TAX SPARING

In an interesting judgment the the Hon’ble HC of Delhi has upheld the ITAT decision in case of Polyplex Corporation Ltd, in relation to matter related to deemed tax credit arising from a Thailand subsidiary. The HC held that the deemed tax of 10%, that was otherwise spared by Thailand tax authority, shall be allowed as credit to the Indian company on the dividend income earned by the parent from its Thai subsidiary, considering the concept of ‘tax sparing’.

 
The batch of appeals pertained to AYs 2010-11 to 2013-14 of Polyplex Corporation Ltd, wherein the dividend income was included in the Income Tax Return (ITR) of Indian Company and the Indian Company claimed a deduction @10% (as would have been ordinarily applicable if the said dividend income was not tax free in Thailand). During the course of further proceedings, the ITAT concluded that incurring the liability to pay tax shall be the only pre-requisite to avail the benefit under Article 23 of the India-Thailand DTAA, irrespective of whether the tax has actually been paid or not. On the other hand, Revenue argued that the promotion certificate issued to the Thai subsidiary allowed it to be exempted from paying tax on the dividend distributed, and hence the dividend received by the Indian Company, being in the nature of income shall be taxable. Dismissing the Revenue’s appeal, the HC held that on a plain reading of Article 23 of the India-Thailand DTAA, it becomes evident that the provisions are designed to incentivize the investments in Thailand. This can be achieved only by granting enticing tax credit relief on the tax payable in Thailand, even if the same is unpaid owing to the exemptions or reductions granted under Thai law.
 
Key takeaway – The interpretation of tax treaties by HC was laudable, wherein the HC commented that its not within its realm to go into the merits of economic consequences of such decisions. Underscores that concept of tax sparing is embedded in several DTAAs executed by India, such as with France, Jordan and Oman, apart from Thailand, insofar as the India-Thailand DTAA is concerned, credit for tax sparing works for residents of Thailand, as well as India on a mutual basis. This beneficial ruling will not be useful under the India-Thailand DTAA post-amendment (tax sparring clause deleted in amended DTAA). However, similar benefits could be explored under DTAAs with countries such as Bangladesh, France, Oman, Philippines, and Singapore