the coordinate bench in the case of Green Emirates Shipping & Travels (supra) in support of this proposition. Learned counsel has then also relied upon the decisions of Hon'ble Karnataka High Court in Wipro's case (supra) in support of the contention that the payment of tax in the residence jurisdiction is not a condition precedent for availing the benefit of foreign tax credits. 15. So far as the decision of coordinate bench, in the case of Green Emirates Shipping & Travels (supra) is concerned, that was a decision in the context definition of the expression 'liable to tax' and in the context of Indo UAE Double Taxation Avoidance Agreement; [(1995) 205 ITR (St) 29; Indo UAE tax treaty in short] with a jurisdiction which did not have, at least at the relevant point of time, any provisions enabling domestic law taxation of the income concerned. On these peculiar facts, both the jurisdictions subsequently revised the DTAA itself, and delinked the treaty entitlement requirement, i.e. definition of resident in UAE, to the taxation of the resident by restating the definition as "an individual who is present in the UAE for a period or periods aggregating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax' in the treaty partner jurisdiction. It was in this context that the AAR, speaking through Hon'ble Justice Quadri, speaking for the Authority of Advance Ruling, observed that the expression 'subject to tax' has materially distinct connotations vis-à-vis the connotations of 'liable to tax', and observed that "It is worth pointing out that the phrase 'liable to tax' in para (1) and the phrase 'subject to tax' in proviso (b) are not synonymous. If both were to be read as synonymous, proviso(b) would become otiose. Whereas para (1) speaks of being in the tax net, proviso is concerned with actual taxation". The AAR then added "Thus it would follow that the term "resident of USA" for the purpose of the treaty would mean a person who under the laws of USA is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature; however, in the case a trust, the term "resident of USA" would apply only to the extent that the income derived by such trust is subject to tax in USA as the income of a resident either in its hands or in the hands of its beneficiaries". What essentially follows fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational Taxation) Mumbai (2005) 8 ITLR 1053, the Indian Authority for Advance Rulings held that a pension fund which was exempt from tax in the US under US tax law was not "subject to tax" in the US and so could not fall within the meaning of "resident of a Contracting State" as that was defined for a trust under the US/India double tax treaty. After describing the relevant provision, under which in the case of income derived or paid by a trust the term 'resident of a Contracting State' applied only to the extent that the income derived by the trust (which would have to be liable to tax by reason of residence or another relevant criterion in the State in question) was in addition subject to tax in that State as the income of a resident either in its own hands or in the hands of the beneficiaries, Syed Shah Mohammed Quadri J said (at p 1061): "It is worth pointing out that the phrase 'liable to tax' in para (1) and the phrase 'subject to tax' in proviso (b) are not synonymous. If both were read to be synonymous, proviso (b) would become otiose. Whereas para (1) speaks of being in the tax net, proviso (b) speaks of actual taxation." 27. The distinction between "liable to tax" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Crown Forest, the broad international consensus was confirmed at the IFA Congress in 2004. As the authors describe the position (at p 172), that view encompasses a contrast between "liable to tax", which refers simply to an abstract liability to tax on a person's worldwide income, and the expression "subject to tax" which may require an effective liability to tax on a person's income. 30. The same analysis also appears from the Editor's Note to the General Electric ruling in the International Tax Law Reports, where he says (p1054): "It is generally recognised that 'subject to tax' has a different meaning from 'liable to tax' and requires that the person claiming benefit of the treaty is actually required to pay tax (or would, for example, be required to do so if it had any positive income)." 31. Although it was not cited to me, I should also refer to the commentary on the OECD Model Convention. Although, as I have mentioned earlier, the Treaty provision with which I am concerned does not follow the OECD Model, there are nonetheless some useful indicators to be obtained from the commentary. 32. In its reference to Article 18 of the Model on the taxation of pensions, the comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m one which requires that the individual fall within the scope of a State's taxation generally. This provision is not concerned with the status of the individual, but with the chargeability to tax of the specific income. Income which is exempted from taxation cannot during the currency of that exemption be income in respect of which an individual can be said to be subject to tax. 35. Although it is not necessary to place any reliance on the international cases and academic writings I have referred to, nor on the OECD commentary, this conclusion does accord with what appears to be a broad consensus as to the meaning of the expression "subject to tax". I have no doubt that the contracting states of Israel and the UK, when entering into the Treaty, intended that pension income exempt from Israel tax should be excluded from the exemption from UK tax. If it had been intended otherwise, so that merely