TaxTMI 
TaxTMI 
2017 (4) TMI 394
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.... disallowance of foreign tax credit of Rs. 3,10,799 and directing the balance unallowed foreign tax credit of Rs. 52,50,507 to be allowed as deduction under section 37(1). 3. In ground no.1, in the appeal filed by the revenue, this grievance of the Assessing Officer is as follows: The Ld. CIT(A) has erred in law and on facts in deleting the disallowance made by the AO on account of commission paid to non-residents amounting to Rs. 65,96,434/-, without properly appreciating the facts of the case and the material brought on record. 4. So far as this ground of appeal is concerned, the relevant material facts are like this. The assessee before us is engaged in the business of developing software products. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has paid commission of Rs. 1,02,33,461 for procuring the business, out of which Rs. 65,96,434 were paid to non-resident agents. It was also noticed that no tax was withheld from the payments made to non-resident commission agents. On an examination of the supporting evidences furnished by the assessee, the Assessing Officer was not satisfied with genuineness of the commission paym....
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....ontentions of the learned AO that the Appellant has not proved the genuineness as well as reasonableness of the commission payment is not acceptable. The contention of the AO that there are no agreements and hence genuineness of the payment cannot be ascertained is also not acceptable as there is no need to have an agreement for each and every situation. The non-resident agent has raised the bill on the Appellant for the services rendered. The Appellant has also submitted the purchase order for the sales undertaken through the services of the non-resident agents. The learned AO in the assessment order had concluded that the Appellant had not proved the identity, evidences of the services rendered and the copy of the agreements entered. On the basis of this conclusion, the learned AO made an observation that the services have not been rendered and the payments are not genuine. Against this the Appellant submitted that during the assessment proceedings it had submitted the sample copy of the invoices raised by the agents as well as purchase orders vide its submission dated 16 March 2015. A remand report was also called from the learned AO under which the learned AO has contended that....
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.... also at the appellate stage, and no specific defects have been pointed out in the same, it cannot be open to the revenue to contend that genuineness of commission payments is not established. The commission payments are made with regulatory approvals and through banking channels, and all the requisite documentation is furnished for perusal. In these circumstances, we are of the considered view that the CIT(A) was indeed justified in his well reasoned conclusions on this aspect of the matter. We approve the same. As regards the question as to whether the assessee had any obligations to deduct tax at source from these payments of commission to non resident agents, as learned representatives fairly agree, the issue is now covered, in favour of the assessee, by a coordinate bench decision in the case of DCIT Vs Welspun Corporation Ltd [(2017) 77taxman.165 (Ahd)], speaking through one of us, has observed as follows: 31. The scheme of taxability in India, so far as the non residents, are concerned, is like this. Section 5 (2), which deals with the taxability of income in the hands of a non-resident, provides that "the total income of any previous year of a person who is a non-r....
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....er section 9(1)(i) is concerned, it cannot be invoked in the present case since no part of the operations of the recipient's business, as commission agent, was carried out in India. Even though deeming fiction under section 9(1)(i) is triggered on the facts of this case, on account of commission agent's business connection in India, it has no impact on taxability in the hands of commission agent because admittedly no business operations were carried out in India, and, therefore Explanation 1 to Section 9(1)(i) comes into play. 33. There are a couple of rulings by the Authority for Advance Ruling, which support taxability of commission paid to non-residents under section 9(!)(i), but, neither these rulings are binding precedents for us nor are we persuaded by the line of reasoning adopted in these rulings. As for the AAR ruling in the case of SKF Boilers & Driers Pvt Ltd [(2012) 343 ITR 385 (AAR)], we find that this decision merely follows the earlier ruling in the case of Rajiv Malhotra [(2006) 284 ITR 564] which, in our considered view, does not take into account the impact of Explanation 1 to Section 9(1)(i) properly. That was a case in which the non-resident commission agent ....
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....t opinion anyway in view of its limited binding force under s. 245S of the Act, do not impress us, and we decline to be guided by the same. The stand of the revenue, however, is that these rulings, being from such a high quasi-judicial forum, even if not binding, cannot simply be brushed aside either, and that these rulings at least have persuasive value. We have no quarrel with this proposition. We have, with utmost care and deepest respect, perused the above rulings rendered by the Hon'ble Authority for Advance Ruling. With greatest respect, but without slightest hesitation, we humbly come to the conclusion that we are not persuaded by these ruling ................... Once we come to the conclusion that the income embedded in these payments did not have any tax implications in India, no fault can be found in not deducting tax at source from these payments or, for that purpose, even not approaching the Assessing Officer for order under section 195. In our considered view, the assessee, for the detailed reasons set our above, did not have tax withholding liability from these payments. As held by Hon'ble Supreme Court in the case of GE India Technology Centre Pvt Ltd Vs CIT [(201....
