TaxTMI 
TaxTMI 
2010 (11) TMI 709
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....rseas taxes paid. 2. We will first take up the issue regarding deduction of overseas taxes paid. The relevant ground of appeal is as follows : "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the amount of Rs. 67,89,30,514 in respect of overseas taxes paid." 3. The issue in appeal is set out in a narrow compass of material facts. While the assessee is mainly an investment company in the sense that it holds major investments in equity shares of Tata Group of companies, the assessee is also engaged in the business of exports of software through one of its division, namely Tata Consultancy Services, and in engineering consultancy through its other division. On 30-11-2000, the assessee filed return of income disclosing an income of Rs. 110.26 crores. During the course of the assessment proceedings, it was noticed by the Assessing Officer that the assessee has debited an amount of Rs. 85,36,04,000 in its profit and loss account in respect of overseas taxes paid, out of which Rs. 24,89,36,449 represented overseas tax liability which has remained unpaid. In the course of assessment proceedings, the assessee restricted the ded....
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....ent. The Assessing Officer took note of these statutory provisions and held that under the scheme of the Act, the Income-tax paid abroad are entitled to relief under section 90 or under section 91, and that these taxes cannot be allowed as deduction under section 37 of the Act. The Assessing Officer further observed that, "in any case, foreign Income-tax cannot be allowed as a deduction under section 37 and, as such, foreign Income-tax are levied at a rate or as proportion of income earned abroad, such amounts paid are also hit by section 40(a)(ii)". Section 40(a)(ii) incidentally places a restriction on deductibility of "any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains" in computation of business income of an assessee. The Assessing Officer thus disallowed the claim of deduction amounting to Rs. 60,46,67,551 on account of Income-tax paid overseas. Aggrieved by the disallowance so made by the Assessing Officer, assessee carried the matter in appeal before the CIT(A). The CIT(A) upheld the claim of the assessee in view of Tribunal's decisions....
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....l precedents will continue to have binding effect so far as deductibility of states Income-taxes paid in USA and Canada are concerned. Learned Departmental Representative submits that the earlier decisions of the Tribunal, on which reliance has been placed by the learned counsel, are clearly contrary to the basic scheme of the Act and this fact has been unambiguously brought out by insertion of Explanation 1 to section 40(a)(ii) which, though introduced in 2006, is clarificatory in nature. Learned Departmental Representative also invites our attention to extracts from Chaturvedi & Pithisaria's commentary on Income-tax Law which, according to him, show that, even without this legislative amendment, Income-tax paid abroad does not constitute admissible deduction in computation of income. It is vehemently argued, with the help of an elemental analysis of scheme of the Act, that a deduction in respect of foreign Income-tax is contrary to the fundamental scheme of the Indian Income-tax Act, and it also submitted that the doubts, if any, have been set at rest by the insertion of Explanation 1 to section 40(a)(ii). We were urged to deviate from the judicial precedents cited by the assesse....
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....risdiction in which a person is resident. The source rule, however, lays down that an income earned in a tax jurisdiction, irrespective of the residential status of the person earning the said income, is liable to be taxed in the tax jurisdiction where the income is earned. Therefore, a tax object, i.e., the income which is to be taxed, as a rule attracts taxability in the source jurisdiction, and a tax subject, i.e., the person who is to be taxed, is taxed in the residence jurisdiction. These competing claims put the taxpayer to risk of being taxed more than once in respect of the same income, and a solution to avoid such double taxation is thus to be found within the four corners of tax systems. While source rule as also the residence rule continue to be integral part of most of the tax systems, a mechanism is provided in the domestic tax legislations to relieve a taxpayer of such double taxation. In 'Tax Law Design and Drafting', an International Monetary Fund publication (ISBN 90-411-9784-2), Prof Richard Vann, at page of 756 of Volume II, deals with this issue by observing as follows : "It is necessary to distinguish among four basic methods in this area. The first is for a....
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....g the average rate of tax on the worldwide income before the credit to the foreign-source income. In its simplest form, this limit is applied to foreign income in its entirety, without distinguishing the type of income and the country where it is sourced. The fourth system is to give a deduction for foreign Income-taxes in the calculation of taxable income. While this system is used in some countries, often as a fall back from a foreign tax credit where the credit may not be of use to the taxpayer, it is not widely accepted as a method for use on its own and, more specifically is not used in tax treaties. It can be argued that relief of double taxation in either credit or exemption form involves a number of complexities that are best avoided by developing or transition countries. Pure territorial taxation, however, simply invites tax avoidance through the moving of income offshore, and once qualifications on the pure territorial principle are admitted, such as limiting it to certain kinds of income, it is hard to see that any great simplicity is achieved as problems of characterization of income arise, as well as incentives to convert income from one form to another. Similar ....
