Introduction:
The Hon’ble Ahmedabad Income Tax Appellate Tribunal (‘ITAT’) has recently delivered a significant ruling concerning the eligibility of TDS credit in a subsequent Assessment Year (‘AY’), where corresponding income has been offered to tax in previous AYs. A significant ruling was recently made in the case of M/s Suzlon Energy Ltd vs. Deputy Commissioner of Income Tax, Ahmedabad (1), with the judgment being announced on October 29, 2024.
In the instant case, the ITAT held that amendment to Section 199 drawn in Chapter XVII entitles the Assessee to claim TDS credit in the year in which tax is deducted and paid to government, regardless of the fact whether the corresponding income pertains to the previous year. This decision provides significant clarity on the treatment of TDS credits and income recognition across different AYs.
Judgement referred
- Ahmedabad ITAT in the case of Sadbhav Engineering Ltd.
- Delhi ITAT in the case of Chander Shekhar Aggarwal.
- Mumbai ITAT in the case of Shri Rangji Realties Pvt. Ltd.
- Ahmedabad ITAT in the case of M/s. Elitecore Technologies Pvt Ltd
Facts
- Suzlon Energy Ltd (“Assessee”) is engaged in the business of manufacturing Wind Turbine Generators [WTG], Rotor blades, etc.
- The Assessee earned royalty income from technical services rendered to its Subsidiary company namely M/s. Suzlon Energy [Tianjin] Ltd at China (‘SETL’) aggregating to approximately INR 1,106 Lakhs and INR 1,623 Lakhs during AYs 2007-08 and 2008-09, respectively.
- These royalty incomes were already taxed in China on gross basis at 10% under Article 23(2) of the India-China Double Tax Avoidance Agreement (‘DTAA’). Furthermore, the Transfer Pricing Officer (‘TPO’) had already recognized these royalties as being at arm’s length price during the transfer pricing assessments for the relevant AYs, with no objections raised regarding the royalty income.
- However, the Assessee failed to claim the Foreign Tax Credit (‘FTC’) under Section 90 of the Income Tax Act, 1961 (‘the Act’) while filing its Income Tax Returns, as the Tax Withholding Certificates (‘TWC’) from SETL, China were received only in September 2009. The TWC details for the tax withheld on royalty incomes were INR 105 Lakhs in AY 2007-08 and INR 162 Lakhs in AY 2008-09.
- During the assessment proceedings, the Assessee, in its letter dated 17-11-2011, claimed a tax credit for taxes withheld in China under Article 23(2) of the DTAA. The Assessee requested relief from double taxation under Section 90 of the Act, amounting to INR 1,623 Lakhs for AY 2008-09 and INR 1,106 Lakhs for A.Y. 2007-08.
Facts
- The Assessing Officer (‘AO’) rejected the above claim on the ground that the claim was neither made in the Original Return nor in the Revised Return of Income filed by the Assessee. However, on appeal against the above assessment order by the Assessee, the Commissioner of Income Tax – Appeals (‘CIT(A)’) allowed the claim, ruling that FTC was denied on technical ground, with no objections raised on the merits. The CIT(A) instructed the Assessing Officer (AO) to permit the claim in conformity with the applicable legal provisions.
- Aggrieved by the appellate order, the Revenue appealed to the ITAT, which remanded the case to the CIT(A) for fresh adjudication.
- In the de novo proceedings, the CIT(A) denied a tax credit of INR 105 Lakhs for AY 2008-09, citing its relevance to AY 2007-08 as per Article 23(2) of the DTAA. However, the CIT(A) allowed a tax credit of INR 162 Lakhs for AY 2008-09, referencing similar DTAA provisions and a precedent set by the ITAT in the case of Elitecore Technologies Pvt. Ltd.
- The Revenue challenged these proceedings by filing an appeal in the Ahmedabad ITAT.
AO’s Contention
- AO contended that CIT(A) has erred in law and on facts in allowing credit for tax paid u/s. 90 of the Act in a foreign country amounting to INR 162 Lakhs against tax liability under the Minium Alternate Tax (‘MAT’) provisions.
Assessee’s Contention
- The Assessee contended that the appeal of the Revenue has no substance because, even the DTAA contemplates credit to be given in respect of taxes paid in respect of income earned in China in respect of which tax has been paid. The provisions of Minimum Alternate Tax (MAT) do not explicitly deny the allowance of Foreign Tax Credit (FTC) when calculating tax liability under MAT.
