TaxTMI 
TaxTMI 
2021 (3) TMI 343
X X X X Extracts X X X X
X X X X Extracts X X X X
....nterest to the Indian business houses operating abroad rather than a typical Indian public sector undertaking, and yet ironically, it has come up for adjudication in this case of a public sector undertaking. Be that as it may, whatever we decide in this case will be equally applicable to all similarly situated taxpayers and thus affect a large number of Indian taxpayers. The order impugned in this appeal is the order dated 30th November, 2017, passed by the learned Commissioner (Appeals) in the matter of order under section 250 r.w.s. 143(3) of the Income Tax Act, 1961, for the assessment year 2012-13. Issues requiring our adjudication in this appeal: 3. As we have noted in our opening observations, the questions that we are required to adjudicate upon in this appeal are of far-reaching ramifications, and the answers to these questions affect a large number of Indian corporates having business operations, through branches or other forms of permanent establishments (PEs), outside India. These questions, as learned representatives fairly agree, are as follows: (a) Whether or not, on the facts and in the circumstances of this case, learned CIT(A) was justified in uphold....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Claim for refund, of the taxes paid abroad, by the Indian tax authorities: 6. The assessee before us is a major Indian bank, with several branches abroad- a few in the treaty partner jurisdictions, i.e., the countries with which India has entered into Double Taxation Avoidance Agreements under section 90, and remaining in the non-treaty partner jurisdictions. The assessee has also invested, as a shareholder, in two foreign banks, namely PT Bank Swadeshi (Indonesia) and Indo Zambia Bank Limited (Zambia). The assessee has earned business profits from its branches outside India, namely in UK, USA, France, Belgium, Kenya, Japan, Singapore, China, Hong Kong, Cambodia, and Jersey. During the relevant previous year, the assessee earned profits in these jurisdictions, and, in accordance with the domestic tax laws in the respective tax jurisdictions, the assessee bank paid income tax aggregating to Rs. 165.96 crores in treaty partner jurisdictions (on taxable income aggregating to Rs. 200.90 crores in these jurisdictions) and Rs. 15.79 crores in non-treaty partner jurisdictions (on taxable income aggregating to Rs. 635.19 crores in these jurisdictions), in addition to income tax amounti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntion has relied on the decision of Hon'ble Karnataka High Court in the case of Wipro Ltd. V DCIT (supra). In respect of such reliance placed, it is observed that the Hon'ble High Court in their order at para 33 have clearly observed that section 91 makes it clear that if a person is residing in India has paid tax in any country with which, there is no agreement u/s 90 for the relief or avoidance of double taxation, Income-tax if deducted or otherwise paid as per law in force in that country, then he shall be entitled to the deduction from the India 'Income-tax payable' by him in a sum computed on such doubly taxed income, at the Indian rate of tax or the rate of tax of the said country, whichever is lower of the Indian rate of tax, if both the rates are equal. From the observations as aforesaid at Para 33 of the order it can be noted that the entitlement to the deduction is from the Indian 'Income-tax payable'. It does not say anywhere that deduction or the refund would even be available when there is no tax payable in India. It is further seen from the same order of the Hon'ble High Court wherein at Para 39 they have observed as under. "Thirdl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not a condition precedent for being entitled to tax credit, in the computation of tax liability, in India. He relies upon the decisions of Hon'ble Karnataka High Court in the case of Wipro Ltd Vs DCIT [(2015) 62 taxmann.com 26 (Kar)] wherein it was held that even though income in question of the assessee was exempt from tax in India, the assessee was entitled to tax credit in respect of taxes paid abroad on the foreign income embedded therein. In effect, thus, the taxes one pays abroad, for all practical purposes, can indeed be refunded in India. It is further pointed out that this decision has been consistently followed by various coordinate benches of this Tribunal. It is also pointed out that actual taxation of an income is not the condition precedent for taking benefit of the tax treaty provisions in the other country. He has filed a decision of a coordinate bench of this Tribunal in the case of ADIT Vs Green Emirates Shipping & Travels [(2006) 200 ITD 203 (Mum)] in support of this proposition. Learned counsel then repeatedly states, even though after being conveyed our reservations of this averment, that it is an admitted position that the income of the foreign branches has b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ous issues cannot be taken up at this stage. Once the assessee has not raised these points earlier, he cannot raise these points even at this stage where only the mechanical exercise of giving effect to the appellate order is to be carried out. On merits, it is submitted that the question of the foreign tax credit will only arise when there is any Indian tax payable by the assessee. When there is no Indian tax payable by the assessee, no credit can be granted in respect of the taxes paid abroad. Our attention is then invited to a decision of a coordinate bench in the case of JCIT Vs Digital Equipment India Pvt Ltd [(2004) 94 ITD 340 (Mum)] wherein it is held, vacating the relief granted by the CIT(A), that a foreign tax credit is to eliminate double taxation of an income and it can never exceed the actual tax liability in the residence jurisdiction. As regards the Wipro decision (supra) by Hon'ble Karnataka High Court, learned Departmental Representative submits that this decision overlooks, and does not even deal with, other Hon'ble High