being within the scope of Israel tax as a general matter would suffice for the treaty exemption to apply, there would have been no need to include any reference to the pension income being subject to tax; the position would have been covered by the mere reference to the individual being a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indian Tax Laws the assessee was allowed deduction under section 80-O and tax was levied in India, on the net amount only. Hence only 50 per cent of the royalty on which tax was levied in India, could be considered as income subjected to tax in India. Even though royalty income subjected to tax in Singapore was Rs. 18,97,295, in India the assessee had to bear the tax burden only on 50 per cent of the royalty amount. The intention behind the Agreement for Avoidance of Double Taxation is to remove the hardship caused to a tax payer by the burden of double taxation on the same quantum of income. That objective is achieved by following the procedure laid down in the provisions of the Agreement. In accordance with the provisions of clause 2(a) of the Agreement tax at the rates applicable in Singapore on that amount of income assessed in both countries has to be found out and it is 40 per cent of Rs. 9,48,647 and not Rs. 18,97,295. 11. In Singapore tax incentive is provided on 100% of the income, but tax is deemed to have been paid by deduction. There is a specific reference in clause 2(a) of Article 24 to the amount of tax payable, - whether directly or by deduction. But with reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el for the assessee is correct that the expression used in section 91 is "such doubly taxed income" and not 'income subjected to tax' in both countries as appearing in the Agreement with Singapore with which we are now concerned. We may mention here that in the case of C.S. Murthy (supra) decided by the A.P. High Court the expression 'subjected to tax' has been used on page 691, as we have understood- "... The main requirement, therefore, is that the income must have been taxed outside India and the same income must have again been subjected to tax under the Income-tax Act in India. If any portion of the foreign income is not subjected to tax in India, then, the assessee will not be entitled to claim deduction on that part of the foreign income which is not subjected to tax in this country. This fits into the real scheme and intent of section 91 of the Act which is to the effect that in respect of any income, a person should not be doubly taxed, once outside India and again in India. If the income taxed outside India is subjected to tax again in India, then, the provisions of section 91 of the Act would come into operation and the assessee can claim appropriate relief on the doub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kuwait, the said income was included in its Indian taxable income, but the foreign tax credit was declined on the ground that the said payment of Rs. 82 lakhs was paid after the end of the relevant previous year. The stand so taken by the Assessing Officer was reversed by a coordinate bench of this Tribunal, and the order so passed by the coordinate bench was upheld by Hon'ble jurisdictional High Court. The issue adjudicated upon in this judicial precedent relates only to the 'timing' of the foreign tax payments, and whether the foreign tax credit can be declined only on the ground of delay in payment of taxes or mistiming of payment of taxes. It has nothing to do with the present situation where taxes have admittedly been paid abroad in the relevant previous year, but no taxes on the said income have been levied in India at all. We reject this line of argument as well. 20. The next issue to be considered is to what extent the foreign tax credit, in respect of taxes paid in the UK, is available in the computation of tax payable by the assessee in India. 21. Article 24(2) makes it clear that credit will be available "against the Indian tax payable in respect of such income, but in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms to provide for the elimination of juridical double taxation. When the same taxation object, i.e., an income, is taxed in the hands of the same taxation subject, i.e. the taxpayer, in two tax jurisdictions, it is defined as juridical double taxation, and such a juridical double taxation can be of a cross-border income can be relieved either under exemption method or under credit method Fundamentally, the difference between the methods is that the exemption methods look at income, while the credit methods look at tax. This relief is relevant only in the residence jurisdiction, where the global income of the assessee is taxed, because under the tax treaties, only source taxation rights are restricted, and under the domestic tax law legislation, the relief is unilateral anyway. There are small variants of these methods, and small nuances in their applications, but those issues are not really relevant in the present context. Coming back to these methods of relieving double taxation, under the exemption method, which hardly finds application in the Indian tax treaties or under the domestic law, once an income is taxed in the source jurisdiction, it is excluded from the scope of taxati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the domestic and foreign taxes. [Emphasis, by underlining, supplied by us] 23. Clearly, therefore, by application of the credit method, and by resultant grant of foreign tax credits, can ever exceed the actual Indian tax liability in respect of foreign-sourced income. Explaining this aspect of the credit method, or grant of foreign tax credits. in very emphatic terms, Prof Klaus Vogel, in his oft referred treatise "Klaus Vogel on Double Taxation Conventions" [ISBN 978-81-899960-62-9; Second Indian reprint 2010, published by Wolters Kluwers (India) Pvt Ltd, @ page 1227], states as follows: h) Maximum deduction (limitation): Credit is allowed only upto that part of the domestic tax which is "attributable" to the items of income or capital taxed in the State of source in accordance with the treaty. Hence, application of credit method never results in a loss in revenue which is greater than under 'exemption with progression' method. The State thus makes use of advantage it derives from a lower rate of tax applied abroad, while warding off the disadvantages inherent in application of a higher rate of tax in the other contracting state [Emphasis, by underlining, is supplied by us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cross border tax situation, set out at page 5 of this book, in which Allan, resident of Country A, rents an office in country A, and pays Beth, a resident of Country B owning the said office in Country A, the rent for the said office] Credit The credit method is often viewed as a complex method of foreign tax relief, particularly in the form of the underlying or indirect foreign tax credit, discussed below at 4.1.2.1. Returning to the example with Beth*, under this method Country B would initially calculate Beth's residence tax liability without any relief for the source tax of Country A. Further, Beth's Country A income would be calculated without a deduction for the Country A tax. The inclusion of tax in calculating income is referred to as gross-up. So initially, Beth's Country B tax liability would be 40, i.e. 40 per cent of 100. This amount is then reduced by source country tax, i.e. 30. So Beth's Country B tax liability would be 10 (40 less 30). Her overall tax liability is 40 (30 Country A tax and 10 Country B tax), which is consistent with her residence country progressive tax rate. For this reason, the foreign tax credit method is viewed as consistent w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith respect to foreign source income. This is referred to as an ordinary foreign tax credit system. If Country B adopts an ordinary foreign tax credit, Beth will not be permitted to use her extra 10 Country A tax to offset Country B tax with respect to Country B income. In this case, Beth must calculate her Country B tax liability with respect to her Country A source income separately from her Country B tax liability with respect to her Country B source income. Assuming Beth is taxed at 20 per cent by Country B, this means her Country B tax liability with respect to her Country A source income will be 20 and her Country B tax liability with respect to her Country B source income will also be 20. The foreign tax credit for Country A tax may reduce only the former 20 and not the latter 20. This is referred to as the limitation on credit, i.e. the foreign tax credit is limited to Country B tax on the Country A income. In the result, the foreign tax credit will exhaust Beth's Country B tax liability on that income but not reduce Beth's Country B tax on Country B source income. Beth pays 30 tax to Country A (on her Country A source income) and 20 tax to Country B (on her Count ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grant ordinary credit relief for foreign taxes. Under the ordinary credit relief method, the foreign tax credit cannot exceed the domestic tax payable on the income in the country of residence. It limits the tax credit to the tax on the same income, as computed under its domestic tax law, as if it were earned at home in the same accounting period. Therefore, the taxpayer pays the deficit as tax if the home equivalent tax exceeds the foreign tax paid on the same income, but the excess tax is not refunded if the foreign tax exceeds the home tax. He ends up paying the higher of the source and residence taxes. Unlike the exemption method, the credit method avoids double taxation within the worldwide tax principle. If the home tax exceeds the foreign tax paid, the difference is payable as a residual tax. Excess foreign tax credit arises if the foreign tax paid exceeds the foreign tax credit given at home. Some countries allow the excess foreign tax credit to be carried forward or back for offset. Many of them, however, do not have provisions for the carry-over of excess credits, which are then lost. [Emphasis, by underlining, is supplied by us] 27. Similar is the position taken b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligible for set off against the eligible profits- if at all so happens. For example, if in the current year, total losses incurred by the assessee (excluding the profits of Rs. 50 crores so taxed abroad, and reduced from the losses carried forward) are Rs. 100 crores, and the assessee has a total taxable income (before setting off the losses carried forward) of Rs. 150 crores in the next year, the assessee will have only Rs. 100 crores set off against that year's income whereas assessee's actual eligibility for set off, excluding the foreign profit of Rs. 50 crores, could have been Rs. 150 crores. That's the year in which the so-called double jeopardy will hit the assessee. In case the assessee is not to make any profits during the period eligible for set off, there cannot be any double jeopardy. Therefore, the so called double jeopardy, as in the present year, is nothing more than a mere possibility, in the realm of a contingent event. The taxation reliefs cannot be on the basis of possibilities. The second point is that one has to see the legal position in the year in which the double jeopardy actually hits the assessee. Rule 128 of the Income Tax Rules 1962, introduced with ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontext of holding that no double disadvantage to the assessee, by denial of the tax credit, at least in the present assessment year, and, these observations should be seen in this context alone. As to what is the impact of this deduction being claimed on the possible claim of the assessee with respect to the carry forward of the tax credit, even if that be admissible, it may indeed appear that once the assessee is allowed a deduction for expenses, the claim of the assessee for carrying forward of the tax credit, whether permissible in the pre 1st April 2017 period or not, may cease to be inadmissible for the short reason of this deduction having been allowed alone. It could be so for the reason that there may be no double disadvantage in that case. However, we need not deal with that aspect of the matter at this stage. 30. Let us now take up the judgment rendered by Hon'ble Karnataka High Court in Wipro's case (supra). 31. We may, at the outset, point out that the questions which came up for consideration before Hon'ble Karnataka High Court, was "whether the Tribunal was right in holding that credit for income tax paid in a country outside India in relation to an income eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional High Court in the case of CIT v. Sudhir Jayantilal Mulji [(1995) 214 ITR 154 (Bom)] wherein it is observed that, a judicial precedent is only "an authority for what it actually decides and not what may come to follow from some observations which find place therein". In any case, we must always bear in mind the fundamental fact that at best the Wipro decision (supra) can be seen as an authority for full tax credit- something similar to Indian tax credits under the Indo Namibian tax treaty discussed in paragraph 21 earlier, rather than an ordinary tax credit, on account of peculiarities of section 10A exemption. A full tax credit will mean that irrespective of the actual residence jurisdiction tax liability in respect of an income taxed in the treaty partner jurisdiction, the residence jurisdiction will grant credit for the entire tax paid in the source jurisdiction, but even then, as is the global consensus, foreign tax credit cannot exceed the domestic tax liability- save and except for carry forward or carry back of the excess foreign tax credits. That proposition remains intact. A coordinate bench of this Tribunal, in the case of Maharashtra State Electricity Board vs. JCI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view that the question as to whether a refund can be granted by the Indian tax administration as a result of foreign tax credits being in excess of the domestic tax liability, as is claimed to be settled in favour of the assessee by this decision, has not been the subject matter of consideration and has been thus left intact by this judicial precedent. 33. In any case, in the present case, there is a specific tax credit entitlement requirement of the UK sourced income being "subjected to tax in India," which was not the case before Their Lordship in the Wirpo's case (supra). 34. Be that as it may, it is also essential to bear in mind the fact that the said judicial precedent from a non-jurisdictional High Court. It is necessary to deal with this aspect for two fundamental reasons. The first reason is that whether or not this decision applies to the present fact situation, there are certainly other aspects of decisions, which may be relevant and critical in different facets of foreign tax credit situations. Therefore, one has to take a conscious call about the binding nature of this judicial precedent outside of Hon'ble Karnataka High Court jurisdiction. The second reason is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s placed at a level certainly below the Hon'ble High Court, and it's a conscious call that is required to be taken with respect to the question whether, on the facts of a particular situation, the non-jurisdictional High Court is required to be followed. The decisions of non-jurisdictional High Courts do not, therefore, constitute a binding judicial precedent in all situations. To a forum like us, following a jurisdictional High Court decision is a compulsion of law and absolutely sacrosanct that way, but following a non-jurisdictional High Court is a call of judicial propriety which is never absolute, as it is inherently required to be blended with many other important considerations within the framework of law, or something which cannot be, in deserving cases, deviated from. The rationale justifying the approach that non-jurisdictional High Courts are to be followed proceeds, inter alia, on the basis that, as held by Hon'ble Supreme Court in the case of CIT Vs Vegetable Products Ltd (88 ITR 192), when two interpretations are possible, and one of the views is in favour of the assessee, the view in favour of the assessee, and a decision of Hon'ble non-jurisdictional High Court is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties which have been highlighted, inter alia, by Hon'ble Supreme Court in the case of Union of India Vs Azadi Bachao Andolan [(2004) 263 ITR 702 (SC) at page 751] as follows: A: "Interpretation of treaties The principles adopted in interpretation of treaties are not the same as those in interpretation of statutory legislation. While commenting on the interpretation of a treaty imported into a municipal law, Francis Bennion observes: "With indirect enactment, instead of the substantive legislation taking the well-known form of an Act of Parliament, it has the form of a treaty. In other words the form and language found suitable for embodying an inter-national agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganized composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for very good reason. To get agreement, politic uncertainty is called for. . . The interpretation of a treaty imported into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aly which a contrary construction would lead to. The Court recognized that "we cannot expect to find the same nicety or strict definition as in modern documents, such as deeds, or Acts of Parliament; it has never been the habit of those engaged in diplomacy to use legal accuracy but rather to adopt more liberal terms". [Emphasis, by underlining, supplied by us] 36. Similarly, in the case of Union of India Vs Ram Jethmalani [(2011) 12 taxman.com 27 (SC)], Hon'ble Supreme Court has observed as follows: 60. Article 31, "General Rule of Interpretation", of the Vienna Convention of the Law of Treaties, 1969 provides that a "treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose." While India is not a party to the Vienna Convention, it contains many principles of customary international law, and the principle of interpretation, of Article 31 of the Vienna Convention, provides a broad guideline as to what could be an appropriate manner of interpreting a treaty in the Indian context also. 61. This Court in Union of India v. Azadi Bachao Andoian [2003] 132 Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its object and purpose". Hon'ble Courts above, in a large number of reported judgments, including in Hon'ble Supreme Courts' landmark judgments in the cases of Azadi Bachao Andolan (supra) and Formula One World Championship Ltd [(2017) 80 taxmann.com 47 (SC)], referred to OECD Commentary in support of their reasoning. None of these aids to interpretation have been thus factored in the Wipro decision (supra). When the choice before us is between the views, even obiters, of Hon'ble Supreme Court, the binding force of which emanates from article 141 of the Constitution of India, and between the views of Hon'ble non-jurisdictional High Court, which, according to one of the binding judicial precedents from Hon'ble jurisdictional High Court, have no binding force of law outside the jurisdiction of respective Hon'ble High Court, we have no difficulty in taking that call. We would rather be guided by the obiters of the Hon'ble Supreme Court. 38. Viewed thus and following the path shown by Hon'ble Supreme Court, what is to be essentially seen is whether the interpretation being assigned by the learned counsel, i.e., seeking a refund of taxes paid in the UK from Indian tax authorities, cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular items under consideration are concerned. Words are to be understood with reference to the subject-matter, i.e., verba accipienda sunt secundum subjectam materiam." Double Taxation Avoidance Agreements are international agreements entered into between States. The conclusion and interpretation of such conventions is governed by public international law, and particularly, by the Vienna Convention on the Law of Treaties of 23rd May, 1969. The rules of interpretation contained in the Vienna Convention, being customary international law, also apply to the interpretation of tax treaties. This view also finds mention in the Tribunal's order in the case of Modern Threads (I) Ltd. v. Dy. CIT [1999] 69 ITD 115 (Jp.)(TM). Although India is not a signatory to Vienna Convention on Law of Treaties (VCLT), our judicial forums, right upto Hon'ble Supreme Court, have consistently referred to, and relied upon, Vienna Convention on Law of Treaties (VCLT), e.g. in the case of Azadi Bachao Andolan (supra). Elaborating upon the principles governing interpretation of tax treaties, Lord Denning, in Bulmer Ltd. v. S.A. Bollinger [1972] 2 AER 1226, has observed that " ....... The treaty .... i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its object and purpose" and thus clearly contrary to article 31 of Vienna Convention of Law of Treaties. On the first principles and in the light of the words of guidance of Hon'ble Supreme Court as well, therefore, the claim of the assessee us is not tenable in law, and must be rejected as such. 40 The next claim is for the foreign tax credit of Rs. 148.75 crores in respect of taxes paid by the assessee in Singapore, in respect of profits earned by its branch office in Singapore. 41. So far as India Singapore Double Taxation Avoidance Agreement [(1994) 209 ITR (Stat) 1; Indo Singapore tax treaty, in short] is concerned, the relevant treaty provision is as follows: Article 25- Avoidance of Double Taxation 2. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income tax paid in the US, from income tax payable in India, cannot exceed Indian income tax liability in respect of such an income. This restriction on the deduction is unambiguous and beyond any controversy, as evident particularly from the last sentence in Article 25(2)(a) which is underlined as above the supply the emphasis on the same. As a matter of fact, we are unable to appreciate any basis whatsoever for the CIT(A)'s conclusion that the taxes paid in the US, in the instant case, are to be credited to the assessee's account and are to be refunded to the appellant, in case he has no income tax liability in respect of that income in India. As for the Commissioner (Appeals)'s observation, referring to payment of income-tax in the United States on an income and returning a loss in respect of that income in India, to the effect that "this is an absurd situation and was not visualized by the Treaty", it cannot but stem from his inability to take note of the fact that certain incomes (e.g., royalties, fees for technical or included services, interest, dividends etc.), are taxed on gross basis in the source country but