We are pleased to
release a Tax Alert which summarizes a recent ruling of the Karnataka High
Court (HC) in the case of Wipro Ltd. (Taxpayer), wherein the HC, amongst
various other issues, ruled on the matters relating to the availability of
foreign tax credit (FTC). The question before the HC was whether the tax paid
in a foreign country in respect of income which is exempted under the
income-linked incentive scheme (ILIS) of the Indian Tax Laws (ITL), is eligible
for FTC in India.
The HC analyzed the charging provisions, as well as the double tax relief (DTR) provision, of the ITL and ruled that the income which is exempt by virtue of the ILIS of the ITL, though exempt from Indian taxes, qualifies as “income chargeable to tax”. Accordingly, any foreign taxes paid in respect of such income shall be available for FTC, if allowed under the relevant double taxation avoidance agreement (DTAA). The HC evaluated the availability of FTC in respect of the DTAA with the US (US DTAA) and Canada (Canada DTAA). In terms of the US DTAA, it held that FTC is available in India for taxes paid in the US, even though no taxes are paid in India. With regard to the Canada DTAA, it held that the Taxpayer, being exempted from payment of tax in India, the benefits of FTC will not be available as there is no payment of tax in India. The HC also held that the State taxes paid in the foreign countries are to be allowed as FTC under the unilateral tax credit provision of the ITL.
This HC ruling is a significant judgment on principles governing claim of FTC under the ITL, as well as under the DTAA. This ruling provides guidance as to how FTC can be claimed under the ITL and the DTAA in respect of income on which exemption has been claimed under the ILIS. The ruling also deals with the availability of relief in respect of State taxes paid in the foreign jurisdiction.
The HC analyzed the charging provisions, as well as the double tax relief (DTR) provision, of the ITL and ruled that the income which is exempt by virtue of the ILIS of the ITL, though exempt from Indian taxes, qualifies as “income chargeable to tax”. Accordingly, any foreign taxes paid in respect of such income shall be available for FTC, if allowed under the relevant double taxation avoidance agreement (DTAA). The HC evaluated the availability of FTC in respect of the DTAA with the US (US DTAA) and Canada (Canada DTAA). In terms of the US DTAA, it held that FTC is available in India for taxes paid in the US, even though no taxes are paid in India. With regard to the Canada DTAA, it held that the Taxpayer, being exempted from payment of tax in India, the benefits of FTC will not be available as there is no payment of tax in India. The HC also held that the State taxes paid in the foreign countries are to be allowed as FTC under the unilateral tax credit provision of the ITL.
This HC ruling is a significant judgment on principles governing claim of FTC under the ITL, as well as under the DTAA. This ruling provides guidance as to how FTC can be claimed under the ITL and the DTAA in respect of income on which exemption has been claimed under the ILIS. The ruling also deals with the availability of relief in respect of State taxes paid in the foreign jurisdiction.
1 comment:
Could please upload a copy of the judgment. Thanks.
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