Court judgments in the case of CIT Vs M A Morris [(1994) 210 ITR 284 (AP)] and CIT Vs Dr R N Jhanji [(1990) 185 ITR 586 (Raj)]. On the first prin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uestion of refund being made to the assessee. Learned Departmental Representative very politely, but equally firmly, submits that this decision is per incuriam, it is from a non-jurisdictional High Court, and on a materially different set of facts, and, therefore, does not bind us. For all these reasons, and relying upon the reasoning adopted by the learned CIT(A), he urges us to approve the order of the learned CIT(A) and decline to interfere in the matter. In a brief rejoinder, learned counsel for the assessee submits that the "CIT(A) had clearly held that appellant is entitled of relief of tax paid in a foreign country which was not granted when AO gave effect to the direction of ld. CIT(A)". It is thus submitted that the grounds raised clearly emanates and arise from the appeal effect order. Learned counsel then points out that learned Departmental Representative seeks to distinguish various decisions relied on by the bank on the contention that "in none of the cases, refunds were being claimed when the assessed income was a loss and no taxes were paid" but then this plea amounts to stipulating a new condition viz 'to be eligible for tax relief, the assessee should not have ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he law of India regarding the allowance as a credit against Indian tax of tax paid in a territory outside India (which shall not affect the general principle hereof), the amount of the United Kingdom tax paid, under the laws of the United Kingdom and in accordance with the provisions of this Convention, whether directly or by deduction, by a resident of India, in respect of income from sources within the United Kingdom which has been subjected to tax both in India and the United Kingdom shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax. For the purposes of the credit referred to in this paragraph, where the resident of India is a company, by which surtax is payable, the credit to be allowed against Indian tax shall be allowed in the first instance against the income-tax payable by the company in India and, as to the balance, if any, against the surtax payable by it in India. ................... 6. Income which in accordance with provisions of this Convention is not to be subjected to tax in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....jurisdictions, the assessee has to be relieved of such double subjection of tax in two jurisdictions, by giving appropriate relief in the residence jurisdiction, i.e., India. Learned counsel has also submitted that the actual taxation of an income in not a condition precedent for availing the tax treaty benefit, and he has relied upon a decision of the coordinate bench in the case of Green Emirates Shipping & Travels (supra) in support of this proposition. Learned counsel has then also relied upon the decisions of Hon'ble Karnataka High Court in Wipro's case (supra) in support of the contention that the payment of tax in the residence jurisdiction is not a condition precedent for availing the benefit of foreign tax credits. 15. So far as the decision of coordinate bench, in the case of Green Emirates Shipping & Travels (supra) is concerned, that was a decision in the context definition of the expression 'liable to tax' and in the context of Indo UAE Double Taxation Avoidance Agreement; [(1995) 205 ITR (St) 29; Indo UAE tax treaty in short] with a jurisdiction which did not have, at least at the relevant point of time, any provisions enabling domestic law taxation of the income c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in important observations and emphasized that actual taxation is a sine qua non for an income being treated as having been subjected to tax. That was a case in which the AAR was dealing with a treaty requirement for 'resident of a contract state' for a trust which required the income derived by the trust being subject to tax' in the treaty partner jurisdiction. It was in this context that the AAR, speaking through Hon'ble Justice Quadri, speaking for the Authority of Advance Ruling, observed that the expression 'subject to tax' has materially distinct connotations vis-à-vis the connotations of 'liable to tax', and observed that "It is worth pointing out that the phrase 'liable to tax' in para (1) and the phrase 'subject to tax' in proviso (b) are not synonymous. If both were to be read as synonymous, proviso(b) would become otiose. Whereas para (1) speaks of being in the tax net, proviso is concerned with actual taxation". The AAR then added "Thus it would follow that the term "resident of USA" for the purpose of the treaty would mean a person who under the laws of USA is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngdom he is not "subject to United Kingdom tax in respect thereof". These words I think describe a present liability of a person to tax, not the character of income in respect of which he will if it comes to him in the United Kingdom in the future incur then a liability to tax" 26. In General Electric Pension Trust v Director of Income-tax (International Taxation) Mumbai (2005) 8 ITLR 1053, the Indian Authority for Advance Rulings held that a pension fund which was exempt from tax in the US under US tax law was not "subject to tax" in the US and so could not fall within the meaning of "resident of a Contracting State" as that was defined for a trust under the US/India double tax treaty. After describing the relevant provision, under which in the case of income derived or paid by a trust the term 'resident of a Contracting State' applied only to the extent that the income derived by the trust (which would have to be liable to tax by reason of residence or another relevant criterion in the State in question) was in addition subject to tax in that State as the income of a resident either in its own hands or in the hands of the beneficiaries, Syed Shah Mohammed Quadri J said (....
