The division bench of the Ahmedabad ITAT, in Elitecore Technologies Private Limited v. Dy. CIT held that where assessee-company receives certain amount from its foreign AEs after deduction of tax at source,the tax credit has to be allowed to it only to extent corresponding income has suffered tax in India and gross receipts couldn’t be taken into account for the purpose of computing admissible tax credit under the provisions of the Income Tax Act.
The factual settings of the case are that, the appellant-assessee is a wholly owned subsidiary of a US based company by the name of Elitecore Technologies Inc,- a company engaged in the business of software developments and products are assessed under MAT provisions.During the relevant assessment year, assessee certain amounts from various foreign companies after deducting tax at source. The assessee claimed foreign tax credit on the aggregate of tax deductions. Rejecting the claim, the AO observed that the tax credit is to be allowed only to the extent corresponding income has suffered tax in India, and that the extent to which income has suffered tax in India in respect of these receipts is to be computed by reference to the actual MAT liability being divided in the same ratio as the ratio of corresponding foreign receipts to the overall turnover of the assessee. The assessee maintained that the gross receipts are material for the purpose of computing the tax credit even if the ratio of foreign receipts to the overall receipts are to be taken into account.
“All that both the treaties state is that the foreign tax credit shall not exceed the part of the income tax as computed before the deduction is given, “which is attributable as the case may be, to the income which may be taxed in that other State” but there is little guidance on how to compute such income. However, quite clearly, as the expression used is ‘income’, which essentially implied ‘income’embedded in the gross receipt, and not the ‘gross receipt’ itself.”
Diving deeply into the facts of the case, the bench noted that the entire receipts of the assessee represents the money received for the release of retention money and annual maintenance fees etc. “In our considered view, therefore, the computation of income element, as given by the assesse, is fair and reasonable and, in any event, the Assessing Officer has not pointed out any specific infirmities in the same. Given this analysis, we see no need to compute the profit element by taking into account the ratio of entire income to entire turnover of the assessee. Such a course, if at all, could have been relevant if the assessee had not furnished a reasonable computation of income embedded in the related receipts of the assessee.”
“we are dealing with a situation in which a major portion of income, by release of retention money as also by addition of an additional user by the customer, is a somewhat passive income, even though in the nature of business receipt, and as such, to that extent, allocation of all the expenses incurred by the assessee, in respect of such earnings, will not be justified. As regards the income from maintenance contracts, the relates costs have already been allocated and the Assessing Officer has not pointed out any infirmity in the same. In this view of the matter, quantification of income for the purpose of computing admissible tax credit, as done by the assessee and as reproduced earlier, is accepted. “
Read the full text of the order below.
