Assessee covered by DTAA will be eligible for credit of State taxes u/s 91 despite DTAA not providing for the same
1) The India-US tax treaty (DTAA) provides for the credit of the Federal income taxes only.
2) This is allowed under Section 90 of Income tax act.
3) In terms of the India-US and India-Canada tax treaties, the payment of State income taxes in the USA and Canada are not taken into account for granting foreign tax credit, as only federal income tax is eligible for tax credit.
4) Further, these taxes are not allowed deduction under section 37(1) of the Act as these are in the nature of taxes on income.
ITAT obesrved that:
1) Section 91 of the Act provides credit of foreign taxes paid “in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation”
2) Explanation 1 to Section 40 (a)(ii) of the Act inserted by the Finance Act 2006 clarifies that amount eligible for double taxation avoidance relief would always be deemed to be part of tax on profits and therefore disallowable.
3) Section 2(43) of the Act states that “tax” in relation to AY 1965-66 and subsequent years means income-tax chargeable under the provisions of Act.
4) Tax credit provisions under Indian Income Tax Act are more beneficial to the taxpayer vis-à-vis the tax credit provisions in related tax treaties as the provisions does not discriminate between State and Federal taxes, and in effect provides for both these types of income taxes to be taken into account for the purpose of tax credits against Indian income-tax liability.
5) However, the India-US tax treaty provides for the credit of the Federal income taxes only.
6) While the title of section 91 of Indian Income Tax suggests that it is applicable only in cases where India has not entered into a double taxation avoidance agreement with the respective jurisdiction, but the scheme of section 91, read along with section 90, does not reflect any such limitation. Section 91 is, thus, required to be treated as general in application.
7) The fact that a taxpayer is entitled to make a particular claim, in accordance with a tax treaty provisions, does not disentitle him to make the claim in accordance with the provisions of the Act if it is more beneficial to him.
The Mumbai bench of Income-tax Appellate Tribunal (the Tribunal) in this case held that US federal tax and state tax paid in respect of income earned overseas are not deductible as expenditure incurred for earning income under section 37 of the Income-tax Act, 1961 (the Act).
Further, the Tribunal observed that, though relief is not available for state income taxes paid under the India- US tax treaty (tax treaty), the relief is available under Section 91 read with Section 90 of the Act
Reference :Tata Sons Limited vs. DCIT (ITAT No: 4978/Mum/04)