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DATE: March 4, 2021 (Date of pronouncement)
DATE: March 13, 2021 (Date of publication)
AY: 2012-13
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S. 90, 91: An Indian taxpayer is not entitled to claim refunds from the Government of India of taxes paid by the said taxpayer outside India, i.e., to the foreign Governments, in respect of the income taxes paid abroad on income earned in the respective tax jurisdictions, if the said income is not taxed in India due to a loss. However, the taxes paid abroad are allowable as a deduction in the computation of the business income of the assessee (Entire law is discussed in detail)

In the present case, our entire focus was on whether these foreign tax credits could be allowed even when such tax credits lead to a situation in which taxes paid abroad could be refunded in India, but that must not be construed to mean that, as a corollary to our decision, these foreign tax credits would have been allowed, even if there is no domestic tax liability in respect of the related income in India if it was not to result in such a refund situation. At the cost of repetition, we may add that, for the detailed reasons set out earlier, we have our reservations on the applicability of the Wipro decision (supra) on this bench, being situated outside of the jurisdiction of Hon’ble Karnataka High Court, and we are of the considered view that full tax credit for source taxation cannot, as such and to that extent, be extended in the residence jurisdiction when a tax treaty sanctions only proportionate credit, and does not, in any case, specifically provide for the full foreign tax credit. A full tax credit, which goes beyond eliminating double taxation of an income, actually ends up subsidizing the foreign exchequer, to the extent that the taxes paid to the foreign exchequer are allowed to discharge exclusive domestic tax liability, rather than eliminating double taxation of an income, and that is the reason that even in the solitary full credit situation visualized in the Indian tax treaties, in the Indo Namibia tax treaty (supra), it’s one-way traffic inasmuch as while India, as a relatively developed nation, offers, under article 23(2), full credit for taxes paid in Namibia, whereas, in contrast, Namibia, as a developing nation, offers, under article 23(1), proportionate credit for taxes paid in India. It reinforces our understanding that the full foreign tax credits cannot be inferred to be permissible as a matter of course and normal practice

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DATE: March 2, 2021 (Date of pronouncement)
DATE: March 2, 2021 (Date of publication)
AY: -
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Taxability of sums received for supply of software as "royalty": Given the definition of royalties contained in Article 12 of the DTAAs, the amounts paid by resident Indian end-users/ distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements is not the payment of royalty for the use of copyright in the computer software and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases

Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment

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DATE: January 13, 2021 (Date of pronouncement)
DATE: January 23, 2021 (Date of publication)
AY: 2014-15
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S. 17(2)(vi): (i) ESOP benefits granted to an assessee when he was resident and in consideration for services rendered in India is taxable even though the assessee is a non-resident in the year of exercise. S. 17(2)(vi) decides the timing of the income to be the year of exercise of the ESOPs but does not dilute or negate the fact that the benefit had arisen at the point of time when the ESOP rights were granted.

(ii) Article 15 of the India-UAE DTAA permits taxation of ESOP benefit, which is included in the scope of the expression "other similar remuneration" appearing immediately after the words "salaries and wages", in the jurisdiction in which the related employment is exercised. Thus, an assessee who gets ESOP benefits in respect of his service in U.A.E. and he exercises these options at a later point of time, say after returning to India and ceasing to be a non-resident, will still have the treaty protection of that income under article 15(1). Conversely, when the assessee gets the ESOP benefit on account of rendering services in India, he cannot have the benefit of article 15 in respect of the said income.

We find that so far as the ESOP benefit is concerned, while the income has arisen to the assessee in the current year, admittedly the related rights were granted to the assessee in 2007 and in consideration for the services which were rendered by the assessee prior to the rights being granted- which were rendered in India all along. The character of income may be inchoate at that stage but certainly what is being sought to be taxed now, on account of the specific provision under section 17(2)(vi), is a fruit of services rendered much earlier and the benefit, which has now become a taxable income, accrued to the assessee in 2007. All that section 17(2)(vi) decides is the timing of an income, but it does not dilute or negate the fact that the benefit, in which is being sought to be taxed, had arisen much earlier i.e. at the point of time when the ESOP rights were granted. On these facts, in our considered view, the income, even if it was inchoate at the point of time when the options were granted, has accrued and has arisen in India. The assessee is a non- resident in the current assessment year, but quite clearly, the benefit, in respect of which the income is bring sought to be taxed now, had arisen at an earlier point of time in India. Viewed thus, the income in respect of ESOP grant benefit accrued and had arisen at the point of time when the ESOP rights were granted, even though the taxability in respect of the same, on account of the specific legal provisions under section 17(2)(vi), has arisen in the present in this year.

