FACTS OF THE CASE

  • The assessee earned dividend income from its Thai subsidiary.
  • Thailand granted tax exemption on such dividend under its domestic law.
  • The assessee claimed tax credit in India (10%) on such income under Article 23 of DTAA.
  • The Assessing Officer disallowed the credit since no actual tax was paid in Thailand.
  • CIT(A) upheld the disallowance.
  • ITAT allowed the assessee’s claim.
  • Revenue appealed before the High Court.

 ISSUES INVOLVED

  1. Whether tax credit under Article 23 of DTAA is available even when tax is not actually paid in the source country?
  2. Whether “tax payable” includes notional tax (tax sparing credit) under DTAA?
  3. Whether exemption under foreign law can still entitle assessee to tax credit in India?

 PETITIONER’S (REVENUE) ARGUMENTS

  • Tax credit is allowable only when tax is actually paid in Thailand.
  • Assessee cannot claim benefit of exemption granted to subsidiary.
  • Tribunal wrongly interpreted foreign law without proper proof.
  • DTAA does not permit notional tax credit without payment.
  • Exemption relied upon was not applicable to dividend in assessee’s hands.

 RESPONDENT’S (ASSESSEE) ARGUMENTS

  • Article 23 incorporates tax sparing concept, allowing credit for tax that would have been payable but for exemption.
  • DTAA explicitly includes deemed tax payable under Article 23(3).
  • Dividend income was taxable in India; hence credit must be allowed.
  • Similar principle upheld in earlier judicial precedents.
  • Tax incentives in Thailand aim at economic development and must be respected under DTAA.

 COURT’S FINDINGS / ORDER

  • The High Court upheld the ITAT decision in favour of the assessee.
  • It held that:

 Tax Sparing Credit Allowed

  • Article 23 clearly provides that “tax payable” includes tax not paid due to exemption.

 Deeming Fiction Applies

  • DTAA includes notional tax (deemed tax) under its provisions.

 Purpose of DTAA Recognized

  • Tax sparing provisions are intended to promote economic development and investment.

 No Requirement of Actual Payment

  • Tax credit is allowable even if tax is not actually paid, provided it was otherwise payable.

 No Substantial Question of Law

  • Appeals dismissed; assessee entitled to tax credit.

 IMPORTANT CLARIFICATION

  • “Tax payable” ≠ “Tax actually paid” under DTAA.
  • Tax sparing provisions allow credit for hypothetical tax liability.
  • DTAA provisions override domestic law where beneficial (Section 90(2)).
  • Encouragement of foreign investment is a key objective behind such provisions.

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

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