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TMI Blog2021 (1) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 25(2)(a) of India US DTAA. Relevant clauses for elimination of double taxation in the treaties under consideration states that, foreign tax credit shall not 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 . We also note that, these clauses uses the expression income , which essentially means income embedded in the gross receipt, and not the gross receipt itself. We therefore do not agree with the computation adopted by Ld.AO. For eliminating double taxation of doubly taxable income in the hands of assessee, it would be necessary to establish the taxes paid by assessee in USA, Japan, and Germany. The condition stipulated is very clear that FTC is available on taxes paid in these countries. India- Korea DTAA - On perusal of the said Article, we find that, in India FTC is available to the taxes paid in Korea and such credit shall not exceed the taxes payable in India on doubly taxed income. Thus there is a difference in FTC available to assessee on taxes paid in USA, Japan and Germany vis-s-vis Korea. In the present facts of the case, respective treaty coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in similar manner as has been tabulated by assessee for assessment year 2013-14 reproduced hereinabove. Our observations for assessment year 2013-14 in allowing tax credit to assessee is applied mutatis mutandis for year under consideration. Insofar as Taiwan is concerned, section 91 also interprets computation of foreign tax credit to assessee in the similar manner. Section 91 contemplates the situation where there is no agreement between the Central Government and the other country concerned for the grant of relief in respect of income which has suffered taxation in both the countries or for the avoidance of double taxation of the same income. This section lays down its own conditions for and extent of the relief contemplated to be given to an assessee. The first condition is that the assessee should be a resident in India as per term defined in Section 6 of the Act. The second condition is that the income which has accrued or arisen outside India to such resident in India should not be deemed to accrue or arise to him in India. The third condition is that such resident-assessee should have paid income-tax on such income under the law in force in that country. Once these three c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction of foreign taxes paid under section 37(1) read with section 40(a)(ii) of the Act to the extent relief of FTC is denied to the Appellant having regard to the ratio of the decision of the Hon'ble Bombay High Court in the case of Reliance Infrastructure Ltd. reported in 390 ITR 271. 5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered." Asst.Yr.2014-15 "1. That the learned CIT[A] erred on facts and in law in restricting the claim of Foreign Tax Credit (FTC) to ₹ 71,11,538/- as against ₹ 2,36,78,371/- claimed by the Appellant. 2. That the Learned CT[A] erred in not granting the tax credit in full as claimed by the appellant having regard to the ratio of the decision of the Hon'ble Karnataka High Court i.e. the jurisdictional High Court in the case of Wipro Limited reported in 382 ITR 179. 3. That the learned CIT[A] erred in restricting the foreign tax credit claimed by the appellant by applying a blanket formula to the entire income and granting the tax credit as a proportion to the Income returned instead of granting the credit in fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of ratio of withheld tax 2 total receipts on which tax is withheld, whereas 4 effective rate in India the same has been computed on the basis of ratio of total tax payable to income on which tax is calculated. Ld.AO was of the opinion that the effective tax rate outside India was calculated by assessee on receipts whereas the effective tax rate payable in India was calculated on income. He was of the opinion that it is a mismatch there is difference of 9.9% between effective tax rate outside India on receipts and effective tax rate in India on income. Ld.AO was of the opinion that as per DTAA, relief has to be calculated based on deduction from tax on income of that resident and not the receipts. Ld.AO thus was of the opinion that effective rate of taxation by USA exceeded 100% of income, and hence, assessee is eligible for relief of ₹ 40,48,267/- under section 90, as it is the amount of tax paid in India in respect of receipt of ₹ 12,60,52,970/- from outside India. 5. Aggrieved by order of Ld.AO, assessee preferred appeal before Ld.CIT(A). 6. Before Ld.CIT(A), assessee submitted that during the year under consideration it received royalty and license fees f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccepted then it would lead to a very anomalous situation as the income of the appellant would be 100% from foreign as there are no expenses but in India it will be having loss which would be as follows: Total receipts of the business ₹ 59,34,99,200/- Less Foreign Receipts ₹ 13,07,41,769/- Balance receipts of' the business ₹ 46,27,57,431/- Total expenditure claimed in computation of income ₹ 51,01,60,030/- Business Loss ₹ 4,74,02,599/- Such an approach of the appellant can thus not he accepted. Since actual details of expenditure in relation 10 these foreign receipts are not available. so the method its adopted by the AO is fund to be very reasonable, although with slight modification as as discussed follows: 4.7. For working out income in comparison to receipt at 9.9%, the AO has adopted the book profits of ₹ 106,762,895/- to determine business income of ₹ 5,87,07,920/-. Since the issue is regarding income for the purposes of Income-Tax Act, for working out income in comparison to receipt the income as reflected by the appellant in its computation of income, being ₹ 12,94,29,350/-, should have been adopted. Adopt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.50% of ₹ 4,19,93,351/- ₹ 10,50,076/- 4.11. So as against withheld tax of ₹ 33,86,167/- paid by the appellant in relation to receipts from Korea. the appellant would get credit of foreign tax to the extent of ₹ 10,50,076/-. 4.12. Considering above, total credit available to the appellant in relation to foreign taxes paid by it works out to ₹ 59,54,729/- (₹ 10,50,076+49,04,653) as against credit of ₹ 46,21,684/- allowed by the AO. 9. Ld.CIT(A) thus gave a further relief of ₹ 10,50,076/-. Assessee also raised additional ground, wherein it sorted reduction of foreign taxes paid under section 37(1) read with section 40(a)(ii) of the Act, to the extent of relief of FTC denied to it. Ld.CIT(A) however dismissed the additional ground raised by assessee. 