X X X X Extracts X X X X
X X X X Extracts X X X X
....According to an article published in 2011, "Worrying Interpretation of 'Liable to Tax': OECD Clarification Would Be Welcome" (Arnaud de Graaf and Frank Pötgens), Intertax, Vol 39, Issue 4, 169, which discusses a ruling of the Dutch Supreme Court (4 December 2009; V-N 2009/63.17) that adopted a similar approach to the residence article in the Netherlands/US treaty to that of Crown Forest, the broad international consensus was confirmed at the IFA Congress in 2004. As the authors describe the position (at p 172), that view encompasses a contrast between "liable to tax", which refers simply to an abstract liability to tax on a person's worldwide income, and the expression "subject to tax" which may require an effective liability to tax on a person's income. 30. The same analysis also appears from the Editor's Note to the General Electric ruling in the International Tax Law Reports, where he says (p1054): "It is generally recognised that 'subject to tax' has a different meaning from 'liable to tax' and requires that the person claiming benefit of the treaty is actually required to pay tax (or would, for example, be required to do so if it had any positive income)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iew be drawn between the use, in double tax treaties, of the expressions "liable to tax" and "subject to tax", and also by the requirement, under Art XI(2), that the individual concerned should not only be a resident of Israel (that is, resident in Israel for the purposes of Israel tax), but should be subject to tax in respect of the relevant income. The reference to that income in this context clearly distinguishes this provision from one which requires that the individual fall within the scope of a State's taxation generally. This provision is not concerned with the status of the individual, but with the chargeability to tax of the specific income. Income which is exempted from taxation cannot during the currency of that exemption be income in respect of which an individual can be said to be subject to tax. 35. Although it is not necessary to place any reliance on the international cases and academic writings I have referred to, nor on the OECD commentary, this conclusion does accord with what appears to be a broad consensus as to the meaning of the expression "subject to tax". I have no doubt that the contracting states of Israel and the UK, when entering into the Treat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....admissible deduction from the scope of 'income subjected to tax', has observed as follows: 10. We are thus left with the question : What is the amount of Singapore tax payable by the assessee in respect of the income which has been subjected to tax in both countries? It is our considered view that the expression "subjected to tax" has a narrower meaning, and it refers to the amount of income on which tax has been levied. In the present case though "income chargeable to tax" in both countries was royalty, under the Indian Tax Laws the assessee was allowed deduction under section 80-O and tax was levied in India, on the net amount only. Hence only 50 per cent of the royalty on which tax was levied in India, could be considered as income subjected to tax in India. Even though royalty income subjected to tax in Singapore was Rs. 18,97,295, in India the assessee had to bear the tax burden only on 50 per cent of the royalty amount. The intention behind the Agreement for Avoidance of Double Taxation is to remove the hardship caused to a tax payer by the burden of double taxation on the same quantum of income. That objective is achieved by following the procedure laid down in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Court observed: "Section 91 cannot be construed in isolation, but with the other provisions of the Act. Accordingly it is only the tax already paid on that part of the foreign income under the Indian Income-tax which is required to be deducted for the purpose of giving relief from double taxation." The above decision was followed in the subsequent decision of the Rajasthan High Court in CIT v. Dr. J.C. Sharma [1990] 186 ITR 1733. 13. True, the above decisions are concerned with the D.I.T. relief under section 90. The ld. counsel for the assessee is correct that the expression used in section 91 is "such doubly taxed income" and not 'income subjected to tax' in both countries as appearing in the Agreement with Singapore with which we are now concerned. We may mention here that in the case of C.S. Murthy (supra) decided by the A.P. High Court the expression 'subjected to tax' has been used on page 691, as we have understood- "... The main requirement, therefore, is that the income must have been taxed outside India and the same income must have again been subjected to tax under the Income-tax Act in India. If any portion of the foreign income is no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted for the simple reason that this judicial precedent deals with an altogether different question and that question is whether, in terms of the provisions of Section 91, the taxes paid abroad, in respect of which credit can be availed in an assessment year, can be paid either in the relevant previous year or even subsequently. Their Lordships have held that as long as the assessee has paid the tax, whether in the relevant previous year, or even later, the tax credit in respect of the same is available. That was a case in which the assessee had paid tax of Rs. 82 lakhs in Kuwait, the said income was included in its Indian taxable income, but the foreign tax credit was declined on the ground that the said payment of Rs. 82 lakhs was paid after the end of the relevant previous year. The stand so taken by the Assessing Officer was reversed by a coordinate bench of this Tribunal, and the order so passed by the coordinate bench was upheld by Hon'ble jurisdictional High Court. The issue adjudicated upon in this judicial precedent relates only to the 'timing' of the foreign tax payments, and whether the foreign tax credit can be declined only on the ground of delay in payment of taxes or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in the above illustration, the tax credit would have been Rs. 50,000 which is much more than UK tax liability, but nevertheless less than the Indian tax liability. Even in this situation, since tax credit is allowed as a deduction from the Indian tax liability, the deduction cannot exceed the liability itself. This aspect of the matter will be more glaring from the academic literature on the subject. Let us, therefore, take a look at the guidance available on what constitutes tax credit, and how does this mechanism works. 