Companies having overseas divisions or business abroad specially in US must give attention to the recent judgment of Mumbai Income Tax Tribunal Mumbai in case of DCIT vs Tata Sons Ltd [ 2010] 43 SOT 27 wherein the claim of Tata Sons of deduction of tax paid in US -state & federal- as expense under section 37 of the Inocme Tax Act was rejected by the Tribunal on the ground that that such a claim is not within the Indian Tax Law.
Facts of the case
Facts of the case
ICC Cricket World Cup 2011 - Points Table (12.03.2011)
*
The assessee is mainly an investment company and also engaged in the business of exports of software through one of its division, namely Tata Consultancy Services, and in engineering consultancy through its other division.
*
The assessee filed return of income disclosing an income of Rs 110.26 crores. During the course of the assessment proceedings, it was noticed by the Assessing Officer that the assessee has debited an amount of Rs 85,36,04,000 in its profit and loss account in respect of overseas taxes paid, out of which Rs 24,89,36,449 represented overseas tax liability which has remained unpaid.
*
Assessee claimed benefit of deduction u/s 80HHE on it s exports income .
*
Further assessee also claimed the relief in form of tax credit of taxes paid abroad u/s 90 & 91 of the I T Act.
The A.O allowed relief u/s 90 & 91 , but disallowed claim of expenditure u/s 37 of the I T Act.
The assessee appealed before CIT(A) who deleted A.O’s disallowance .
The department then approached ITAT , Mumbai against decision of CIT(A). After hearing both side , Mumbai Tribunal held that the taxes paid by assessee in USA can not be claimed as expenditure u/s 37 because of express provision u/s 40(ii) of the I T Act
The assessee is mainly an investment company and also engaged in the business of exports of software through one of its division, namely Tata Consultancy Services, and in engineering consultancy through its other division.
*
The assessee filed return of income disclosing an income of Rs 110.26 crores. During the course of the assessment proceedings, it was noticed by the Assessing Officer that the assessee has debited an amount of Rs 85,36,04,000 in its profit and loss account in respect of overseas taxes paid, out of which Rs 24,89,36,449 represented overseas tax liability which has remained unpaid.
*
Assessee claimed benefit of deduction u/s 80HHE on it s exports income .
*
Further assessee also claimed the relief in form of tax credit of taxes paid abroad u/s 90 & 91 of the I T Act.
The A.O allowed relief u/s 90 & 91 , but disallowed claim of expenditure u/s 37 of the I T Act.
The assessee appealed before CIT(A) who deleted A.O’s disallowance .
The department then approached ITAT , Mumbai against decision of CIT(A). After hearing both side , Mumbai Tribunal held that the taxes paid by assessee in USA can not be claimed as expenditure u/s 37 because of express provision u/s 40(ii) of the I T Act
17. If we are to hold that the assessee is entitled to deduction of tax paid abroad, in addition of admissibility of tax relief under section 90 or section 91, it will result in a situation that on one hand double taxation of an income will be eliminated by ensuring that the assessee’s total income tax liability does not exceed income tax liability in India or income tax liability abroad – whichever is greater, and, on the other hand, the assessee’s domestic tax liability will also be reduced by tax liability in respect of income decreased due to deduction of taxes. Such a benefit to the assessee is not only contrary to the scheme of the Act and contrary to the fundamental principles of international taxation, it also ends up making double taxation relief a mechanism to reduce domestic tax liability in India – something which is most incongruous. In our considered view, an interpretation which leads to such glaring absurdities cannot be adopted.18. Learned counsel has also submitted that in the event of our declining the deduction, we should at least direct that tax credit in terms of the provisions of Section 90 be granted in respect of the entire amount. Learned counsel submits that this approach is justified inasmuch as we must take into account right to tax, rather than the actual levy of tax.……………………….In view of this limitation on the foreign tax credit, the innovative theory of crediting the entire tax paid in the US to the assessee and grant of refund to him in case there is no tax liability in India in respect of that income, as enunciated and adopted by the Commissioner (Appeals), is wholly unsustainable in law. Where is the question of refund of taxes paid abroad when FTD (i.e., foreign tax credit), in view of specific provisions to that effect in the DTAAs, cannot even exceed the Indian 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.