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.... from the vendors, average per unit likely repair costs; and (c) the assessee determines the likely number of units which are likely to have such defects, by adopting percentage (a) to the total units sold, and estimates the provision required by multiplying the number of units so likely to receive warranty service, with the average cost incurred on such service as a result of (b) above. The assessee also invited attention of the assessee to, and relied upon in this context, Hon'ble Supreme Court's judgment in the case of Rotork Controls India Pvt Ltd Vs CIT [(2009) 314 ITR 62 (SC)]. These submissions, however, did not impress the Assessing Officer. He was of the view that the assessee has not been following this method consistently inasmuch as till the assessment year 2010-11, the assessee used to make such a provision but also used to add in back in the statement of taxable income whereas now he is not doing so. As for assessee's reliance of Rotork case (supra), the Assessing Officer was of the view that it is only when a consistent and scientific method of ascertain provision for warranty is followed that the same can be allowed as deduction in computation of business income. In....
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....and selling valve actuators. They are in the business from asst. yr. 1983-84 onwards. Valve actuators are sophisticated goods. Over the years appellant has been manufacturing valve actuators in large numbers. The statistical data indicates that every year some of these manufactured actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy valve actuator without a warranty. Therefore, warranty became integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case. 13. In this case we are concerne....
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.... made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under s. 37 of the 1961 Act. Therefore, all the th....
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....d in ss. 30 to 39 of the 1961 Act. In other words, as regards deduction in respect of gratuity, the assessee was required to comply with the provisions of s. 40A(7) after Finance Act, 1975. It is interesting to note that prior to 1st April, 1973 actual payment or provision for payment was eligible for deduction either under s. 28 or under s. 37 of the 1961 Act. This has been reiterated in Shree Sajjan Mills Ltd. (supra). The position got altered only after 1st April, 1973. Before that date, provision made in the P&L a/c for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis could be deducted either under s. 28 or s. 37 of the 1961 Act. This has been explained in Shree Sajjan Mills Ltd. (supra) at p. 599. Sec. 40A(7) deals only with the case of gratuity. Even in the case of gratuity but for insertion of s. 40A(7), provision made in the P&L a/c on the basis of present value of the contingent liability properly ascertained and discounted on an accrued basis was entitled to deduction either under s. 28 or under s. 37 of the said Act. This aspect, therefore, indicates that the present value of the contingent liability like the....
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....se principles are affirmed by the judgment of the Supreme Court in Shree Sajjan Mills Ltd. (supra) upto 1st April, 1973. In this case we are concerned with warranty claims. In respect of warranty claims during the relevant assessment years in question there is no provision similar to s. 40A(7) of the 1961 Act. We may add that the above principle of commercial accounting in Metal Box Company of India (supra) also finds place in the judgment of this Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC), in which the Court has explained the meaning of the word "expenditure" in s. 37 of the 1961 Act. In other words, the principle enunciated in Metal Box Company of India (supra) which has been reiterated in Shree Sajjan Mills Ltd. (supra) (upto 1st April, 1973) which deals with making of provision on the basis of estimated present value of contingent liability holds good during the assessment years in question qua warranty claims. [Emphasis, by underlining, supplied by us] 14. Quite clearly, therefore, as long as the assessee has made the provision for warranty claims on a scientific basis and historical data, ....
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....ore, quite justified in granting the impugned relief. We uphold his action and decline to interfere in the matter. 15 Ground no. 2 is thus dismissed. 16. As for ground no. 3 in the appeal filed by the Assessing Officer, we will deal with it a little later alongwith connected ground of appeal raised by the assessee. 17. Let us now turn to the appeal filed by the assessee. 18. In the first ground of appeal, the assessee has raised the following grievance: 1.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO of disallowing the employees' contribution to ESI of Rs. 43,908 under section 2(24)(x) r.w.s. 36(1)(va) of the Act. The Appellant submits that the said amounts have been paid before the due date of filing return of income under Section 139(1) and hence allowable. 19. Learned representatives fairly agree that this issue is covered, against the assessee, by Hon'ble Gujarat High Court's judgment in the case of CIT Vs Gujarat State Toad Transport Corporation [(2014) 366 ITR 170 (Guj)]. The conclusions arrived at by the learned CIT(A), which are in harmony with the view so expr....
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....s income. Accordingly, the Assessing Officer proceeded to disallow this loss , which is termed as 'marked to market loss' in commercial parlance, amounting to Rs. 71,22,045. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) did take note of Hon'ble Supreme Court's judgment in the case of CIT Vs Woodward Governor India Pvt Ltd [(2009) 357 ITR 673 (SC)] though did not deal with it any further at all, accepted that the accounting treatment given by the assessee is in accordance with AS-11 which is binding on the assessee but declined the deduction for this loss nevertheless, as, according to the CIT(A), the views of the assessee "are not acceptable in view of the view expressed by the CBDT vide instruction no. 3 of 2010 dated 23/03/2010". The assessee is aggrieved and is in further appeal before us. 23. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 24. It is with some amount of anguish that we have taken note of the fact that the CIT(A) was so much overawed with the CBDT instruction no. 3 (supra) on the subject that r....
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.... expenditure for which a legal liability has been incurred before it is actually disbursed. (See judgment of this Court in the case of United Commercial Bank vs. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC). Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. As stated, there is no finding given by the AO on the correctness of the Accounting Standard followed by the assessee(s) in this batch of civil appeals. 17. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under s. 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard-11 mandatory, we are now required to examine the said Accounting Standard ("AS"). 18. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of exchange differences. Under para 2, ....
