ORDER
Cherian, A.M.
In view of the common grounds involved in these two appeals by the same assessee, they are consolidated in a common order for the sake of convenience. These appeals have been filed by the assessee M/s. Durametallic (India) Ltd., Karapakkam Village, Chennai against the orders passed by the Commissioner (Appeals)-I, Madras for the assessment years 1987-88 and 1988-89.
2. The dispute in these appeals is regarding the manner of computation of double income-tax relief under the Agreement for Avoidance of Double Taxation between the Government of India and the Government of Singapore. During the previous years relevant for the assessment years 1987-88 and 1988-89 the assessee was in receipt of royalty from M/s. Durametallic Asia Ltd., Singapore. The assessee being a resident, the income by way of royalty from the foreign concern was includible in its total income. On the royalty amount the assessee was entitled to deduction under section 80-0 of the Income Tax Act to the extent of 50 per cent of the income so received and brought to India. Accordingly on the balance amount tax was levied under the Income Tax Act. On the income subjected to tax in India and Singapore the assessee is entitled to Double Income Tax Relief in terms of the Agreement between the two countries on the amount of Singapore tax payable on the income subjected to tax in both countries, but not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax. For the assessment year 1987-88 the assessee claimed double income-tax relief on a sum of Rs. 7,58,918, as the tax payable under the Tax Laws of Singapore in respect of the royalty income calculated as under :
Royalty income
Rs. 18,97,295
Tax payable in India on royalty at the rate of 50 per cent
Rs. 9,48,648
Tax payable in Singapore on royalty at the rate of 40 per cent
Rs. 7,58,918
The assessing officer did not accept the assessees computation of the Double Income Tax Relief as he was of the view that after the deduction under section 80-0 only 50 per cent of the royalty was subjected to tax in India and so the relief was allowable to the extent of the tax payable in Singapore on that amount. Accordingly the assessing officer allowed Double Income Tax Relief on a sum of Rs. 3,79,459 calculated as shown below :
Royalty income
Rs. 18,97,295
Deduction under section 80-0 at the rate of 50 per cent
Rs. 9,48,647
Balance royalty amount subjected to tax in India
Rs. 9,48,647
Income-tax at 50 per cent on the above sum subjected to tax in India
Rs. 4,74,323
Singapore tax at 40 per cent on the royalty amount subjected to tax in both countries, i.e., Rs. 9,48,648.
Rs. 3,79,459
In the assessment for the assessment year 1987-88 the assessing officer thus allowed relief to the extent of Rs. 3,79,459 only as against the assessees claim of Rs. 7,58,918.
3. For the assessment year 1988-89 the assessee was in receipt of royalty of Rs. 14,38,673 which was taxed in Singapore at 40 per cent. In this year also the assessee claimed relief to the extent of Rs. 5,75,467, i.e., tax payable in Singapore on the entire sum of Rs. 14,38,673. The assessing officer noticed that after the deduction under section 80-0 only the balance amount of Rs. 7,19,376 was subjected to tax in India. The tax payable in Singapore at 40 per cent was worked out on the sum of Rs. 7,19,336 and on that basis the assessing officer allowed relief to the extent of Rs. 2,87,735. Thus for the assessment year 1988-89 though the assessee had claimed relief to the extent of Rs. 5,75,469, the assessing officer allowed only Rs. 2,87,735.
4. Though the assessee took up the matter in appeal, for both years the Commissioner (Appeals) held that the relief as allowed by the assessing officer was correct and that in view of the deduction allowed under section 80-0, only the balance amount could be considered as income subjected to tax in both countries on which alone relief had to be worked out. Aggrieved with the orders passed by the first appellate authority the assessee has filed these appeals before the Tribunal.