19. In view of the aforesaid judicial precedent, and being in considered agreement with the same, we reject this alternate claim of the assessee.20. Learned counsel has also contended that in any event, we must allow deduction in respect of state income taxes paid in USA and Canada as relief is not admissible in respect of the same in respective tax treaties. We have been taken through India USA tax treaty to point out that tax credits are admissible only in respect of income tax levied by the federal government and not by the state governments. It is contended that since no relief is admissible in respect of state taxes under section 90 or section 91, these taxes will continue to be tax deductible, and to that extent, decisions of the coordinate benches will hold good. We are unable to see legally sustainable merits in this submission either. Apart from the fact that such a claim of deduction is clearly contrary to the law laid down by Hon’ble jurisdictional High Court in Lubrizol’s case (supra), there is another independent reason to reject this claim as well. The reason is this. It is only elementary that tax treaties override the provisions of the Income Tax Act, 1961, only to the extent the provisions of the tax treaties are beneficial to the assessee. In other words, a person cannot be worse off vis-a-vis the provisions of the Income Tax Act, even when a tax treaty applies in his case. Section 90 (2) states that even in relation to the assessee to whom a tax treaty applies "the provisions of this Act shall apply to the extent they are more beneficial to that assessee". Undoubtedly, title of section 91 as also reference to the countries with which India has entered into agreement, suggests that it is applicable only in the cases where India has not entered into a double taxation avoidance agreement with respective jurisdiction, but the scheme of the Section 91, read alongwith section 90, does not reflect any such limitation, and Section 91 is thus required to be treated as general in application. The scheme of the Income Tax Act is to be considered in entirety in a holistic manner, and each of the section cannot be considered on standalone basis. It is important to bear in mind the fact that so far as Section 91 is concerned, it does not discriminate between taxes levied by the Federal Governments and taxes levied by the State Government. The income tax levied by different States in USA usually ranges from 3% to 11%, and the aggregate income tax paid by the assessee in USA will range from 38% to 46%.Therefore, on the facts of the present case and bearing in mind the fact that the Federal income tax in USA at the relevant point of time was lesser in rate at 35% vis-a-vis 38.5% income tax rate applicable in India, the admissible double taxation relief under section 91 will be higher than relief under the tax treaty. It will be so for the reason that State income tax will also be added to income tax abroad, and the aggregate of taxes so paid will be eligible for tax relief – of course subject to tax rate on which such income is actually taxed in India. The tax relief under section 91 thus works out to at least 38%, as against tax credit of only 35% admissible under the tax treaty. In such a situation, the assessee will be entitled to relief under section 91 in respect of federal as well as state taxes, and that relief being more beneficial to the assessee vis-a-vis tax credit under the applicable tax treaty, the provisions of section 91 will apply to state income taxes as well. The state income tax is also, therefore, covered by Explanation 1 to Section 40(a)(ii), and deduction can not be allowed in respect of the same. Finally, in view of Hon’ble Bombay High Court’s judgment in Gill’s case (supra), income tax abroad cannot be allowed as a deduction in computation of income and this judgment does not discriminate between federal and state taxes either. Interestingly, state income taxes paid in USA, subject to certain limitations, are deductible in computation of income for the purposes of computing federal tax liability in USA, but that factor cannot influence deductibility of these taxes, particularly in the light of the provisions of Explanation 1 to Section 40(a)(ii) and in the light of Hon’ble Bombay High Court’s judgment in Gill’s case (supra), in computation of business income under Indian Income Tax Act. For all these reasons, we are unable to uphold the plea of the assessee seeking deduction of at least state income tax paid in USA.21. In view of the above discussions, and for the detailed reasons set out above, we uphold the grievance of the Assessing Officer. The CIT(A) was indeed not justified in deleting the disallowance of Rs 67,89,30,514 in respect of income tax paid abroad. We vacate the relief granted by the CIT(A) and restore this disallowance.
Don't Download any thing before free Registration on the TOP of this site and check your Inbox for clicking on activation link of feed burner.
