PCIT Vs Polyplex Corporation Ltd (Delhi High Court)
Delhi High Court held that tax credit could not be extended to the assessee, because it had not paid tax in Thailand, i.e., that benefit under Article 23 of the Indo-Thai DTAA could only be extended in a situation where the tax had actually been paid.
Facts- The respondent/assessee claims that it is eligible for tax credit qua tax which, though payable in the country from where the income emanated, was not paid because of the statutory regime operating in that country.
The respondent/assessee, in seeking tax credit qua tax payable [though not paid], has sought to place reliance on Article 23 of the Double Taxation Avoidance Agreement [“DTAA”] obtained between India and Thailand.
It was the respondent/assessee’s stand that it ought to be given tax credit qua the tax which it was spared from paying, on income by way of dividend, received from its subsidiary in Thailand, in consonance with the provisions of Article 23 of the Indo-Thai DTAA. Thus, the issue at hand centres around the concept of “tax sparing”, which is embedded in several DTAAs arrived between India and other countries, including Thailand.
Conclusion- Held that tax credit as claimed, could not be extended to the respondent/assessee, because it had not paid tax in Thailand, i.e., that benefit under Article 23 of the Indo-Thai DTAA could only be extended in a situation where the tax had actually been paid. In view of the rationale provided by us hereinabove, this argument is completely misconceived. The concept of tax sparing is embedded in several DTAAs which have been executed by India, such as with France, Jordan and Oman, apart from Thailand.
Insofar as the Indo-Thailand DTAA is concerned, credit for tax sparing works for residents of Thailand, as well as India. This is a mechanism which is engrafted in DTAAs to incentivize investment for economic development.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
The above-captioned appeals, which are four (4) in number, are directed against a common order dated 24.01.2019 [hereafter referred to as “impugned order”] passed by the Income Tax Appellate Tribunal [in short, “Tribunal”].
1.1. The impugned order concerns Assessment Years (AY) 2010-11 (ITA 573/2019), 2011-12 (ITA 574/2019), 2012-13 (ITA 571/2019) and 2013-14 (ITA 575/2019).
2. The disputants before us, via their respective counsel, have conveyed that the controversy at hand is common to all four AYs and therefore, a decision rendered vis-a-vis one AY, will cover and/or apply to the remaining AYs as well. Notably, this position was also adopted before the Tribunal.
3. Accordingly, as was the case before the Tribunal, we will be adverting to the facts, as obtained in AY 2010-11.
4. Before we proceed further, we may indicate that the broad issue which arose for consideration before the statutory authorities [including the Tribunal] and us, concerns the following:
4.1. The respondent/assessee claims that it is eligible for tax credit qua tax which, though payable in the country from where the income emanated, was not paid because of the statutory regime operating in that country.
4.2. The respondent/assessee, in seeking tax credit qua tax payable [though not paid], has sought to place reliance on Article 23 of the Double Taxation Avoidance Agreement [in short, “DTAA”] obtaining between India and Thailand.
4.3. It is the respondent/assessee’s stand that it ought to be given tax credit qua the tax which it was spared from paying, on income by way of dividend, received from its subsidiary in Thailand, in consonance with the provisions of Article 23 of the Indo-Thai DTAA. Thus, the issue at hand centres around the concept of “tax sparing”, which is embedded in several DTAAs arrived at between India and other countries, including Thailand.
5. On the other hand, appellant/revenue seeks to contend that because the tax was not paid by the respondent/assessee on dividend received from its Thai subsidiary, i.e., Polyplex (Thailand) Public Limited Company, it could not be granted tax credit on dividend income, which was otherwise taxable in India at the rate of 30% (plus surcharge and cess, at the applicable rates).
6. Thus, before we proceed further to adjudicate the issue at hand, the following broad facts concerning AY 2010-11 are required to be noticed.
7. The respondent/assessee had e-filed its return of income for AY 201011 on 13.10.2010. The income declared for the said AY was Rs.11,41,46,171/-. The return of income (ROI) was processed under Section 143 (1) of the Income Tax Act, 1961 [hereafter referred to as, “Indian Income Tax Act”].
7.1 The ROI was picked up for scrutiny, whereupon it was discovered that the respondent/assessee had claimed tax credit amounting to Rs.1,60,74,706/- in respect of tax, which it would have to ordinarily pay in Thailand on dividend received from its Thai subsidiary, but for the statutory regime obtaining in Thailand, which exempted levy of tax in that country.
7.2 It is important to note at this stage that the respondent/assessee had included in its ROI, dividend income amounting to Rs.68,81,05,808/- earned from its Thai subsidiary.
8. But for the exemption granted under the statutory regime obtaining in Thailand, the respondent/assessee would have to pay tax, in Thailand, at the rate of 10% on dividend received by it from its Thai subsidiary. On account of this, the respondent/assessee claimed tax credit for the amount quantified at the said rate, i.e., 10%, under the provisions of paragraphs 2 & 3 of the Article 23 of the Indo-Thai DTAA.