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....ome not being exempted from tax, or subjected to less at a less than ordinary tax rate, under a tax treaty arrangement. Effectively thus it is not a simplicitor exemption of Income-taxed abroad, but an exemption of income subject to several riders. In that sense, it is distinct from the pure territorial method of taxation. • In the third method, tax credit is given, in computation of tax liability of the taxpayer in respect of his worldwide income, in respect of taxes paid abroad. However, the credit so given, in respect of taxes paid abroad, does not exceed the domestic tax liability in respect of the income earned abroad. In principle, thus, even Income-tax paid abroad is seen as appropriation of income towards state's share in income of a taxpayer and the credit is granted, in computation of domestic taxes, in respect thereof. • In the fourth method, deduction is allowed in respect of the Income-taxes paid abroad. It is thus seen as a charge of income, rather than appropriation of income, and is seen as an expense incurred in earning the income abroad. That is in sharp contrast with all other methods where Income-tax paid abroad is seen as an applicatio....
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....ontext otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. Explanation 1.-For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company. Explanation 2.-For the purposes of this section, "specified territory" means any area outside India which may be notified as such by the Central Government.] 90A. Adoption by Central Government of agreement between specified associations for double taxation relief.-(1) Any specified association in India may enter into an agreement with any specified association in the specified territory outside India and the Central Government may, by notification in the Official Gazette, make such provisions as may be necessary for adopting and implementing such agreement- (a) for the granting of relief in respect of- (i) income on which have been paid bot....
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....p;"specified territory" means any area outside India which may be notified as such by the Central Government for the purposes of this section.] 91. Countries with which no agreement exists.-(1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal. (2) If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that....
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....it is reproduced nevertheless for the sake of completeness. Similarly, there are certain other variations in the statutory provisions as prevailing in the assessment year 2000-01 vis-a-vis the statutory provisions as on now, but these variations are not relevant in the context of issue under consideration in this appeal." 10. The scheme of relief from double taxation of an income, as evident from a plain reading of the above provisions, is like this. Under section 91 of the Act, when a person resident in India earns any income outside India, which is not deemed to accrue or arise in India, and he suffers Income-tax thereon in such source country, that person is entitled to deduction from his domestic Income-tax liability to the extent of domestic tax liability in respect of such foreign income or taxes actually paid abroad in respect of such income - whichever is less. In other words thus, if at all a taxpayer is also taxed in India in respect of the Income-taxed abroad, it is only to the extent the tax rate abroad falls short of Indian tax rate. Each foreign sourced income is thus treated as a separate basket of income, and foreign tax relief in respect of that basket of income....
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.... as deduction as expenditure incurred to earn an income, as also an application of income, by claiming the same as appropriation of income being tax levied on profits and claiming Income-tax credit in respect thereof. There is no meeting ground between these two diametrically opposed approaches, and, in our humble understanding, there cannot be any justification for making these contradictory claims. This would also result in a double unintended benefit to the assessee. To illustrate, the assessee has paid US Federal Income-tax at the rate of 35 per cent amounting to Rs. 35,01,71,283. On the one hand, the assessee has claimed deduction in respect of these taxes which gives assessee a tax advantage of Rs. 13,48,15,940, being 38.5 per cent of this amount, and the assessee has also claimed tax credit of Rs. 35,01,71,283 in respect of US Federal Income-tax, in computation of Indian Income-tax liability. Thus, for a payment of US Federal Income-tax amounting to Rs. 35.01 crores, the assessee has claimed tax relief of Rs. 48.49 crores in India. To cap it all, the income which is so subjected to US Federal Tax has not been taxed in India at all, due to deduction under section 80HHE being ....
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....ion 2(43) In this Act, unless the context otherwise requires "tax" in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date." 13. Let us now address ourselves to the web of legal arguments in support of this claim of deduction, in respect of taxes paid abroad, made by the assessee. The case of the assessee is that taxes paid abroad are paid for the purposes of business, and as such deductible under section 37(1) which provides that, "any expenditure (not being expenditure of the nature described in sections 30 to section 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". It is contended that the taxes paid are inherently in the nature of expenses incurred for the purposes of busi....
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....or the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91". It cannot, therefore, be said that a foreign tax, in respect of which relief is eligible under section 90 or section 91, is not covered by the scope of expression 'tax' in section 40(a)(ii). 15. In any event, the scope of expression 'tax' has to be considered in the context of section 40(a)(ii), and in harmony with the scheme of things as envisaged in the Income-tax Act. A lot of emphasis has been placed on definition of 'tax' in section 2(43), but, like any other definition clause in the Act, all definitions are subject to the rider that only 'unless the context otherwise requires' these definitions hold the field. It thus follows that these definitions cannot be viewed on standalone basis in isolation with the context in which the expressions so defined are set out. The underlying principle of this approach is that the statutory definitions cannot be....
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.... India Ltd. v. CIT [1991] 187 ITR 25, Hon'ble Bombay High Court has observed that, "As held in a number of decisions income-tax is a Crown's or Central Government's share in the profits of a company". In other words thus, Income-tax represents State's share in income of a subject. The principle of Income-tax being an appropriation of income rather than a charge on income is also in harmony with the views expressed by Hon'ble Bombay High Court, in the case of S. Inder Singh Gill v. CIT [1963] 47 ITR 284 wherein Their Lordships took note of this Tribunal's findings to the effect that "We (the Tribunal) are not aware of any commercial practice or principle which lays down that tax paid by one on one's income is a proper deduction in determining one's income for the purpose of taxation", and approved the same by observing that "no good reason has been shown to us to differ from the conclusion to which the Tribunal has reached". It is thus clear that in the esteemed views of Hon'ble jurisdictional High Court, taxes paid abroad do not constitute admissible deduction under section 37(1). Incidentally, these observations were in the context of overseas Income-tax paid by the assessee, i.e.....