10. Aggrieved by the order passed by Ld.CIT(A) assessee is in appeal before us. 11. Ld.AR submitted that authorities below was satisfied that assessee is eligible to claim foreign tax credit. However the same was restricted to the extent of percentage of profit derived by assessee in India and not on the whole amount withheld. Ld.AR submitted that, there is a specific provision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vanced by both sides in light of records placed before us. 17. For sake of convenience it is necessary to reproduce the relevant clauses of double taxation agreement with the countries in respect of which foreign tax credit has been claimed by assessee. India US DTAA 18. Article 25 of the Indo - US Double Taxation Agreement deals with Relief from double taxation. Clause 2(a) is the relevant provision. It reads as under: "2.(a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the United States, whether directly or by deduction. Such deduction shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States." (emphasis supplied) 19. A perusal of the aforesaid provision makes it clear that, if a resident Indian derives income, which may be taxed in United States, India shall allowed as a deduction from the tax on the income of the resident, an amount equal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... public of Germany." (emphasis supplied) 22. All these clauses are identically worded as Article 25(2)(a) of India US DTAA. 23. Relevant clauses for elimination of double taxation in the treaties under consideration states that, foreign tax credit shall not 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". We also note that, these clauses uses the expression 'income', which essentially means 'income' embedded in the gross receipt, and not the 'gross receipt' itself. We therefore do not agree with the computation adopted by Ld.AO. 24. In all the above clauses, for eliminating double taxation of doubly taxable income in the hands of assessee, it would be necessary to establish the taxes paid by assessee in USA, Japan, and Germany. The condition stipulated is very clear that FTC is available on taxes paid in these countries. India- Korea DTAA 25. We note that Ld.AR relied on Article 24(3), whereas, in India Korea DTAA, Article 23 deals with Elimination of double taxation. Clause (a)(i) is the relevant provision, that reads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -14 for statistical pruposes. Assessemnt Year 2014-15: 32. In assessment year 2014-15 assessee had earned income from Taiwan. Assessee also has earned income during the year under consideration from Japan, Korea, Germany and USA. 33. Ld.CIT(A) for asst. year 2014-15 decided as under: 4.5. The dispute is regarding interpretation of following words in relation to DTAA with USA/Germany/Japan: "Such deduction shall not, however, exceed that part of the Incometax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States." (or Germany or Japan) 4.6 In case of USA/Germany/Japan. the restriction of credit of foreign tax available to a resident of India is determined by the words Income tax which is attributable to the income which may be taxed in the United States/Germany/Japan. So for the purpose of determining FTC available to the appellant it is important to work out the income of the appellant in relation to the receipts of royalty and license fee from these three countries. The approach of the appellant, that receipt and to be considered as income which is doubly taxed i.e. in India as well as in these three other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt would get credit of foreign tax to the extent of ₹ 49,37,414/-. 4.9 As regards DTAA with Korea, the relevant words which need to be interpreted are: "The credit shall not, however, exceed that proportion of Indian tax which the income from sources within Korea bears to the entire income subject to Indian tax." 4.10 In case of Korea the restriction of credit foreign tax available to a resident of India is determined by the proportion of Indian tax which the income from sources within Korea bears to the entire income subject to Indian tax. So, for the purpose of determining FTC available to the appellant it is important to work out this proportion. This proportion is worked out as follows: Total receipts of the appellant from Korea ₹ 4,43,12,245/- %age of business income to business receipts as in para 4.7 12.48% Income of the appellant from Korea (included in total income as in the income tax return filed) @12.48% of the receipts ₹ 8,66,198/- Total income subject to Indian Tax ₹ 10,53,76,580/- Ratio of income from Korea to total income subject to Indian Tax 5.248% Total tax on the income subject to Indian Tax ₹ 3,58,17,49 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it falls under Chapter III and does not therefore partake the nature of total income chargeable to tax as per provisos of section 4 of the Act and therefore not entitled to?" 34. It is submitted that, total receipt from Taiwan was ₹ 68,40,688/- and withholding tax paid by assessee in Tiwan was ₹ 13,39,875/-. Ld.AR submitted that tax payable on the said receipts from Taiwan as per Indian Income tax is 32.44% (as was applicable during the relevant assessment year), which would amount to ₹ 22,19,119/-. He thus submitted that, assessee is therefore for credit of entire taxes paid in Taiwan in India. 35. Both sides reiterated identical arguments for year under consideration in respect of foreign tax credit claimed by assessee. Both sides relied on submissions for assessment year 2013-14 reproduced hereinabove. We have perused submissions advanced by both sides in light of records placed before us. 36. We note that, India has not entered into double taxation avoidance agreement with Taiwan. Therefore, foreign tax credit available to assessee against taxes paid in Taiwan will be computed in accordance with section 91 of the Act. 37. Section 91 of the Act specifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for year under consideration. 41. Insofar as Taiwan is concerned, section 91 also interprets computation of foreign tax credit to assessee in the similar manner. Section 91 contemplates the situation where there is no agreement between the Central Government and the other country concerned for the grant of relief in respect of income which has suffered taxation in both the countries or for the avoidance of double taxation of the same income. This section lays down its own conditions for and extent of the relief contemplated to be given to an assessee. The first condition is that the assessee should be a resident in India as per term defined in Section 6 of the Act. The second condition is that the income which has accrued or arisen outside India to such resident in India should not be deemed to accrue or arise to him in India. The third condition is that such resident-assessee should have paid income-tax on such income under the law in force in that country. Once these three conditions are fulfilled, such resident-assessee would be entitled to the deduction from the Indian income-tax, as is payable by him, of a sum calculated on the doubly taxed income at the Indian rate of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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