Tax paid in foreign country not eligible for benefit u/s 91 is expenditure eligible for deduction under section 37(1) of the Act – ITAT
ABCAUS Case Law Citation
ABCAUS 3289 (2020) (03) ITAT
Important case law relied upon by the parties:
Reliance Infrastructure Ltd versus CIT 390 ITR 271
Hindustan Construction Co.Ltd versus DCIT 25 SOT 359
In the instant case the appeal had been filed by the Assessee against the order of the Commissioner of Income Tax (Appeals) inter alia in confirming the action of the Assessing Officer (AO) in not granting Foreign Tax Credit as claimed by the Appellant u/s 91 of the Income Tax Act, 1961 (the Act).
The assessee had shown income from the foreign parties for the software services rendered to them. These foreign parties had deducted TDS @ 7% of the income received by the assessee.
Accordingly the assessee claimed that it had paid the taxes on the foreign income at the rate of 7% whereas the rate of income tax in India was 30.90% the income. As per the assessee, it was entitled for the relief under section 91of the Act, with respect to doubly taxed income for the entire amount of TDS deducted in the foreign country being lower rate of tax in the said country.
The assessee also submitted that provision of section 91 of the Act have referred the income and not overseas net profit, net income or proportionate income. Therefore, the rate of tax in the foreign country should be worked out after considering the gross receipts and the amount of TDS deducted which came out at 7% which was lower than the rate of tax in India. Accordingly, the assessee claimed the foreign tax credit under section 91 of the Act.
However, the AO disagreed with the contention of the assessee by observing that the tax in the foreign country cannot be applied to the amount of gross receipts. As such, the amount of income which is getting tax twice should be worked out for determining the rate of tax in the foreign country and the same needs to be compared with the rate of tax in India.
Accordingly, the AO held that the expenses incurred by the assessee against the gross income from foreign countries needed to be adjusted for determining the rate of tax in the foreign country. But the assessee had not furnished the detailed computation of allowable tax credit of foreign countries.
The AO further noted that the assessee had already incurred expenses in India and abroad for the income in India and abroad which had already been claimed by the assessee in the return of income.
As per the AO the assessee had shown gross receipts including the receipts from the foreign countries in its profit and loss account against which it had declared taxable profit and thus determined the tax liability under the normal computation of income.
The AO accordingly held that the taxable income shown by the assessee were constituting 5.56% of the gross receipts on which it is paying the tax at the rate of 30.90% in India. Thus the AO further held that whole of the gross receipt of the assessee are not made subject to tax in India. It was only profit of the company i.e. 5.56% in the receipts which was being taxed in India.
Accordingly the AO applying the same ratio with respect to the gross receipts generated from the foreign countries and worked out the doubly taxed income being 5.56%. Thus the AO determined the allowable tax credit under section 91 of the Act.
The CIT(A) disregarded with the contention of the assessee by observing that the relief under section 91 of the Act is available to the assessee with respect to the doubly taxed income. The doubly taxed income shall be construed with respect to the net amount of receipts i.e. gross receipts minus the expenses. Thus the CIT(A) confirmed the order of the AO.
Before the Tribunal, the assessee alternatively also contended that if the tax credit was not allowed to the assessee then the same should be allowed as an expense under section 37(1) of the Act.
Thus, the question before the Tribunal was as to whether rate of tax in foreign country needs to be determined after considering the gross receipts or the net receipts/profit embedded in such gross receipts?
The Tribunal observed that the explanation (iii) to section 91 of the Act provides mechanism for determining the rate of tax in the foreign country. It requires that the income tax/super tax actually paid in the foreign country as per the laws prevailing therein and dividing the same by the whole amount of income as assessed in the foreign country.
The Tribunal pointed out that as per the said provisions, the amount of tax/super tax needs to be divided by the whole amount of income to work out the rate of tax. The word used whole amount of income denotes the income which signifies after the expenses. The word gross receipts have not been used therein. Even under the normal parlance, the income denotes only to the net profit i.e. gross receipts minus the expenses. Thus it is the only profit which should be considered while determining the rate of tax in the foreign country and the same needs to be compared with the rate of tax in India.
However, the Tribunal noted that in the instant case, the assessee had not given any working about the expenses incurred in the foreign country against the gross receipts. Thus, in the absence of sufficient details, the AO had no alternate except to work out the proportionate amount of income eligible for relief under section 91 of the Act.
Accordingly, the Tribunal opined that there was no infirmity in the order of the authorities below.
However, the Tribunal opined that there was force in the alternate argument of the assessee claiming for the deduction of the taxes paid in the foreign country as expenditure under section 37(1) of the Act. The amount of tax paid in a foreign country which is not eligible for benefit under section 91 of the Act, is expenditure eligible for deduction under section 37(1) of the Act. It is because such tax was paid in the course of the business and the corresponding business receipts were made to tax in India. In this regard, the Tribunal found support from the judgment of Hon’ble Bombay High Court.
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