2025 (2) TMI 648 - AT - Income Tax

Assessee's appeal allowed as Philippines branch income correctly included under section 263 and DTAA Article 24

The ITAT Ahmedabad dismissed a revision petition under section 263 regarding alleged understatement of income from the assessee's Philippines branch. The ... Revision u/s 263 - taxable income in Philippines - allegation of understatement of income - Whether the income from the assessee's Philippines branch was correctly assessed and taxed in India, considering the tax paid in the Philippines? - HELD THAT:- Revenue & profit earned in Philippines is included in Indian Financials and has been offered to tax as per Indian Income Tax Act. The taxable income of the company as per Philippines ITS. The assessee has considered the total income & expenses of the Philippine's branch in its profit & loss account prepared in India for the company as a whole and has offered the income earned in Philippine’s to tax in India. As required by the Article 24 of the DTAA, the assessee has computed the taxable income of the Philippines branch as per the provisions of Indian Income Tax Act to determine the income doubly taxed in India & Philippines. Such doubly taxed income worked out to Rs. 13,32,45,195/- which has been mentioned in the Form no 67. From the entire events and accounting, it is clear that the income as mentioned in the notice of Rs. 29,17,91,560/- being 100% of the tax payable in Manila of Rs. 8,75,37,468/- @ 30% is taxed in India. Accordingly, no further income needs to be taxed in India. The amount of Rs. 13,32,45,195/- is income of the Philippines as worked out under the Indian Income Tax Act. We hold that there is neither any error committed by the Assessing Officer nor any prejudice is caused to the department by the virtue of order u/s 143(3) of the Act. Appeal of the assessee is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:1. Whether the order passed by the Principal Commissioner of Income-Tax (PCIT) under Section 263 of the Income-tax Act, 1961, was legally valid.2. Whether the original assessment order under Section 143(3) was erroneous and prejudicial to the interests of the Revenue, justifying a revision under Section 263.3. Whether the income from the assessee's Philippines branch was correctly assessed and taxed in India, considering the tax paid in the Philippines and the provisions of the Double Taxation Avoidance Agreement (DTAA).ISSUE-WISE DETAILED ANALYSIS1. Validity of the PCIT's Order under Section 263Relevant Legal Framework and Precedents: Section 263 of the Income-tax Act empowers the PCIT to revise an assessment order if it is erroneous and prejudicial to the interests of the Revenue. Explanation 2 to Sub-Section (1) of Section 263 provides circumstances under which an order is deemed erroneous.Court's Interpretation and Reasoning: The Tribunal examined whether the PCIT's invocation of Section 263 was justified. The PCIT had argued that the AO's assessment was erroneous due to a lack of proper inquiry into the income from the Philippines branch.Key Evidence and Findings: The Tribunal considered the financial statements and tax returns of the Philippines branch, which showed that the income was duly accounted for in the Indian financials and subjected to tax as per Indian law.Application of Law to Facts: The Tribunal found that the AO had conducted a sufficient inquiry during the assessment proceedings and that the income from the Philippines was correctly included in the Indian taxable income.Treatment of Competing Arguments: The Tribunal noted the arguments of both the assessee and the Revenue. The assessee contended that the PCIT's order was based on a misinterpretation of the income figures and tax computations, while the Revenue argued for a higher taxable income based on the tax paid in the Philippines.Conclusions: The Tribunal concluded that the PCIT's order under Section 263 was not justified, as there was no error in the original assessment order that was prejudicial to the interests of the Revenue.2. Assessment of Income from the Philippines BranchRelevant Legal Framework and Precedents: The DTAA between India and the Philippines and the provisions of the Income-tax Act relating to the taxation of foreign income were relevant to this issue.Court's Interpretation and Reasoning: The Tribunal analyzed the income tax returns and financial statements to determine whether the income from the Philippines was correctly assessed in India.Key Evidence and Findings: The Tribunal found that the income from the Philippines was computed as per the local laws and was included in the Indian financials. The tax paid in the Philippines was on gross income, while the taxable income in India was computed after permissible deductions.Application of Law to Facts: The Tribunal applied the provisions of the DTAA and the Income-tax Act to conclude that the income was correctly taxed in India, taking into account the tax already paid in the Philippines.Treatment of Competing Arguments: The assessee argued that the income was correctly assessed and taxed in India, while the Revenue contended that the income was understated. The Tribunal found the assessee's arguments more convincing based on the evidence presented.Conclusions: The Tribunal held that the income from the Philippines branch was correctly assessed and taxed in India, and no further income needed to be taxed.SIGNIFICANT HOLDINGSThe Tribunal's significant holdings include:'In view of the these facts on the merits of the case, we hold that there is neither any error committed by the Assessing Officer nor any prejudice is caused to the department by the virtue of order u/s 143(3) of the Act.'Core principles established by the Tribunal include the importance of proper inquiry and verification by the AO during the assessment process and the correct application of the DTAA provisions in determining the taxable income of foreign branches.Final determinations on each issue:1. The Tribunal quashed the PCIT's order under Section 263, finding it unjustified.2. The Tribunal upheld the original assessment order, concluding that the income from the Philippines branch was correctly assessed and taxed in India.