22. Tax credit mechanism is one of the two broad mechanisms to provide for the elimination of juridical double taxation. When the same taxation object, i.e., an income, is taxed in the hands of the same taxation subject, i.e. the taxpayer, in two tax jurisdictions, it is defined as juridical double taxation, and such a juridical double taxation can be of a cross-border income can be relieved either under exemption method or under credit method Fundamentally, the difference between the methods is that the exemption methods look at income, while the credit methods look at tax. This relief is relevant only in the residence jurisdiction, where the global income ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tic income. In other words, the credit for foreign taxes paid is usually limited to the amount of domestic tax payable on foreign source income. Various limitation rules, sometimes quite complex in application, are used to prevent what is perceived as inappropriate use of foreign tax credits. As a result of such limitations on the credit, foreign income is typically taxed at the foreign effective rate whenever the foreign effective rate wherever the foreign rate is higher than domestic rate. In summary, under the credit method, foreign-source income earned by the residents is taxed at the higher of the domestic and foreign taxes. [Emphasis, by underlining, supplied by us] 23. Clearly, therefore, by application of the credit method, and by resultant grant of foreign tax credits, can ever exceed the actual Indian tax liability in respect of foreign-sourced income. Explaining this aspect of the credit method, or grant of foreign tax credits. in very emphatic terms, Prof Klaus Vogel, in his oft referred treatise "Klaus Vogel on Double Taxation Conventions" [ISBN 978-81-899960-62-9; Second Indian reprint 2010, published by Wolters Kluwers (India) Pvt Ltd, @ page 1227], state....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the credit when the lack of tax due in the residence state is the consequence of a timing mismatch. [Emphasis, by underlining, is supplied by us] 25. Explaining the mechanism of foreign tax credit, and recognizing the distinction between ordinary (or proportionate) foreign tax credit system vis-à-vis its rather rarely used variant full foreign tax credit system, Peter Harris and David Oliver, in their book 'International Commercial Tax' (published by Cambridge University Press; 2010 Edition; ISBN 978-0-521-85311-8 Hardback), state as follows: *[These observations frequently refer to the Beth Example which refers to a simple cross border tax situation, set out at page 5 of this book, in which Allan, resident of Country A, rents an office in country A, and pays Beth, a resident of Country B owning the said office in Country A, the rent for the said office] Credit The credit method is often viewed as a complex method of foreign tax relief, particularly in the form of the underlying or indirect foreign tax credit, discussed below at 4.1.2.1. Returning to the example with Beth*, under this method Country B would initially calculate Beth's resid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ax credit permits Country A tax to not only exhaust Beth's Country B tax liability with respect to Country A income but also reduce Beth's Country B tax liability with respect to Country B source income. It provides an inducement for foreign countries to subject residents of foreign tax credit countries to high tax rates. Such a subsidy for deriving income from high tax countries is viewed as unacceptable by virtually all foreign tax credit countries and so there are no major examples of countries that provide a full foreign tax credit. Rather, foreign tax credit countries limit the amount of foreign tax that may be credited to the amount of tax levied by the residence country with respect to foreign source income. This is referred to as an ordinary foreign tax credit system. If Country B adopts an ordinary foreign tax credit, Beth will not be permitted to use her extra 10 Country A tax to offset Country B tax with respect to Country B income. In this case, Beth must calculate her Country B tax liability with respect to her Country A source income separately from her Country B tax liability with respect to her Country B source income. Assuming Beth is taxed at 20 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the taxpayer must pay the deficit as additional tax at home. However, if the foreign tax exceeds the home tax on the same income, the excess tax credit may be carried forward (or back) or forfeited. The foreign tax credit may be either full credit or ordinary credit. The full credit leaves the taxpayer with the same post-tax income at home, irrespective of the source of the income. The taxpayer receives full credit for the foreign tax paid, and is liable to pay only the difference between the home and foreign tax due on the same income. If the foreign tax exceeds the home tax. the residence State refunds the excess tax payment. The full credit method is rarely used. Most countries using the credit method grant ordinary credit relief for foreign taxes. Under the ordinary credit relief method, the foreign tax credit cannot exceed the domestic tax payable on the income in the country of residence. It limits the tax credit to the tax on the same income, as computed under its domestic tax law, as if it were earned at home in the same accounting period. Therefore, the taxpayer pays the deficit as tax if the home equivalent tax exceeds the foreign tax paid on the same ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....double jeopardy inasmuch as, on the one hand, the assessee has been subjected to tax abroad in respect of the foreign-sourced income, and, on the other hand, the said income will also end up reducing its losses carried forward, and thus enhance the domestic tax liability. In legal parlance, double jeopardy has very narrow connotation in the criminal law, but, lest such technicalities may detain the flow of our discussion, let us take this expression in a liberal sense of double disadvantage. There are two important points in this regard. The first point is that the double jeopardy, if one can call these two aspects of impact on the tax liability of the taxpayer as a double jeopardy, will arise in the year in which the losses incurred in India in this year will be eligible for set off against the eligible profits- if at all so happens. For example, if in the current year, total losses incurred by the assessee (excluding the profits of Rs. 50 crores so taxed abroad, and reduced from the losses carried forward) are Rs. 100 crores, and the assessee has a total taxable income (before setting off the losses carried forward) of Rs. 150 crores in the next year, the assessee will have only ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....redits, the taxpayer can nevertheless, on the grounds of equity and double disadvantage, claim those tax credits in the year in which the taxpayer is actually subjected to a higher tax burden on account of reduced eligible set off of losses carried forward, thus perhaps remains an open issue for adjudication. In all fairness, we must add that, as we have seen in our survey of academic literature on the subject a short while ago, according to one school of thought, in the absence of domestic law provisions for carry forward or back for offset for foreign tax credits, the excess tax credits are lost. To what extent this school of thought is correct or not is a call to be taken as and when the occasion comes for that adjudication. Our observations above are in the context of holding that no double disadvantage to the assessee, by denial of the tax credit, at least in the present assessment year, and, these observations should be seen in this context alone. As to what is the impact of this deduction being claimed on the possible claim of the assessee with respect to the carry forward of the tax credit, even if that be admissible, it may indeed appear that once the assessee is allowed a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings. In H.H. Maharajadhiraja Madhav Rao Jiwaji Rao Scindia Bahadur v. Union of India [1971] 3 SCR 9 this Court cautioned. 