Bank of India Vs ACIT (ITAT Mumbai)
To sum up, the assessee is declined the foreign tax credits for Rs 182,64,22,948, and, accordingly, we hold that the assessee is not entitled to seek a refund of that money from the Indian tax exchequer. As we hold so, we may add that in the present case, our entire focus was on whether these foreign tax credits could be allowed even when such tax credits lead to a situation in which taxes paid abroad could be refunded in India, but that must not be construed to mean that, as a corollary to our decision, these foreign tax credits would have been allowed, even if there is no domestic tax liability in respect of the related income in India if it was not to result in such a refund situation. At the cost of repetition, we may add that, for the detailed reasons set out earlier, we have our reservations on the applicability of the Wipro decision (supra) on this bench, being situated outside of the jurisdiction of Hon’ble Karnataka High Court, and we are of the considered view that full tax credit for source taxation cannot, as such and to that extent, be extended in the residence jurisdiction when a tax treaty sanctions only proportionate credit, and does not, in any case, specifically provide for the full foreign tax credit. A full tax credit, which goes beyond eliminating double taxation of an income, actually ends up subsidizing the foreign exchequer, to the extent that the taxes paid to the foreign exchequer are allowed to discharge exclusive domestic tax liability, rather than eliminating double taxation of an income, and that is the reason that even in the solitary full credit situation visualized in the Indian tax treaties, in the Indo Namibia tax treaty (supra), it’s one-way traffic inasmuch as while India, as a relatively developed nation, offers, under article 23(2), full credit for taxes paid in Namibia, whereas, in contrast, Namibia, as a developing nation, offers, under article 23(1), proportionate credit for taxes paid in India. It reinforces our understanding that the full foreign tax credits cannot be inferred to be permissible as a matter of course and normal practice. Just because the coordinate benches have subconsciously taken a stand that seems to be condoning, and in a way legitimizing, a contrary perception, even if that be so, we cannot, particularly after taking a closer look at the situation, follow the same course. When such huge national revenues, involving thousands of crores, are involved in this macro issue, we cannot afford to be superficial, or perfunctory, in our approach. On a separate note, nevertheless, we do uphold the claim of the assessee that these taxes paid abroad will be allowed as a deduction in the computation of the business income of the assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. One of the interesting questions that have come up for our adjudication, in this case, is whether an Indian taxpayer can claim refunds from the Government of India of taxes paid by the said taxpayer outside India, i.e., the foreign Governments, in respect of the income taxes paid abroad on income earned in the respective tax jurisdictions. It’s like someone making a contribution to, say, the US Exchequer because an income was earned there, and claiming that the Indian Treasury refunds the said tax because the aggregate of overall taxable income, from all the operations worldwide- including India, is in negative, i.e., a loss figure. In effect, one pays tax, for example, to the US and seeks its refund from the Indian Exchequer.
2. Such issues are more of an interest to the Indian business houses operating 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 refund to the assessee for Rs 165,96,87,349 for income tax paid in treaty partner jurisdictions, for Rs 15,79,80.943 for income tax paid in non-treaty partner jurisdictions and for Rs 87,54,656 in respect of dividend taxes abroad?
and, in the event of our holding this issue against the assessee,
(b) Whether or not the learned CIT(A) was justified in upholding the action of the Assessing Officer in declining deduction, in the computation of business income, of Rs 182,64,22,948 in respect of taxes so paid abroad?
4. The related grounds of appeal, for the records, are set out below:
1A: On the facts in the circumstances of the case in law, while computing refund due to the appellant bank, the learned Deputy Commissioner of Income Tax -2(1)(1) [hereinafter referred to as ‘DCIT’] has erred in not granting the credit of:
a) Income tax paid by the branches of the appellant bank, located outside India, under section 90 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] amounting to Rs 165,96,87,349;
b) Income tax paid by the branches of the appellant bank outside India, under section 91 of the Act, amounting to Rs 15,79,80.943;
c) TDS, on dividend income received from foreign associates of the bank, amounting to Rs 87,54,656
and the Hon’ble CIT(A) erred in confirming the said disallowance.
The learned CIT(A) be directed to allow the credit for the aforesaid taxes paid outside India, under section 90 and 91, and enhance the refund due to the appellant bank accordingly.
1B: Without prejudice to Ground 1A above, assuming without accepting that your honours are of the opinion that the credit for taxes paid outside India aggregating to Rs 182,64,22,948 is not allowable under section 90n and 91 of the Act, as the case may be, while computing the refund due, then appellant bank prays that such taxes be allowed as a deduction while computing total income and the learned DCIT be directed to reduce the total income accordingly.
