Foreign tax credit would be allowed even if income is exempt in India; Credit of states taxes is also allowed

The Karnataka High Court allowed credit of taxes paid outside India (which includes states taxes) in respect of an income which is exempt in India by virtue of Section 10A

Facts

a)  The assessee (‘Wipro Limited’) paid tax in foreign countries in respect of profit attributable to its permanent establishment (PE) situated outside India.

b)  Being an Indian company, assessee was liable to pay tax in India on its worldwide income including the profits attributable to its Permanent Establishments and, accordingly, it claimed relief under Section 90 in respect of taxes paid outside India.

c)  The assessee also made a claim for tax relief against the State Taxes paid in USA and Canada.

d)  AO disallowed assessee’s claim of foreign tax credit on the ground that the income in respect of which claim was made do not form part of total income as per Section 10A.

e)  AO also rejected assessee’s claim for tax relief against the State Taxes paid in USA and Canada. The contention of the AO was that DTAA with USA and Canada allows credit of the taxes paid under the Income Tax Act in India and Federal tax in USA and Canada. Therefore, the claim for relief for the State Taxes paid was not admissible under respective DTAA.

f)  On appeal, CIT(A) set aside the order of AO. However, on further appeal by revenue before the tribunal, the tribunal confirmed the order of AO.

g)  Aggrieved by the order of tribunal, assessee filed the instant appeal before the High Court.

The High Court held in favour of assessee as under-

1)  Section 90(1)(a)(ii) provides relief from double taxation where the income of the assessee is chargeable under the income-tax Act as well as in the corresponding law in force in the foreign country. Hence, as per section 90(1)(a)(ii), what is important is that income should be chargeable to tax in either country and not subjected to tax.

2)  Income under Section 10A is chargeable to tax under Section 4 and is includible in the total income under Section 5, but no tax is charged on such income because of the exemption given under Section 10A. Merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax.

3)  Therefore, assessee would be entitled to take credit of income tax paid in a country outside India in relation to income eligible for deduction under section 10A.

4)  As far as issue related to credit of states taxes is concerned, section 91 provides relief from double taxation where no agreement relating to avoidance of double taxation exist with a foreign country.

5)  Explanation (iv) to Section 91 defines the expression income tax in relation to any country to include any excess profit tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country.

6)  The intention of the Parliament is very clear. The Income tax in relation to any country includes income tax paid not only to the Federal Government of that Country, but also any income tax charged by any part of that country meaning a State or a local authority, and the assessee would be entitled to the relief of double taxation benefit with respect to the latter payment also.

7)  Therefore, even though, India has not entered into any agreement with the State of a Country, the income tax paid in relation to that State is also eligible for tax credit.

8)  Hence, the argument that in the absence of an agreement between India and the State, the benefit of Section 90 is not available to the assessee is ex-facie illegal and requires to be set aside- Wipro Ltd. v. DCIT [2015] 62 taxmann.com 26 (Karnataka)

Non-furnishing of PAN by NR doesn't attract higher TDS rate of 20% u/s 206AA if tax rate under DTAA is beneficial

Where payment has been made to non-residents who did not have PAN and tax has been deducted on the strength of the provisions of DTAAs, the provisions of section 206AA could not be invoked by the AO to insist on the tax deduction at 20% having regard to overriding nature of Section 90(2).

Facts:

a)Assessee made payment of royalty and fee for technical services to non-residents after deducting tax at source in accordance with the rates provided under DTAAs.

b)It was noted by the AO that on account of payment of royalty and fee for technical services in case of some of the non-residents, the recipients did not have PANs. As a consequence, AO treated such payments, as cases of 'short deduction' of tax in terms of the provisions of section 206AA of the Income-tax Act (‘the Act’).

c)The AO contended that assessee was under an obligation to deduct tax at higher rate of 20% following the provisions of section 206AA, hence he raised demand relatable to the difference between 20% and the actual tax rate provided under the DTAAs.

d)Onappeal, the CIT(A) deleted the demandas he was of the view that Section 206AA would not be applicable in case of non-residents as the DTAA overrides the Act. The aggrieved-revenue filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1)Section 206AAof the Act prescribes that where PAN is not furnished by recipient of income on which tax is deductible the payer would be required to deduct tax at the higher of the following rates:

- At the rate prescribed in the relevant provisions of the Act; or

- At the rate/rates in force; or

- At the rate of 20%

2)Further, Section 90(2) of the Act provides that the provisions of the DTAAs would override the provisions of the Act in cases where the provisions of DTAAs are more beneficial to the assessee.

3)Thus, there could not be any doubt to the proposition that in case of non-residents, tax liability in India is liable to be determined in accordance with the provisions of the Act or the DTAA between India and the relevant country, whichever is more beneficial to the assessee, having regard to the provisions of section 90(2) of the Act.For the said reason, assessee deducted the tax at source having regard to the provisions of the respective DTAAs which provided for a beneficial rate of taxation.