'It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment'." It would, therefore, be grossly incorrect to pick out some observations from this judicial precedent and treat the same as complete law declared by the Hon'ble High Court. We may also, at this stage, take note of Hon'ble jurisdictional High Court in the case of CIT v. Sudhir Jayantilal Mulji [(1995) 214 ITR 154 (Bom)] wherein it is observed that, a judicial precedent is only "an authority for what it actually decides and not what may come to follow from some observations which find place therein". In any case, we must always bear in mind the fundamental fact that at best the Wipro decision (supra) can be seen as an authority for full tax cr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oordinate benches have not examined this aspect of the matter, we cannot examine this aspect either. 32. In view of the above discussions, in our humble understanding, under no circumstances, therefore, this decision can be seen as a judicial precedent in support of the proposition that the taxes paid outside India can be refunded in India in a situation in which the income has suffered tax abroad but has not been subjected to tax in India, which precisely is the issue before us. The inference that the situation envisaged in the Wipro decision can also result in a refund situation of the taxes paid abroad is neither dealt with by the said decision nor implicit from the conclusions arrived therein- and, in any case, contrary to the first principles. It is our considered view that the question as to whether a refund can be granted by the Indian tax administration as a result of foreign tax credits being in excess of the domestic tax liability, as is claimed to be settled in favour of the assessee by this decision, has not been the subject matter of consideration and has been thus left intact by this judicial precedent. 33. In any case, in the present case, there is a specific t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of Hon'ble non-jurisdictional High Court are followed by the lower authorities on account of the persuasive effect of these decisions and on account of the concept of judicial propriety- factors which are inherently subjective in nature. Quite clearly, therefore, the applicability of the non-jurisdictional High Court is never absolute, without exceptions and as a matter of course. That is the principle implicit in Hon'ble Supreme Court's judgment in the case of ACIT Vs Saurashtra Kutch Stock Exchange Ltd [(2008) 305 ITR 227 (SC)] wherein Their Lordships have upheld the plea that "non-consideration of a decision of Jurisdictional Court or of the Supreme Court can be said to be a mistake apparent from the record". The decisions of Hon'ble non-jurisdictional High Courts are thus placed at a level certainly below the Hon'ble High Court, and it's a conscious call that is required to be taken with respect to the question whether, on the facts of a particular situation, the non-jurisdictional High Court is required to be followed. The decisions of non-jurisdictional High Courts do not, therefore, constitute a binding judicial precedent in all situations. To a forum like us, following a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....one of the foundational propositions in support of following the non-jurisdictional High Courts ceases to hold good in law. 35. It is interesting to note that in the case of Wipro Ltd (supra), in paragraphs 58 to 63, Their Lordships have proceeded to interpret the provisions of India USA Double Taxation Avoidance Agreement [(1991) 187 ITR (Stat) 102; Indo US tax treaty, in short] and India Canada Double Taxation Avoidance Agreement [(1998) 229 ITR (Stat) 44; Indo Canadian tax treaty, in short] and it is on the observations so made in the course of this interpretation that the learned counsel seeks to rely upon. While so interpreting the provisions of the tax treaties, Their Lordships have simply proceeded without taking into account peculiarities of interpretation of tax treaties which have been highlighted, inter alia, by Hon'ble Supreme Court in the case of Union of India Vs Azadi Bachao Andolan [(2004) 263 ITR 702 (SC) at page 751] as follows: A: "Interpretation of treaties The principles adopted in interpretation of treaties are not the same as those in interpretation of statutory legislation. While commenting on the interpretation of a treaty imported into....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on. This view of the Revenue was upheld in appeal by the Tax Court of Canada. Upon further appeal to the Federal Court it was held that capital gains were exempt from tax under the Canada-U.S.A. Tax Treaty as Canada had no capital gains tax when it entered the treaty and it could not unilaterally amend its legislation. The argument which prevailed with the trial court in this case was similar to the one which prevailed with the High Court in the matter before us. Interpreting the relevant Article of the Double Taxation Avoidance Treaty the trial court held : "The parties could not have negotiated to avoid double taxation on a tax which did not exist in Canada". The Federal Court emphasised that in interpreting and applying treaties the Courts should be prepared to extend "a liberal and extended construction" to avoid an anomaly which a contrary construction would lead to. The Court recognized that "we cannot expect to find the same nicety or strict definition as in modern documents, such as deeds, or Acts of Parliament; it has never been the habit of those engaged in diplomacy to use legal accuracy but rather to adopt more liberal terms". [Emphasis, by underlining....