Where Assessee had Paid Taxes in a Foreign Country and since the Tax Credit is not available, Taxes Paid in Foreign Country are allowed as Business Expenditure
Facts of the case:
- During the Assessment year (AY) 2012-13, the taxpayer earned income from the foreign parties based in Afghanistan on which the foreign parties deducted the tax.
- The taxpayer claimed that it had paid taxes in the foreign country at the rate of 7 per cent which was less than the rate of tax in India. Therefore, it was eligible for the tax relief u/s 91 of the Act with respect to the entire amount of tax deducted by the foreign parties.
Contention of Assessing Officer:
- The Assessing Officer (AO) observed that the rate of tax is to be worked out on net income and not on gross receipts as claimed by the taxpayer.
- The AO worked out the proportionate amount of tax with respect foreign income which was eligible for tax relief.
Contention of Assessee:
- Before the Tribunal, the taxpayer alternatively contended that the amount of tax paid in a foreign country which is not eligible for Foreign Tax Credit (FTC) u/s 91 of the Act, should be allowed as business expenditure.
Decision held by ITAT Bench, Ahmedabad:
- The Tribunal observed that the amount of tax paid in a foreign country which is not eligible for FTC u/s 91 of the Act shall to be treated as eligible for deduction as business expenditure. The deduction was allowable because such tax was paid in the course of business and the corresponding business receipts were offered to tax in India. The Tribunal relied on the decision of the Bombay High Court in the case of Reliance Infrastructure Ltd.
Conclusion:
- The foreign tax does not come under the purview of the definition of ‘Tax’ as defined in Section 2(43) of the Act.
- When the taxpayer is not eligible to avail benefit u/s 91 of the Act, then foreign tax should not be considered as a tax within the meaning of section 2(43) of the Act and therefore, it is an allowable business expenditure u/s 37 of the Act.
Source: Virmati Software & Telecommunications Ltd. v. DCIT [ITA No. 1135/AHD/2017]