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....difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L account for the reporting period. 10. As stated above, on facts in the case of M/s Woodward Governor India (P) Ltd., the Department has disallowed the deduction/debit to the P&L a/c made by the assessee in the sum of Rs. 29,49,088 being unrealized loss due to foreign exchange fluctuation. At the very outset, it may be stated that there is no dispute that in the previous years whenever the dollar rate stood reduced, the Department had taxed the gains which accrued to the assessee on the basis of accrual and it is only in the year in question when the dollar rate stood increased, resulting in loss that the Department has disallowed the deduction/debit. This fact is important. It indicates the double standards adopted by the Department. 11. The dispute in this batch of civil appeals centers around the year(s) in which deduction would be admissible for the increased liability under s. 37(1). 12. We quote hereinbelow s. 28(i), s. 29, s. 37(1) and s. 145 of the 1961 Act, which read as follows : "Sec. 28. Profits and gains of business or profession-T....
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....Molasses Company (supra). Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-a-vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of "expenditure" is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression "expenditure incurred" while dealing with the question as to whether there was a distinction between the actual liability in praesenti and a liability de futuro. The word "expenditure" is not defined in the 1961 Act. The word "expenditure" is, therefore, required to be understood in the context in which it is used. Sec. 37 enjoins that any expenditure not....
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.... in as much as the gains on foreign exchange contracts in the same year have been taxed as 'other income', the losses on foreign exchange contracts have not been allowed as deduction. Such an approach cannot meet any judicial scrutiny. As we say so, we must make it clear that since the assessee succeeds on merits, in the light of Hon'ble Supreme Court's direct judgment on the issue in the case of Woodward Governor (supra), such considerations of equity are rather peripheral issues. The assessee has succeeded on merits. As for the CBDT instructions, it is only elementary that any instructions issued by the CBDT cannot bind the assessee even though the assessee is entitled to, and can legitimately ask for, any benefits granted to the assessee by such instructions or circulars. Nothing, therefore, turns on the CBDT instruction even if it is actually contrary to the claim of the assessee. 26. Ground no. 2 is thus allowed. 27. In ground no. 3, the assessee has raised the following grievance 3.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in not allowing entire foreign tax credit amounting to Rs. ....
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.... in appeal, the first appellate authority, i.e. learned CIT(A) simply followed his predecessor's order on this issue, in assessee's own case for the 2009-10, and confirmed the quantification of eligible tax credit at Rs. 3,10,799. As for the balance amount of Rs. 52,50,507 (i.e. tax withheld abroad at Rs. 55,61,306 minus tax credit allowed of Rs. 3,10,799), the CIT(A) held that it should be allowed as deduction under section 37(1)- a claim which was negatived, or rather simply brushed aside, by the Assessing Officer without any discussion at all. Aggrieved by learned CIT(A) upholding the eligible tax credit at Rs. 3,10,799, the assessee is in appeal before us. In the meantime, however, the order so followed by the CIT(A) also came up for examination before us. Vide order dated 3rd January 2017 on assessee's appeal for the assessment year 2009-10, the stand of the CIT(A) on quantification of tax credit was reversed, claim of the assessee on quantification, to a very large extent, was upheld, and, in the process, some observations on principles governing the quantification of such tax credit were made. Learned counsel for the assessee suggests that matter deserves to be remitted to t....
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.... the assessee. In a way, therefore, these earnings are, so far as the present year is concerned, are passive earnings, and no part of the costs incurred in India can be allocated to earnings from Singapore and Indonesia. As regards earnings from maintenance contract, the assessee has allocated the costs on a proportionate basis and no defects are pointed out in the allocation so made by the assessee. However, there seems to be no logic in allocating a share, in proportion of turnover, of all the costs borne by the assessee to these earnings- as has been done by the Assessing Officer. When the income in respect of such foreign operations is not separately computed, it is to be done on a reasonable basis, and what would constitute reasonable basis will be the basis which is based on sound reasoning. The concept of averaging on the basis of overall revenues and profits of the assessee, or on the basis of some other ratio analysis, can only come into play when the income element cannot be worked out on some other reasonable basis on the facts of a particular case So far as the facts of the present case are concerned, we have also noted that the assessee has, during the course of the as....
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....the general proposition that only marginal or incremental costs incurred in respect of foreign income should be taken into account and the overheads cannot be allocated thereto. As we have noted earlier, the allocation of proportional deductions can be justified in some situations, such as when business operations are somewhat evenly or even in a significant manner, spread over the residence and source jurisdiction, but that's not the case here. Right now, we are dealing with a situation in which a major portion of income, by release of retention money as also by addition of an additional user by the customer, is a somewhat passive income, even though in the nature of business receipt, and as such, to that extent, allocation of all the expenses incurred by the assessee, in respect of such earnings, will not be justified. As regards the income from maintenance contracts, the relates costs have already been allocated and the Assessing Officer has not pointed out any infirmity in the same. In this view of the matter, quantification of income for the purpose of computing admissible tax credit, as done by the assessee and as reproduced earlier, is accepted. 10. We have noted that the....