5. Before us, Sri Vijayaraghavan, Advocate appearing on behalf of the assessee submitted that the revenue authorities were not correct in holding that the assessee was entitled to relief under the Double Taxation Avoidance Agreement to the extent of the Singapore tax payable on the reduced amount of royalty after the deduction under section 80-0. The learned counsel pointed out that under the Singapore Tax Laws, no deduction was allowed on the royalty income and that the entire royalty amount was subjected to tax in that country at 40 per cent. Though under the Income Tax Act deduction was allowed under section 80-0 on the royalty income, what was relevant to consider was the nature of the income and not the quantum as such-that was the main contention of the learned counsel. Drawing our attention to the relevant provisions in the Double Taxation Agreement Sri Vijayaraghavan submitted that the expression subjected to tax” used in article 24 of the Agreement refers to the qualitative aspect rather than the quantitative aspect. According to him, it was the royalty income that was the subject-matter of taxation in both countries and so the tax payable in respect of such income was to be considered for the relief. Referring to the assessment year 1987-88 it was stated that the royalty income subjected to tax was Rs. 18,97,295. The tax payable in Singapore at 40 per cent was Rs. 7,58,918 and so the assessee was entitled to relief to that extent. The learned counsel placed reliance on the decision of the ITAT, C-Bench, Mumbai in the case of K.E.C. International Ltd. v. STO (1991) 38 ITD 90 (Mum) to emphasise that qualitative and not quantitative aspect of the expression “income subjected to tax” were to be considered for the purpose of working out the Double Income Tax Relief. According to him, in the quantitative aspect the expression would denote the nature of the income, i.e., royalty in the instant case. it was his contention that as per article 24 of the D.T.A. Agreement once an income of a particular nature, e.g., royalty is subjected to tax both in India and Singapore, the entire tax in respect of that income payable in Singapore should be allowed as credit against the tax payable under the Income Tax Act in respect of such income. It was also pointed out that while applying the ceiling provision the proportion which the net income after the deduction under section 80-0 bears to the net taxable income would have to be taken into account. Sri Vijayaraghavan submitted that the amount of income-tax not exceeding that proportion which the net royalty income (after deduction under section 80-0) bears to the entire income chargeable to Indian tax was to be allowed as double income-tax relief in terms of the agreement. Our attention was also drawn to a decision of this Tribunal (B-Bench) in the case of Indian Bank v. ITO (1982) 13 TTJ (Mad-Trib) 252. In that case, it was pointed out the Tribunal allowed double income-tax relief on the tax payable on the income in Ceylon and Singapore without considering the deduction allowed under section 35B of the Income Tax Act. Arguing on the above lines, the learned counsel urged us to reverse the finding of the revenue authorities and to accept the relief as worked out by the assessee.
6. Per contra, Senior T. Goraknathan, the Sr. Departmental Representative supported the orders of the Commissioner (Appeals) and submitted it was after a detailed analysis of the provisions of the Double Taxation Avoidance Agreement that the appellate authority found that the assessee was entitled to double income-tax relief on the net income from royalty after the deduction under section 80-0. It was the contention of the learned Senior Departmental Representative that though deduction under section 80-0 was not allowable under the Singapore tax laws, under the Indian tax laws the assessee was allowed such deduction and only the balance amount after the deduction, was subjected to tax in India. According to Sri Goraknathan what is to be considered while working out the relief is, what is the income subjected to tax in both countries, and what is the amount of tax payable on the income tax in both countries. Referring to the assessment year 1987-88 the learned Departmental Representative stated that there was no dispute on the fact that the assessee was in receipt of royalty of Rs. 18,97,295 from the foreign concern. That was subjected to tax in Singapore. According to him, what was subjected to tax in India was not Rs. 18,97,295, but only the net amount of Rs. 9,48,648, after the deduction under section 80-0. It was his contention that only that net amount could be considered as having been subjected to tax in both countries and so the tax payable in Singapore in respect of that net amount alone was eligible for deduction as double income-tax relief. The learned Departmental Representative further submitted that the decisions relied on by the learned counsel for the assessee, were distinguishable on facts and not concerned with the interpretation of the expression “subjected to tax”. Sri Goraknathan contended that the Commissioner (Appeals) made a correct interpretation of the relevant provisions of the agreement and urged us to uphold his decision.
7. Under section 90 of the Income Tax Act, the Central Government is empowered to enter into an agreement with the government of any foreign country for avoidance of double taxation of income and to make provision for implementing the agreement by issue of notification, The two clauses (a) and (b) of section 90 provide for distinct circumstances; clause (a) provides for relief in cases where income-tax is already paid, both in India and in the foreign country on the same income. Clause (b) on the other hand, provides for the avoidance of double taxation. In other words, in clause (a), relief is granted after an income has suffered tax under the laws of both the countries; but in clause (b) relief is allowed at the time of assessment itself vide Shell Co. of India Ltd. v. CIT (1964) 51 ITR 669, 677 (Cal).