are only be taxed on net basis, as is the inherent scheme of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income tax liability? It is not the tax payment abroad which is the material figure for the purpose of computing Indian income tax liability, but it is the admissible foreign tax credit in respect of the same which affects such an Indian income tax liability. The FTD in respect of income tax paid in the US cannot exceed the Indian income tax liability in respect of the income on which income tax is paid in US. Unless one entirely ignores this restriction on deduction, as unambiguously placed in the last sentence of Article 25(2)(a) itself, the interpretation approved by the CIT(A) is not even a possible view of the matter. We cannot, therefore, approve the same. We hold that the CIT(A) indeed erred in directing the Assessing Officer to grant the refund to the assessee by giving credit for the taxes paid in the USA. Accordingly, we vacate the order of the CIT(A) on this issue and uphold the stand taken by the Assessing Officer. 46. As for the learned counsel's plea that this decision is no longer good law in the light of Hon'ble Karnataka High Court's decision in Wipro's case (supra), all we can say is that the issue before Hon'ble Karnataka High Court was materially different, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax credit is restricted to the Indian tax attributable to the income which has been taxed in Japan. Learned counsel fairly agrees that so far as the year before us is concerned, no part of the said income has been taxed in India inasmuch the total income of the assessee was a negative figure. There is no question of any admissible foreign tax credit in this year. In any event, any such foreign tax credit, on the facts of this case, will result in a refund of taxes paid to the Japanese exchequer by the Indian exchequer- something clearly impermissible, in the light of the foregoing discussions. We, therefore, reject this claim as well. 50. The foreign tax credit claim of Rs. 115.31 crores, paid in Japan, is thus also rejected. 51. The next foreign tax credit claim is for the tax of Rs. 29.27 crores paid in respect of profits earned by the Belgian branch of the assessee bank. 52. So far as this claim of the assessee is concerned, we find that the related tax treaty provision under the India Belgium Double Taxation Avoidance Agreement [(1997) 228 ITR (Stat) 79; Indo Belgian tax treaty, in short] is as follows: ARTICLE 23- ELIMINATION OF DOUBLE TAXATION 1. The laws in force in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nyan branch of the assessee bank. 56. So far as this claim of the assessee is concerned, we find that the related tax treaty provision under the India Kenya Double Taxation Avoidance Agreement [(1986) 157 ITR (Stat) 8; Indo Kenyan tax treaty, in short] is as follows: ARTICLE 24- METHODS FOR ELIMINATION OF DOUBLE TAXATION 1. The laws in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Agreement. 2. Double taxation shall be eliminated in India as follows: (a) Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Kenya, India shall allow as a deduction from the tax on the income of that resident, an amount equal to the tax paid in Kenya. Such deduction shall not, however, exceed that portion of the tax as computed before the deduction is given, which is attributable, as the case may be, to the income which may be taxed in Kenya. (b) Where in accordance with any provision of the Agreement income derived by a resident of India is exempt from tax in India, India may nevertheless, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us is concerned, no part of the said income has been taxed in India inasmuch the total income of the assessee was a negative figure. There is no question of any admissible foreign tax credit in this year. In any event, any such foreign tax credit, on the facts of this case, will result in a refund of taxes paid to China exchequer by the Indian exchequer- something clearly impermissible, in the light of the foregoing discussions. We, therefore, reject this claim as well. 62. The foreign tax credit claim of Rs. 11.38 crores, paid in China, is thus rejected. 63. The next foreign tax credit claim is for the tax of Rs. 4.07 crores paid in respect of profits earned by the French branch of the assessee bank. 64. So far as this claim of the assessee is concerned, we find that the related tax treaty provision under the India France Double Taxation Avoidance Agreement [(1994) 209 ITR (Stat) 130; Indo French tax treaty, in short], is as follows: ARTICLE 25- ELIMINATION OF DOUBLE TAXATION 1. Double taxation shall be avoided in the following manner: In the case of India: (a) Where a resident of India derives income or owns capital which, in accordance with the provisions of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid abroad in non-tax treaty partner jurisdictions. 