Facts of the Case

The case pertains to Assessment Years 2010–11 to 2013–14, where the assessee, Polyplex Corporation Ltd., earned dividend income from its Thai subsidiary. The assessee claimed foreign tax credit amounting to ₹1.60 crore on such dividend income under Article 23 of the Indo-Thailand Double Taxation Avoidance Agreement (DTAA).

Although tax on such dividend income was not actually paid in Thailand due to exemption under Thai law, the assessee claimed credit based on the concept of “tax sparing”, arguing that the tax was otherwise payable but exempted under the statutory regime of Thailand.

The Assessing Officer disallowed the credit, which was upheld by CIT(A). However, the Income Tax Appellate Tribunal allowed the assessee’s claim, leading to appeals before the Delhi High Court.

Issues Involved

  1. Whether foreign tax credit can be allowed for tax not actually paid but deemed to be payable under the tax sparing provisions of DTAA.
  2. Interpretation of Article 23 of the Indo-Thailand DTAA concerning “tax sparing credit”.
  3. Whether exemption granted under Thai law qualifies for deemed tax credit in India.

Petitioner’s Arguments (Revenue)

  • Tax credit cannot be granted unless tax is actually paid in the source country.
  • Article 23 does not permit credit for hypothetical or notional tax.
  • The exemption benefit was granted to the Thai subsidiary, not the Indian assessee.
  • The Tribunal erred in interpreting foreign law without proper verification.
  • The assessee failed to prove actual exemption applicability.

Respondent’s Arguments (Assessee)

  • 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 under Thai laws.
  • Thai laws (Investment Promotion Act & Revenue Code) clearly exempt such dividend income.
  • DTAA provisions override domestic law where more beneficial (Section 90(2)).
  • Reliance placed on judicial precedents including PCIT vs Krishak Bharti Cooperative Ltd.

Court Findings / Order

  • The Delhi High Court upheld the Tribunal’s decision and dismissed the Revenue’s appeals.
  • It held that tax sparing credit is valid even when tax is not actually paid, if exemption exists under the foreign country’s law.
  • Article 23(3) creates a deeming fiction, treating exempted tax as “tax payable”.
  • The purpose of such provisions is to encourage foreign investment and economic development.
  • No substantial question of law arose in the matter.

Important Clarification

  • “Tax payable” under DTAA must be interpreted as defined in the treaty, not under ordinary meaning.
  • Tax sparing provisions prevent neutralization of tax incentives given by source countries.
  • Even if no tax is paid abroad, credit can still be allowed in India if DTAA specifically provides.
  • DTAA provisions prevail where they are more beneficial than domestic law (Section 90(2)).

Sections / Provisions Involved

  • Section 90 & 90(2), Income Tax Act, 1961
  • Section 143(1), Income Tax Act, 1961
  • Article 23, Indo-Thailand DTAA (Elimination of Double Taxation)
  • Section 34, Thailand Investment Promotion Act
  • Section 70, Thai Revenue Code

 Link to download the order - 

https://delhihighcourt.nic.in/app/showFileJudgment/RAS18072023ITA5712019_152249.pdf

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