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Judgment
PER MADHUMITA ROY, JM:
The instant appeal filed by the assessee is directed against the order dated 25.11.2025 passed by the Ld. Commissioner of Income Tax Appeals ADDL/JCIT(A), Thane, under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) arising out of the Order dated 15.03.2024 passed by CPC Bangalore, under Section 154 of the Act for Assessment Year 2017-18.
The assessee an Indian Company, providing a bouquet of products and services in the telecommunication sector filed its original return of on 07.11.2017 for A.Y 2017-18 inter alia claiming foreign tax credit of Rs. 43,25,706/- case whereof was selected for limited scrutiny under Section 143(3) of the Act on the issues of “Double Taxation Relief under Section 90/9 of the Act”. The assessee, during the course of scrutiny proceeding explained the contract with Huawei Technologies Nepal Co. Private Limited which had deducted TDS @ 5%and against which foreign tax credit was claimed.
The Learned AO further questioned the assessee and sought certain documents to verify the claim made by the assessee under Section 90/91 of the Act to this effect that what was the rate of conversion of currency considered in the matter, what was the date considered for conversion, reconciliation of amount claimed to have been deducted under Section 90/91 of the Act and the amount claimed as TDS required and further that an affidavit stating under oath that the certificate under Section 90/91 of the Act produced is true and genuine in response whereto the assessee duly submitted the details.
Subsequently, Form No. 67 against which relief under Section 90/91Aof the Act was sought for by the Ld. AO which was duly filed before theLd. AO. Thereafter,the Ld. AO on detailed questioning and upon perusal of the documents furnished by the assessee accepted the returned income filed by the assessee by and under its order dated 28.09.2019 appearing at page 91 to 92 of the paper book filed before us. In fact all the details as stated hereinabove are part of the paper book filed before us by the assessee.
Subsequently on 8.03.2024 the Ld. AO issued a show cause under Section 154 of the Act to the assesseeon the pretext of the entire receipts of Nepal having been considered as taxable in India which is according to the Ld AR refutable on perusal of the amount of “tax payable on such income under formal provision in India” submitted in column 7 of Form No. 67 as INR 45,80,913/-. Admittedly this show cause was issued after anelapse of four years from the date of passing of orders by the Ld. AO on 28.09.2019 under Section 143(3) of the Act. The show cause issued by the Ld. AO is reproduced herein below:
“Sir/Madam/Ms,
Subject: Proceedings under section 154 - Notice
Whereas the assessment order was passed under section 143(3) of the IT Act on 28.09.2019 in the case of Telecom Network Solutions Private Limited for the A.Y. 2017-18, at returned income which is required to be rectified as there is a mistake apparent from the record within the meaning of Section 154 of the Income Tax Act, 1961.
PARTICULARS OF MISTAKE(S) PROPOSED TO BE RECTIFIED:-
2.On perusal of ITR filed by the assessee it is seen that the assessee has claimed relief u/s 90/91 of the Act of Rs. 43,25,706/- against total foreign receipts of Rs. 8,65,14,112/- from Nepal. Furthermore, on perusal of details filed by the assessee during assessment proceedings, it is seen that the assessee has worked out allowable claim u/s 90/91 with reference to receipts (and not income) from Nepal. This approach is incorrect because as per the clause - "Avoidance of Double Taxation" of Article 23 of DTAA with Nepal, allowable relief u/s 90 needs to be worked out with reference to "income" and not "receipts". Here, it is also pertinent to note that deduction u/s 90/91 cannot exceed the part of income tax which is attributable to the income which may be taxed in other country.
From the above, it is clear that the assessee has to claim credit of foreign tax with reference to income earned from Nepal and not the total receipts from that country. In other words, foreign tax credit cannot exceed the tax payable in India on income earned from foreign countries. So, the assessee had towork out net profit earned from foreign countries and only tax credit equal to the tax payable on such net profit can be given. The assessee has not submitted these calculations. The assessee has shown net profit of Rs. 14,32,19,316/- against total receipts of Rs. 1,80,10,48,992/- which comes to net profit rate of 7.95%. Accordingly, net profit rate of 7.95% should be applied to the foreign receipts and allowable credit u/s 90/91 should be worked out as under:
Foreign Receipts from Nepal Nettaxable profit in India 7.95% on foreign receipts Tax plus surcharge payable in India on such profit Foreign TDS allowed Excess credit allowedu/s90/91 8,65,14,112/- 68,77,872/- 23,80,293/- 43,25,706/- 19,45,413/- From the above, it is seen that the assessee would have earned a net profit of Rs. 68,77,872/- from foreign countries and has set off foreign tax credit against the net profit earned from Indian operations which is not permissible under Income tax Act. The mistake has resulted in excess credit of foreign tax u/s 90/91 amounting to Rs. 19,45,413/-R
3.The above mistake is apparent from record and comes under the purview of section 154 of the I.T. Act, 1961. The same is proposed to be rectified u/s 154 of the I.T. Act.