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....of income taxes paid abroad by the assessee, and that is with respect to deductibility of taxes so paid abroad, except to the extent of tax credit being granted in respect of the same under section 90 or 91, under section 37(1). Aggrieved by deduction being granted by the CIT(A) in respect of the balance amount of income tax paid abroad (i.e. income tax withheld abroad minus the tax credit held admissible in such respect of such income tax paid abroad), the Assessing Officer is in appeal before us. 31. So far as this aspect of the matter is concerned, the stand of the assessee, at the assessment stage, has been that in case any part of the amount of income tax withheld abroad is not allowed as tax credit against the Indian tax liability, a deduction under section 37(1) be allowed in respect of the same. It was pointed that though there is a bar, under section 40(a)(ii), on deduction in respect of 'tax' on the profits and gains of the business, such a bar does not apply on the taxes paid outside India, as, in terms of definition of tax under section 2(43), "income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax c....
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....rovision. He, however, left the matter to us. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position. If we are to uphold the contentions of the assessee and the impugned order of the CIT(A). the scheme of benefit available to the assessee in respect of taxes paid or withheld outside India, by way of an example, is as follows: Assuming that the assessee earned an income of Rs. 100 from outside India, and the taxes withheld abroad are Rs. 60 and the admissible tax credit available to the assessee under section 90 and/or 91, in respect of these taxes withheld, is Rs. 40 as the effective tax rate in India in respect of the said income is 40%, the benefit available to the assessee should be as follows: Tax credit to be adjusted against tax liability under the Income Tax Act, 1961 Rs. 40 Deduction under section 37(1) in respect of taxes paid or withheld outside India Rs. 20 In effect thus, the assessee gets a tax benefit of Rs. 48 (i.e. Rs. 40 plus 40% of Rs. 20 which is allowed as deduction) as against a related tax liability of Rs. 40 33. The stand of the revenue....
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....ombay High Court had, rejecting this plea in no uncertain terms though in the context of surtax, observed as follows: With respect, this argument does not appeal to us. It is significant to note that the word "tax'; is used in conjunction with the words "any rate or tax", The word "any" goes both with the rate and tax. The expression is further qualified as a 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. If the word "tax" is to be given the meaning assigned to it by s. 2(43) of the Act, the word "any" used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Furthermore, the word "tax" as defined in s. 2(43) of the Act is subject to "unless the context otherwise requires". In view of the discussion above, we hold that the words "any tax" herein refers to any kind of tax levied or leviable 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. [Emphasis, by underlining, supplied by us now] 34. The views so express....
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.... Brooke Bond (India) Ltd. vs. CIT (1992) 193 ITR 390 (Cal) : TC 15R.590], Bombay (in) Lubrizol (India) Ltd. vs. CIT (1991) 187 ITR 25 (Bom) followed in several other decisions of that Court], Karnataka [CIT vs. International Instruments Pvt. Ltd. (1983) 144 ITR 936 (Kar), Madras [Sundaram Industries Ltd. vs. CIT (1986) 159 ITR 646 (Mad), Andhra Pradesh [Vazir Sultan Tobacco Co. Ltd. vs. CIT (1988) 169 ITR 35 (AP)], Rajasthan [Associated Stone Industries Co. Ltd. vs. CIT (1988) 170 ITR 653 (Raj)], Gujarat [S.L.M. Maneklal Industries Ltd. vs. CIT (1988) 172 ITR 176 (Guj) followed in several cases thereafter], Allahabad [Himalayan Drug Co. Pvt. Ltd. vs. CIT (1996) 218 ITR 346 (All)] and Punjab & Haryana High Court [Highway Cycle Industries Ltd. vs. CIT (1989) 178 ITR 601 (P&H) : TC 17R.807]. 35. A coordinate bench of this Tribunal, while dealing with the same question of deductibility of income tax paid abroad and in the case of DCIT Vs Tata Sons Ltd [(1991) 9 ITR (Trib) 154 (Bom)] and speaking through one of us, elaborately set out the broad principles governing the issue and observed as follows: 7. Let us deal with some fundamentals first. The payment of income-tax in overseas....
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....orial system. Most exemption systems are not of this kind and so are to be distinguished from territorial systems. Most countries using an exemption system adopt exemption with progression, under which the total tax on all income of a resident is calculated, and then the average rate of tax is applied to the income that does not enjoy the exemption. Exemption systems are also increasingly subject to various conditions to ensure satisfaction of the assumption underlying the system (that the income has been taxed in the source country at its ordinary rates).These conditions can consist of subjectto- tax tests (including the specification of tax rates) or selective application of exemption to foreign countries under domestic law or tax treaties. In particular, the exemption is usually not given where the source tax has been reduced or eliminated by a tax treaty. The result is that there are no countries asserting jurisdiction to tax worldwide income that give an exemption for all kinds of foreign income; where a country is referred to as an exemption country, this generally means that it provides some form of exemption to business income, dividends received from direct investments in ....
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....e in domestic law. Whichever double tax relief system is adopted, some method of apportioning deductions between domestic and foreign income will be necessary. Where deductions allocated to foreign income exceed that income, the loss should not be available for use against domestic income." 8. There are thus four methods in which relief can be granted to a taxpayer in the residence country in respect of income-tax paid abroad. It is also important to bear in mind the fact that these four methods are mutually exclusive methods in the sense that each one of these methods, on standalone basis, is meant to grant requisite relief from double taxation of an income. Application of more than one of these methods, in a particular situation can thus only result in granting relief greater than the double taxation itself. To sum up even at the cost of an element of repetition, these methods are as follows : * In the first method, residence country follows pure territorial method of taxation and brings to tax only such incomes as are sourced in the residence jurisdiction itself. There is then no conflict between the source rule and the residence rule in as much as the resid....