69. As far as non-tax treaty partner jurisdictions are concerned, the foreign tax credits are granted unilaterally under section 91(1) of the Income Tax Act, 1961, which specifically provides that "If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income (emphasis supplied) at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal". A plain reading of this statutory provision shows that double taxation of an income is a condition precedent for this relief because the relief is granted only with respect to "such doubly taxed income", and when there is no incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho is a resident in India in any previous year, in respect of his income which accrued or arose during the previous year outside India and if he has paid the tax under the law in force in that country, a deduction of a sum calculated on such doubly taxed income has to be made from the Indian income-tax payable by that person. The tax has to be calculated at the Indian rate of tax or if the rate of tax in that country is lower than the Indian income-tax at the rate applicable in the foreign country and if both are equal at the Indian rate of tax. The relief granted in India is by way of reduction of tax by deducting the tax paid in the foreign country on doubly taxed income from out of the amount of income-tax payable by him in India. The Indian tax is reduced by the amount of tax paid by the assessee in the foreign country on such doubly taxed income. In a given case, the foreign income that has gone into computation may be much more than the income which actually suffered double taxation. The intention of the Legislature is not to exempt from tax the whole foreign income which hasgone into computation ; not also that the whole of the tax paid by an assessee in a foreign country be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 686 understood the judgment of the Supreme Court in RamanathanChettiar's case [1973] 88 ITR 169 in the same way as we did. That was also a case of an assessee resident in India who was having foreign income in respect of which double taxation relief was claimed. The Division Bench held that by merely including the foreign income in the total income it could not be said that the whole foreign income was subjected to tax in India. It laid down the criteria that not only the foreign income must be included in the total income in the assessment made under the Income-tax Act in India, but it should also be subjected to tax in India. For claiming relief under section 91 of the Act, these two conditions must be satisfied. Respectfully we agree with this test. For the above reasons, we answer the question in the negative, that is, in favour of the Revenue and against the assessee. 71. On a similar note, Hon'ble Rajasthan High Court, in the case of Dr R N Jhanji (supra), has observed as follows: 8. We shall first refer to the Supreme Court decision in K.V. AL. M. Ramanathan Chettiar's case (supra) which is the sheet anchor of the argument of the learned counsel for the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, relief from double taxation under section 91(1) can be given only by allowing deduction of the amount of tax paid once again in India on half of the total foreign income. The principle enunciated in the above Supreme Court decision supports this construction. 10. We find that the Andhra Pradesh High Court in CIT v. C.S. Murthy [1988] 169 ITR 686 has taken the same view and construed the Supreme Court decision in K.V.AL.M. Ramanathan Chettiar's case (supra) similarly. The conclusion reached by the Andhra Pradesh High Court is as under : "... The relief by way of deduction of tax under section 91 of the Act should be confined to the amount doubly taxed in accordance with the provisions of the Act and not to the full amount received by the assessee from the foreign employer. It is reasonable to assume that in enacting section 80RRA, the Legislature intended to grant relief under section 91 with reference to the amount of foreign income doubly taxed in accordance with the provisions of the Act and not with reference to the full amount which did not bear tax in this country. . . .The Legislature only intended to prevent double taxation but not to provide an additional benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . These claims for the foreign tax credits are thus dismissed. Claim for deduction in respect of taxes paid abroad 75. That brings us to our next question, and that is whether or not the assessee is eligible for a deduction of Rs. 182,64,22,948 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. 76. 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 Vs CIT [(2016) 390 ITR 271 (Bom)], wherein Their Lordships have, inter alia, observed as follows: (i) We have considered the rival submissions. So far as the question relating to the Tribunal not following its order in the case of the applicant itself for A.Y. 1979-80, we find that there is a justification for the same. This is so as the decision of this Court in S. Inder Singh Gill (supra) was noted by the Tribunal on an identical issue while passing the order for the subject assessment year. Thus, the Tribunal had not erred in not following its order for A.Y. 1979-80. In fact, the decisions of this Court in South East As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is only after deducting all expenses incurred for the purpose of business from the total receipts that profits and/or gains of business/ profession are determined. It is this determined profits or gains of business/profession which are subject to tax as income tax under the Act. The main part of Section 40(a)(ii) of the Act does not allow deduction in computing the income i.e. profits and gains of business chargeable to tax to the extent, the tax is levied/ paid on the profits/ gains of business. Therefore, it was on the aforesaid general principle, universally accepted, that this Court answered the question posed to it in S. Inder Singh Gill (supra) in favour of the Revenue. (l) We would have answered the question posed for our consideration by following the decision of this Court in S. Inder Singh Gill (supra). However, we notice that the decision of this Court in S. Inder Singh Gill (supra) was rendered under the Indian Income Tax Act, 1922 and not under the Act. We further note that just as Section 40(a)(ii) of the Act does not allow deduction on tax paid on profit and/or gain of business. The Indian Income Tax Act, 1922 Act also contains a similar provision in Section 