9. The Assessing Officer (AO), however, disagreed with the stand taken by the respondent/assessee and thus, declined the tax credit sought in the ROI.
10. The respondent/assessee, being aggrieved, carried the matter before the Commissioner of Income Tax (Appeals) [in short, “CIT(A)”]. The CIT(A), via a common order dated 24.06.2016, rejected the appeals preferred against the assessment orders concerning the aforementioned AYs.
11. In the Tribunal, however, the respondent/assessee was successful. It was able to persuade the Tribunal that, having regard to the tax sparing concept which is embedded in several DTAAs, including the subject Indo-Thai DTAA, it was entitled to tax credit at the rate of 10%, on the dividend income received from the Thai subsidiary.
12. It is in this backdrop that the aforementioned appeals came to be lodged before this court.
Submissions of Counsel
13. In support the appellant/revenue’s case, submissions were advanced by Mr Kunal Sharma, learned senior standing counsel, while on behalf of the respondent/assessee, submissions were made by Mr Ved Jain, Advocate.
14. Mr Sharma’s arguments can, broadly, be paraphrased as follows:
(i) The AO had rightly declined tax credit. The respondent/assessee’s stand that in view of Article 23 of the Indo-Thai DTAA, it could get tax benefit concerning tax which it had not, infact, paid, was flawed.
(ii) The CIT(A) correctly noted that paragraph 6 of the promotion certificate issued to the Thai subsidiary, based on which a claim was made that dividend distributed did not suffer tax in Thailand, did not, as a matter of fact, refer to dividend.
(iii) The Tribunal took a view that to obtain benefit under Article 23(2) of the Indo-Thai DTAA, it was not necessary that the respondent/assessee ought to have paid tax: what was relevant was whether it was liable to pay tax, and if so, that tax was not paid in view of exemption granted in that behalf. This was an erroneous conclusion, as it went beyond the scope and ambit of the Article 23 of the Indo-Thai DTAA. The respondent/assessee was not granted exemption, as envisaged in Article 23(2) of the Indo-Thai DTAA.
(iv) Furthermore, the respondent/assessee failed to furnish proof of such exemption being accorded to it. Thus, the Tribunal erroneously concluded that tax had not been paid in view of the exemption extended under the statutory regime prevailing in Thailand.
(v) The respondent/assessee did not pay tax, for reasons other than those provided in Article 23(2) of the Indo-Thai DTAA.
(vi) The exemption relied upon by the respondent/assessee was, in fact, extended to its Thai subsidiary. The exemption permitted the Thai subsidiary to not pay tax on the dividend distributed by it. In the hands of the respondent/assessee, however, the dividend distributed and/or remitted to the respondent/assessee, became its income, and hence, the respondent/assessee cannot be allowed to rely upon the exemption under Thai law, to claim tax credit in India, under the Indian Income Tax Act.
(vii) The Tribunal, erroneously, interpreted provisions of Thai statues, which, being in the domain of foreign law, presented pure questions of fact. Given this position, the Tribunal ought to have remanded the matter to the AO.
(viii) In the given facts, the respondent/assessee could have claimed benefit of under Article 23(2) of the Indo-Thai DTAA, only if it had paid tax in Thailand. Since the respondent/assessee had not paid tax in Thailand, it was rightly declined tax credit by the AO.
15. Mr Ved Jain, on the other hand, on behalf of the respondent/assessee, emphasized the following aspects, in defence of the impugned order rendered by the Tribunal:
(i) The concept of tax sparing credit runs through several DTAAs executed by India, including with Oman, Jordan and France, apart from Thailand.
(ii) Under tax sparing provisions, tax credit may be claimed even for tax which, though payable, is exempted on account of incentives granted by the source country. Article 23 of the Indo-Thai DTAA would show that these benefits are available to the recipient of income, as in this case, in India, as well as those who reside in Thailand. [See Article 23(2) and Article 23(3) alongside Article 23(4) and Article 23(5) of the Indo-Thai DTAA].
(iii) The Thai subsidiary of the respondent/assessee was granted exemption from corporate income tax vis-a-vis its net profit under Section 31 of Investment Promotion Act B.E. 2520 (1997) [in short, “Investment Promotion Act”]. Besides this, the dividend distributed by the respondent/assessee’s Thai subsidiary is also exempted from tax under the provision of 34 of the Investment Promotion Act.
(iv) Section 70 of the Revenue Code B.E. 2481 (1938) of Thailand [in short, “Thai Revenue Code”] levies tax at the rate of 10% on companies incorporated under foreign law, qua assessable income which emanates from, or is received in Thailand.
(v) Tax could only be levied, as per the Indo-Thai DTAA, on the dividend distributed by the Thai company, in Thailand. [See Article 101 of the Indo-Thai DTAA.]
1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that State, but if the beneficial owner of the dividends is a company which is a resident of the other Contracting State, the tax shall not exceed—
