Objective
Author in this article discusses a recent judgement of Mumbai tribunal dealing with question as to whether it is possible that an assessee pays taxes in UK to the UK ex-chequer and claims refund in India from Indian Ex-chequer. The real tussle is interpretation is application of principles laid down in the case of Wipro Ltd [1].
Structure-:
The article gives authors own analysis. This article is based on a judicial pronouncement and is divided into following parts.
| Citation of the Pronouncement | ||
| Entering the subject | ||
| Take away points | ||
| Question posed & Answer by ITAT | ||
| Basic about the assessee | ||
| Broad categories of discussion-: | ||
| 1 | Types of elimination of double taxation | |
| 2 | what is section 90(1)(a)(ii) | |
| 3 | what is not a double taxation | |
| 4 | what is a double taxation | |
| 5 | Subjected to tax vis-à-vis liable to tax | |
| 1 | Subjected to tax | |
| 2 | Liable to tax | |
| Analysis of Wipro Ltd. | ||
| Text of rule 128 and rule 26 | ||
| Cross References | ||
Citation of the Pronouncement
Entering the subject
In general, it is a settled principle that, foreign tax credit can-not exceed the domestic tax liability. In simple terms, foreign tax credit can-not give rise to a refund. But a decision of Karnataka High Court in the case of Wipro Ltd. [1] that allowed a refund arising from foreign tax credit as the income of the company was exempt u/s 10A.
Take Away Points
1) There are various types of treaties and as of today only Indo-Namibian[2] treaty gives full credit i.e. from which refund can get generated. Rest of the treaties has mechanism of as mentioned in point 2 hereinbelow.
2) There are broadly 3 methods for elimination of Double Taxation namely exemption method, credit method and hybrid method. All these three methods restrict the foreign tax credit to liability under domestic tax laws.
3) There is a confusion prevailing in the methodology of granting foreign tax credit. Rule 128 of the IT Rules, 1962 has codified the mechanism.
4) Non Jurisdictional high Court Judgement may not be binding on sub-ordinate courts.
5) Treaty has to be interpreted in good faith and not like a legal document.
6) There is a fundamental difference in subjected to tax and liable to tax. Liable to tax has more nexus with Geography and residency.
7) Though indirectly and not using so many words, the bench states that the decision of Wipro Ltd is per in curium.
8) Section 90(1)(a)(ii) which came into effect from 1-4-2004 can-not read into treaties entered into before 1-4-2004. It only authorises Govt. to enter into such kind of treaties.
Questions posed and answer of ITAT-:
| Question | Ans-wer |
| Whether or not, on the facts and in the circumstances of this case, the AO / CIT(A) erred in | |
| declining refund to the assessee for
Rs. 165.96 crores for income tax paid in treaty partner jurisdictions, Rs. 15.79 crores for income tax paid in non- treaty partner jurisdictions and Rs. 00.87 crores in respect of dividend taxes abroad? |
No |
| declining deduction, in the computation of business income, of Rs. 182.64 crores in respect of taxes so paid abroad | Yes |
Basic about the assessee
Bank of India has several branches abroad- a few in the treaty partner jurisdictions, 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).
Broad categories of discussion-:
The decision has discussed various subjects / concepts like
1) Types of elimination of double taxation;
2) What is section 90(1)(a)(ii);
3) What is not a double Taxation
4) What is double Taxation
5) Subjected to tax vis-à-vis liable to tax
6) Analysis of decision of Wipro Ltd.
♦ Types of elimination of double taxation
In most of the treaties, almost all the methods of eliminating the double taxation, as mentioned herein-below restrict the liability to tax in the source jurisdiction. Fundamentally, the difference between the methods is that the exemption methods look at income, while the credit methods look at tax.
| Exemption method | The specified income will be taxed only in one of the countries. |
| Credit method | One country will allow credit of tax paid in other country against tax liability of own country. |
| Hybrid method | The taxing scope is limited, for example, article 12, where tax rate restrictions are imposed on one of the countries. |
To illustrate, let us assume an assessee earns Rs. 1,00,000 in UK whereas his total global income taxable in India is Rs. 10,00,000, and pays 50% tax thereon in the UK, whereas tax rate payable by the assessee in India in respect of such income is only 30%. In this case, whereas the assessee will pay Rs. 50,000 as tax in the UK, the admissible tax credit will only be Rs. 30,000 even though his total tax liability in India will be Rs. 3,00,000. That is what is typically called “ordinary tax credit” under the scheme of the treaties.