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned", Their Lordships have simply gone by the plain words of the treaty. While dealing with the principles of interpretations of tax treaties, it may be added that, time and again, various judicial forums, right from Hon'ble Supreme Court to the coordinate benches of this Tribunal, have recognized peculiarities of these principles. Hon'ble Supreme Court has, in the cases of Azadi Bachao Andolan (supra) and Ram Jethmalani (supra), have referred to the principles set out in Vienna Conventions on Law of Treaties (VCLT) which, inter alia, refer to the interpretation of the tax treaties "in good faith in accordance with the ordinary meaning given to the terms of the treaty in their context and in the light of its object and purpose". Hon'ble Courts above, in a large number of reported judgments, including in Hon'ble Supreme Courts' landmark judgments in the cases of Azadi Bachao Andolan (supra) and Formula One World Championship Ltd [(2017) 80 taxmann.com 47 (SC)], referred to OECD Commentary in support of their reasoning. None of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ial precedents from even outside India and the related first principles, inter alia, observed that "A tax treaty is to required to be interpreted as a whole, which essentially implies that the provisions of the treaty are required to be construed in harmony with each other", that "the words employed in the tax treaties ...... need not be examined in precise grammatical sense or in literal sense" and "even departure from plain meaning of the language is permissible whenever context so requires, to avoid the absurdities and to interpret the treaty ut res magis valeat quam pereat. i.e., in such a manner as to make it workable rather than redundant". It was also observed that "A literal or legalistic meaning must be avoided when the basic object of the treaty might be defeated or frustrated when the basic object of the treaty might be defeated or frustrated insofar as particular items under consideration are concerned. Words are to be understood with reference to the subject-matter, i.e., verba accipienda sunt secundum subjectam materiam." Double Taxation Avoidance Agreements are international agreements entered into between States. The conclusion and interpretation of such conventions....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ure as also in the Model Convention Commentary, right from the views of Brian Arnold, Klaus Vogel, Michael Lang, Peter Harris and Roy Rohtagi, to the OECD Model Convention Commentary, there is a complete unanimity that foreign tax credits cannot exceed the domestic tax liability. Therefore, at the minimum, normal, even if not universal, meaning of the foreign tax credit., must be held to be in consonance of such an approach. The ordinary meanings given to the expression 'foreign tax credit' does not thus visualize the possibility of refund of taxes paid in the source jurisdiction by the residence jurisdiction. In view of this position, interpretation that results in the refund of taxes paid abroad by the Indian exchequer is something which cannot be said to be "in good faith in accordance with the ordinary meaning given to the terms of the treaty in their context and in the light of its object and purpose" and thus clearly contrary to article 31 of Vienna Convention of Law of Treaties. On the first principles and in the light of the words of guidance of Hon'ble Supreme Court as well, therefore, the claim of the assessee us is not tenable in law, and must be rejected as such. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ision of a coordinate bench of this Tribunal, in the case of JCIT Vs Digital Equipment India Pvt Ltd [(2004) 94 ITD 340 (Mum)], wherein speaking through one of us (i.e., the Vice President), the bench had 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 income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow a deduction from the income of that resident an amount equal to income tax paid in the Unites States, whether directly or by way of deduction. Such deduction shall however not exceed that part of income tax (as computed before the deduction is given) which is attributable to the income which is taxed in the United States." [Emphasis supplied] A plain reading of the above provision makes it clear that the deduction on account of income tax paid in the US, from income tax payable in India, cannot exceed Indian income tax liability in respect of such an income. This restriction on the deduction is unambiguous and beyond any controversy, as evident particularly from the last sen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r 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 taxes paid by the assessee in the Untied States. In view of this limitation on the foreign tax credit, the innovative theory of crediting the entire tax paid in the US to the assessee and grant of refund to him in case there is no tax liability in India in respect of that income, as enunciated and adopted by the Commissioner (Appeals), is wholly unsustainable in law. Where is the question of refund of taxes paid abroad when FTD (i.e., foreign tax credit), in view of specific provisions to that effect in the DTAAs, cannot even exceed the Indian income tax liability? It is not the tax payment abroad which is the material figure for the purpose of computing Indian income tax liability, but it is the admissible foreign tax credit in respect of the same which affects such an Indian income tax liabi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable, as the case may be, to the income which may be taxed in Japan. Further, where such resident is a company by which surtax is payable in India, the deduction in respect of income-tax paid in Japan shall be allowed in the first instance from income-tax payable by the company in India and as to the balance, if any, from surtax payable by it in India. (b) Where a resident of India derives income which, in accordance with the provisions of this Convention, shall be taxable only in Japan, India may include this income in the tax base but shall allow as a deduction from the income-tax that part of the income-tax which is attributable, as the case may be, to the income derived from Japan. 49. In addition to the discussions earlier in the context of foreign tax credit claim for taxes paid by the assessee in the UK, it is clear that in this case also the foreign tax credit is restricted to the Indian tax attributable to the income which has been taxed in Japan. Learned counsel fairly agrees that so far as the year before us is concerned, no part of the said income has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Once again, in addition to the discussions earlier in the context of foreign tax credit claim for taxes paid by the assessee in the UK, it is clear that in this case also the foreign tax credit is restricted to the Indian tax attributable to the income which has been taxed in Belgium. Learned counsel fairly agrees that so far as the year before us is concerned, no part of the said income has been taxed in India inasmuch the total income of the assessee was a negative figure. There is no question of any admissible foreign tax credit in this year. In any event, any such foreign tax credit, on the facts of this case, will result in a refund of taxes paid to Belgium exchequer by the Indian exchequer- something clearly impermissible, in the light of the foregoing discussions. We, therefore, reject this claim as well. 54. The foreign tax credit claim of Rs. 29.27 crores, paid in Belgium, is thus rejected. 