Education cess and surcharge eligible for claim of foreign tax credit- Income Tax Tribunal

Facts of the Case:

• The Assessee is a private limited company engaged in the business of manufacturing of telecommunication products and software development services having operations in India and outside India i.e. Ghana.
• The Assessee had filed its return of income disclosing a total receipt of Rs. 15,99,37,226/- from Ghana wherein the payer had deducted tax of Rs.1,05,36,759/-. The Assessee had claimed the foreign tax credit in its return of income under the provisions of section 91 of the Income Tax Act, 1961 (“Act”) read with relevant income tax rules.
• AO questioned the way the Assessee had computed effective tax rate while claiming foreign tax credit as per the provisions of section 91 of the Act, and hence disallowed some portion of total foreign tax deducted.
• It was the case of the AO that while computing the income from Ghana, the Assessee had included entire receipt/foreign turnover as income. Further, the Assessee was not able to provide the details of computation of income assessed in Ghana for deducting tax. The AO rejected the contentions of the Assessee of considering entire receipt as income and had applied net profit ratio method (i.e., ratio derived at by dividing net profit with turnover) on foreign turnover to ascertain net profit on receipt from Ghana. Further, the AO didn’t consider the other income while calculating net profit ratio.
• Further, the method applied by AO resulted in decrease in the amount of foreign tax credit claim by the Assessee.
• Aggrieved by the same, the Assessee preferred an appeal before the CIT. The CIT affirmed the disallowances made by the AO and hence the Assessee preferred an appeal before the Tribunal.

Issues before The Tribunal:

• The AO had not considered the other income in denominator while calculating net profit of Ghana which resulted in decrease in assessed income from Ghana.
• The application of net profit ratio method by AO for computation of foreign tax credit has not been prescribed u/s 90/91 of the Act.
• In calculating the effective Indian rate of tax, the AO had not considered surcharge and education cess which resulted in lowering the effective Indian rate of tax.

Decision of Tribunal:

• The net profit ratio method adopted by Assessing officer can be considered as reasonable method in absence of any other better method. Therefore, we can conclude that different methodology can be applied to ascertain income for claiming foreign tax credit.
• In calculating Indian rate of tax, surcharge and cess should be considered (as settled by the Hon’ble Supreme Court in the case of CIT Vs K Srinivasan).
• Other income should be considered while calculating rate of tax of non-treaty foreign country as same is considered for business purpose while calculating book profit u/s 115JB.

Case Law: Invendis Technologies India (P.) Ltd v. Assistant Commissioner of Income-tax.

Prateek Sharma, Tax Associate, SW India