ITAT Declines Foreign Tax Credits to Bank of India for Rs. 182.64 crores

ITAT Declines Foreign Tax Credits to Bank of India for Rs. 182.64 crores

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, on 4 March 2021 in the case titled Bank of India (Appellant/ Assessee) v. Asst. Commissioner of Income Tax (Respondent/ Revenue) declined foreign tax credits to the appellants of Rs.182.64 crore.

The ITAT Vice President Pramod Kumar dealt with the question- whether foreign tax credits could be allowed even when such tax credits lead to a situation in which taxes paid abroad could be refunded in India.

It stated that it must not be construed to mean that, as a corollary to the Tribunal's decision, these foreign tax credits would have been allowed, even if there is no domestic tax liability in respect of the related income in India if it was not to result in such a refund situation.

The factual background of the case is that the assessee is a major bank of India that has several branches abroad as well and a few in the treaty partner jurisdictions, i.e., the countries with which India has entered into Double Taxation Avoidance Agreements (DTAA) and remaining in the non-treaty partner jurisdictions.

The assessee has also invested, as a shareholder, in two foreign banks, namely PT Bank Swadeshi (Indonesia) and Indo Zambia Bank Limited (Zambia). It has earned business profits from its branches outside India, namely in UK, USA, France, Belgium, Kenya, Japan, Singapore, China, Hong Kong, Cambodia, and Jersey.

The assessee earned profits in these jurisdictions, and in accordance with the domestic tax laws in the respective tax jurisdictions, the assessee bank paid income tax aggregating to Rs 165.96 crore in treaty partner jurisdictions (on taxable income aggregating to Rs 200.90 crore in these jurisdictions) and Rs 15.79 crore in non-treaty partner jurisdictions (on taxable income aggregating to Rs 635.19 crore in these jurisdictions), in addition to income tax amounting to Rs 87,54,656 having been withheld from the foreign dividend income aggregating to Rs 8,46,61,252 received by the assessee.

The assessee did earn profits from these foreign operations and by way of foreign dividend income, the computation of the assessee's global income, which is taxable in India, resulted in a net loss of Rs 191,38,89,912. This was the loss computed by the Assessing Officer (AO) in its order.

The order stated that the assessee had no tax liability in India for its income and profits earned abroad and hence the assessee was not given any credit for the taxes paid abroad.

The assessee claimed that the taxes paid to the overseas tax jurisdictions, where the related profits are earned, should be given due credit in the computation of refund. Hence, the income tax paid by the assessee to foreign tax jurisdictions should be refunded to the assessee by the Indian tax authorities.

An appeal was filed before the Commissioner of Income Tax (Appeals) [CIT(A)] that upheld the order of the AO i.e. declining of the deductions in the computation of business income, of Rs 182,64,22,948 in respect of taxes so paid abroad.

The Bank moved to the ITAT against the order of the CIT(A). The main issue before the ITAT was whether the foreign tax credits could be allowed even when such tax credits lead to a situation in which taxes paid abroad could be refunded in India.

It was submitted by the assessee that during the course of hearing while the assesses has actually suffered taxation of a soured foreign income in the source jurisdiction, the income earned by the assessee abroad has also been included in the income taxable in India, which happens to be a negative figure nevertheless, the foreign-sourced income has been subjected to tax in India as well.

The Appellant Tribunal opined that full tax credit for source taxation cannot be extended in the residence jurisdiction when a tax treaty sanctions only proportionate credit, and does not, in any case, specifically provide for the full foreign tax credit.

The ITAT observed that the assessee declined the foreign tax credits for Rs.182,64,22,948, and, accordingly, held that the assessee is not entitled to seek a refund of that money from the Indian tax exchequer.