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2017-06-06
Globalisation of business brings with it the dangers of the same income getting taxed in more than one country, due to overlaps between residence-based and source-based taxation. To mitigate hardship, countries often provide its residents credit for taxes paid in other countries. While u/s.91 of the Income Tax Act, 1961, India provides unilateral credit for taxes paid in countries with which India has not signed a treaty, s.90 provides for foreign tax credit (FTC) as negotiated by India with other countries in the form of DTAAs. In most DTAAs, Article 23 provides for credit of tax when income is so doubly taxed. Owing to lack of clarity on availability and computation of FTC, as also on the allied issue of deductibility of foreign tax paid for which credit is not available, much litigation has arisen.
In this insight, the Taxsutra Database Editorial Team brings to you a compilation of various Indian judgments and rulings dealing with different issues surrounding FTC.
Foreign Tax Credit Rules : To reduce ambiguities in computing and claiming FTC, the CBDT, vide notification No. 54/2016 dated 27 June 2016, notified the Foreign Tax Credit (FTC) Rules (Rule 128 of the IT Rules) w.e.f 1st April, 2017, laying down broad principles and conditions for computation and claim of taxes paid in foreign countries by resident taxpayers, and procedural requirements associated with availing foreign tax credit in India. Some significant issues dealt with/ resolved by the Rules are year of availability of FTC, disparities arising due to timing mismatch on account of different tax years followed by different countries, credit availability against MAT, taxes covered and availability of credit against disputed tax.
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Sr.No. |
Case Law |
Conclusion in the Ruling |
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1. |
[TS-5111-ITAT-2017(AHMEDABAD)-O] Taxes withheld on software license sale and AMC in Singapore |
FTC eligible on 'income', not 'gross-receipts'- Ahmedabad ITAT allows taxpayer's claim considering 'unique' facts, allows foreign tax credit (‘FTC’) claimed by assessee (an Indian company engaged in software development) in respect of taxes withheld in Singapore and Indonesia on receipt from software license sale and annual maintenance contract (AMC); During AY 2009-10, assessee claimed FTC by taking into consideration gross receipts & adjusted against MAT liability, however, Revenue restricted FTC claim only to the extent of corresponding ‘income’ that has suffered tax in India…read more |
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2. |
Taxes withheld on tax-free dividend from JV company in Oman |
Dividend exemption in Oman satisfies ‘tax payable’ criteria under DTAA, allows FTC - Delhi ITAT allows foreign tax credit (‘FTC’) to assessee (a co-operative society registered in India) u/s 90 read with Article 25(4) of India-Oman DTAA in respect of dividend received from its JV company in Oman during AYs 2010-11 & 2011-12; Rejects Revenue’s stand that since no tax was payable by assessee on dividend receipts in Oman by virtue of Article 8(bis) of Omani Tax Laws, no tax credit can be allowed to assessee u/s 90…read more |
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3. |
[TS-5432-ITAT-2015(BANGALORE)-O] FTC u/s 90 against MAT liability |
Foreign tax credit u/s 90 available against MAT liability - ITAT follows L&T ruling & grants relief u/s 90 for taxes paid by assessee in foreign country while computing tax liability as per MAT provisions u/s 115JB of the Act; Rejects Revenue's stand that foreign tax credit could not be granted since taxes u/s 115JB stood on a different footing than regular tax…read more |
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4. |
FTC when actual tax payment made in another year |
Foreign tax credit available though actual tax payment made in another year - Bombay HC holds that assessee-AOP eligible for unilateral foreign tax credit u/s 91(1) for taxes paid on Kuwait-sourced income; Revenue's argument that credit available only if taxes paid during relevant previous year rejected…read more |
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5. |
Tax Credit u/s. 91 on "State" taxes paid in US |
Tax credit available in India for US state taxes - Mumbai ITAT holds that "State" taxes paid in US eligible for tax credit as per sec 91 even though credit not available as per treaty provisions….read more |
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6. |
FTC against income eligible for deduction u/s 10B |