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.... income on which taxes have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of an....
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.... (d) for recovery of income-tax under this Act and under the corresponding law in force in that specified territory outside India. (2) Where a specified association in India has entered into an agreement with a specified association of any specified territory outside India under sub-s. (1) and such agreement has been notified under that sub-section, for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. (3) Any term used but not defined in this Act or in the agreement referred to in sub-s. (1) shall, unless the context 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 company incorporated in the specified territory outside India at a rate higher than the rate at which a domestic company is cha....
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....ncome which is liable to tax under this Act also; or (b) of a sum calculated on that income at the Indian rate of tax; whichever is less. (3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under s. 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included 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. Explanation : In this section,- (i) the expression 'Indian income-tax' means income-tax charged in accordance with the provisions of this Act; (ii) the expression 'Indian rate of tax' means the rate d....
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....ficial to the assessee. Under the tax credit scheme envisaged in the schemes of tax treaties, once again each income sourced in the treaty partner country is practically treated as a separate basket of income and the double taxation relief, in respect of taxes paid in that treaty partner country, is restricted to the taxes actually levied in the home country in respect of the said income. It thus follows that the least relief available in respect of income-tax paid abroad is if at all an assessee 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. There is no dispute that the assessee has claimed double taxation relief under the scheme of the Act-as set out in s. 90 and s. 91 of the Act. 11. The assessee, however, was not satisfied with the relief so granted by the AO. He also claimed deduction, in computation of income from 'profits and gains from business and profession', in respect of taxes paid abroad. It is the case of the assessee that the taxes so paid abroad constituted expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, and, therefor....
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....is that even when there is admittedly no double taxation of an income, the assessee is able to reduce his Indian income-tax liability, in respect of other incomes, by being allowed deduction in respect of taxes paid abroad. Such a claim being accepted will lead to quite an incongruous result by any standard. 12. It is in the backdrop of the above claim for deduction that one has to take a look at s. 40(a)(ii) and s. 2(43) which are reproduced below for ready reference : "Sec. 40(a)(ii)-Notwithstanding anything to the contrary in ss. 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",- (ii) any sum paid on account of any rate of 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. **Explanation 1 : For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate of tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under s. 90 or, as the case may be, deduction from t....
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.... the Co-ordinate Benches since then. It has been noted in this order that "there is no finding that local taxes (abroad) were assessed on a proportion of the profits i.e. consultancy fees received". When CIT sought a reference under s. 256(1), for esteemed views of Hon'ble Bombay High Court and against this order on the question of deductibility of local taxes paid abroad, the Tribunal declined the reference and, inter alia, observed that "the question is one of the facts", that "the tax deducted is a local tax and not a tax on profits" and that "foreign tax is not covered by the provisions of s. 40(a)(ii)". Hon'ble High Court also declined CIT's prayer for reference under s. 256(2) and the order of the Tribunal thus received finality. This decision has been consistently followed over the decades. However, in the lead decision cited before us, there is a categorical observation to the effect that "the tax deducted is a local tax and not a tax on profits", whereas in the present case it is an undisputed position that the tax levied abroad, being income-tax, is a tax on profits of the assessee-whether on presumptive basis or on the basis of actual profits earned by the assessee. Obvi....
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....e legislature had in view in enacting that provision and in the context of the setting in which it occurs" and that "we cannot ignore the context and the collection of the provisions in which ......, appears, because, as pointed out by Judge Learned Hand in the most felicitous language : interpret '. . .the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create . ..'" One of the things which is clearly discernible from the above observations of their Lordships is that while interpreting the statutes, one has to essentially bear in mind the context and underlying scheme of the legislation in which the words are set out. Keeping these discussions in mind, let us see the context in which expression 'tax' is used in s. 40(a)(ii) which provides that "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" cannot be allowed as a deduction in computation of income from business or p....
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.... 'any' used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Furthermore, the word 'tax' as defined in s. 2(43) of the Act is subject to "unless the context otherwise requires". In view of the discussion above we hold that the word 'any' tax herein refers to any kind of tax levied or leviable 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." 16. Hon'ble Bombay High Court's judgment in Lubrizol India Ltd. (supra) which holds that the meaning of expression 'tax' cannot be restricted to the definition of 'tax' was delivered on 11th July, 1990, and, to that extent, Tribunal's decision dt. 23rd Oct., 1984, in assessee's own case for the asst. yr. 1976-77 and which has been followed in all other assessment years, is no longer good law. None of the subsequent decisions of the Tribunal, which merely followed the said order, had an occasion to deal with the law so laid down by their Lordships. It needs hardly be stated that mere rejection of reference by the Hon'ble High Court does not amount to approval of the views of the Tribunal. A....
