Thursday, April 6, 2017

Unutilized Foreign Tax Credit isn’t a tax deductible expenditure: Ahmedabad ITAT


a) Assessee pointed out that in terms of the Explanation 1 to Section 40(a)(ii), bar on deduction under section 40(a)(ii) is confined to only such income tax paid abroad in respect of which tax credit is granted under section 90 or 91. There is no bar on deduction under section 40(a)(ii) in respect of foreign tax for which no tax credit is available.

b) The issue before the Tribunal was as under:

‘Whether deduction under section 37(1) could be allowed in respect of foreign tax credit for which only partial credit was allowed in the current year?’ 

Tribunal held in favour of revenue as under:-

1) As per Explanation 1 to section 40(a)(ii), any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91 and as per Explanation 1 to section 40(a)(ii) any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;

2) The scope of Explanations to Section 40(a)(ii), on which assessee had relied upon so much, it may be noticed that if the main provision does not cover the taxes paid abroad, there cannot be any occasion to include under Explanations to Section 40(a)(ii), taxes in respect of which relief under section 90 and 91 is not admissible. 

3) These Explanations do not extend the scope of the Section 40(a)(ii) but rather explain the scope of the said section. If something is covered by the Explanation, it cannot be said that it is not covered by the main provision. If taxes in respect of which tax credit under section 90 or 91 are covered by the proviso, these are covered by the scope of Section 40(a)(ii) as well. And if these taxes are covered by Section 40(a)(ii), the theory that meaning of 'tax' under section 40(a)(ii) must remain confined to the taxes levied under Income Tax Act, 1961 comes to a naught since the taxes in respect of which credits are available under section 90 or 91 cannot be, under any circumstances, imposed under the Indian Income Tax Act.

4) Therefore, in the event of assessee being allowed only partial tax credit in respect of taxes withheld abroad, he could not be allowed any deduction in respect of the balance of the taxes so withheld abroad under section 37(1). - [2017] 80 6 (Ahmedabad - Trib.)

CA could demand higher remuneration if he produced good quality audit report


a) Petitioner-Chartered Accountant (CA) was engaged by the revenue authorities to conduct a special audit of a company. Audit Report was submitted and a huge addition of Rs. 720 crore was made.

b) CA submitted bill to the revenue for his professional services detailing 1315 man hours spent by his team. A total bill of more than Rs. 1 crore was raised taking average rate of manhour at Rs. 7500 per hour.

c) AO was of the view that time spent on lunch, refreshments, etc. should have been proportionately discounted from the bill. 85 per cent of the billed hours were considered by him as reasonable and accordingly reduced the average rate from Rs. 7500/hour to Rs. 4000/hour.

d) CIT(A) upheld the order of the AO. CA filed writ before the High Court: 

High Court held as under:-

1) Unlike employees, professionals do spend 9 to 10 hours a day on their work, even at odd hours, and attend to their basic necessities in the remaining hours of the day. Exclusion of such necessary recess for consumption of food and refreshment, etc. for a person to render quality work was illogical.

2) It was noteworthy that the quality of the report had been assessed as 'very good' by the AO.

3) Audit work was rendered by the CA’s four partners, Chartered Accountants and other personnel i.e. by qualified assistants and semi-qualified assistants. 

4) Notably, the work experience of the partners ranged from 3 to 27 years while the range permissible billing rate was between Rs. 3,500/- to Rs. 7,500/- and the rate of sitting could be correspondingly adjusted as per their regular sitting hours; instead it had arbitrarily been reduced to an average rate of Rs. 4,000/- per hour.

5) What the revenue was to assess was whether the special audit report was (i) within time, (ii) of the desired quality (iii) the billing was commensurate with the nature of inquiry and the quantum of the records to be looked into; etc.

6) If the audit report was of good quality and, inter alia, authored by a qualified professional having a fair number of years of experience then he/she might well be entitled to ask for the highest prescribed billing rate. [2017] 79 415 (Delhi) 

No Sec. 195 TDS on crediting income to payee when it is taxable on receipt basis under treaty: ITAT


a) The assessee was liable to make royalty payment, to Saira Europe SPA, Italy. Liability was duly accounted for in the books of account, though payment was made a bit later.

b) Assessing Officer (AO) raised demand on the assessee by treating the due date for depositing tax deductible at source as being 7 days from the end of the month in which amount was credited in the books of account.

c) Assessee contended before AO that as per article 12(3) of India Italy DTAA, royalty payment was taxable only at the point of time when it was actually paid and not at the point of time of credit. AO, on the contrary rejected the contention of assessee.

d) On appeal, CIT(A) upheld order of AO. Aggrieved-assessee filed instant appeal before tribunal:-

Tribunal held in favour of assessee as under:-

1) It is only elementary that the TDS liability under Section 195 is a vicarious liability in the sense that it's survival in the hands of tax-deductor is wholly dependent on existence of tax liability in the hands of recipient of income.

2) When a credit or a payment made by an Indian resident to a non-resident does not trigger the taxability of that income in the hands of recipient, the tax deduction liability does not come into play at all.

3) The provisions of Section 195 are to be read in conjunction with the charging provisions under the statue, as also in conjunction with the relevant double taxation avoidance agreements which override these charging provisions.

4) Section 195(1) states that any person responsible for paying to a non-resident any sum chargeable under the provisions of this Act, shall, at the time of credit of such income to the account of the payee or at the time of payment deduct tax at source.

5) As per Article 13 of India-Italy DTAA, the term "royalties" means payments of any kind “received”. Therefore, royalty payment was not liable to be taxed at the point of time when account of the non-resident was credited, in view of the fact that under the related DTAA, tax liability can only arise at the point of a subsequent event, i.e., payment.

6) Since, income embedded in the payment was not taxable at that point of time of crediting the amount, there could not be any occasion for deduction of withholding of the tax on such income. – [2017] 79 460 (Ahmedabad - Trib.)