8. By virtue of the powers under section 90 Government of India entered into agreement with the Government of Singapore for avoidance of double taxation between the two countries. The Notification was issued on 18-1-1982 implementing that agreement. Article 24 of the Agreement, under Chapter IV, contains the provisions regarding avoidance of double taxation. The dispute in the present appeals centres round those provisions and so we find it useful to reproduce below the relevant clauses :
“Article 24
Avoidance of Double Taxation
1. The laws in force in either of the contracting states will continue to govern the taxation of income in the respective contracting states except where provisions to the contrary are made in this Agreement. Where income is subject to tax in both contracting states, relief from double taxation shall be given in accordance with the following paragraphs of this Article.
2. (a) The amount of Singapore tax payable, under the laws of Singapore, and in accordance with the provisions of this Agreement, whether directly or by deduction, by a resident of India, in respect of income from sources within Singapore which has been subjected to tax both in India and Singapore, shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax.
(b) For the purposes of credit referred to in sub-paragraph (a) above, there shall be deemed to have been paid by the resident of India the amount of Singapore tax which would have been payable but for the deduction allowed in computing the assessable income, reduction of or exemption from tax under”
It can be seen from clause 2(a) that the amount for which credit can be given against the Indian tax payable is the amount of Singapore tax. It is the amount of the tax payable under the laws of Singapore in respect of income from sources within Singapore, which has been subjected to tax in India and Singapore. What is the income which has been subjected to tax in India and Singapore in the present case? There is no dispute that the income by way of royalty subjected to tax in Singapore was Rs. 18,97,295. In India out of the royalty amount only Rs. 9,68,648, i.e., 50 per cent of the royalty was brought to tax after the deduction under section 80-0. According to the assessee the expression “income subjected to tax” refers to the nature of the income, i.e., royalty and in that sense royalty income was subjected to tax in both countries and the tax payable in Singapore being Rs. 7,58,918 (i.e., at 40 per cent on the sum of Rs. 18,97,295), credit was to be given for that amount, subject to the ceiling regarding the proportion to be maintained. On the other hand, the contention of revenue is that income subjected to tax means the quantum of income that has been brought to tax and so only the net amount of Rs. 9,68,648 could be considered as income subjected to tax in both countries. The decision in the case of K.E.C International Ltd. (supra) relied on by the learned counsel for the assessee is concerned with the interpretation of rule 2(ii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, which makes the following reading :
“In the case of a company which has been charged to tax in a company outside India on any portion of its income, profits and gains included in its total income as computed under the Income Tax Act, the tax actually paid in respect of such income, profits and gains in the said country in accordance with the laws in force in that country after allowance of every relief due under the said laws.”
The Tribunal held that the whole of the foreign tax paid was deductible under rule 2(ii) and that it was not correct to say that foreign tax relatable to only that part of the income which was taxed in the foreign country as well as in India, only should be deductible. It may be noted that the expression “income subjected to tax” is not appearing in rule 2(ii). Hence, the decision given on the interpretation of rule 2(ii) of the First Schedule to the Surtax Act does not help in understanding clause 2(b) of article 24 of the Agreement for Avoidance of Double Taxation between India and Singapore.
9. We find that the other decision in the case of Indian Bank (supra) also does not render assistance in dissolving the dispute in the present case. As can be seen from para-5 of that order, the entire dispute was with regard to the question whether in determining the amount of foreign income for the purpose of double income-tax relief under sections 90 and 91 of the Income Tax Act, the foreign income was to be computed after deducting the extra amount of deduction, allowed to the assessee under section 35 of the Act. In that case the Tribunal was considering the meaning of the word income as appearing in section 90(1)(a), and not the provisions of the Double Taxation Agreement with Singapore or Ceylon. As a matter of fact, the decision of the Tribunal related to the assessment years 1971-72 to 1976-77, whereas the Agreement between India & Singapore came into force after 18-1-1982 only.