5. We will take first take up the claim of the assessee for the refund of taxes paid abroad, and, in the event of our rejecting the said claim, we will take up the alternative claim of the assessee, i.e., for deduction of these taxes in the computation of business income of the assessee.
Claim for refund, of the taxes paid abroad, by the Indian tax authorities:
6. The assessee before us is a major Indian bank, 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 assessee. However, while the assessee did earn profits from these foreign operations and by way of foreign dividend income, the computation of the assessee’s global income, which is taxable in India, resulted in a net loss of Rs 191,38,89,912. This is the loss computed by the Assessing Officer, vide appeal effect order dated 15th March 2017, and the assessee does not, therefore, have any tax liability in India in respect of its income. Since the assessee does not have any Indian tax liability in respect of the profits earned by the assessee abroad, the assessee was not given any credit for the taxes paid abroad. The assessee is not satisfied. The claim of the assessee is that the taxes so paid by the assessee to the overseas tax jurisdictions, where the related profits are earned, should be given due credit in the computation of refund due to the assessee, and, accordingly, the income tax paid by the assessee to foreign tax jurisdictions should be refunded to the assessee by the Indian tax authorities. This claim was rejected by the Assessing Officer by observing as follows:
The claim of the assessee have been perused but not found allowable. As per section 90 of the Income Tax Act, 1961, relief of taxes paid in foreign countries is given against the income tax chargeable under Income Tax Act, 1961 and hence it does not say that the tax paid n foreign countries would be refunded in the cases where income tax chargeable under Income Tax Act, 1961, is NIL. Therefore, the claim of the assessee to refund taxes paid in foreign countries is hereby rejected.
7. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) rejected the claim of the assessee and observed as follows:
However, even if the claim of the assessee is to be considered on the merit, then too, the same is not found to be acceptable in view of the provision of section 90(1)(a)(ii) of the Income-tax Act. In the facts of the assessee’s case it is not disputed that after accounting for the income earned by the assessee from its branches located abroad, the total income computed in India is not resulting into any tax payable after giving the effect to the appellate order. The appellant in support its contention has relied on the decision of Hon’ble Karnataka High Court in the case of Wipro Ltd. V DCIT (supra). In respect of such reliance placed, 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 applies to a case where the income of the assessee is chargeable under this Act as well as in the corresponding law in force in the other country. Though the income-tax is chargeable under the Act, it is open to the Parliament to grant exemptions under the Act from payment of tax for any specified period. Normally it is done as an incentive to the assessee to carry on manufacturing activities or in providing services. Though the Central Government may extend the said benefit to the assessee in this country, by negotiations with the other countries, they could also be requested to extend the same benefit. If the contracting country agrees to extend the said benefit, then the assessee gets the relief. In another scenario, though the said income is exempt in this country, by virtue of the agreement, the amount of tax paid in the other country could be given credit to the assessee. Thus for the payment of Income-tax in the foreign jurisdiction, the assessee gets the benefit of its credit in this country.”
From the above said Para it can be clearly seen that the relief is in respect of grant of relief and credit for the taxes paid in other country. This read with the Para 33 of the said order makes it clear that the credit or the relief which is available is in respect of Indian Income-tax payable and it would not be open to take the credit of such taxes paid outside India if there are no Indian Income-tax payable by the assessee. The provisions of section 90(1)(a)(ii) cannot be interpreted to mean grant of refund to the assessee of taxes paid by such assessee outside India by the Indian authorities under the situations when there are no tax is payable by the assessee in India, in this view of the matter, it is held that the reliance placed by the assessee on the aforesaid decision of Wipro Ltd. V DCIT(supra) does not help the cause of the assessee for seeking refund of taxes paid outside India, in India when it has no Indian Income-tax payable.
