Avail Foreign Tax Credit to Indian Domestic Company

Avail Foreign Tax Credit to Indian Domestic Company

Provision of Tax laws & DTAA (Double Tax Avoidance Agreement) –

A.    Provision of Tax Treaty – Article 23 (ELIMINATION OF DOUBLE TAXATION) stated that, the amount of tax payable, under the Foreign Tax Laws and in accordance with the provisions of treaty between the countries, whether directly or by deduction, by a resident of India, in respect of profits or income arising in foreign country, which has been subjected to tax both in India and in foreign country, shall be allowed as a credit against the Indian tax payable in respect of such profits or income provided that such credit shall not exceed the Indian tax (as computed before allowing any such credit) which is appropriate to the profits or income arising in foreign country. Further, where such resident is a company by which surtax is payable in India, the credit aforesaid shall be allowed in the first instance against income-tax payable by the company in India and as to the balance, if any, against surtax payable by it in India. Therefore, Foreign tax credit to the extent the tax payable on double income tax in India.

B.    Provision of Income Tax Act 1961 –

B1. Any sum paid outside India and eligible for relief of tax under section 90 or deduction from the income tax payable under section 91 of the Income-tax Act 1961, is not allowable as deduction under section 37(1) of the Income-tax Act 1961 and is deemed under section 40 of the Act. However, the taxpayer will continue to be eligible for tax credit in the respect of Income-tax paid in foreign country in accordance with the provision of Section 90 or Section 91 of the Income-tax Act, as case may be. (DCIT vs Elitecore Tech. Pvt. Ltd.)

B2. Recently, the Ahmedabad Bench of the Income-tax Tribunal in case of Elitecore Tech. Private Limited held that the foreign tax credit (FTC) is eligible on income and not on gross receipts. However, based on peculiar facts of the instant case, the tribunal allowed the Foreign Tax Credit to the taxpayer on the basis of “Gross Receipts”.

Compliance to avail the Foreign tax Credit – Compliance with Notification No. 54/2016, dated 27^th June 2016, where The Central Board of Direct Taxes (CBDT) has notified Foreign Tax Credit (FTC) Rules laying down broad principles and conditions for computation and claim of foreign taxes paid in overseas countries by resident taxpayers. These Rules shall come into effect from 1 April 2017.

Forwards – Resident shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India, by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the comply with rule 128 of the IT Rules.

Click here for Detail Notification –

https://www.incometaxindia.gov.in/communications/notification/notification542016.pdf