Let us contrast this with the treaties in which “full tax credit”, a rather rare feature in Indian tax treaties, is given. In India Namibian DTAA [2]; Indo Namibian tax treaty, in short], for example, Article 23(2) provides that
“where a resident of India derives income or capital gains from Namibia, which, in accordance with the provisions of this Convention may be taxed in Namibia, then India shall allow as a deduction from the tax on the income of that resident an amount equal to the tax on income or capital gains paid in Namibia, whether directly or by deduction“.
If this was the method to be followed in the above illustration, the tax credit would have been Rs. 50,000/- which is much more than UK tax liability, but nevertheless less than the Indian tax liability. Even in this situation, since tax credit is allowed as a deduction from the Indian tax liability, the deduction cannot exceed the liability itself.
♦ What is section 90(1)(a)(ii);
Section 90(1) empowers Central Government to enter into agreements with other countries for avoidance of double taxation of income under this Act and under the corresponding law in force in that Country. There are objectives as well for entering into treaty but they are not relevant at this stage.
The Finance Act, 2003 substituted clause (a) to section 90(1). A tabular comparison is given below.
| Clause (a) before the change | Clause (a) after the change |
| E TAXATION RELIEF
Agreement with foreign countries. 90. (1)] The Central Government may enter into an agreement with the Government of any country outside India— (a) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or |
E TAXATION RELIEF
Agreement with foreign countries. 90. (1)] The Central Government may enter into an agreement with the Government of any country outside India— (a) for the granting of relief in respect of— (i) income on which have been paid both income-tax under this Act and income-tax in that country; or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or |
Emphasis by Underline by the author.
Sub clause (ii) of 90(1)(a) came on the law books with effect from 1-4-2004. It enables Central Government to enter into an agreement with the Government of any country outside India for granting relief as specified in sub clause (ii).
The argument is, whether this sub-clause can be read into the treaty entered before 1-4-2004?
♦ What is not a double Taxation
Consider following situation.
All the foreign branches of an entity are in profit but when on consolidation, it results into a loss. The entity is declined tax credit, and, simultaneously, his loss being carried forward are being reduced to the extent of profits earned abroad.
This treatment under domestic tax law is not a double taxation
♦ What is a double Taxation
When the same taxation object, i.e., an income, is taxed in the hands of the same taxation subject, i.e. the taxpayer, in two tax jurisdictions, it is defined as juridical double taxation.
Such a juridical double taxation can be of a cross-border income can be relieved either under exemption method or under credit method.
♦ Subjected to tax vis-à-vis liable to tax
Liable to tax
Indo UAE [3] uses the term ‘liable to tax’. One must bare in mind that, in UAE, there was no law enabling domestic law taxation of the income concerned.
Thus, the said treaty was revised and delinked the treaty entitlement requirement, i.e. definition of resident in UAE, to the taxation of the resident by restating the definition as “an individual who is present in the UAE for a period or periods aggregating totalling in aggregate at least 183 days in the calendar year concerned, and a company, which is incorporated in UAE and which is managed and controlled wholly in UAE”.
Quite clearly, therefore, the expression ‘liable to tax’ is no longer used in this treaty and, the actual taxation of an income ceases to be relevant for this purpose. In any event, what it means is that the actual taxation of an income is not availing the treaty benefits in general, because the term ‘liable to tax‘, as appearing in the definition of a resident, refers to a locality related attachment leading to residence type taxation, and not the taxation per se.
However, the entitlement of tax credits uses the expression of the related income having been ‘subjected to tax’ in both the tax jurisdictions, and that is the pre-condition for being granted foreign tax credits.
Compare a tax treaty with, say, a building.
‘liable to tax’ is the key to open the main door, i.e., entitle someone to the tax treaty entitlement in general
‘subjected to tax’ is a key to open doors of one of the rooms inside, i.e. one of the specific benefits of the treaty entitlement.