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....on 40(a)(ii). With respect, instead of following the coordinate bench in such circumstances, we have to yield to the higher wisdom of the Hon'ble Courts above. 17. The situation before us is also quite unique in the sense that in none of the decisions cited before us, the assessee has claimed double taxation relief under section 90 or section 91, and, in addition to such a relief having been claimed, the assessee has also claimed deduction, in computation of business income, in respect of the taxes so paid. This is clearly double 'double taxation relief' to the assessee whereas in fact there is no double taxation at all to the extent assessee's income from exports of software was held to be eligible for deduction under section 80HHE in India. What does it lead to? It leads to, for example, a situation that the taxes paid in US are being sought to be offset against assessee's tax liability in respect of domestic incomes, and in addition to the same, the taxes paid in USA are also being sought to be deducted from assessee's taxable income in India. The net result of this claim is that, as we have seen in paragraph 11 above, that the assessee is claiming a weighted deduction of 1.3....
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....unsel submits that this approach is justified inasmuch as we must take into account right to tax, rather than the actual levy of tax. In our considered view, however, the right to tax is relevant only for the purpose of allocation of taxing rights, as was held by this Tribunal in the case of Asstt. DIT v. Green Emirate Shipping & Travels [2006] 100 ITD 203 (Mum.), and not for the purposes of granting tax credits. Being granted tax credits in excess of the actual domestic tax liability would result in a situation that even when assessee has no tax liability in India, he is to be allowed credit in respect of entire taxes paid in US, and thus perhaps even entitling himself to refund in India in respect of taxes paid in USA. That is clearly contrary to the scheme of tax credit under the applicable tax treaty. In any event, this issue is, however, covered against the assessee by Tribunals decision in the case of Digital Equipments India Ltd. (supra), wherein the coordinate bench, speaking through one of us, has observed as follows : "4. We consider it useful to reproduce the text of Article 25(2)(a) of the Indo US DTAA which is as follows : "Where a resident of India derives incom....
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....ower rate though, in the country in which the income in question is earned. It is also noteworthy that the heading of Article 25 is "Elimination of double taxation" but then there has to be double taxation of an income in the first place before the question of elimination of that double taxation can arise. In the case before us the assessee company has paid taxes, in respect of that earning, only in one country, i.e., the United States, and claimed losses, on taking into account the admissible deductions therefrom, in the other country i.e., India. This is surely not, by any stretch of logic, a case of double taxation of an income. Article 25 does not, therefore, come into play at all. Turning to the Commissioner (Appeals)'s observation that "the Treaty nowhere stipulates that the credit for the taxes paid in the USA has to be given on proportionate basis", all we need to say is that the Indo US DTAA, as indeed other DTAAs as well, does stipulate that the foreign tax credit cannot exceed the Income-tax leviable in respect of that income in the country of which the assessee is resident. It is because of this limitation that the Assessing Officer declined the refund in respect of tax....
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....on 90(2) states that even in relation to the assessee to whom a tax treaty applies "the provisions of this Act shall apply to the extent they are more beneficial to that assessee". Undoubtedly, title of section 91 as also reference to the countries with which India has entered into agreement, suggests that it is applicable only in the cases where India has not entered into a double taxation avoidance agreement with respective jurisdiction, but the scheme of the section 91, read alongwith section 90, does not reflect any such limitation, and section 91 is thus required to be treated as general in application. The scheme of the Income-tax Act is to be considered in entirety in a holistic manner, and each of the section cannot be considered on standalone basis. It is important to bear in mind the fact that so far as section 91 is concerned, it does not discriminate between taxes levied by the Federal Governments and taxes levied by the State Government. The Income-tax levied by different States in USA usually ranges from 3 per cent to 11 per cent, and the aggregate Income-tax paid by the assessee in USA will range from 38 per cent to 46 per cent. Therefore, on the facts of the present....
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....nce of Income-tax paid abroad amounting to Rs. 67.89 crores, is thus allowed. 23. We now come to first ground of appeal which is sub-divided into sub- ground of appeal as follows: "(a) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in reducing the disallowance towards interest expenses from Rs. 30.62 crores to Rs. 30.35 crores for earning the dividend. (b) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs 1.58 crores towards administrative expenses for earning the dividend." 24. As regards first limb of this ground of appeal, learned counsel for the assessee fairly concedes the Assessing Officer's grievance to the effect that the CIT(A) indeed erred in reducing the interest disallowance from Rs. 30.62 crores to Rs. 30.35 crores. To that extent, relief granted by the CIT(A) must be vacated. We do so. 25. Ground No. 1(a) is thus allowed. 26. However, as far as second limb of this ground of appeal is concerned, we have noted that the CIT(A) has deleted the disallowance of Rs. 1.58 crores, out of administrative expenses, on the ground that the ....