55. The next foreign tax credit claim is for the tax of Rs. 27.25 crores paid in respect of profits earned by the Kenyan branch of the assessee bank. 56. So far as this claim of the assessee is concerned, we find that the related tax treaty provision under the India Kenya Doub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....idance Agreement [ (1995) 214 ITR (Stat) 160; Indo China tax treaty, in short], as it stood at the relevant point of time, was as follows: ARTICLE 23- METHOD OF ELIMINATION OF DOUBLE TAXATION 2. In India, double taxation shall be eliminated as follows: Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in China, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in China whether directly or by deduction. Such deduction shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable, as the case may be, to the income which may be taxed in China. 61. Once again, in addition to the discussions earlier in the context of foreign tax credit claim for taxes paid by the assessee in UK, it is clear that in this case also the foreign tax credit is restricted to the Indian tax attributable to the income which has been taxed in China. Learned counsel fairly agrees that so far as the year before us is concerned, no part of the said income has been taxed in India inasmuch the total in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tax credit claim for taxes paid by the assessee in the UK, it is clear that in this case also the foreign tax credit is restricted to the Indian tax attributable to the income which has been taxed in France. Learned counsel fairly agrees that so far as the year before us is concerned, no part of the said income has been taxed in India inasmuch the total income of the assessee was a negative figure. There is no question of any admissible foreign tax credit in this year. In any event, any such foreign tax credit, on the facts of this case, will result in a refund of taxes paid to the French exchequer by the Indian exchequer- something clearly impermissible, in the light of the foregoing discussions. We, therefore, reject this claim as well. 66. The foreign tax credit claim of Rs. 4.07 crores, paid in France, is thus rejected. 67. To sum up, all the foreign tax credit claims, in respect of the taxes paid abroad in treaty partner jurisdictions, are thus rejected inasmuch refund of these taxes by the Indian tax administration is declined. 68. Let us now turn to the assessee's claim for the foreign tax credit in respect of the taxes paid abroad in non-tax treaty partner jurisdic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ating upon the scheme of foreign tax credits under section 91, Hon'ble Andhra Pradesh High Court, in the case of M A Morris (supra), has observed as follows: To appreciate the contention of learned counsel for the assessee it is relevant to have a look at sub-section (1) of section 91 of the Act, which reads as follows : "91. (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." From a perusal of the above section, it is clear that for avoidance of double taxation relief is provided to any person, who is a resident in In....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bears tax under the Act." It is this observation which is relied on by Sri Ravi S. in support of his contention that the relief should be granted on the amount of income which has gone into computation of the total income. We are unable to accede to his contention. The observations of the Supreme Court have to be understood in the context in which they are used. Their true import will be lost or distorted if they are taken in isolation and out of context. That observation is elucidated in the passage that follows it which reads thus (at page 191) : "The word 'such' in the phrase 'such doubly taxed income' has reference to the foreign income which is again being subjected to tax by its inclusion in the computation of the income under the Act and not the same income under an identical head of income under the Act." Thus, it is clear that the relief under section 91 of the Act is limited only to the amount of tax paid on such doubly taxed income at the Indian rate of tax or the rate of tax of the foreign country, whichever is the lower, or at the Indian rate of tax, if both the rates are equal. A Division Bench of this court in CIT v....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... amendment and 'such doubly taxed income' after the amendment. The Supreme Court held that prior to the amendment the benefit given was of deduction of only one-half of the amount of tax, whereas after the amendment the benefit given was of deduction of the entire amount of tax paid on the foreign income which was taxed also in India. The object of the amendment in section 49D was to encourage Indian residents to start business in foreign country and to give full relief at the Indian rate of tax or the rate of tax of the foreign country, whichever was lower. Under the 1922 Act no such deduction was given as is provided in section 80RRA of the 1961 Act in computing the 'total income', and, therefore, the total foreign income was taxed in India also. This Supreme Court decision does not support the assessee's contention in the present case. 9. The consequence of the construction we have made of section 91(1) is that the entire foreign income which is actually taxed in India being included in computing the 'total income' is only 50 per cent of the total foreign income by virtue of the deduction given under section 80RRA. This entire amount which al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....spect of the same. We, therefore, reject the foreign tax credit claim of Rs. 15,79,80,943 in respect of taxes paid in non-tax treaty partner jurisdictions as well. 73. As regards dividend taxes of Rs. 87,54,656 paid abroad, the assessee has not addressed any specific arguments in respect of the same, and it, therefore, appears that the assessee has not proceeded on the basis that if the assessee is to be allowed any foreign tax credits in respect of the taxes paid abroad in respect of the profits of its PEs, the same fate must follow for the taxes paid abroad on the dividend. For the detailed reasons set out above, we have rejected these claims. In this view of the matter, and in the absence of any other specific arguments, this claim of the assessee is also dismissed as devoid of legal merits. Our conclusions on the first issue 74. In view of the above discussions, as also bearing in mind, we answer the first question that we had identified for our adjudication, i.e., whether or not the assessee is eligible for foreign tax credits of Rs. 165,96,87,349 for taxes paid in treaty partner jurisdictions, of Rs. 15,79,80,943 in non-treaty partner