10(4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 40(a)(ii) of the Act. This is evident from the Explanatory notes to the Finance Act, 2006 as recorded in Circular No.14 of 2006 dated 28th December, 2006 issued by the CBDT. The above circular inter alia, records the fact that some of the assessee who are eligible for credit against the tax payable in India on the global income to the extent the tax has been paid outside India under Sections 90 or 91 of the Act, were also claiming deduction of the tax paid abroad as it was not tax under the Act. In view of the above, Explanation inserted in 2006 to Section 40(a)(ii) of the Act, would require in the context thereof that the definition of the word "tax" under the Act to mean also the tax which is eligible to the benefit of Sections 90 and 91 of the Act. However, this departure from the meaning of the word "tax" as defined in the Act is only restricted to the above and gives no license to widen the meaning of the word "tax" as defined in the Act to include all taxes on income/profits paid abroad. (o) Therefore, on the Explanation being inserted in Section 40(a)(ii) of the Act, the tax paid in Saudi Arabia on income which has accrued and/or arisen in India is not eligible to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mann.com 6 (Ahd)], wherein even after taking note of Hon'ble Bombay High Court's judgment in the case of Reliance Infrastructure (supra), the coordinate bench rejected the similar claim. Learned Departmental Representative also invites our attention to certain points in Hon'ble Bombay High Court decision and submits that this decision is based on certain concessions during the course of arguments which learned Departmental Representative is specifically declining now. He thus urges us to follow the Elitecore decision (supra), and, in particular, he invites our attention to the following observations therein: 43. In the light of the above observations in judicial precedents relied upon by the learned counsel for the assessee, and in the light of extracts from the impugned orders, the core issue, in our considered view, is whether or not the meaning of expression 'tax' appearing in section 40(a)(ii) must remain confined to a tax levied under the Indian Income-tax Act, 1961. As a matter of fact, Hon'ble Bombay High Court, in the case of Reliance Infrastructure Ltd. (supra), Their Lordships have gone to the extent of saying that but for definition of tax under section 2(4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate or tax levied on the profits and gains of business or profession. The observations relied upon must be read in the said context and not literally or as the provisions in a statute. But so far as the issue herein is concerned, even this literal reading of the said observations does not help the assessee. As we have pointed out hereinabove the surtax is essentially levied on the business profits of the company computed in accordance with the provisions of the IT Act. Merely because certain further deductions [adjustments] are provided by the Surtax Act from the said profits, it cannot be said that the surtax is not levied upon the profits determined or computed in accordance with the provisions of the IT Act. Sec. 4 of the Surtax Act read with the definition of "chargeable profits" and the First Schedule make the position abundantly clear. We agree with the view taken by the High Courts of Calcutta [Molins (India) Ltd. v. CIT [1983] 144 ITR 317 (Cal) and Brooke Bond (India) Ltd. v. CIT [1992] 193 ITR 390 (Cal) : TC 15R.590], Bombay (in) Lubrizol (India) Ltd. v. CIT [1991] 187 ITR 25 (Bom) followed in several other decisions of that Court], Karnataka [CIT v. International Instr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue that the context of Section 40(a)(ii) of the Act would require it to mean tax paid anywhere in the world and not only tax payable/ paid under the Act". That was not the situation before us. The very thrust of stand of the revenue was that the connotations of expression 'tax' in section 40(a)(ii) must be taken in its contextual meaning which extends to any tax ascertainable with reference to the profits of the assessee as evident from the wordings of section which refer to "any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains , and that its connotations cannot be treated as restricted to tax under the Income Tax Act. This argument, in the context of deduction in respect of tax outside Income-tax Act, 1961, has already met the approval of Hon'ble Supreme Court. The law laid down by Hon'ble Supreme Court binds all of us under Article 141 of the Constitution of India. Once we are aware about a particular position that Hon'ble Supreme Court has taken, it is not open to us to reach a conclusion which is, or can be perceived as, in defiance to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duty to follow the same in letter and in spirit. Whatever arguments learned Departmental Representative seeks to make in support of any other interpretation, than the interpretation adopted by Hon'ble jurisdictional High Court even if was adopted in the light of a concession then made by the learned counsel for the revenue before them, being more appropriate, these arguments may be made before Their Lordships if and when that occasion comes. It is for Their Lordships to take a call on these arguments. We are not inclined to entertain these arguments before us. In the light of these discussions, as also bearing in mind the entirety of the case, 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. Our conclusions on the second issue 79. The secon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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