2021 (1) TMI 1106 - AT - Income Tax

Tribunal orders full Foreign Tax Credit for USA, Japan, Germany; limits for Korea; computes under Section 91 for Taiwan.

M/s ITTIAM Systems Pvt. Ltd. Versus The Income Tax Officer, Ward-3 (1) (2), Bengaluru.

M/s ITTIAM Systems Pvt. Ltd. Versus The Income Tax Officer, Ward-3 (1) (2), Bengaluru. - [2021] 86 ITR (Trib) 611 (ITAT [Bang]) Issues Involved:1. Restriction of Foreign Tax Credit (FTC) by the CIT(A).2. Interpretation of Double Taxation Avoidance Agreements (DTAA) with USA, Japan, Germany, and Korea.3. Application of Section 37(1) read with Section 40(a)(ii) of the Income Tax Act for deduction of foreign taxes paid.4. Computation of FTC under Section 91 of the Income Tax Act for countries without DTAA (specifically Taiwan).Detailed Analysis:1. Restriction of Foreign Tax Credit (FTC) by the CIT(A)The primary issue revolves around the restriction of the FTC claimed by the assessee. The CIT(A) limited the FTC to Rs. 59,54,729/- for AY 2013-14 and Rs. 71,11,538/- for AY 2014-15, against the claimed amounts of Rs. 1,80,54,300/- and Rs. 2,36,78,371/- respectively. The CIT(A) applied a formula based on the proportion of the income returned in India to the total income, rather than granting the full credit for the actual tax withheld.2. Interpretation of Double Taxation Avoidance Agreements (DTAA) with USA, Japan, Germany, and KoreaThe interpretation of the DTAA provisions was crucial in determining the FTC. The relevant clauses from the treaties with the USA, Japan, Germany, and Korea were examined:- India-US DTAA (Article 25): Allows deduction from the tax on income of the resident an amount equal to the income-tax paid in the USA, provided it does not exceed the part of the income-tax attributable to the income taxed in the USA.- India-Japan DTAA (Article 23(2)): Similar to the US treaty, allows deduction from the tax on income of the resident an amount equal to the Japanese tax paid.- India-Germany DTAA (Article 23(2)): Also allows deduction from the tax on income of the resident an amount equal to the income-tax paid in Germany.- India-Korea DTAA (Article 23(a)(i)): Allows deduction from the tax on income of the resident an amount equal to the tax paid in Korea, but not exceeding the portion of the tax as computed before the deduction is given, which is attributable to the income taxed in Korea.The Tribunal noted that the clauses use the term 'income,' meaning the income embedded in the gross receipt, not the gross receipt itself. Thus, the assessee is eligible for FTC in full for taxes paid in the USA, Japan, and Germany, but for Korea, the FTC is limited to the lesser of the taxes paid in Korea or the taxes payable in India on the doubly taxed income.3. Application of Section 37(1) read with Section 40(a)(ii) of the Income Tax Act for deduction of foreign taxes paidThe assessee argued that if the FTC is denied, the foreign taxes paid should be allowed as a deduction under Section 37(1) read with Section 40(a)(ii) of the Act. However, since the Tribunal directed the AO to grant the FTC as per the treaties, this ground was not adjudicated.4. Computation of FTC under Section 91 of the Income Tax Act for countries without DTAA (specifically Taiwan)For AY 2014-15, the assessee earned income from Taiwan, a country with which India does not have a DTAA. The FTC for taxes paid in Taiwan was to be computed under Section 91 of the Income Tax Act, which provides for a deduction from the Indian income-tax payable by the assessee of a sum calculated on the doubly taxed income at the Indian rate of tax or the rate of tax of the foreign country, whichever is lower.Conclusion:The Tribunal directed the AO to grant the FTC in full for taxes paid in the USA, Japan, and Germany. For Korea, the FTC is limited to the lesser of the taxes paid in Korea or the taxes payable in India on the doubly taxed income. For Taiwan, the FTC is to be computed as per Section 91 of the Income Tax Act. The appeals for both assessment years were allowed for statistical purposes, and the AO was directed to recompute the FTC accordingly. The alternative plea regarding the deduction of foreign taxes under Section 37(1) read with Section 40(a)(ii) was not adjudicated.