- Accordingly, the Assessee contended that the CIT(A) had erred in law and on facts in holding that no credit can be given for withholding tax of INR 105 Lakhs on the royalty income received from China.
- The Assessee further argued that the Rule 128 provides for FTC to be allowed in the year of booking of income which was introduced prospectively from 01-04-2017 and hence not applicable to AY 2008-09. Therefore, there was no bar allowing subject FTC in AY 2008-09 on the grounds that the corresponding income was offered in the previous year.
- Further, the Assessee contended that the CIT(A) had erred in law and on facts in directing AO to restrict credit u/s. 115JAA of the Act claimed in the subsequent year to the extent of withholding tax allowed in the current year.
Issues raised before the ITAT
a) Whether the CIT(A) has appropriately ruled that credit for taxes paid in China for AY 2007-08 will not be available in AY 2008-09, as it does not pertain to the relevant AY?
b)Whether Revenue’s contention that tax paid in a foreign country under Section 90 of the Act cannot be credited against MAT liability is valid?
c) Whether the CIT(A) has correctly determined that MAT credit u/s 115JAA in subsequent years is to be restricted to the extent of withholding tax allowed in current year as per second proviso to Section 115JAA(2A)?
Decision of the ITAT
(a) Whether credit for taxes paid in China is available in AY 2008-09 where the corresponding income relates to previous year?
- The ITAT cited Section 115JB of the Act, which stipulates that when the tax liability on “book profit” exceeds the tax liability on income computed under the regular provisions, the “book profit” is deemed to be the Assessee’s income, and Minimum Alternate Tax (MAT) is payable accordingly. Pursuant to Section 90 of the Act, the Assessee is eligible for Foreign Tax Credit (FTC) benefits in relation to the Assessment Year (AY) 2008-09.
- Additionally, the ITAT cited Section 199, as amended with effect from April 1, 2008, which provides that credit for Tax Deducted at Source (TDS) shall be granted in the assessment year in which the tax is deducted and paid to the government, irrespective of the year to which the corresponding income relates.
(b) Whether Revenue’s contention that no credit is to be allowed for FTC against tax liability under MAT provisions valid?
- The ITAT based its decision on Section 115JB of the Act, which stipulates that when the tax liability on “book profits” exceeds the tax liability on income computed under the regular provisions, the “book profits” are treated as the Assessee’s “deemed income” for the purposes of Minimum Alternate Tax (MAT) liability
- Therefore, the Act does not differentiate between tax liability computed under MAT provisions and under the normal provisions of Act.
- Based on the above observations, the ITAT ruled that the Assessee is eligible to claim FTC against its tax liability computed in accordance with the MAT provisions of the Act and held that Revenue’s contention on disallowance of credit under MAT provisions is invalid.
(c) Whether CIT(A) has correctly determined that MAT credit u/s 115JAA in subsequent years is to be restricted to the extent of withholding tax allowed in current year as per second proviso to Section 115JAA(2A)?
- ITAT held that the said proviso to Section 115JAA(2A) which was inserted by the Finance Act, 2017 w.e.f. 01.04.2018 is applicable prospectively. As a result, the proviso cited by the CIT(A) does not apply to the Assessment Year (AY) 2008-09.
- Furthermore, the ITAT upheld the principle that, unless explicitly stated otherwise, legislation is generally presumed to have prospective effect, rather than retrospective application.
- Hence, ITAT concluded that CIT(A) was not justified in directing AO to restrict the MAT credit u/s Section 115JAA in subsequent years to the extent of withholding tax allowed in current year, and accordingly quashed the direction given by CIT(A) in this regard.
Conclusion
In view of the amended provisions and judicial precedents, the ITAT in this significant ruling has upheld that the Assessee is eligible for claiming TDS credit in the current AY 2008-09 even though corresponding income was reported by the Assessee in the previous AY 2007-08, i.e. Assessee, in the instant case, is entitled to claim FTC for taxes paid in a foreign country, irrespective of when the corresponding income was recognized.
This reinforces the principle that the timing of income recognition does not impact the eligibility for claiming credit for foreign taxes paid, ensuring a more taxpayer-friendly approach.
Source
1 https://itat.gov.in/public/files/upload/1731916398-47wKPZ-1-TO.pdf