10. We are thus left with the question : What is the amount of Singapore tax payable by the assessee in respect of the income which has been subjected to tax in both countries? It is our considered view that the expression “subjected to tax” has a narrower meaning, and it refers to the amount of income on which tax has been levied. In the present case though “income chargeable to tax” in both countries was royalty, under the Indian Tax Laws the assessee was allowed deduction under section 80-0 and tax was levied in India, on the net amount only. Hence only 50 per cent of the royalty on which tax was levied in India, could be considered as income subjected to tax in India. Even though royalty income subjected to tax in Singapore was Rs. 18,97,295, in India the assessee had to bear the tax burden only on 50 per cent of the royalty amount. The intention behind the Agreement for Avoidance of Double Taxation is to remove the hardship caused to a tax payer by the burden of double taxation on the same quantum of income. That objective is achieved by following the procedure laid down in the provisions of the Agreement. In accordance with the provisions of clause 2(a) of the Agreement tax at the rates applicable in Singapore on that amount of income assessed in both countries has to be found out and it is 40 per cent of Rs. 9,48,647 and not Rs. 18,97,295.
11. In Singapore tax incentive is provided on 100 per cent of the income, but tax is deemed to have been paid by deduction. There is a specific reference in clause 2(a) of article 24 to the amount of tax payable,-whether directly or by deduction. But with regard to the Indian tax there is no reference to tax exemption or concession in the hands of a resident in India. There is only a reference to the Indian tax payable and it can mean only the tax liability arising out of the assessment of the amount of royalty in India. What is subjected to tax in both the countries is Rs. 9,48,647 and so the assessee is entitled to the credit on the Singapore tax of Rs. 3,79,459, i.e., tax calculated at 40 per cent on the sum of Rs. 9,48,647. Though it has to be limited to an amount not exceeding that portion of Indian tax which such income bears, i.e., the doubly taxed income of Rs. 9,48,647 bears to the entire income chargeable to Indian tax, as the Indian income-tax at 50 per cent comes to Rs. 4,74,323, the ceiling is not applicable in this case. The assessee is thus entitled to a credit of Rs. 3,79,459 being the Singapore tax paid on the income subjected to tax in both countries.
12. In this connection it is useful to refer to section 91 which provides for relief in respect of income from countries with which there exists no agreement under section 90 for avoidance of double taxation. It is provided in section 91 that a person resident in India is entitled to the deduction from the income-tax payable by him, a sum calculated on such doubly taxed income at the Indian rate of tax or at the rate of the foreign country whichever is lower. In the case of CIT v. CS. Murthy (1988) 169 ITR 686 the A.P. High Court held that as the assessee had been granted deduction under section 80RRA, on 50 per cent of the remuneration from foreign employer, only balance amount was subjected to tax in India and so relief on double taxation was available only on 50 per cent of the remuneration. That was the view taken by the Rajasthan High Court also in CIT v. Dr. R.N. Jhanji (1990) 185 ITR 586 (Raj). In that case the court observed :
“Section 91 cannot be construed in isolation, but with the other provisions of the Act. Accordingly it is only the tax already paid on that part of the foreign income under the Indian Income Tax which is required to be deducted for the purpose of giving relief from double taxation.”
The above decision was followed in the subsequent decision of the Rajasthan High Court in CIT v. Dr. JC Sharma (1990) 186 ITR 173 (Raj).
13. True, the above decisions are concerned with the D.I.T. relief under section 90. The learned counsel for the assessee is correct that the expression used in section 91 is “such doubly taxed income” and not income subjected to tax in both countries as appearing in the Agreement with Singapore with which we are now concerned. We may mention here that in the case of C.S. Murthy (supra) decided by the A.P. High Court the expression subjected to tax has been used on page 691, as we have understood
“…….The main requirement, therefore, is that the income must have been taxed outside India and the same income must have again been subjected to tax under the Income Tax Act in India. If any portion of the foreign income is not subjected to tax in India, then, the assessee will not be entitled to claim deduction on that part of the foreign income which is not subjected to tax in this country. This fits into the real scheme and intent of section 91 of the Act which is to the effect that in respect of any income, a person should not be doubly taxed, once outside India and again in India. If the income taxed outside India is subjected to tax again in India, then, the provisions of section 91 of the Act would come into operation and the assessee can claim appropriate relief on the doubly taxed income………”
14. It may be seen that the court has used the expression doubly taxed to mean that the income taxed outside India is subjected to tax again in India. The view taken is that the same income should have been subjected to tax in both countries. In the circumstances of this case, we hold that the Commissioner (Appeals) was justified in confirming the order passed by the assessing officer allowing the D.I.T. relief on the Singapore tax on net amount of royalty subjected to tax in India. This ground of appeal is accordingly decided against the assessee.