Mumbai ITAT allows credit for foreign tax paid to tax-holiday entity post-2000 Sec 10B amendment - ITAT directs AO to allow credit of foreign tax paid in Japan against tax levied on corresponding income eligible for deduction u/s 10B of the Act in India for AY 2003-04 to 2005-06; States that lower authorities did not take into account the sea change in provisions of Sec 10A/10B vide Finance Act, 2000 amendment w.e.f. April 1, 2001 which now contemplates 'deduction' and not 'exemption' from 'total income'…read more |
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7. |
[TS-5416-ITAT-2017(AHMEDABAD)-O] Deduction u/s 37(1) towards foreign taxes not available u/s Sec. 90/91 |
Revenue wins "close call" on FTC; Tribunal bows to SC's "higher wisdom" - Ahmedabad bench of Tribunal reverses CIT(A) order, denies deduction u/s 37(1) of Income-tax Act for that portion of foreign taxes paid for which relief is not available u/s Sec. 90/91; Decisively rejects taxpayer's interpretation w.r.t disallowance prescribed u/s 40(a)(ii) for taxes paid abroad, rejects assessee's attempt to take aid of the definition of 'tax' appearing in Sec. 2(43), which restricts the scope of the word to "...income-tax chargeable under the provisions of this Act (IT Act, 1961)"…read more |
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8. |
Double taxation relief u/s 91 on profits claimed as deduction u/s 80HHB and u/s 35B |
Bombay HC denies foreign tax credit u/s 91, but allows expense-deduction; Distinguishes reliance on Wipro ruling - HC upholds foreign tax credit denial u/s 91 to Reliance Infrastructure Ltd. (‘assessee’) with respect to taxes paid in Saudi Arabia during AY 1983-84, however, allows expense-deduction for foreign taxes paid applying the 'real income theory'; During the relevant AY, assessee claimed double taxation relief u/s 91 on profits against which export incentives were claimed [viz. deduction u/s 80HHB (available on execution of foreign projects) and u/s 35B (which provides for export markets development allowance)]…read more |
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9. |
[TS-5221-HC-2015(KARNATAKA)-O] FTC against Sec. 10A tax holiday Income |
HC explains law on foreign tax credit relief - HC reverses ITAT's ruling, Holds Sec. 4 & 5 are subject to DTAA provisions; Allows foreign tax credit to Wipro on a portion of its Sec. 10A tax holiday income; On a thorough perusal of charging sections Sec 4, 5 & DTAA benefit related Sec 90; Extensively relying on Apex Court verdict in Azadi Bachao Andolan on scheme of DTAA, HC rules that Sec 4 & 5 of Income tax Act are subject to Sec 90 and by "necessary implication they are subject to the terms of the double taxation avoidance agreement.."…read more |
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10. |
Deduction u/s. 37 towards taxes paid abroad in respect of income earned overseas |
Taxes paid abroad in respect of income earned overseas is not allowable as deduction as expenditure incurred for earning income u/s 37 - Mumbai ITAT holds that the taxes paid abroad in respect of income earned overseas is not allowable as deduction as expenditure incurred for earning income under section 37 of Indian Income-tax Act, 1961 (the Act)…read more |
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11. |
[TS-5701-ITAT-2017(Ahmedabad)-O] Taxes withheld on dividend earned in US |
FTC cannot exceed applicable withholding under treaty - Ahmedabad ITAT lays down principle for computation; Sets aside CIT(A)'s order disallowing foreign tax credit (‘FTC’) with respect to taxes withheld on dividend earnings in the US for AY 2009-10 in case of assessee-individual (resident in India), observes that reasons given by lower authorities are "too vague and general"…read more |
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12. |
FTC on proportionate basis as per Article 23(2) of India–Thailand DTAA |
Proportionate, not full FTC available under Art 23 of India – Thailand DTAA - ITAT dismisses assessee’s appeal, allows foreign tax credit on proportionate basis in view of Article 23(2) of India – Thailand DTAA, as against full credit claimed by assessee; As per Article 23(2), credit of taxes paid in Thailand shall be allowed against Indian income-tax payable in respect of such income, not exceeding total India tax appropriated to Thailand income…read more |
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13. |
Maintainability of appeal to CIT(A) on issue of computation of "FTC set off" |
Appeal to CIT(A) is possible on the issue of computation of "foreign tax credit set off" - Mumbai ITAT holds that a tax payer's appeal on the issue of set-off of foreign tax credit u/s 90 and Sec. 91 while determining tax payable is maintainable. |
