The Delhi High Court has held that tax credit under Article 23 of the Indo-Thai Double Taxation Avoidance Agreement (DTAA) can be claimed only when income tax had been paid by a subsidiary in Thailand.
M/s. Polyplex Corporation Ltd, the respondent/assessee claimed that it is eligible for tax credit qua tax which, though payable in the country from where the income emanated, was not paid because of the statutory regime operating in that country.
The respondent/assessee, in seeking tax credit qua tax payable [though not paid], has sought to place reliance on Article 23 of the Double Taxation Avoidance Agreement [“DTAA”] obtained between India and Thailand.
It was the respondent/assessee’s stand that it ought to be given tax credit qua the tax which it was spared from paying, on income by way of dividend, received from its subsidiary in Thailand, in consonance with the provisions of Article 23 of the Indo-Thai DTAA. Thus, the issue at hand centres around the concept of “tax sparing”, which is embedded in several DTAAs arrived between India and other countries, including Thailand.
On the other hand, the appellant/revenue seeks to contend that because the tax was not paid by the respondent/assessee on the dividend received from its Thai subsidiary, i.e., Polyplex (Thailand) Public Limited Company, it could not be granted tax credit on dividend income, which was otherwise taxable in India at the rate of 30% (plus surcharge and cess, at the applicable rates).
The respondent/assessee had e-filed its return of income for AY 201011 on 13.10.2010. The income declared for the said AY was Rs.11,41,46,171/-. The return of income (ROI) was processed under Section 143 (1) of the Income Tax Act, 1961 [hereafter referred to as, “Indian Income Tax Act”].
The ROI was picked up for scrutiny, whereupon it was discovered that the respondent/assessee had claimed tax credit amounting to Rs.1,60,74,706/- in respect of tax, which it would have to ordinarily pay in Thailand on dividend received from its Thai subsidiary, but for the statutory regime obtaining in Thailand, which exempted levy of tax in that country.
The respondent/assessee had included in its ROI, dividend income amounting to Rs.68,81,05,808/- earned from its Thai subsidiary. But for the exemption granted under the statutory regime obtaining in Thailand, the respondent/assessee would have to pay tax, in Thailand, at the rate of 10% on dividend received by it from its Thai subsidiary. On account of this, the respondent/assessee claimed a tax credit for the amount quantified at the said rate, i.e., 10%, under the provisions of paragraphs 2 & 3 of the Article 23 of the Indo-Thai DTAA.
The Assessing Officer (AO), however, disagreed with the stand taken by the respondent/assessee and thus, declined the tax credit sought in the ROI. On appeal, the CIT(A) rejected the appeals preferred against the assessment orders concerning the aforementioned AYs.
In the Tribunal, however, the respondent/assessee was successful. It was able to persuade the Tribunal that, having regard to the tax sparing concept which is embedded in several DTAAs, including the subject IndoThai DTAA, it was entitled to tax credit at the rate of 10%, on the dividend income received from the Thai subsidiary.
Mr Ved Jain, on behalf of the respondent/assessee, emphasized that the concept of tax-sparing credit runs through several DTAAs executed by India, including with Oman, Jordan and France, apart from Thailand.
Under tax-sparing provisions, the tax credit may be claimed even for tax which, though payable, is exempted on account of incentives granted by the source country. Article 23 of the Indo-Thai DTAA would show that these benefits are available to the recipient of income, as in this case, in India, as well as those who reside in Thailand. [See Article 23(2) and Article 23(3) alongside Article 23(4) and Article 23(5) of the Indo-Thai DTAA].
It was further stated that the Thai subsidiary of the respondent/assessee was granted exemption from corporate income tax vis-a-vis its net profit under Section 31 of Investment Promotion Act B.E. 2520 (1997) [“Investment Promotion Act”].
As per Article 10, Indo-Thai DTAA, Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
A division bench comprising Justice Rajiv Shakdher and Justice Tara Vitasta Ganju observed that the appellant/revenue’s appeals are based on the proposition that tax credit as claimed, could not be extended to the respondent/assessee, because it had not paid tax in Thailand, i.e., that benefit under Article 23 of the Indo-Thai DTAA could only be extended in a situation where the tax had been paid.
Insofar as the Indo-Thailand DTAA is concerned, credit for tax-sparing works for residents of Thailand, as well as India. This is a mechanism which is engrafted in DTAAs to incentivize investment for economic development.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