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....redits, in respect of taxes paid abroad, are restricted to assessee's domestic tax liability in respect of the subject income as was held by this Tribunal in the case of Jt. CIT vs. Digital Equipments India Ltd. (2005) 93 TTJ (Mumbai) 478 : (2005) 94 ITD 340 (Mumbai). If we are to hold that the assessee is entitled to deduction of tax paid abroad, in addition to admissibility of tax relief under s. 90 or s. 91, it will result in a situation that on one hand double taxation of an income will be eliminated by ensuring that the assessee's total income-tax liability does not exceed income-tax liability in India or income-tax liability abroad-whichever is greater, and, on the other hand, the assessee's domestic tax liability will also be reduced by tax liability in respect of income decreased due to deduction of taxes. Such a benefit to the assessee is not only contrary to the scheme of the Act and contrary to the fundamental principles of international taxation, it also ends up making double taxation relief a mechanism to reduce domestic tax liability in India-something which is most incongruous. In our considered view, an interpretation which leads to such glaring absurdities cannot b....
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....any basis whatsoever for the CIT(A)'s conclusion that the taxes paid in the US, in the instant case, are to be credited to the assessee's account and are to be refunded to the appellant, in case he has no income-tax liability in respect of that income in India. As for the CIT(A)'s observation, referring to payment of income-tax in the United States on an income and returning a loss in respect of that income in India, to the effect that "this is an absurd situation and was not visualized by the treaty", it cannot but stem from his inability to take note of the fact that certain incomes (e.g., royalties, fees for technical or included services, interest, dividends etc.), are taxed on gross basis in the source country but are only be taxed on net basis, as is the inherent scheme of income-tax legislation normally, in the country of which the assessee is resident. In such situations, it is quite possible that while an assessee pays tax in the source country which is on gross basis, he actually ends up incurring loss when all the admissible deductions, in respect of that earning, are taken into account. There is nothing absurd about it. The underlying philosophy of the source rule on gr....
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....edent, and being in considered agreement with the same, we reject this alternate claim of the assessee. 20. Learned counsel has also contended that in any event, we must allow deduction in respect of State income-taxes paid in USA and Canada as relief is not admissible in respect of the same in respective tax treaties. We have been taken through India USA tax treaty to point out that tax credits are admissible only in respect of incometax levied by the Federal Government and not by the State Governments. It is contended that since no relief is admissible in respect of State taxes under s. 90 or s. 91, these taxes will continue to be tax deductible, and to that extent, decisions of the Co-ordinate Benches will hold good. We are unable to see legally sustainable merits in this submission either. Apart from the fact that such a claim of deduction is clearly contrary to the law laid down by Hon'ble jurisdictional High Court in Lubrizol's case (supra), there is another independent reason to reject this claim as well. The reason is this. It is only elementary that tax treaties override the provisions of the IT Act, 1961, only to the extent the provisions of the tax treaties are benefi....
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....ally, in view of Hon'ble Bombay High Court's judgment in Gill's case (supra), income-tax abroad cannot be allowed as a deduction in computation of income and this judgment does not discriminate between Federal and State taxes either. Interestingly, State incometaxes paid in USA, subject to certain limitations, are deductible in computation of income for the purposes of computing Federal tax liability in USA, but that factor cannot influence deductibility of these taxes, particularly in the light of the provisions of Expln. 1 to s. 40(a)(ii) and in the light of Hon'ble Bombay High Court's judgment in Gill's case (supra), in computation of business income under Indian IT Act. For all these reasons, we are unable to uphold the plea of the assessee seeking deduction of at least State income-tax paid in USA. 21. In view of the above discussions and for the detailed reasons set out above, we uphold the grievance of the AO. The CIT(A) was indeed not justified in deleting the disallowance of Rs. 67,89,30,514 in respect of income-tax paid abroad. We vacate the relief granted by the CIT(A) and restore this disallowance. 36. Oblivious of the judicial precedents discussed above, another ....
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....ountry had collected income-tax at source, according to them, a part of such earnings accrued and arose in their countries which were liable to income-tax under its taxing laws. Such foreign tax claimed as a deduction by the assessee was turned down by the AO. This was reversed by the AAC with a reasoning that the 'payment of foreign income-tax formed part of the expenditure like other usual business expenses incurred in the course of business and as such, the assessee was entitled to claim deduction of the same u/s 37 of the Act for being incurred wholly and exclusively for the purpose of business.' On a further appeal, the Tribunal had, after due consideration of the provisions of both the sections - 37 which allows a business expenditure and 40(a)(ii) which contained prohibition -as under: '40(a)(ii) - 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' The Tribunal observed that the term 'tax' is defined in relation to the AY commencing on the 1st day of April, 1965 and in subsequent assessment years as mea....
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....by the coordinate bench, however, are not only diametrically opposed to an earlier decision of another coordinate bench in the case of Tata Sons (supra), as reproduced earlier, and of Hon'ble Bombay High Court's decision in the case of Lubrizol India (supra) but also clearly contrary to certain observations a later judgment of Hon'ble Bombay High Court in the case of Reliance Infrastructure Ltd vs CIT [TS 676 HC 2016 (BOM)] wherein Their Lordships have, inter alia, observed as follows: We have considered the rival submissions. So far as the question relating to the Tribunal not following its order in the case of the applicant itself for A.Y. 197980, we find that there is a justification for the same. This is so as the decision of this Court in Inder Singh Gill (supra) was noted by the Tribunal on an identical issue while passing the order for the subject assessment year. Thus, the Tribunal had not erred in not following its order for A.Y. 197980. In fact, the decisions of this Court in South East Asia Shipping Co.(supra) and Tata Sons Ltd. (supra), which are being relied upon in preference to Inder Singh Gill (supra) cannot be accepted as both the orders being relied upon by the....
