2017 (10) TMI 308 - AT - Income Tax

Appeal allowed to exclude US taxes from taxable income; Indo-US tax treaty applied

The appeal was allowed for statistical purposes, directing the Assessing Officer to reassess the taxable income without including Federal and State taxes ... Income deemed to accrue or arise in India - Addition holding that Federal Taxes withheld in the USA is part of Salary Income of the assessee - scope of total income for a resident in India is provided in Section 5(1) - P.E. in India - Held that:- Section 198 of the Act provides that the taxes which are deducted at source in accordance with the provisions of the Act is deemed to be income which is received. Accordingly, taxes deducted at source is deemed income as the same is not actually received by the assessee. There is no inclusion under Section 198 of the Act of the sums deducted at source abroad. Accordingly, there is no specific provision under the Act to include sums deducted abroad. • Additionally, Section 5(1)(c) of the Act defines the concept of total income which covers only income accrues or arises to him outside India during such year. Scope of income under Section 5(1)(c) does not include income which is deemed to accrue or arise outside India. • Therefore, tax deducted abroad is neither income which is accruing or arising outside India nor there is any provision similar to Section 198 to cover taxes deducted at source abroad. Accordingly, taxes deducted at source abroad is not taxable in India in the absence of any specific provision under the Act. For clause (c) of section 5(1), grossing up of income is not required and only net income after TDS is to be taxed in India but for granting the benefit of Federal tax withheld in USA, the same has to be quantified as per Article 25 of Indo US DTAA. Section 9(1)(ii) of the Act states that when services are rendered in India, salary for such services are earned in India. On a converse interpretation of this section, if services are rendered outside India, then salary for such services is earned outside India and it cannot be construed as accruing in India. Based on the above, during the Appellant's tenure of employment with FIS, he was rendering services outside India and salary was earned outside India. Since, the A.O. has determined the amount of credit of tax paid in USA after including the US tax amount as an income taxable in India; this issue has to go back to his file for a fresh decision. Hence, set aside the order of CIT (A) and restore the matter back to the file of the AO for a fresh decision with the direction that the tax withheld in USA (Federal and State Tax) should not be added back to quantify the income taxable in India as held by Hon’ble M. P. High Court in the case of CIT vs. Yawar Rashid [1995 (12) TMI 68 - MADHYA PRADESH High Court] of the assessee and relevant Para reproduced above. The amount of foreign tax credit to be allowed to the assessee should be quantified afresh as per Article 25 of Indo US DTAA after providing adequate opportunity of being heard to the assessee because foreign tax credit cannot exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States. Taxable salary income in India we follow the judgment of Hon’ble Delhi High Court rendered in the case of CIT vs. Lala Sridhar [1971 (3) TMI 21 - DELHI High Court] and hold that this is not taxable because it cannot be said that it has accrued or arisen in the absence vested right. Issues Involved:1. Addition of Federal Taxes withheld in the USA to the Salary Income of the assessee.2. Inclusion of Medicare paid in the USA as part of Salary Income.3. Inclusion of State Income Tax withheld in the USA as part of Salary Income.4. Credit for State Income Tax withheld in the USA if considered part of Salary Income.Detailed Analysis:1. Addition of Federal Taxes Withheld in the USA to the Salary Income:The first grievance concerns the affirmation of the addition of Rs. 275,336/- made by the A.O. by holding that Federal Taxes withheld in the USA is part of the Salary Income of the assessee. The assessee argued that the taxes deducted at source in the USA should not be considered as income received by him. The relevant legal provision cited was Section 5(1)(c) of the Income Tax Act, 1961, which includes income accruing or arising outside India in the total income of an ordinary resident. The assessee contended that the Federal tax withheld should not be included in the taxable income in India as it is a diversion of income by overriding title. The tribunal referenced the judgment of the Hon’ble Madhya Pradesh High Court in CIT vs. Yawar Rashid, which held that for clause (c) of Section 5(1), only net income after TDS is to be taxed in India. The matter was remanded back to the A.O. to quantify the foreign tax credit as per Article 25 of the Indo-US DTAA.2. Inclusion of Medicare Paid in the USA as Part of Salary Income:The second grievance pertains to the CIT (A)'s direction to include Medicare paid in the USA of Rs. 28,752/- as part of the Salary Income. The assessee argued that Medicare is similar to social security and should not be taxable in India. The tribunal relied on the judgment of the Hon’ble Delhi High Court in CIT vs. Lala Sridhar, which held that contributions that do not result in immediate benefits to the employee and are contingent in nature are not taxable. The tribunal concluded that Medicare paid in the USA is not taxable in India as it does not result in a vested right for the employee.3. Inclusion of State Income Tax Withheld in the USA as Part of Salary Income:The third grievance involves the CIT (A)'s direction to include State Income Tax withheld in the USA of Rs. 77,042/- as part of the Salary Income, thereby enhancing the taxable income. The tribunal noted that similar to the Federal tax, State Income Tax withheld should not be added to the taxable income in India. The tribunal referred the matter back to the A.O. to reassess the taxable income without including the State Income Tax withheld, in line with the judgment in CIT vs. Yawar Rashid.4. Credit for State Income Tax Withheld in the USA:The alternative contention raised was that if State Income Tax withheld in the USA is considered part of Salary Income, the assessee should be allowed credit for such tax. The tribunal directed the A.O. to quantify the foreign tax credit afresh as per Article 25 of the Indo-US DTAA, ensuring that the credit does not exceed the part of the income tax attributable to the income taxed in the USA.Conclusion:The appeal was allowed for statistical purposes, with directions to the A.O. to reassess the taxable income without including the Federal and State taxes withheld in the USA and to quantify the foreign tax credit as per the Indo-US DTAA. The tribunal also held that Medicare paid in the USA is not taxable in India.