‘liable to tax’ is a condition precedent to be covered by the scope of the tax treaty, and ‘subjected to tax’ is a condition precedent for being eligible for getting the foreign tax credits under article 24(2).
Subjected to tax
The phrase ‘subjected to tax’ is simple and easy to understand. In plain words, it means when an income is actually subjected to tax, i.e., tax is levied on the said income. AAR in the case of General Electric Pension Trust [4] had, highlighting the distinction between ‘liable to tax’ and ‘subject to tax’.
It has emphasized that actual taxation is a sine qua non for an income being treated as having been subjected to tax. That was a case in which the AAR was dealing with a treaty requirement for ‘resident of a contract state’ for a trust which required the income derived by the trust being subject to tax’ in the treaty partner jurisdiction.
AAR observed that the expression ‘subject to tax’ has materially distinct connotations vis-à-vis the connotations of ‘liable to tax’, and observed that “It is worth pointing out that the phrase ‘liable to tax’ in para (1) and the phrase ‘subject to tax’ in proviso (b) are not synonymous.
If both were to be read as synonymous, proviso (b) would become otiose. Whereas para (1) speaks of being in the tax net, proviso is concerned with actual taxation”. The AAR then added
“Thus it would follow that the term “resident of USA” for the purpose of the treaty would mean a person who under the laws of USA is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature; however, in the case a trust, the term “resident of USA” would apply only to the extent that the income derived by such trust is subject to tax in USA as the income of a resident either in its hands or in the hands of its beneficiaries”.
What essentially follows from this discussion is that so far income being subjected to tax in a particular jurisdiction is concerned, that requirement can be met when income tax is actually levied in respect of the said income in the jurisdiction in question.
In view of above discussion, refer following para from India-UK treaty-:
The Phrase ‘liable to tax’ appears in article 4 and the phrase ‘subject to tax’ appears in article 24.
ARTICLE 4
FISCAL DOMICILE
1. For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that:
| (a) | this term does not include any person who is liable to tax in that State in respect only of income from sources in that State; and |
| (b) | in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries. |
ARTICLE 24
ELIMINATION OF DOUBLE TAXATION
1. Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof):
| (a) | Indian tax payable under the laws of India and in accordance with the provisions of this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within India (excluding, in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the Indian tax is computed. |
| (b) | In the case of a dividend paid by a company which is a resident of India to a company which is a resident of the United Kingdom and which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividend, the credit shall take into account (in addition to any Indian tax for which credit may be allowed under the provisions of sub-paragraph (a) of this paragraph) the Indian tax payable by the company in respect of the profits out of which such dividend is paid. |
2. Subject to the provisions of the law of India regarding the allowance as a credit against Indian tax of tax paid in a territory outside India (which shall not affect the general principle hereof), the amount of the United Kingdom tax paid, under the laws of the United Kingdom and in accordance with the provisions of this Convention, whether directly or by deduction, by a resident of India, in respect of income from sources within the United Kingdom which has been subjected to taxboth in India and the United Kingdom shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax.
For the purposes of the credit referred to in this paragraph, where the resident of India is a company by which surtax is payable, the credit to be allowed against Indian tax shall be allowed in the first instance against the income tax payable by the company in India and, as to the balance, if any, against the surtax payable by it in India.