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....e case of Reliance Infrastructure (supra): It therefore, follows that the tax which has been paid abroad would not be covered with in the meaning of Section 40(a) (ii) of the Act in view of the definition of the word 'tax' in Section 2(43) of the Act. To be covered by Section 40(a)(ii) of the Act, it has to be payable under the Act. We are conscious of the fact that Section 2 of the Act, while defining the various terms used in the Act, qualifies it by preceding the definition with the word "In this Act, unless the context otherwise requires" the meaning of the word 'tax' as found in Section 2 (43) of the Act would apply wherever it occurs in the Act. It is not even urged by the Revenue that the context of Section 40(a)(ii) of the Act would require it to mean tax paid anywhere in the world and not only tax payable/ paid under the Act. [Emphasis, by underlining, supplied by us] 40. Ironically, there is no meeting ground between the observations so made by Hon'ble Bombay High Court and its earlier observations, in Lubrizol's case (supra), to the effect that "If the word 'tax' is to be given the meaning assigned to it by s. 2(43), the word 'any' used before it....
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.... Tata Sons (supra) is authored by one of us and suggests, in very decorous manner- which is his hallmark anyway, that we should not become so attached to our labour of love that the cause of justice is sacrificed. We are thus urged to follow the Mastek decision (supra) Reliance Infrastructure decision (supra) in letter and in spirit. Learned counsel has then pointed out that the Explanations to Section 40(a)(ii) refer only such taxes paid outside India in respect of which relief under section 90 and 91 are available, and it cannot be open to extend the scope of what is covered by Explanations to Section 40(a)(ii). 42. Learned counsel's remarks are indeed thought provoking. We have to take a conscious call on the points made by him. As we do so, we must make it clear, though at the cost of stating the obvious, that whatever we say is, and shall always remain, what Hon'ble Courts above hold on this issue. In a way, therefore, we are writing on the sand fully aware that whatever we write, no matter how painstakingly we write, on this sand, will be washed away by a wave of judicial thought from Hon'ble Courts above. We are also alive to the fact that considering how significant this....
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.... deductible under the provisions of sec. 37 of the Act and payment of such taxes does not amount to application of income. 40. Let us now have a glimpse at the judicial views on a similar issue. (i) South East Asia Shipping Co. ITA No.123 of 1976 - Mumbai Tribunal: The issue, in brief, was that the tax authorities of the respective country had collected income-tax at source, according to them, a part of such earnings accrued and arose in their countries which were liable to income-tax under its taxing laws. Such foreign tax claimed as a deduction by the assessee was turned down by the AO. This was reversed by the AAC with a reasoning that the 'payment of foreign income-tax formed part of the expenditure like other usual business expenses incurred in the course of business and as such, the assessee was entitled to claim deduction of the same u/s 37 of the Act for being incurred wholly and exclusively for the purpose of business.' On a further appeal, the Tribunal had, after due consideration of the provisions of both the sections - 37 which allows a business expenditure and 40(a)(ii) which contained prohibition -as under: '40(a)(ii) - any sum paid on accou....
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....ins of the business under Section 10(4) of the Indian Tax Act, 1922. Therefore, on the state of the statutory provisions as found in the Indian Income Tax Act, 1922 the decision of this Court in Inder Singh Gill (supra) would be unexceptionable. However, the ratio of the aforesaid decision in Inder Singh Gill (supra) cannot be applied to the present facts in view of the fact that the Act defines "tax" as income tax chargeable under the provisions of this Act. Thus, by definition, the tax which is payable under the Act alone on the profits and gains of business are not allowed to be deducted notwithstanding Sections 30 to 38 of the Act. It therefore, follows that the tax which has been paid abroad would not be covered with in the meaning of Section 40(a) (ii) of the Act in view of the definition of the word 'tax' in Section 2(43) of the Act. To be covered by Section 40(a)(ii) of the Act, it has to be payable under the Act. We are conscious of the fact that Section 2 of the Act, while defining the various terms used in the Act, qualifies it by preceding the definition with the word "In this Act, unless the context otherwise requires" the meaning of the word 'tax' a....
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.... well. • DCIT Vs. Mastek Limited (Ahmedabad Tribunal) - Jurisdictional tribunal decision delivered on 16m may 2012 which relied on above decision of Bombay High Court. The above contention of ETPL has been accepted by the learned Commissioner of Income-tax (Appeals) in ETPL's case for AY 2009-10. Copy of the said order is attached as Annexure 1A [Emphasis, by underlining, supplied by us now] 43. In the light of the above observations in judicial precedents relied upon by the learned counsel for the assessee, and in the light of extracts from the impugned orders, the core issue, in our considered view, is whether or not the meaning of expression 'tax' appearing in section 40(a)(ii) must remain confined to a tax levied under the Indian Income Tax Act, 1961. As a matter of fact, Hon'ble Bombay High Court, in the case of Reliance Infrastructure (supra), Their Lordships have gone to the extent of saying that but for definition of tax under section 2(43) "We (Their Lordships) would have answered the question posed for our consideration by following the decision of this Court in Inder Singh Gill (supra)" which was rendered in the context of the Income Tax Act, 19....