15. Another common ground in these two appeals is to the effect that the Commissioner (Appeals) erred in holding that relief under Double Taxation Agreement was not available against Surtax. Before the Commissioner (Appeals) the assessee contended that Indian Income Tax did not mean income-tax alone, but Surtax as well and that credit should have been allowed first against the Surtax liability in order to give full effect to the terms of the D.T.A. Agreement. The Commissioner (Appeals) did not accept the assessees contention on the reasoning that the D.T.A. Agreement did not spell out any priority in which credit for Singapore tax was to be allowed.
16. Before us, the learned counsel Sri Vijayaragbavan submitted that the Commissioner (Appeals) erred in not appreciating the contention that under the D.T.A. Agreement “income-tax” included “Surtax” also and that, by allowing the relief against Income-tax first and then computing the Surtax liability, unintended hardship would be caused to the assessee. It was submitted that by allowing first the credit towards Income-tax and then computing the Surtax liability based upon the reduced income-tax liability would amount to subjecting to Surtax the tax relief available under D.T.A. Agreement. According to Sri Vijayaraghavan such computation would be against the basic principle underlying the D.T.A. Agreement which was intended to avoid the hardship to taxpayers.
17. Sri Goraknathan, the Sr. Departmental Representative, in his counter argument emphasised the fact that in the D.T.A. Agreement under consideration, there was no provision enjoining that priority should be given to Surtax in the matter of set off of the credit on account of Singapore tax. He added that as income-tax is to be deducted from the chargeable profit for the purpose of levying Surtax, by not adjusting the D.T.A. relief against income-tax, the correct liability would not be ascertained and then the computation of the Surtax liability would not be possible.
18. It is important to note that Surtax under the Companies (Profits) Surtax Act, 1964 can be computed only after determining the income-tax payable under the provisions of the Income Tax Act. It can be seen from rule 2(a) of the First Schedule to the Surtax Act, that the chargeable profit is computed after giving reduction for the amount of income-tax payable by the company in respect of its total income. In rule 2(ii) it is provided that in the case of a company which has been charged to tax in a country outside India on any portion of its income, profits and gains included in its total income as computed under the Income Tax Act, the tax actually paid in respect of such income, profits and gains in the said country after allowance of every relief due under the said laws is to be deducted. That means in computing the chargeable profits under the Surtax Act, from the profits and gains of the previous year, not only the amount of income-tax payable in India is allowed as deduction [as per rule 2(i)] but also the amount of income-tax actually paid in the foreign country in respect of such income (Rule 2(ii)]. In the present case, as per rule 2(ii) of the First Schedule to the Surtax Act, the assessee is entitled to a reduction of the tax actually paid in Singapore in respect of that portion of income from royalty, which has been included in its total income computed under the Income Tax Act. It is the same amount of tax paid in Singapore that is given credit against the income-tax liability. There is thus no merit in the contention of the learned counsel for the assessee that by allowing first the credit against income-tax, the D.T.A. relief is again subjected to tax under the Surtax Act, that the assessee is thus put to unintended hardship. On the other hand by allowing reduction for the reduced amount of income-tax liability under rule 2(1) of the First Schedule and then allowing reduction separately for the tax paid in the foreign country under rule 2(ii), the legislature has taken care to see that no such hardship is a caused to the taxpayer. If the view as canvassed by the learned counsel is accepted, the assessee would be getting an unintended advantage by getting reduction of a higher amount as income-tax liability other than as provided in rule 2(1), which provides for reduction of the amount of income-tax payable by the company in respect of its total income under the provisions of the Income Tax Act, after making allowance for any relief, rebate or reduction in respect of the income-tax to which the company is entitled to under the provisions of the said Act. The D.I.T. relief allowable under section 90 of the Income Tax Act is to be reduced while arriving at the amount of income-tax payable by the company on its total income, which is deductible, for the purpose of computing the chargeable profit.
19. Having regard to the provisions of the Surtax Act, we hold that the Commissioner (Appeals) was justified in not accepting the assessees claim for giving credit for the Singapore Tax against the Surtax liability, on a priority basis. We thus uphold the decision of the Commissioner (Appeals) on this issue.
20. In the result, these two appeals by the assessee are dismissed.