Income Tax Appellate Tribunal - Mumbai
Joint Commissioner Of Income Tax vs Digital Equipments India Ltd. on 10 March, 2004
Equivalent citations: [2005]94ITD340(MUM), [2005]277ITR15(MUM), (2005)93TTJ(MUM)478
ORDER
Pramod Kumar, A.M.
1. In this appeal, against the CIT(A)'s impugned order dt. 9th Feb., 1999, and in the matter of the AO's order under Section 154 r/w Section 143(1)(a) for the asst. yr. 1993-94, the Revenue is aggrieved that "on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the AO to grant the refund to the assessee by giving credit for the taxes paid in the USA".
2. The issue requiring our adjudication is a purely legal issue and is set out in a very narrow compass of material facts. The assessee is a public limited company incorporated in India, and is engaged in the manufacture, sale and service of various kind of computers, as also development, sale and export of software. On 31st Dec, 1999, the assessee-company filed its income-tax return disclosing a loss of Rs. 12,32,71,394. It appears that a part of this income was also subjected to tax in the United States where the same income was earned. While processing the aforesaid income-tax return, the AO did not allow the credit on account of taxes paid in the United States. The relevant material facts are clear from the following observations of the CIT(A) in the impugned order:
".....On the basis of the grounds of appeal, the only issue to be decided is the amount of credit which is required to be given on the basis of US tax paid by the appellant. There is no dispute that the taxes paid in the USA amounted to Rs. 78,21,905. According to Article 25(2A) of the Double Taxation Avoidance Treaty between India and the USA, a deduction of the taxes paid in the USA had to be allowed from taxes payable in respect of the same income in India. The income earned in the USA forms part of the income of the appellant but the appellant had returned a net loss and therefore, according to Article 25(2A) of the Treaty, no credit of taxes payable could be given as no tax was payable in India......."
On these undisputed facts and in the immediately following sentences, the learned CIT(A) interpreted the provisions of the India-USA Double Taxation Avoidance Agreement (Indo US DTAA) in the following manner aggrieved by which Revenue is in appeal before us :
".....This is an absurd situation and was not visualized by the Treaty. Further, the treaty nowhere stipulates that the credit for the taxes paid in the USA has to be given on proportionate basis. In my view, the tax paid on the US has to be credited to the account of the appellant, and if the returned figure is a loss, the amount of taxes paid in the USA would be refundable to the appellant. The AO is, therefore, directed to grant a refund of Rs. 78,21,905....................."
According to the Revenue, the above observations made by the CIT(A) are entirely unsustainable in law and contrary to the scheme of the Indo US DTAA, The Revenue, therefore, is in appeal before us.
3. We have heard Smt. Bhatia, learned CIT (Departmental Representative), though the assessee was unrepresented before us. We have also carefully perused the orders of the authorities below, and have duly considered the applicable legal position.
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 United 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 by underlining, italicised in print, supplied by us] 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 sentence in Article 25(2)(a) which is underlined as above to supply the emphasis on the same. As a matter of fact, we are unable to appreciate 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 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 gross basis, which prescribes taxation of certain incomes on gross basis in the source country, is that irrespective of actual overall profits and losses in earning those incomes, the assessee must pay a certain amount of tax, at a negotiated lower rate though, in the country in which the income in question is earned. It is also noteworthy that the heading of Article 25 is "Elimination of double taxation" but then there has to be double taxation of an income in the first place before the question of elimination of that double taxation can arise. In the case before us the assessee-company has paid taxes, in respect of that earning, only in one country, i.e., the United States, and claimed losses, on taking into account the admissible deductions therefrom, in the other country, i.e., India. This is surely not, by any stretch of logic, a case of double taxation of an income. Article 25 does not, therefore, come into play at all. Turning to the CIT(A)'s observation that "the Treaty nowhere stipulates that the credit for the taxes paid in the USA has to be given on proportionate basis", all we need to say is that the Indo US DTAA, as indeed other DTAAs as well, does stipulate that the foreign tax credit cannot exceed the income-tax leviable in respect of that income in the country of which the assessee is resident. It is because of this limitation that the AO declined the refund in respect of taxes paid by the assessee in the United 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 CIT(A), 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 liability. The FTD in respect of income-tax paid in the US cannot exceed the Indian income-tax liability in respect of the income on which income-tax is paid in US. Unless one entirely ignores this restriction on deduction, as unambiguously placed in the last sentence of Article 25(2)(a) itself, the interpretation approved by the CIT(A) is not even a possible view of the matter. We cannot, therefore, approve the same. We hold that the CIT(A) indeed erred in directing the AO to grant the refund to the assessee by giving credit for the taxes paid in the USA. Accordingly, we vacate the order of the CIT(A) on this issue and uphold the stand taken by the AO.
5. In the result, the Revenue's appeal is allowed.