Double Tax Avoidance Agreement provides computing relief for taxes; same to be followed in India, says ITAT
The Income Tax Appellate Tribunal (ITAT), Bangalore Bench in the case M/s ITTIAM Systems Pvt Ltd, vs. The Income Tax Officer, allowed the appeal filed by the appellant M/s ITTIAM Systems Pvt Ltd were entitled to the deduction from the Indian income-tax, as it was payable by it, for a sum calculated on the doubly taxed income at the Indian rate of tax or the rate of tax of the other country concerned, whichever is said to be lower.
In the present appeal, the appellant raised the contention that it was entitled to claim a reduction in foreign taxes paid under section 37(1) read with section 40(a)(ii) of the Indian Income Tax Act (IIT Act), to the extent of relief of Foreign Tax Credit (FTC). However, the Central Income Tax Authority (CITA) denied it.
Appellant contended that the CITA 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 full for the actual tax withheld, under the facts and circumstances of the appellant's case.
The restriction was placed to the extent of the percentage of profit derived by the appellant in India and not on the whole amount withheld. Appellant submitted that there was a specific provision in Double Tax Avoidance Agreement (DTAA), with USA, Germany, Japan and Korea for computing relief in respect of taxes paid in these countries, and the same should be followed irrespective of provisions of Indian Income-tax Act.
The appellant submitted that Article 25 of the Indo-US Treaty, Article 23 (2) of Indo-Japan Treaty and the Indo-Germany Treaty, Article 24(3) of Indo-Korea Treaty deals with the elimination of double taxation. As per these articles, India shall be allowed a deduction from the tax on the income of the resident and an amount equal to income tax paid in the USA, Japan, Germany whether directly or by deduction. They submitted that the said articles do not speak of -any income-tax been paid by the resident Indian under the Income-tax Act, as a condition preceded and for claiming the said benefit. They also submitted that these articles are in conformity with section 90 (1) (a) (ii) of the IIT Act.
The Tribunal after examining the facts of the case emphasized on Article 25 of the Indo-US Double Taxation Agreement deals with relief from double taxation. Clause 2(a) is the relevant provision which clearly stated that if resident Indian derives income, which may be taxed in the US, India shall also be allowed for deduction from the tax on the income of the resident, an amount equal to the tax paid in the US, whether directly or by deduction. The conditions mandated in the treaty were that if any 'income derived' and 'tax paid in the United States of America on such income', then tax relief/credit shall be granted in India on tax paid in the United States of America.
The Tribunal then highlighted Article 23(2) of India Japan DTAA deals with the elimination of double taxation which stated, for eliminating double taxation of double taxable income in the hands of appellant/assessee, it would be necessary to establish the taxes paid by the assessee in the USA, Japan, and Germany. The Tribunal stated that the condition stipulated was very clear that FTC is available on taxes paid in these countries.
The Tribunal further relied on Section 91 of the IIT Act, which contemplates the situation where there is no agreement between the Government of India 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.
According to the Tribunal, this section laid 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 IIT 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 or the rate of tax of the other country concerned, whichever is the lower. Thus, as per section 91 of the Act, in case of Taiwan, FTC is to be computed based on rate of tax applicable in India or Korea, whichever is less, on such doubly taxable income," Tribunal stated in its judgment delivered on 13 January 2021.