3. Subject to paragraph (5) of this Article, for the purposes of paragraph (1) of this Article the term “Indian tax payable” shall be deemed to include:
| (a) | any amount which would have been payable as Indian tax but for a deduction allowed in computing the taxable income or an exemption or reduction of tax granted for that year in question under the provisions of the Income-tax Act 1961 (43 of 1961) referred to in paragraph (4)(a) or (b) of this Article; |
| (b) | that proportion of any amount which would have been payable as Indian tax by a resident of India but for a deduction allowed in computing the taxable income or an exemption or reduction granted for the year in question under the provisions of the Income-tax Act 1961 (43 of 1961) referred to in paragraph (4)(c) of this Article which corresponds to the proportion of that resident’s total production in that year which was actually sold in the Indian Domestic Tariff Area under Orders issued by the Chief Controller of Imports and Exports bearing Nos. 21/90-93, 22/90-93, 23/9093, 25/9093, 26/90-93, 27/90-93 dated 30th March 1990 and similar Orders from time to time published in the Official Gazette by the Central Government under power conferred to it by Section 3 of the Import and Export (Control) Act, 1947 (18 of 1947). |
4. The provisions referred to in this paragraph are:
| (a) | sections 10(4), 10(4B), 10(6)(viia), 10(15)(iv), 33AB, 80HHD, 80I and 80IA; |
| (b) | any other provision which may subsequently be enacted granting an exemption or reduction from tax which is agreed by the competent authorities of the Contracting States to be of a substantially similar character to a provision referred to in subparagraph (a) of this paragraph, if it has not been modified thereafter or has been modified only in minor respects so as not to affect its general character; |
| (c) | sections 10A and 10B. |
5. Relief from United Kingdom tax shall not be given by virtue of this paragraph (3) of this Article in respect of income from any source if the income relates to a period starting more than 10 fiscal years after the deduction in computing taxable income or exemption from, or reduction of, Indian tax is first granted to the resident of the United Kingdom or to the resident of India, as the case may be, in respect of that source.
6. Income which in accordance with the provisions of this Convention is not to be subjected totax in a Contracting State may be taken into account for calculating the rate of tax to be imposed in that Contracting State on other income.
7. For the purposes of paragraphs (1) and (2) of this Article profits, income and chargeable gains owned by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with the provisions of this Convention shall be deemed to arise from sources in that other Contracting State.
♦ Analysis of decision of Wipro Ltd.
Question posed before High Court was
| Substantial question of law No. 1 |
| [Question of law No. (e) in ITA No. 879/2008, 880/2008 and 334/2009; Question of law No. (d) in ITA No. 108/2009 (Assessee’s appeal)]
“Whether the Tribunal was right in holding that credit for income tax paid in a country outside India in relation to income eligible for deduction under section 10A would not be available under section 90(1)(a)?” [Question of law No. 18 in ITA Nos. 210 & 211/2009 (Department’s Appeal)] “Whether the appellate authorities were correct in reversing the finding of the AO that the credit for taxes paid in foreign countries being income which falls u/s 10A of the Act does not fall part of the total income to the extent of 90% for which deduction is allowable as it falls under Chapter III and does not therefore partake the nature of total income chargeable to tax as per provisions of section 4 of the Act and therefore not entitled to?” |
| Answer question of law No. 1 |
| 56. Therefore, it follows that the income under Section 10A is chargeable to tax under Section 4 and is includible in the total income under Section 5, but no tax is charged because of the exemption given under Section 10A only for a period of 10 years. 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. The said exemption granted under the statute has the effect of suspending the collection of income tax for a period of 10 years. It does not make the said income not leviable to income tax. The said exemption granted under the statute stands revoked after a period of 10 years. Therefore, the case falls under Section 90(1)(a)(ii). |
Irrespective of whether one agrees or not, the answer by the High Court is to be understood strictly in the context of question posed before the HC.
One also should consider future development where section 10A was treated as a Deduction and not an exemption by Supreme Court in the case of Yokogawa India Ltd. [5]. Thus, one may argue that the decision of Wipro Ltd. ceases to be good in law.
Author’s note-: One has to be careful in relying upon the decision of Wipro Ltd. especially out of jurisdiction Karnataka high court.
– – – – – X – – – – – –
Text of Rule 128 and Rule 26
Foreign Tax Credit.
128. (1) An assessee, being a resident shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India, by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the extent as specified in this rule-:
Provided that in a case where income on which foreign tax has been paid or deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those years in the same proportion in which the income is offered to tax or assessed to tax in India.
(2) The foreign tax referred to in sub-rule (1) shall mean,—
| (a) | in respect of a country or specified territory outside India with which India has entered into an agreement for the relief or avoidance of double taxation of income in terms of section 90 or section 90A, the tax covered under the said agreement; |
| (b) | in respect of any other country or specified territory outside India, the tax payable under the law in force in that country or specified territory in the nature of income-tax referred to in clause (iv) of the Explanation to section 91. |
(3) The credit under sub-rule (1) shall be available against the amount of tax, surcharge and cess payable under the Act but not in respect of any sum payable by way of interest, fee or penalty.