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DATE: December 18, 2020 (Date of pronouncement)
DATE: December 23, 2020 (Date of publication)
AY: 2014-15
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The AO's refusal to grant foreign tax credit under article 23(2) of India Japan DTAA on the ground that the assessee's income (legal fees) was not taxable in Japan under Article 14 (Independent Personal Services) & that the taxes were wrongly withheld in Japan is not justified. The income could have been taxed under Article 12 (Fees for Technical Services). Even otherwise, one has to take a judicious call as to whether the view adopted by the source jurisdiction of taxing the income is a reasonable and bonafide view, which may or may not be the same as the legal position in the residence jurisdiction. The view of the treaty partner should be adopted unless it is wholly unreasonable or manifestly erroneous

So far as determination of question as to whether or not the taxation has been done in the source country “in accordance with the provisions of this Convention, may be taxed in … (the source jurisdiction)”, one has to take a judicious call as to whether the view so adopted by the source jurisdiction is a reasonable and bonafide view, which may or may not be the same as the legal position in the residence jurisdiction. While it is indeed desirable that there should be uniformity in tax treaty interpretation in the treaty partner jurisdictions, it may not always be possible to do so in view of a large variety of variations, such as the sovereignty of judicial systems, domestic law overrides on the treaty provisions, the legal framework in which the treaties are to be interpreted, and the judge-made law in the respective jurisdictions etc. In a situation in which a transaction by resident of one of the contracting states is to be examined in both the treaty partner jurisdictions, from the point of view of taxability of income arising therefrom, different treatments being given by the treaty partner jurisdictions will result in incongruity and undue hardship to the assessee.

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DATE: December 11, 2020 (Date of pronouncement)
DATE: December 23, 2020 (Date of publication)
AY: 2015-16
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(i) The fact that profits of foreign branches of a resident are taxed outside India under tax treaties does not imply that the said income is not taxable in India. The entire global income has to be taxed in India. The assesseee is entitled to credit for taxes paid abroad, as admissible under the treaty or the domestic law. (ii) S. 115JB applies to banking companies after the 2012 amendment. Even profits of foreign branches which are taxed under the tax treaties are also liable for MAT. (iii) The argument that S. 90 overrides S. 115JB and so the incomes taxed abroad should be excluded from taxation of book profits u/s 115 JB is not correct. Treaty protection come normally into play for taxation of a non-resident in India, i.e. source country taxation, and not for taxation of a resident in whose hands global income is to be taxed anyway. All that one gets in the residence jurisdiction, by the virtue of tax treaties, is tax credits for the taxes paid abroad.

The effect of Hon’ble Supreme Court’s judgment in Kulandagan Chettiar (267 ITR 654) that income taxable in the source jurisdiction under the treaty provisions cannot be included in total income of the assessee is clearly overruled by the legislative developments. It is specifically legislated that the mere fact of taxability in the treaty partner jurisdiction will not take it out of the ambit of taxable income of an assessee in India and that “such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement”. A coordinate bench of this Tribunal, in the case of Essar Oil Ltd (supra) also proceeded to hold that this notification was retrospective in effect inasmuch as it applied with effect from 1st April 2004 i.e. the date on which sub-section 3 was introduced in Section 90.

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DATE: December 4, 2020 (Date of pronouncement)
DATE: December 18, 2020 (Date of publication)
AY: 2014-15
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(i) A representative office of a foreign enterprise is not a taxable unit. The foreign enterprise is the taxable unit. A return of income filed in the name of the representative office, with the PAN of the enterprise, offering only the income of the representative office & excluding the other Indian income of the enterprise is not proper. However, as the error is inadvertent and without any consequences in terms of loss of revenue, a pragmatic approach must be adopted and the assessee should not be subjected to avoidable inconvenience (ii) As regards the taxability of interest income under the India-Germany DTAA, as the debt claim in question was not "effectively connected" to the alleged PE, the exclusion article 11(5) was not triggered and the taxability under article 7 does not come into play (Entire law discussed in detail)

It is an undisputed fact that the entire related interest income has been brought to tax in the hands of the foreign enterprise, even though on gross basis under article 11. In case any income is brought to tax on account of ALP adjustment, and bearing in mind the fact that such an income will also be relatable to earning the same interest income, it will indeed result in a situation that for revenue of ‘x’ amount earned from India, what will become taxable in India will be an amount more than ‘x’ amount- something which is clearly incongruous. The taxable amount in a tax jurisdiction cannot, under any circumstances, be more than the entire revenue itself in that jurisdiction. In this view of the matter, even an income on account of ALP adjustment for free rendition of services by the Indian representative office to the foreign enterprise itself- even if that be treated as an associated enterprise and a hypothetically independent entity, in the cases of banks where entire interest revenues are taxed on gross basis, is ruled out.

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DATE: September 15, 2020 (Date of pronouncement)
DATE: November 7, 2020 (Date of publication)
AY: 2006-07
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Interpretation of statutes & DTAAs: The substitution of a provision results in repeal of earlier provision and its replacement by new provision. When a new rule in place of an old rule is substituted, the old one is never intended to keep alive and the substitution has the effect of deleting the old rule and making the new rule operative. Though Notification dated 18.07.2005 (which substitutes paragraph 12 of Article 12 of the DTAA to provide for levy of tax on the royalties or fees for technical services at a rate not exceeding 10%) issued u/s 90 came into force with effect from 01.08.2005, it applies to the entire fiscal year

Before proceeding further, we may advert to well settled rules of Interpretation with regard to taxing statutes. The substitution of a provision results in repeal of earlier provision and its replacement by new provision. [See: U.P.SUGAR MILLS ASSN. VS. STATE OF U.P.’, (2002) 2 SCC 645]. The aforesaid principle of law was reiterated by the Supreme Court in WEST UP SUGAR MILS ASSOCIATION V. STATE OF UP (2012) 2 SCC 773 and by this Court in GOVARDHAN M V. STATE OF KARNATAKA (2013) 1 KarLJ 497. When a new rule in place of an old rule is substituted, the old one is never intended to keep alive and the substitution has the effect of deleting the old rule and making the new rule operative.

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DATE: July 22, 2020 (Date of pronouncement)
DATE: July 24, 2020 (Date of publication)
AY: 2007-08
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The condition precedent for applicability of “fixed place” permanent establishments under Article 5(1) of the Double Taxation Avoidance Treaties is that it should be an establishment “through which the business of an enterprise” is wholly or partly carried on. Further, the profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment. The maintenance of a fixed place of business which is of a preparatory or auxiliary character in the trade or business of the enterprise would not be considered to be a permanent establishment under Article 5. Also, it is only so much of the profits of the enterprise that may be taxed in the other State as is attributable to that permanent establishment (All imp judgements referred)

Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC

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DATE: April 29, 2020 (Date of pronouncement)
DATE: May 8, 2020 (Date of publication)
AY: -
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TDS u/s 115BBA, 194E & DTAA: As the payments to the Non-Resident Sports Associations represented their income which accrued or arose in India u/s 115BBA, the assessee was liable to deduct Tax at Source u/s 194E. The obligation to deduct Tax at Source u/s 194E is not affected by the DTAA. In case the exigibility to tax is disputed by the recipient, the benefit of DTAA can be pleaded and the amount in question will be refunded with interest. But, that by itself, cannot absolve the liability to deduct TDS u/s 194E of the Act (Eli Lilly (2009) 15 SCC 1 & G.E. India Technology Centre 327 ITR (SC) referred)

The obligation to deduct Tax at Source under Section 194E of the Act is not affected by the DTAA and in case the exigibility to tax is disputed by the assesse on whose account the deduction is made, the benefit of DTAA can be pleaded and if the case is made out, the amount in question will always be refunded with interest. But, that by itself, cannot absolve the liability under Section 194E of the Act.In the premises, it must be held that the payments made to the Non-Resident Sports Associations in the present case represented their income which accrued or arose or was deemed to have accrued or arisen in India. Consequently, the Appellant was liable to deduct Tax at Source in terms of Section 194E of the Act.

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DATE: April 24, 2020 (Date of pronouncement)
DATE: April 25, 2020 (Date of publication)
AY: -
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Taxability of Liaison Offices under DTAAs: The activities carried on by the liaison office of the non-resident in India as permitted by the RBI, demonstrate that the liaison office must steer away from engaging in any primary business activity and in establishing business connection as such. It can carry on activities of preparatory or auxiliary nature only. A liaison office which is only carrying on such activity of a "preparatory or auxiliary" character is not a PE in terms of Article 5 of the DTAA. The deeming provisions in Sections 5 and 9 of the 1961 Act can have no bearing whatsoever (all imp judgements referred)

The meaning of expressions “business connection” and “business activity” has been articulated. However, even if the stated activity(ies) of the liaison office of the respondent in India is regarded as business activity, as noted earlier, the same being “of preparatory or auxiliary character”; by virtue of Article 5(3)(e) of the DTAA, the fixed place of business (liaison office) of the respondent in India otherwise a PE, is deemed to be expressly excluded from being so. And since by a legal fiction it is deemed not to be a PE of the respondent in India, it is not amenable to tax liability in terms of Article 7 of the DTAA.

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