Tata Consultancy Services Ltd. Vs Addl. CIT (ITAT Mumbai)
As could be seen, while the Assessing Officer has disallowed assessee’s claim of foreign tax credit in respect of income exempt under section 10A/10AA of the Act on the reasoning that only such income which is subjected to tax in both the countries would qualify for tax credit, learned Commissioner (Appeals) has restricted the relief of foreign tax credit only in respect of tax paid in USA even in respect of income which is exempt under section 10A/10AA of the Act. The learned Commissioner (Appeals) has come to such conclusion by following the decision of the Hon’ble Karnataka High Court in Wipro Ltd. (supra). The reasoning of the learned Commissioner (Appeals) on the issue is, as per the decision of Hon’ble Karnataka High Court in Wipro Ltd. (supra), the foreign tax credit benefit under section 90(1)(a)(ii) of the Act would only be applicable under Indo-US DTAA and would not be applicable to other DTAA countries and non-DTAA countries. On a careful reading of the decision of the Hon’ble Karnataka High Court in Wipro Ltd. (supra), it is noted, while dealing with identical issue the Hon’ble Court held that in the cases covered under section 90(1)(a)(ii) of the Act, it is not the case of income being subjected to tax or the assessee has paid tax on the income. The provision applies to a case where the income of the assessee is eligible to tax under the Act as well as in the corresponding law in force in the other country. The Court observed, though, income tax is chargeable under the Act, it is open to the Parliament to grant exemption under the Act from payment of tax for any specified period, normally, to incentivize the assessee the to carry on manufacturing activities or providing services. The Court thereafter referring to the treaty provisions with USA held that it is not the requirement of law that the assessee before he claims credit under the Indo-US convention or under the provision of the Act must pay tax in India on such income. The Court observed, as per the embargo placed in the DTAA, the assessee is entitled to such tax credit only in respect of that income which is taxed in USA. In similar context, the Court also referred to the tax treaty with Canada where the provisions does not allow credit for tax paid in Canada if the income is not subjected to tax in India. With regard to country’s with which India does not have any agreement for avoidance of double taxation, the Court observed that as per section 91 of the Act, the assessee would be eligible to avail tax credit. Thus, on a careful reading of the aforesaid judgment of the Hon’ble Karnataka High Court, it becomes clear that where the respective tax treaty provides for benefit for foreign tax paid even in respect of income on which the assessee has not paid tax in India, still, it would be eligible for tax credit under section 90 of the Act. Like Article 25 of the Indo-USA treaty, treaties with various other countries such as Indo-Denmark, Indo-Hungary, Indo-Norway, Indo-Oman, Indo-US, Indo-Saudi Arabia, Indo-Taiwan also have similar provision providing for benefit of foreign tax credit even in respect of income not subjected to tax in India. However, Indo-Canada and Indo-Finland treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Therefore, the foreign tax credit would be available to the assessee in all cases except the foreign tax paid in Finland and Canada. The Assessing Officer is directed to grant credit accordingly.
Expenditure reduced in calculation of export turnover should also be reduced from Total Turnover for Section 10A
On the facts and circumstances of the case in law, the Ld.CIT(A) has erred in not appreciating the fact that 30% of the expenses incurred in foreign currency on account of software development expenditure incurred abroad is in the nature of providing technical services and hence it is rightly reduced from export turnover computed u/s 10A.
In view of the order of the Tribunal, dated 04/11/2015 in assessee’s own case for AY 2005-06 (ITA No.7513/M/2010), upholding that the expenditures which are required to be reduced from the export turnover as per the provisions of section 10A of the Act should also be reduced from the total turnover, we dismiss the above grounds of appeal.
FULL TEXT OF THE ITAT JUDGEMENT
The captioned cross appeals-one filed by the assessee and the other by the Revenue – are directed against the order of the Commissioner of Income Tax (Appeals)-58, Mumbai [in short ‘CIT(A)’] and arise out of assessment under section 143(3) of the Income Tax Act 1961, (the ‘Act’). Since common issues are involved, we are proceedings to dispose off these appeals through a consolidated order.
(ITA No. 3262/MUM/2017)
2. The 1st ground of appeal
1.1 On facts and circumstances of the case and in law, the Ld. CIT(A) erred in disallowing deduction of Rs. 13,22,52,218/- being “State Taxes” paid overseas on the ground that the payment of “State Taxes” cannot be allowed under the provisions of section 40(a)(ii) of the Act.
1.2 Without prejudice to the above, the Ld. CIT(A) failed to consider “State Taxes” paid in the USA and Canada, as eligible for the double taxation relief under the provisions of section 90 or 91 of the Act if it is held that the payment of State Taxes is not allowable as deduction.
3. The assessee-company, engaged in the business of computer software and management consultancy, filed its return of income for the assessment year (AY) 2007-08 on 29.10.2007 declaring total income of Rs. 305,52,02,180/-. The return was revised on 10.02.2009 declaring total income of Rs. 313,12,64,074/-. Now we turn to the above ground of appeal.
Briefly stated, the facts are that the assessee had claimed deduction of state taxes paid overseas of Rs.13,22,52,218/- in the return of income. The break-up of it is as under:
