AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (7) TMI 998
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....ly to the remaining AYs as well. Notably, this position was also adopted before the Tribunal. 3. Accordingly, as was the case before the Tribunal, we will be adverting to the facts, as obtained in AY 2010-11. 4. Before we proceed further, we may indicate that the broad issue which arose for consideration before the statutory authorities [including the Tribunal] and us, concerns the following: 4.1 The respondent/assessee claims that it is eligible for tax credit qua tax which, though payable in the country from where the income emanated, was not paid because of the statutory regime operating in that country. 4.2 The respondent/assessee, in seeking tax credit qua tax payable [though not paid], has sought to place reliance on Article 23 of the Double Taxation Avoidance Agreement [in short, "DTAA"] obtaining between India and Thailand. 4.3 It is the respondent/assessee's stand that it ought to be given tax credit qua the tax which it was spared from paying, on income by way of dividend, received from its subsidiary in Thailand, in consonance with the provisions of Article 23 of the Indo-Thai DTAA. Thus, the issue at hand centres around the concept of "tax sparing", w....
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.... It was able to persuade the Tribunal that, having regard to the tax sparing concept which is embedded in several DTAAs, including the subject IndoThai DTAA, it was entitled to tax credit at the rate of 10%, on the dividend income received from the Thai subsidiary. 12. It is in this backdrop that the aforementioned appeals came to be lodged before this court. Submissions of Counsel 13. In support the appellant/revenue's case, submissions were advanced by Mr Kunal Sharma, learned senior standing counsel, while on behalf of the respondent/assessee, submissions were made by Mr Ved Jain, Advocate. 14. Mr Sharma's arguments can, broadly, be paraphrased as follows: (i) The AO had rightly declined tax credit. The respondent/assessee's stand that in view of Article 23 of the Indo-Thai DTAA, it could get tax benefit concerning tax which it had not, infact, paid, was flawed. (ii) The CIT(A) correctly noted that paragraph 6 of the promotion certificate issued to the Thai subsidiary, based on which a claim was made that dividend distributed did not suffer tax in Thailand, did not, as a matter of fact, refer to dividend. (iii) The Tribunal took....
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....source country. Article 23 of the Indo-Thai DTAA would show that these benefits are available to the recipient of income, as in this case, in India, as well as those who reside in Thailand. [See Article 23(2) and Article 23(3) alongside Article 23(4) and Article 23(5) of the Indo-Thai DTAA]. (iii) The Thai subsidiary of the respondent/assessee was granted exemption from corporate income tax vis-a-vis its net profit under Section 31 of Investment Promotion Act B.E. 2520 (1997) [in short, "Investment Promotion Act"]. Besides this, the dividend distributed by the respondent/assessee's Thai subsidiary is also exempted from tax under the provision of 34 of the Investment Promotion Act. (iv) Section 70 of the Revenue Code B.E. 2481 (1938) of Thailand [in short, "Thai Revenue Code"] levies tax at the rate of 10% on companies incorporated under foreign law, qua assessable income which emanates from, or is received in Thailand. (v) Tax could only be levied, as per the Indo-Thai DTAA, on the dividend distributed by the Thai company, in Thailand. [See Article 10^1 of the Indo-Thai DTAA.] (vi) Since the dividend income received by the respondent/assessee has....
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....the existing laws for promoting economic development in Thailand. 4. The amount of Indian tax payable under the laws of India and in accordance with the provisions of this Convention, whether directly or by deduction, by a resident of Thailand, in respect of profits or income arising in India, which has been subjected to tax both in India and Thailand, shall be allowed as a credit against Thai tax payable in respect of such profits or income provided that such credit shall not exceed the Thai tax (as computed before allowing any such credit) which is appropriate to the profits or income arising in India. 5. For the purposes of the credit referred to in paragraph 4, the term "Indian tax payable" shall be deemed to include any amount which would have been payable as Indian tax for any assessment year but for an exemption or reduction of tax granted for that year or any part thereof by the special incentive measures under the provisions of the Income-tax Act, 1961 (43 of 1961), which are designed to promote economic development, or which may be introduced hereafter in modification of, or in addition to the existing provisions for promoting economic development in Ind....
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....ns of the Investment Promotion Act, or of the Thai Revenue Code, which are designed to promote economic development in Thailand, or which may be introduced hereafter, for modification or in addition to the existing law, for promoting economic development in Thailand. 17.4 Paragraph 3 of Article 23, thus, by employing a device of deeming fiction, includes in the expression "Thai Tax Payable" as adverted to paragraph 2 of the very same Article, that tax which would have been otherwise payable, but for an exemption or reduction of tax granted for that year or any part thereof, under the two statutory enactments referred to therein. Para 3 also alludes to the fact that the said statutes are designed to promote economic development in Thailand. Clearly, the provision is configured to incentivize investments in Thailand, by granting tax credit for that amount which, otherwise, would have been payable as tax to the Thai state, but was not paid due to exemption or reduction granted under the said enactments. 17.5 Paragraph 4 and Para 5 of Article of 23 are a mirror image of Paragraphs 2 and 3 of the very same Article. Para 4 enables a resident of Thailand to claim tax credit with res....
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....he credit method is applicable to items of income from foreign sources, tax benefits offered by the source State for reasons of economic or social policies, especially in the form of incentives to encourage economic development, are siphoned off by the State of residence State. Rather than benefitting the tax payer, the incentive benefits the residence State's revenue authorities (always provided that, as usual, the amount of tax collected by the source State is lower, at least on account of the reduction, than the residence State's tax). The tax incentive is thus cancelled out. That effect can be avoided by the residence State calculating the credit as if the tax in the source State remained at the unreduced level ('credit for notional tax', 'tax sparing' or 'tax matching credit') (no. 72 OECD MC Comm. on Article 23). A credit for notional taxes is typically granted in tax treaties concluded between developed and developing countries. Many developing countries insist on the inclusion of a tax sparing provision during tax treaty negotiations in order be able to attract foreign direct investment and promote economic growth by granting tax incentives. Some countries are will....
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....roof is required in the instant case, as the foreign law in question is referred to, specifically, in the DTAA which is being executed by Contracting States, i.e., India and Thailand. Thus, the argument advanced on behalf of the appellant/revenue that Tribunal ought to have sent back the question of the exigibility of dividend income to tax and its exemption, being subject matter of foreign law, to the AO, does not impress us. 25. The other argument advanced on behalf of the appellant/revenue, that paragraph 5^3 of the Promotion Certificate issued by the Board of Investment does not advert to dividend income, does not impress us either. A bare perusal of the document shows that the said certificate has been issued under the provisions of Investment Promotion Act, which as noticed hereinabove, is referred to Article 23 (3) of the Indo-Thai DTAA. Paragraph 5 of the Promotion Certificate, in no uncertain terms, inter alia, states that the under Section 31^4, paragraph 1 of the Investment Promotion Act, the promoted person shall be granted exemption from corporate income tax levied on net profits earned from promoted activity. Notably, Paragraph 6^5 states that under Section 34, div....
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....t of the other Contracting State may be taxed in that other State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that State, but if the beneficial owner of the dividends is a company which is a resident of the other Contracting State, the tax shall not exceed- (a) 15 per cent of the gross amount of dividends, in a case where the company paying the dividends is engaged in an industrial undertaking and the beneficial owner of the dividends is a company of the other Contracting State owning at least 10 per cent of the voting shares of the company paying the dividends ; (b) in the case not covered by sub-paragraph (a) above, 20 per cent of the gross amount of dividends if the company paying the dividends is engaged in an industrial undertaking or if the beneficial owner of the dividends is a company of the other Contracting State owning at least 25 per cent of the voting shares of the company paying the dividends. 3. (a) The term "dividends" as used in this article means income from shares or other rights, not being debt-claims, participating in pr....