ITAT denies BoI Rs 183cr refund for foreign tax
However, the taxes paid overseas will be allowed as a deduction in computing the bank’s business income, added the ITAT. The order, if jurisdictionally applicable, is likely to have wide ramifications for a large number of Indian corporates having overseas operations.
BoI has several branches abroad, both in countries with which India has a tax treaty and non-treaty ones. It had earned profits from its branches in the UK, the US, France, Belgium, Kenya, Japan, Singapore, China, Hong Kong, Cambodia and Jersey, and paid taxes in these countries.
The bank incurred a tax loss during the financial year 2011-12, even after setting off the foreign income. Hence, it did not have any Indian tax liability on such foreign income. However, it claimed a credit of Rs 182.6 crore (and consequently a refund) of foreign taxes (known as foreign tax credit) as a primary claim and alternatively as a business expense deduction.
During assessment, as there was no income tax payable by the bank in India, the I-T officer had denied the credit for foreign taxes paid. “Relief of taxes paid in foreign countries is given against the income tax chargeable under the I-T Act. Section 90 does not stipulate that the tax paid in foreign countries would be refunded in cases where the income tax chargeable under the I-T Act is nil.”
On these grounds, the claims of the bank were denied by the I-T officer and the commissioner (appeals). Finally, BoI filed an appeal with the ITAT. The ITAT bench comprising vice-president Pramod Kumar and judicial member Vikas Awasthy observed that foreign incomes should be “subject to tax” or “doubly taxed” in both countries (the other country and India) in order to avail the foreign tax credit. Further, such credit is available only to the extent of the Indian tax liability.
However, the ITAT held that the taxes paid in foreign countries can be claimed as a business deduction in computing profits, since no credit of such foreign taxes was allowable against an Indian tax liability. In other words, this deduction will further inflate the taxable losses, which can be set off against profits in future years, within the prescribed time frame.According to EY India tax partner Anish Thacker, “The ITAT order reaffirms the conventional understanding that an Indian tax resident cannot expect refund of foreign taxes from the Indian exchequer. Foreign tax credit under the tax treaties or domestic tax rules can merely relieve the Indian tax liability and cannot result in refund of Indian taxes.”