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.... concerned, even this literal reading of the said observations does not help the assessee. As we have pointed out hereinabove the surtax is essentially levied on the business profits of the company computed in accordance with the provisions of the IT Act. Merely because certain further deductions [adjustments] are provided by the Surtax Act from the said profits, it cannot be said that the surtax is not levied upon the profits determined or computed in accordance with the provisions of the IT Act. Sec. 4 of the Surtax Act read with the definition of "chargeable profits" and the First Schedule make the position abundantly clear. ..................................... We agree with the view taken by the High Courts of Calcutta [Molins (India) Ltd. vs. CIT (1983) 144 ITR 317 (Cal) and Brooke Bond (India) Ltd. vs. CIT (1992) 193 ITR 390 (Cal) : TC 15R.590], Bombay (in) Lubrizol (India) Ltd. vs. CIT (1991) 187 ITR 25 (Bom) followed in several other decisions of that Court], Karnataka [CIT vs. International Instruments Pvt. Ltd. (1983) 144 ITR 936 (Kar), Madras [Sundaram Industries Ltd. vs. CIT (1986) 159 ITR 646 (Mad), Andhra Pradesh [Vazir Sultan Tobacco Co. Ltd. vs. CIT (1988) 16....
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....very thrust of stand of the revenue was that the connotations of expression 'tax' in section 40(a)(ii) must be taken in its contextual meaning which extends to any tax ascertainable with reference to the profits of the assessee as evident from the wordings of section which refer to "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", and that its connotations cannot be treated as restricted to tax under the Income Tax Act. This argument, in the context of deduction in respect of tax outside Income Tax Act, 1961, has already met the approval of Hon'ble Supreme Court. The law laid down by Hon'ble Supreme Court binds all of us under Article 141 of the Constitution of India. Once we are aware about a particular position that Hon'ble Supreme Court has taken, it is not open to us to reach a conclusion which is, or can be perceived as, in defiance to the position taken by Hon'ble Supreme Court. Maybe, if the views expressed were by our jurisdictional High Court, or by any of Hon'ble High Courts after taking into account the views expressed by Hon'ble Supreme Court on that iss....
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....rent ground, (iii) when it is inconsistent with the earlier decisions of the same rank, (iv) when it is sub silentio, and (v) when it is rendered per incuriam". Nothing, therefore, turns on Mastek decision by the coordinate bench. Learned counsel has then invited our attention to the fact that the said decision in Mastek's case (supra) is now pending for consideration before Hon'ble jurisdictional High Court, as Their Lordships have, vide order dated 14th March 2013 in TA No. 826 of 2012, have admitted the appeal, inter alia, on the question "whether the Appellate Tribunal has substantially erred in deleting the disallowance under section 40(a)(ii) in respect of Rs. 42,57,297 paid as Belgium Tax claimed as deduction under section 37(1) of the Act". In our considered view, nothing turns on this argument either, since the pendency of matter before Hon'ble jurisdictional High Court acts as a bar only on the constitution of a special bench of this Tribunal, as was held in the case of General Motors India Pvt Ltd Vs ACIT [TS-640 -ITAT-2016-Ahd-TP], and not otherwise. In any event, once a judicial precedent is held to be per incuriam the pendency of appeal against such a per incuriam jud....
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....l precedents really relevant to the issues were duly mentioned before the respective judicial forums. Nothing prevented the revenue authorities from inviting attention of the coordinate bench to earlier decision by another coordinate bench, on the same issue, in favour of the revenue- particularly when it was in public domain and reported by tax journals and websites. Undoubtedly, it was even then open for the bench to agree with this or disagree with this decision, and there were options available to them in case the coordinate bench was to disagree, but a conscious call anyway could have been taken. The same is the position with respect to Lubrizol decision which was dealing with the same expression appearing in the same statutory provision, and was approved by Hon'ble Supreme Court. It was also a well reported decision and it could have been easily located and brought to the notice of Their Lordships. It was for the respective judicial forum to take a conscious call on whether this decision will hold good for the connotations of expression 'tax' in the context of section 40(a)(ii), in the context of surtax only, or will also extend to the connotations of 'tax' for the purpose of....
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....e best out of people assigned to argue the cases before the Tribunal. A cost benefit analysis of various approaches would perhaps be in order. It is also an idea worth exploring that while research and ground work is outsourced to young law and accountancy professionals, final call on the line of argument and actual arguments before the bench, though with or without active assistance of independent professionals retained by the revenue authorities, remains with the Departmental Representatives. Of course, assistance by the independent tax researchers directly to us could help as well. While as a specialist body dealing with only one branch of law, we may not have any excuse for not being up to date on the developments about our area of expertise, we have to be realistic in our approach particularly in the light of many of our constraints. Being informed of the latest judicial precedents cannot be left to chance alone. There has to be a formal mechanism to ensure that all the relevant judicial precedents are duly placed before, and considered, by the Tribunal. There is no point in living in denial. The truth is that reforms are needed about the manner in which interests of revenue a....