Tata Consultancy Services Ltd. v. Additional Commissioner of Income Tax, LTU-1, Mumbai (ITA No. 3262/MUM/2017 Dt. 11.11.2020)
- The assessee, an Indian company, engaged in the business of computer software & management consultancy.
- It filed its return of income for the relevant assessment year for claiming deductions of tax paid in foreign countries.
Issue 1: Claiming deduction of “State tax” paid in the USA & Canada.
- Assessee’s contention: State taxes paid in the USA and Canada do not come within the purview of Section 40(a)(ii). The term ‘tax’ as defined under Section 2(43) of the Act, would mean the tax chargeable under the Act. Further, in respect of state taxes paid, it is not eligible for any relief either u/s 90 or 91 of the Act read with the applicable tax treaty. Thus, deduction claimed was not disallowable under Section 40(a)(ii) of the Act.
- Revenue’s contention: AO is of opinion that “state tax” paid in foreign countries were not liable to be allowed as deduction u/s 40(a)(ii) even in the assessee’s own case in AY 2005-06, the tribunal while referring to the decision in the case of Tata Sons Ltd. held that state taxes paid overseas cannot be allowed as deduction in the view of provisions of section 40(a)(ii) of the Act.
By relying on the decision of the Bombay High Court in Reliance Infrastructure Ltd. v. CIT (390 ITR 271), where the court held that taxes levied overseas which are not eligible for relief either under Section 90 or 91 of the Act, would not come within the purview of Section 40(a)(ii) of the Act.
Therefore, the Tribunal directed the AO to verify whether the State taxes paid by the taxpayer overseas are eligible for any relief under Section 90 of the Act and if the taxpayer is not eligible for the same, the taxpayer’s claim of deduction should be allowed.
Issue 2: Claiming Foreign tax credit in respect of income pertaining to section 10A/10AA where tax paid in the USA.
- Assessee’s contention: Foreign tax credit should also be provided for taxes paid in overseas jurisdiction, in respect of section 10A/10AA eligible income in India, as per the provisions of respective DTAA.
- Revenue contentions: AO is of opinion that tax credit will be allowed in respect of those income which was offered to tax abroad as well as subjected to tax in India also.
The Tribunal observed with reference to the high court decision in case of Wipro Ltd. (2016) 382 ITR 179 (Karn.) that where the respective tax treaty provides for benefit for foreign tax paid even in respect of income on which the taxpayer has not paid tax in India, still, it would be eligible for tax credit under Section 90 of the Act.
Thus, as per Article 25 of the Indo-USA treaty benefit off foreign tax credit can be availed even in respect of income not subjected to tax in India.
However, India-Canada, Finland treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Therefore, the foreign tax credit would be available to the taxpayer in all cases except the foreign tax paid in Finland and Canada.
Conclusion: Thus, if foreign tax credit is not available in India then same can be claimed as expense and further tax credit shall be available in India for foreign tax paid even if income is exempt in India, if DTAA provides so.
To read full judgement CLICK HERE.