8. The assessee is not satisfied and is in further appeal before us.
Rival contentions on this issue
9. Learned counsel’s basic submission before us, on this issue, is that it is now a settled legal position that the actual payment of tax abroad is not a condition precedent for being entitled to tax credit, in the computation of tax liability, in India. He relies upon the decisions of Hon’ble Karnataka High Court in the case of Wipro Ltd Vs DCIT [(2015) 62 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 income has been subjected to tax in India, learned counsel explains that the income in question was includible in its total income in India inasmuch much as it has reduced the entitlement for losses carried forward, and, to that extent, it has suffered income tax in India. It is contended that the income earned abroad has a real impact on the assessee’s Indian tax liability because his carried forward business losses have been reduced by the said income. Learned counsel also refers to the decision of Hon’ble jurisdictional High Court in the case of CIT Vs Petroleum India International [(2013) 29 taxmann.com 250 (Bombay)]. All that ‘subject to tax’ in India means, according to the learned counsel, is that the income in question should be subjected to Indian tax laws whether or not there is any actual liability to tax, and that clearly is the situation before us. It was put to the learned counsel that ‘liable to tax’ and ‘subject to tax’ are two different terms used in the tax treaties, and in the light of his hypothesis, will there be the line of demarcation between ‘liable to tax’ and ‘subject to tax’, he did not have anything to say. When asked whether he does indeed pray that the taxes paid abroad contributed in the respective national exchequers should be refunded by the Indian tax administration and from the Indian exchequer, he does confirm that prayer. Learned counsel for the assessee then takes us through the related tax treaty provisions and justifies the interpretation that he is canvassing. We are thus urged to uphold the plea of the assessee. Learned Departmental Representative submits that he has already filed a written note in support of his stand, and he would seek to rely upon the same. He nevertheless makes brief submissions supporting the stand that refunds cannot be granted for the taxes paid abroad. It is submitted that it is clearly stretching the things too far that the taxes paid, for example, in UK, to the UK exchequer, should be refunded in India, from the Indian exchequer. Leaned Departmental Representative submits that it is important to bear in mind the fact that right now, we are dealing with the proceedings to give effect to the appellate order, and such contentious issues cannot be taken up at this stage. Once the assessee has not raised these points earlier, he cannot raise these points even at this stage where only the mechanical 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 the liability to tax in the source jurisdiction, but the relief sought in the present case goes well beyond that and would result in a refund of taxes by India and what is being termed as a refund is not even paid to Indian exchequer. Learned Departmental Representative then points out that this judicial precedent is in context of the question as to whether the credit for income tax paid in a country outside India in relation to an income eligible for deduction under section 10A would not be available under section 90(1)(a), and what Their Lordships have held is that merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax, and, therefore, the case falls under Section 90(1)(a)(ii). It is then pointed out that 10A was held to be in the nature of exemption and, therefore, it cannot be said that the said income was not liable to tax, but then, in the light of the subsequent judgment of Hon’ble Supreme Court in the case of CIT Vs Yokogawa India Ltd [(2017) 77 taxmann.com 41 (SC)], section 10A is required to be treated as deduction and not as an exemption, and thus the decision of Hon’ble Karnataka High Court ceases to be good in law. It is then pointed out that even going by the interpretation canvassed by Hon’ble Karnataka High Court, such a refund is permissible as a result of relaxation in the nature of treaty that India can enter under section 90(1)(a)(ii) but then this statutory came into effect from 1st April 2004 and all the related tax treaties were entered into by India well before that date. This decision cannot, therefore, have any impact of the tax treaties which were entered into prior to that date. Learned Departmental Representative submits that this decision from a High Court other than Hon’ble jurisdictional High Court, and is not a binding judicial precedent for this reason also. It is then pointed out that this decision was in the context of an income that was taxable in the hands of the assessee but exempt for the reason of an incentive provision and the assessee had actually paid his taxes on the non-exempt income. In none of these cases, therefore, there was any question of refund being made to the assessee. Learned Departmental Representative very politely, but equally firmly, submits that this decision is per incuriam, it is from a 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 whether the appellant is entitled to relief in respect of income chargeable under the Act and the corresponding law in force in a foreign country in accordance with the DTAA, and that issue is no longer res integra. His stand is that the assessee is being subjected to double jeopardy inasmuch as on the one hand the assessee is declined tax credit, and, on the other hand, his loss being carried forward are being reduced to the extent of profits earned abroad. As against a business loss of Rs 826.58 crores, what is being allowed to be carried forward for set-off against future profits is only Rs 191.39 crores as the foreign profits of Rs 635.19 crore are set off against the same. It is submitted that such double jeopardy will be absolutely unjust and inequitable to the assessee. We are, in effect, once again urged to direct the Assessing Officer to refund the taxes paid by the assessee abroad.
Our analysis on the first issue for consideration
10. Let us now deal with the specific claims made by the assessee. The incomes earned by the assessee outside India, and taxes paid by the assessee in the respective jurisdiction are as follows:
