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Total Number of Subscribers: 464 | |
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Date:24th September 2008 |
Compiled by Mr. M. Sathya Kumar | |
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The concept of "Double
Dipping" Increasing investments from
India in various foreign jurisdictions (‘outbound’ investment) and
vice-versa (‘inbound’ investment) has thrown more and more international
tax issues involving interpretation of Double Taxation Avoidance
Agreements entered into by India with various foreign countries (or ‘DTAA’
or ‘Treaty’). In this regard, useful reference may be interalia made to
Section 90 of Income Tax Act (‘Act’) delegating treaty making power to the
Central Government, which can be further traced to Article 73 (read with
Article 253) of Indian Constitution giving power to Union/Central
Government for making laws to give effect to international agreements etc.
Also, relevant in this regard is Article 51 of Indian Constitution, which
stipulates respect for international treaties etc. As regards treatment of
losses incurred by overseas unit of an Indian Company is concerned, the
same has been a subject matter of debate in Patni Computers ruling (supra). In this connection, one
important aspect of international taxation, which also got deliberated by
ITAT in aforesaid ruling, related to ‘double dipping’ of losses.
wHAT IS DOUBLE DIPPING OF LOSSES, IN CONTEXT OF
INTERNATIONAL TAXATION?
In order to understand and
appreciate Patni ruling (supra), it may be appropriate to
first discuss the concept of ‘double dipping’ of losses. ‘Double dipping’
(on www. http://www.yourdictionary.com/double-dipping) has been defined as “The
ability to deduct interest expense in two different tax jurisdictions at
the same time. This is a creative, cross-border financing arrangement.
Double dipping can also refer to any other similar situation in which a
system is used to a person or company’s benefit.” As evident from this definition,
‘double dipping’ involves double benefit for the same allowance (here
‘losses’).
FACTUAL MATRIX IN PATNI
RULING
(SUPRA)
Assessee, who was a resident
of India under the Act, had set up a trading office in Japan. In
assessment Year (‘AY’) 2001-2002, assessee claimed loss incurred at its
Japanese Office amounting to INR 5,396,061, treating the same as an
allowable expenditure against its Indian income, while filing its return
of income under the Act. Assessing Officer (‘AO’) during the course of
assessment proceedings disallowed the subject claim of loss, holding that
as income pertaining to Japanese Office can be taxed in Japan exclusively
under Article 7 of India-Japan Double Taxation Avoidance Agreement
(‘DTAA’), hence loss for the same may also be allowable in Japan only. On
appeal to CIT(A), subject claim of loss was allowed as the assessee is
resident in India and is assessable for its global income/loss in India.
Revenue feeling aggrieved by this order of CIT(A) moved to ITAT.
REVENUE’S CONTENTION BEFORE
ITAT
While challenging aforesaid
CIT(A)’s order allowing losses of Japanese Office in the hands of assessee
under the Act, revenue broadly submitted before ITAT that:
Under Article 7 of subject DTAA, as right to tax the profits of Japanese Office (being a Permanent Establishment or ‘PE’ of assessee in Japan) vests solely with source country (here Japan), as a corollary to this loss from said office should also be assessable only in Japan. It is not open to the assessee to switch from provisions DTAA to Act, from year to year as when the assessee in the instant case has opted for DTAA in an earlier year, it cannot apply the Act in later year. Allowance of subject loss under the Act to the assessee may result in an absurdity in as much as ‘double dipping’ i.e double benefit for the same loss, once by the parent entity in residence country (opting for taxation under the Act) and subsequently by the ‘PE’/office in source country (opting for taxation under DTAA), may get cropped up. REVENUE’S CONTENTION BEFORE
ITAt
Assessee
plainly relied on CIT(A)’s order before ITAT, to buttress its
case.
ITAT’S ANALYSIS OF THE
MATTER
ITAT
in its final order though upheld the order of CIT(A) and allowed the
assessee’s claim of loss pertaining to its Japanese Office, but it has
discussed two school of thoughts on the subject, while sailing through the
issue in
hand.
‘Double Dipping’ may not be
permissible
Where ITAT recognized that ‘double dipping’ may not be permissible and an Indian resident will be taxable on its global income, including income pertaining to ‘PE’ in a foreign jurisdiction, it laid emphasis on ‘global basis’ taxation model adopted by India for taxability of residents. Further, ITAT distinguished the ‘global’ basis of taxation as applicable to residents in Indian scenario from the ‘territorial’ basis of taxation as adopted in some jurisdictions like Hongkong. Applying this thought process to the facts of instant case, ITAT cognizised/considered that though the income of Japanese Office may not be excludible from Indian taxation in the hands of assessee, but a tax credit for taxes paid in Japan may be available to it under Article 23 of DTAA. This view point was finally dropped by the ITAT in view of prevailing provisions of the Act and judicial precedents surrounding the same. ‘Double Dipping’ is permissible under present
Indian scenario
Giving its final word on the matter, ITAT held that in present framework of the Act, the assessee can not be denied the deduction of subject losses incurred at Japanese Office against its Indian profits. Further, ITAT also held that even though subject claim of losses result in ‘double dipping’, the same remains permissible under the present framework of the Act. In so concluding, ITAT
followed the Hon’ble Supreme Court ruling in the case of Azadi Bachao Andolan 263 ITR 706 and relied on
Karnataka High Court ruling in the case of R.M.Muthia 202 ITR 508 and Madras High Court
ruling in the case of SRM Firm and Others 208 ITR 400. That “once
an income is held to be taxable in a tax jurisdiction under DTAA, and
unless there is a specific mention that it can also be taxed in the other
jurisdiction, the other tax jurisdiction is denuded of its powers to tax
the same” was the ratio which ITAT culled out from aforesaid cited
case laws/authorities.
CONCLUSION
It seems that views echoed by ITAT
in Patni ruling (supra) have also been endorsed
recently by ITAT in its ruling in the case of Frontier Offshore Exploration
India Limited. Albeit it seems that matter is not bereft from
doubt, from subject ITAT rulings, it is apparent that epicenter for
‘double dipping’ lies around the interpretation of words “may be” as
appearing in Article 7 of relevant DTAA particularly where resident
country follows worldwide taxation model for its residents. Further,
reference in this connection may be made to OECD’s commentary on Model ax
Convention (‘MTC’) which has in context of Article 23A of Model Tax
Convention (dealing with Tax Credit and Tax Exemption) , in Para 44, seems
to have echoed the view that solution to address ‘double dipping’
primarily depends on the domestic laws of the ‘residence’ state. Further,
in aforesaid scenario, Indian residents can also look forward to invoke
Mutual Agreement Procedure (‘MAP’) in case relevant treaty article so
provides.
Source : The AIFTP
Journal
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