TaxTMI 
TaxTMI 
2007 (6) TMI 277
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.... the CIT(A) ought to have held that loss of Rs. 53,96,061 incurred by Japan office of the assessee company is not to be taken into account while computing its income taxable in India. 3. The issue in appeal lies in a narrow compass of material facts. The assessee company is engaged in the business of development of computer software. In the relevant previous year, the assessee company had set up a trading office in Japan. In the course of assessment proceedings, the AO noted that while the assessee had opened the office in Japan, the assessee has only debited expenses in the accounts-resulting in a loss of Rs. 53,96,061. On these facts, he observed that "as per DTAA with Japan, the profit of trading office is chargeable to tax only in Japan" but "in view of the loss for the year in trading office, no amount is excludable from the total income of the company". He further noted that "since the profit of the said trading office is taxable in Japan only, hence any loss incurred by the assessee in respect of this trading office is not allowable as deduction from the income which is taxable in India". It was on the basis of this reasoning that the AO disallowed the loss of Japan office ....
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....ons for this year. On the strength of these arguments, as also on the basis of learned Departmental Representative's vehement reliance on the order of the AO. we are urged to vacate the relief given by the CIT(A) and restore the order of the AO on the issue in appeal before us. Shri S.P. Joshi, learned counsel for the assessee, argues that nowhere in the India Japanese tax treaty, it is provided that the profit of the PE of an Indian company in Japan, will not be taxed in India. He submits that as per the clear provisions of the IT Act, all the profits and losses of an Indian resident, irrespective of wherever they arise, will be taxed in India. There are no exceptions to this general rule. On the basis of this reasoning, Shri Joshi submits that the CIT(A) was quite justified in directing the AO to take into account the loss, incurred by Japan office of the assessee company, while computing taxable income in India. He also places strong reliance on the order of the CIT(A). We are thus urged to confirm the relief given by the CIT(A) and decline to interfere in the matter. In rejoinder, learned Departmental Representative merely reiterated his arguments. 5. In order to properly appr....
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....e the case is governed by a tax treaty, the provisions of the said tax treaty. In contrast with this worldwide basis of taxation, in case a tax jurisdiction is following the territorial basis of taxation, its concern is obviously confined to the profits and losses accruing or arising in the territory over which it has taxing jurisdiction, and, therefore, an income-positive or negative-sourced outside that tax jurisdiction may not have any relevance in computation of taxable income of the tax subject. In effect, therefore, under the scheme of the Indian IT Act, an income sourced abroad, was includible in total income of a resident taxpayer and the relief from double taxation of income was granted by way of corresponding tax exemption of income or by way of tax credit for the income-tax paid in the source country. 6a. According to this school of thought, so far as specific provisions of the India Japan tax treaty are concerned, the relief from double taxation of an income in India was to be granted, under art. 23 of the tax treaty which provides for tax credit in respect of taxes paid in Japan to the extent of Indian income-tax liability in respect of the said income. Therefore, eve....
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....h taxes will be paid only on the income actually taxed in Japan, the grant of set off in Japan will be neutralized by the correspondingly lower tax credit in India. The subsequent recapture of loss by the PE, in such a situation, only creates a tax deferral or a timing issue in the residence State. In case the PE losses cannot be carried forward for whatever reason, there is obviously no tax relief in the source country in the subsequent year, and, no issue arises on account of tax recapture in the home State. Whichever way one looks at, as long as the legal position as set out above was to be followed, there would have been no possibility of allowing a double dip to the assessee, i.e. double benefit on account of losses incurred by the PE, in respect of loss of Japan office being allowed to be set off against domestic income of the assessee. 7. In view of some significant developments by the virtue of Judge made law, this school of thought does not, however, hold good in law any longer. We may at this stage deal with a diametrically opposite school of thought which has also now found judicial acceptance before higher judicial authorities. While dealing with India Malaysia DTAA, H....
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....inding on us under art. 141 of the Constitution of India. The prevailing legal position, therefore, is that once an income is held to be taxable in a tax jurisdiction under a DTAA. and unless there is a specific mention that it can also be taxed in the other tax jurisdiction, the other tax jurisdiction is denuded of its powers to tax the same. To that extent, the worldwide basis of taxation in the scheme of the Indian IT Act is no longer applicable in a situation provisions of a DTAA entered into under s. 90 apply. The next question then arises whether in a loss situation in the PE State, as is the case before us, can the assessee be forced to go for taxation in accordance with the provisions of the treaty with the said PE State. The provisions of s. 90(2) of the Indian IT Act are quite unambiguous and categorical in this regard. Sec. 90(2), inter alia, provides that when the Government of India has entered into a DTAA with Government of any other country, "in relation to an assessee to whom such agreement applies, the provisions of this Act shall apply to the extent these are more beneficial to that assessee". Sec. 90 only grants relief; it does not impose any liability. Even with....