Foreign tax credit against MAT upheld, with timing allowed under the domestic credit mechanism and later amendment held prospective.
Foreign tax credit for tax paid in China was treated as claimable in the assessment year when the tax was deducted and paid, because the treaty did not prescribe a contrary timing rule and the domestic credit mechanism under section 199 permitted such allowance. The Tribunal also held that foreign tax credit could be set off against tax computed under the minimum alternate tax regime, as the Act did not exclude MAT liability from the credit scheme. A proviso inserted into section 115JAA(2A) by the Finance Act, 2017 was held prospective and could not restrict MAT credit for the year under appeal. The assessee therefore succeeded on timing, MAT credit, and prospective application of the amendment.
Issues: (i) Whether foreign tax credit for tax paid in China could be claimed in the assessment year under appeal even though the corresponding royalty income had been offered in the preceding year; (ii) Whether foreign tax credit was allowable against tax computed under the minimum alternate tax provisions; (iii) Whether the restriction introduced for MAT credit by the proviso to section 115JAA(2A) applied to the assessment year under appeal.
Issue (i): Whether foreign tax credit for tax paid in China could be claimed in the assessment year under appeal even though the corresponding royalty income had been offered in the preceding year.
Analysis: The treaty did not prescribe the manner or timing of claiming foreign tax credit, so the domestic provisions were examined. Section 199, as amended with effect from 01.04.2008, was treated as permitting credit in the year in which the tax is deducted and paid, rather than confining credit strictly to the year of corresponding income. The Tribunal also relied on the credit mechanism and the absence of any bar in the treaty or the Act against allowing the credit in the assessment year in which the withholding tax certificate became available.
Conclusion: The foreign tax credit was held allowable in the assessment year under appeal.
Issue (ii): Whether foreign tax credit was allowable against tax computed under the minimum alternate tax provisions.
Analysis: The Tribunal held that the scheme of the Act does not draw a distinction between normal tax computation and tax computed under section 115JB for the purpose of foreign tax credit, and that the treaty credit for tax paid abroad must be given effect to against the Indian tax liability. The Tribunal accepted the line of authorities recognising such credit even where tax is ultimately payable under MAT.
Conclusion: The foreign tax credit was held allowable against MAT liability.
Issue (iii): Whether the restriction introduced for MAT credit by the proviso to section 115JAA(2A) applied to the assessment year under appeal.
Analysis: The proviso relied upon by the lower authority was inserted by the Finance Act, 2017 with effect from 01.04.2018. Applying the settled principle against retrospective operation of fiscal amendments, the Tribunal held that the proviso could not govern the assessment year under appeal. The direction to restrict future MAT credit to the extent of the current year's foreign tax credit was therefore unsustainable.
Conclusion: The restriction on MAT credit was held inapplicable for the year under appeal.
Final Conclusion: The Revenue's challenge failed and the assessee succeeded on the substantive credit issues, including timing of foreign tax credit and its availability against MAT, while the prospective amendment to MAT credit could not be applied to the year in question.
Ratio Decidendi: Where the treaty and the Act do not prescribe a contrary restriction, foreign tax credit is to be given effect in accordance with the operative domestic credit mechanism, including against MAT liability, and a later fiscal amendment cannot be applied retrospectively to curtail that credit for an earlier assessment year.