We are of the considered view that no deduction under section 37(1) can be allowed in respect of any income tax withheld abroad as the same will be, for the detailed reasons set out above, hit by the disabling provisions under section 40(a)(ii) of the Act. The relief granted by the CIT(A), by directing the grant of deduction of Rs.52,50,507 in respect of income tax withheld abroad in respect of which no foreign tax credit is admissible, under section 37(1) of the Act must, therefore, stand vacated. We direct so. We further direct that, as a result of our directions earlier in this order, in the event of assessee being allowed only partial tax credit in respect of taxes withheld abroad, the assessee cannot be allowed any deduction, in respect of the balance of the taxes so withheld abroad, under section 37(1) of the Act.
Relevant Extract of the Order
28. In a connected ground of appeal, i.e. ground no. 3 which we must take up along with the above stated interrelated grievance of the assessee, the Assessing Officer has also raised the following grievance in its appeal:
3. The Ld. CIT(A) has erred in law and on facts in restricting the dis allowance of foreign tax credit to Rs.3,10,799 and the balance un allowed credit of Rs.52,50,507 allowed u/s.37(1) of the Act, without properly appreciating the facts of the case and the material brought on record.
29. The relevant material facts are as follows. The assessee before us, a wholly owned subsidiary of a US based company by the name of Elitecore Technologies Inc, is a company engaged in the business of software developments and products. During the relevant previous year, the assessee earned foreign income amounting to Rs 2,72,96,723 from Indonesia, Rs 66,53,562 from Malaysia and Rs 3,51,570 from Rwanda. It was in respect of these incomes that the taxes were withheld in the respective source countries, and the taxes so withheld aggregated to Rs 55,61,306. The assesse claimed a tax credit in respect of the taxes so withheld abroad. There is no dispute that the assessee should get foreign tax credit for the taxes so paid abroad- under section 90 read with the relevant treaty provisions in cases in which the income is sourced from tax treaty partner jurisdictions, i.e. Malaysia and Indonesia in this case, and under section 91 from the jurisdictions with which India has not entered into a tax treaty. The dispute is confined to the of tax credit. While the assessee has claimed a tax credit of Rs 55,61,306, the Assessing Officer has granted the tax credit of only Rs 3,10,799. When the matter travelled in appeal, the first appellate authority, i.e. learned CIT(A) simply followed his predecessor’s order on this issue, in assessee’s own case for the 2009-10, and confirmed the quantification of eligible tax credit at Rs 3,10,799. As for the balance amount of Rs 52,50,507 (i.e. tax withheld abroad at Rs 55,61,306 minus tax credit allowed of Rs 3,10,799), the CIT(A) held that it should be allowed as deduction under section 37(1)- a claim which was negatived, or rather simply brushed aside, by the Assessing Officer without any discussion at all. Aggrieved by learned CIT(A) upholding the eligible tax credit at Rs 3,10,799, the assessee is in appeal before us. In the meantime, however, the order so followed by the CIT(A) also came up for examination before us. Vide order dated 3rd January 2017 on assessee’s appeal for the assessment year 2009-10, the stand of the CIT(A) on quantification of tax credit was reversed, claim of the assessee on quantification, to a very large extent, was upheld, and, in the process, some observations on principles governing the quantification of such tax credit were made. Learned counsel for the assessee suggests that matter deserves to be remitted to the file of the CIT(A) for fresh adjudication, on quantification aspect, in the light of the order so passed by the Tribunal, and learned Departmental Representative does not oppose this prayer. On the quantification aspect, therefore, we remit the matter the file of the CIT(A) for adjudication de novo in accordance with the law, in the light of the observations made by the Tribunal for the assessment year 2009-10 in assessee’s own case, by way of a speaking order and after giving a reasonable opportunity of hearing to the parties. For the sake of completeness, we reproduce these observations as below:
8. So far as the first issue that we have identified for adjudication, i.e. the manner in which the quantum of income eligible which is required to be treated as taxed in both the countries ,is concerned, there is no guidance available in the treaties. All that both the treaties state is that the foreign tax credit shall not exceed the part of the income tax as computed before the deduction is given, “which is attributable as the case may be, to the income which may be taxed in that other State” but there is little guidance on how to compute such income. However, quite clearly, as the expression used is ‘income’, which essentially implied ‘income’ embedded in the gross receipt, and not the ‘gross receipt’ itself. This approach is reflected in the UN Model Convention Commentary as well, which, in turn, follows the approach in OECD Model Convention Commentary in this regard. UN Model Convention Commentary (2011 update @ page 333) states that “Normally the basis of calculation of income tax is total net income, i.e. gross income less allowable deductions. Therefore, it is the gross income derived from the source state less any allowable deductions (specific or proportional) connected with such income which is to be exempted”. It is, therefore, not really the right approach to take into account the gross receipts, as was contended by the assessee, for the purpose of computing admissible tax credit. The case before us is, however, somewhat unique in the sense that the main business is carried on in India and only some isolated transactions have taken place in Singapore and Indonesia. So far as the first two transactions are concerned, these are only for release of margin money and addition of a separate user- things which donot require any activity on the part of the assessee. In a way, therefore, these earnings are, so far as the present year is concerned, are passive earnings, and no part of the costs incurred in India can be allocated to earnings from Singapore and Indonesia. As regards earnings from maintenance contract, the assessee has allocated the costs on a proportionate basis and no defects are pointed out in the allocation so made by the assessee. However, there seems to be no logic in allocating a share, in proportion of turnover, of all the costs borne by the assessee to these earnings- as has been done by the Assessing Officer. When the income in respect of such foreign operations is not separately computed, it is to be done on a reasonable basis, and what would constitute reasonable basis will be the basis which is based on sound reasoning. The concept of averaging on the basis of overall revenues and profits of the assessee, or on the basis of some other ratio analysis, can only come into play when the income element cannot be worked out on some other reasonable basis on the facts of a particular case So far as the facts of the present case are concerned, we have also noted that the assessee has, during the course of the assessment proceedings, given the working on the computation of income- a copy of which is placed at page 79 of the paper-book filed before us.. …….
