Facts of the Case

The present matter arose from appeals filed by the Revenue against a common order of the Income Tax Appellate Tribunal concerning Assessment Years 2010–11 to 2013–14.

The assessee, M/s Polyplex Corporation Ltd., had received substantial dividend income from its Thai subsidiary. Although such dividend income was exempt from tax in Thailand due to statutory incentives under Thai law, the assessee claimed foreign tax credit (FTC) in India for the tax that would have been payable in Thailand (i.e., “tax sparing credit”) under Article 23 of the Indo-Thailand Double Taxation Avoidance Agreement (DTAA).

The Assessing Officer disallowed the claim on the ground that no tax had actually been paid in Thailand. The CIT(A) upheld the disallowance. However, the ITAT allowed the assessee’s claim, leading to appeals before the Delhi High Court.

Issues Involved

  1. Whether the assessee is entitled to claim tax credit in India for taxes not actually paid in Thailand but exempted under Thai law.
  2. Interpretation of Article 23 of the Indo-Thailand DTAA concerning “tax sparing”.
  3. Whether actual payment of tax is a prerequisite for claiming foreign tax credit under Section 90 of the Income Tax Act, 1961.

Petitioner’s (Revenue’s) Arguments

  • Tax credit cannot be granted unless tax is actually paid in the source country.
  • Article 23 of the DTAA does not extend to hypothetical or notional taxes.
  • The exemption under Thai law applied to the subsidiary, not the assessee.
  • The assessee failed to prove entitlement to exemption under Thai law.
  • The Tribunal erred in interpreting foreign law without proper factual verification.
  • The benefit of DTAA cannot be extended beyond its explicit scope.

 Respondent’s (Assessee’s) Arguments

  • The concept of tax sparing credit is embedded in Article 23 of the DTAA.
  • “Tax payable” includes tax that would have been payable but for exemption.
  • Thai law granted exemption on dividend income under its Investment Promotion Act.
  • DTAA provisions override domestic law under Section 90(2) where more beneficial.
  • Reliance placed on judicial precedents recognizing tax sparing provisions.
  • Since income was taxed in India at higher rates, credit must be granted to avoid double taxation.

 Court’s Findings / Order

The Delhi High Court dismissed the Revenue’s appeals and upheld the Tribunal’s decision.

  • Article 23 clearly includes “deemed tax payable”, i.e., tax that would have been payable but for exemption.
  • The DTAA explicitly incorporates tax sparing provisions to promote economic development.
  • Actual payment of tax is not necessary if the DTAA deems such tax as payable.
  • The Court emphasized that:
    • DTAA provisions prevail over domestic law where beneficial.
    • Tax sparing is a deliberate policy tool between contracting states.
  • Dividend income would have been taxable in Thailand at 10% but for exemption; hence credit is allowable.

Final Outcome:

  • No substantial question of law arose.
  • All Revenue appeals were dismissed.

Important Clarifications

  • Tax Sparing Credit Recognized: Even notional tax qualifies for FTC under DTAA.
  • Deeming Fiction Valid: “Tax payable” includes exempted tax under incentive laws.
  • DTAA Overrides Domestic Law: Section 90(2) ensures beneficial interpretation.
  • Encouragement of Foreign Investment: Tax sparing provisions are policy-driven and legally enforceable.

Sections / Provisions Involved

  • Section 90, Income Tax Act, 1961
  • Section 143(1), Income Tax Act, 1961
  • Article 23, Indo-Thailand DTAA (Elimination of Double Taxation)
  • Article 10, Indo-Thailand DTAA (Dividends)
  • Thai Investment Promotion Act (Sections 31 & 34)
  • Thai Revenue Code (Section 70)

Link to download the order - https://delhihighcourt.nic.in/app/showFileJudgment/RAS18072023ITA5712019_152249.pdf

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