4)It would be incorrect to say that though the charging section 4 and section 5 of the Act are subordinate to the principle enshrined in section 90(2) of the Act but the provisions of Chapter XVII-B governing tax deduction at source are not subordinate to section 90(2) of the Act. Notably, section 206AA of the Act is not a charging section but is a part of a procedural provisions dealing with collection and deduction of tax at source.

5)Therefore, where the tax has been deducted on the strength of the beneficial provisions of section DTAAs, the provisions of section 206AA of the Act could not be invoked by the AO to insist on the tax deduction at 20%, having regard to the overriding nature of the provisions of section 90(2) of the Act. -DEPUTY DIRECTOR OF INCOME-TAX V. SERUM INSTITUTE OF INDIA LTD.[2015] 56 taxmann.com 1 (Pune - Trib.)

NBFC couldn't take shelter of prudential norms to treat overdue interest as NPA if it didn't try to recover it

Overdue interest could not be treated as NPA by taking shelter of prudential norms of RBI prohibiting recognition of interest on loans, which remained overdue for more than six months if assessee had not taken any steps to recover it.

Facts

a)The assessee, a company registered as NBFC, advanced term loans to two companies. In return of income, the assessee didn’t show interest income on the ground that prudential norms of RBI prohibited recognition of interest on loans which remained overdue for more than six months.

b)The Assessing Officer (‘AO’) opined that assessee was bound to show the interest accrued on the loans as its income as it was following mercantile system of accounting. Further, he held that interest accrued on loans was chargeable to tax and consequently, made additions.

c)On appeal, the CIT(A) deleted the additions made by AO. The aggrieved revenue filed the instant appeal. The Tribunal held in favour of revenue as under:

1)Rule 3 of prudential norms states that income including interest/discount shall be recognized only when it is actually realised if a loan is considered as NPA. It further prescribes that a loan can be treated as NPA when it remained overdue for a period of six months or more. However, in the instant case, the assessee had been unable to produce any document to show that it had made any demand for return of the loan.

2)As per section 5 of the income-tax Act, total income shall include all income from whatsoever source derived by such person, which accrues or arise to him in a given in previous year.

3)In case of Southern Technologies Ltd. v. Jt. CIT [2010] 187 Taxman 346 (SC) it was held by the Supreme Court that prudential norms issued by the Reserve Bank of India could not override the provisions of the Act. Thus, by virtue of the application of the accrual principle, interest income had definitely accrued to the assessee.

4)The concerned companies (i.e. borrowers) were charging interest in their respective accounts, deducting tax at source and also remitting such tax to the Government account. Hence, there was nothing on record to show that there was no possibility of realising the interest.

5)Hence, one could not presume that interest income was illusory. Therefore, the CIT (A) had erred in deleting the addition made by the AO – ITO V. TRADELINK SECURITIES LTD [2014] 46 taxmann.com 190 (Kolkata - Trib.)

Resident assessee can claim losses incurred from house property located abroad in return filed in India

An option is available to the resident-assessee to file return of income either under the Indian tax laws or under the treaty. If assessee files the return of global income in India, the Revenue is bound to give effect to such return. Therefore, losses from house property located abroad was to be included in the income of resident-assessee.

Facts:
a)The assessee filed his return of income after including losses from house property located abroad. He purchased this property in Australia which was already on rent. He obtained a loan from ANZ Bank, Australia (‘ANZ’) to purchase the property.

b)The loss was computed under the head house property due to payment of interest to ANZ.

c)During appellate proceedings, the CIT(A) referred to the decision of Apex Court in case of CIT V. PVAL Kulandagan Chettiar [2004] 137 Taxman 460 (SC) and held that as far as rent income from Australia was concerned, the assessee was required to file the return in Australia and such income could not be included in Indian income. Therefore, negative income could not be assessed in India.

The Tribunal held in favour of assessee as under:

1)In view of Section 5 of the Income-tax Act (‘the Act’) in case of a resident, income accruing or arising outside India had to be assessed in India. The Sec 90(2) of the Act clearly provides that wherever DTAA is applicable to assessee he has an option to apply either Indian Tax Laws or provisions of DTAA, whichever are more beneficial to him.

2)Therefore, the assessee had an option to file return of income under the Indian tax laws where DTAA was applicable.

3)In the instant case, the assessee had exercised the option of filing return under Indian laws, thus, the same could not have been refused simply because DTAA was applicable.

4)The decision in case of PVAL Kulandagan Chettiar (supra) was distinguishable because in that case the assessee was a resident of India and Malaysia. It was due to financial connection of the assessee with Malaysian property it was held that income from Malaysian rubber plantation was taxable only in Malaysia.

5)The assessee had right to file the return of global income in India and the Revenue was bound to give effect to such return. The CIT(A) was not correct in holding that income from house property in Australia was not assessable in India. Accordingly, the order of the CIT(A) was to be set aside and the Assessing officer was to be directed to include the loss from such house property in the hands of the assessee. - SUMIT AGGARWAL V. DY. CIT [2014] 45 taxmann.com 345 (Chandigarh - Trib.)