(4) No credit under sub-rule (1) shall be available in respect of any amount of foreign tax or part thereof which is disputed in any manner by the assessee:
Provided that the credit of such disputed tax shall be allowed for the year in which such income is offered to tax or assessed to tax in India if the assessee within six months from the end of the month in which the dispute is finally settled, furnishes evidence of settlement of dispute and an evidence to the effect that the liability for payment of such foreign tax has been discharged by him and furnishes an undertaking that no refund in respect of such amount has directly or indirectly been claimed or shall be claimed.
(5) The credit of foreign tax shall be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country or specified territory outside India and shall be given effect to in the following manner:—
| (i) | the credit shall be the lower of the tax payable under the Act on such income and the foreign tax paid on such income : |
| Provided that where the foreign tax paid exceeds the amount of tax payable in accordance with the provisions of the agreement for relief or avoidance of double taxation, such excess shall be ignored for the purposes of this clause; | |
| (ii) | the credit shall be determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which such tax has been paid or deducted. |
(6) In a case where any tax is payable under the provisions of section 115JB or section 115JC, the credit of foreign tax shall be allowed against such tax in the same manner as is allowable against any tax payable under the provisions of the Act other than the provisions of the said sections (hereafter referred to as the “normal provisions”).
(7) Where the amount of foreign tax credit available against the tax payable under the provisions of section 115JB or section 115JC exceeds the amount of tax credit available against the normal provisions, then while computing the amount of credit under section 115JAA or section 115JD in respect of the taxes paid under section 115JB or section 115JC, as the case may be, such excess shall be ignored.
(8) Credit of any foreign tax shall be allowed on furnishing the following documents by the assessee, namely:—
| (i) | a statement of income from the country or specified territory outside India offered for tax for the previous year and of foreign tax deducted or paid on such income in Form No.67 and verified in the manner specified therein; |
| (ii) | certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee,— |
| (a) | from the tax authority of the country or the specified territory outside India; or |
| (b) | from the person responsible for deduction of such tax; or |
| (c) | signed by the assessee: |
| Provided that the statement furnished by the assessee in clause (c) shall be valid if it is accompanied by,— | |
| (A) | an acknowledgement of online payment or bank counter foil or challan for payment of tax where the payment has been made by the assessee; |
| (B) | proof of deduction where the tax has been deducted. |
(9) The statement in Form No.67 referred to in clause (i) of sub-rule (8) and the certificate or the statement referred to in clause (ii) of sub-rule (8) shall be furnished on or before the due date specified for furnishing the return of income under sub-section (1) of section 139, in the manner specified for furnishing such return of income.
(10) Form No.67 shall also be furnished in a case where the carry backward of loss of the current year results in refund of foreign tax for which credit has been claimed in any earlier previous year or years.
Explanation.—For the purposes of this rule ‘telegraphic transfer buying rate’ shall have the same meaning as assigned to it in Explanation to rule 26.
Rate of exchange for the purpose of deduction of tax at source on income payable in foreign currency.
26. For the purpose of deduction of tax at source on any income payable in foreign currency, the rate of exchange for the calculation of the value in rupees of such income payable to an assessee outside India shall be the telegraphic transfer buying rate of such currency as on the date on which the tax is required to be deducted at source under the provisions of Chapter XVIIB by the person responsible for paying such income.
Explanation : For the purposes of this rule, “telegraphic transfer buying rate”, in relation to a foreign currency, means the rate or rates of exchange adopted by the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), for buying such currency, having regard to the guidelines specified from time to time by the Reserve Bank of India for buying such currency, where such currency is made available to that bank through a telegraphic transfer.
Cross References
| Particulars | |
| [1] | [2015] 62 taxmann.com 26 (Karnataka) |
| [2] | Double Taxation Avoidance Agreement [(1999) 236 ITR (Stat) 230 |
| [3] | Double Taxation Avoidance Agreement; [(1995) 205 ITR (St) 29 |
| [4] | Hon’ble Authority for Advance Ruling, in the case of General Electric Pension Trust In re [2006] 280 ITR 425 (AAR) |
| [5] | Hon’ble Supreme Court in the case of CIT v. Yokogawa India Ltd. [2017] 77 taxmann.com 41 (SC), |
Author Bio