jurisdictions, and of Rs. 87,54,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Tata Sons Ltd. (supra) as produced before us for Assessment Year 1985-86 had not noticed the decision of this Court in S. Inder Singh Gill (supra) on a Reference. Therefore, it is rendered per incuriam. (j) This Court in S. Inder Singh Gill (supra) was required to answer the question whether for the purpose of computing total world income of the assessee as defined in Section 2(15) of the I. T. Act, the income accruing in Uganda has to be reduced by the tax paid to the Uganda Government in respect of such income? The Court while answering the question in the negative observed that it is not aware of any commercial principle/practice which lays down that the tax paid by one on one's income is allowed as a deduction in determining the income for the purposes of taxation. (k) It is axiomatic that income tax is a charge on the profits/ income. The payment of income tax is not a payment made/incurred to earn profits and gains of business. Therefore, it cannot be allowed an as expenditure to determine the profits of the business. Taxes such as Excise Duty, Customs Duty, Octroi etc., are incurred for the purpose of doing business and earning profits and/or gains fro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion 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. (n) However, to the extent tax is paid abroad, the Explanation to Section 40(a)(ii) of the Act provides/clarifies that whenever an Assessee is otherwise entitled to the benefit of double income tax relief under Sections 90 or 91 of the Act, then the tax paid abroad would be governed by Section 40(a)(ii) of the Act. The occasion to insert the Explanation to Section 40(a)(ii) of the Act arose as Assessee was claiming to be entitled to obtain necessary credit to the extent of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the extent the payment of tax in Saudi Arabia on income which has arisen/accrued in India has to be considered in the nature of expenditure incurred or arisen to earn income and not hit by the provisions of Section 40(a)(ii) of the Act. (q) The Explanation to Section 40(a)(ii) of the Act was inserted into the Act by Finance Act, 2006. However, the use of the words "for removal of dobuts" it is hereby declared "...." in the Explanation inserted in Section 40(a)(ii) of the Act, makes it clear that it is declaratory in nature and would have retrospective effect. This is not even disputed by the Revenue before us as the issue of the nature of such declaratory statutes stands considered by the decision of the Supreme Court in CIT v. Vatika Township (P) Ltd. [2014] 367 ITR 466/227 Taxman 121/49 taxmann.com 249 and CIT v. Gold Coin Health Foods (P.) Ltd. [2008] 304 ITR 308/172 Taxman 386 (SC). (r) In the above facts and circumstances, question (iii)(a) is answered in the negative i.e. against the Revenue and in favour of the applicant assessee. Question (iii)(b) is answered in the negative i.e. against the Revenue and in favour of the applicant assessee. 77. Learned D....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 supplied] (ii) Hon'ble Supreme Court in Smithkline & French India Ltd. case (supra) specifically approving the Lubrizol judgment . . . . . . Firstly, it may be mentioned, s. 10(4) of the 1922 Act or s. 4....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... definition of tax under section 2(43), so far as the question of credit for taxes abroad is concerned, even though Hon'ble Supreme Court notes, in the case of Smithkline & French India Ltd. (supra), that s. 40(a)(ii) of the present Act do not contain any words indicating that the profits and gains spoken of by them should be determined in accordance with the provisions of the IT Act. All they say is that it must be a rate or tax levied on the profits and gains of business or profession". We, therefore, do not think we have the liberty of taking the view that learned counsel is urging us to take. 45. In any case, Hon'ble Bombay High Court's judgment in the case of Reliance Infrastructure (supra) proceeds on peculiar facts and a sort of concession by the revenue inasmuch as it was not the case of the revenue that context in which the expression 'tax' is used in section 40(a)(ii) requires a meaning different from the meaning assigned by Section 2(43). This is evident from the observations made by Their Lordships to the effect that "We are conscious of the fact that Section 2 of the Act, while defining the various terms used in the Act, qualifies it by pre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....x Court in the case of Ambika Prasad Mishra v. State of U.P. AIR 1980 SC 1762; [1980] 3 SCC 719 (Page 1764 of AIR 1980 SC):" Every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent.... A decision does not loose its authority merely because it was badly argued, inadequately considered or fallaciously reasoned....". Similarly in the case of Kesho Ram & Co. v. Union of India [1989] 3 SCC 151, it was stated by the Supreme Court thus (page 160): "The binding effect of a decision of this Court does not depend upon whether a particular argument was considered or not, provided the point with reference to which the argument is advanced subsequently was actually decided in the earlier decision." We are, therefore, not swayed by the arguments of the learned Departmental Representative. As a matter of fact, even in the Elitecore decision (supra), it is specifically stated that the fact that the Reliance Infrastructure decision, being a non-jurisdictional Hon'ble High Court decision, is on a different footing and that "Maybe, if the views expressed were by our jurisdictional High Court, or by any of Hon'ble High Courts after taking into acc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....our decision, these foreign tax credits would have been allowed, even if there is no domestic tax liability in respect of the related income in India if it was not to result in such a refund situation. At the cost of repetition, we may add that, for the detailed reasons set out earlier, we have our reservations on the applicability of the Wipro decision (supra) on this bench, being situated outside of the jurisdiction of Hon'ble Karnataka High Court, and we are of the considered view that full tax credit for source taxation cannot, as such and to that extent, be extended in the residence jurisdiction when a tax treaty sanctions only proportionate credit, and does not, in any case, specifically provide for the full foreign tax credit. A full tax credit, which goes beyond eliminating double taxation of an income, actually ends up subsidizing the foreign exchequer, to the extent that the taxes paid to the foreign exchequer are allowed to discharge exclusive domestic tax liability, rather than eliminating double taxation of an income, and that is the reason that even in the solitary full credit situation visualized in the Indian tax treaties, in the Indo Namibia tax treaty (supra), it'....