4.If you wish to be heard, you are requested to submit your reply/documents so as to reach the undersigned on or before 15/03/2024.
5.It may be noted that if no reply is received from your end by 15/03/2024, rectification u/s 154 of the Income Tax Act, 1961 will be carried out by the Department.”
Under these facts and circumstances of the matter, it is the case made out before us by the assessee that the allowability of this deduction is a complex issue requiring detailed examination andmoreso, the same has already been accepted by the Ld. AO after perusal and proper consideration of the relevant records and due application of mind which was incorrectly treated as rectification without mentioning “ mistake apparent from the record”; the same is nothing but change of opinion by the Assessing Officer and unless there is an mistake apparent from record the provision of Section 154 of the Act cannot be applied and therefore, the order initiating the rectification proceeding under Section 154 of the Act by the Ld. AO is liable to be quashed. Relevant to mention that the Ld. AO finally on 18.03.2024 passed the order under Section 154 of the Act whereby and whereunderthe excess credit of foreign tax allowed under Section 90 amounting to Rs. 19,45,413/-stood disallowed and total tax relief under Section 90 has been restricted to Rs. 23,80,293/- which was further confirmed by the First Appellate Authority. Hence the instant appeal before us.
For further clarification the order passed by the Ld. AO under Section 154 read with 143(3) of the Act dated 18.03.2024 is reproduced herein below:-
“ORDER U/S 154/143(3) OF THE INCOME TAX ACT, 1961
The return of income was filed by the assessee company Telecom Network Solutions Private Limited on 07.11.2017 declaring income of Rs. 15,60,31,570/-. The case was selected for scrutiny & assessment order u/s 143(3) of the Income Tax Act was passed on 16.12.2019 at returned income.
2.On perusal of ITR filed by the assessee it is seen that the assessee has claimed relief u/s 90/91 of the Act of Rs. 43,25,706/- against total foreign receipts of Rs. 8,65,14,112/- from Nepal. Furthermore, on perusal of details filed by the assessee during assessment proceedings, it is seen that the assessee has worked out allowable claim u/s 90/91 with reference to receipts (and not income) from Nepal. This approach is incorrect because as per the clause "Avoidance of Double Taxation" - of Article 23 of DTAA with Nepal, allowable relief u/s 90 needs to be worked out with reference to "income" and not "receipts". Here, it is also pertinent to note that deduction u/s 90/91 cannot exceed the part of income tax which is attributable to the income which may be taxed in other country.
From the above, it is clear that the assessee has to claim credit of foreign tax with reference to income earned from Nepal and not the total receipts from that country. In other words, foreign tax credit cannot exceed the tax payable in India on income earned from foreign countries. So, the assessee had to work out net profit earned from foreign countries and only tax credit equal to the tax payable on such net profit can be given. The assessee has not submitted these calculations. The assessee has shown net profit of Rs. 14,32,19,316/- against total receipts of Rs. 1,80,10,48,992/- which comes to net profit rate of 7.95%. Accordingly, net profit rate of 7.95% should be applied to the foreign receipts and allowable credit u/s 90/91 should be worked out as under:
Foreign Receipts Net Taxable profit in India @ 7.95% on foreign receipts Tax plus surcharge payable in India on such profit Foreign TDS allowed Excess credit allowedu/s 90/91 8,65,14,112/- 68,77,872/- 23,80,293/- 43,25,706/- 19,45,413/- From the above, it is seen that the assessee would have earned a net profit of Rs. 68,77,872/-from foreign countries and has set off foreign tax credit against the net profit earned from Indian operations which is not permissible under Income tax Act. The mistake has resulted in excess credit of foreign tax u/s 90/91 amounting to Rs. 19,45,413/-.
3.Accordingly, notice dated 08.03.2024 u/s 154 of the 1.T. Act, 1961 was issued and served upon the assessee through ITBA vide DIN & Letter No. ITBA/COM/F/17/2023-24/1062270888(1) fixing the date for filing submission if any on or before 15.03.2024.
4.In response to the notice, the assessee has filed a submission dated 13.03.2024 wherein assessee has claimed that the net margins against export sales is higher than domestic sales and in the case of the assessee net margin on sales made in Nepal is much higher as compared to the net margin against the sales to customers in India of similar products. To support this claim, assessee has attached sample copies of Invoices for customer in Nepal and for customer in India. However, these invoices are not sufficient to prove the claim of assessee as from these invoices we can extract only the information about the revenue earned by assessee company from the work performed by the company. These invoices do not tell anything about the cost incurred by assessee company in performing the work mentioned in the invoices. Thus, the profit margins made by assessee company from these works cannot be computed. Assessee is trying to claim the tax relief u/s 90/91 only on the basis of the receipts (and not income) from Nepal.
However, as per the clause - "Avoidance of Double Taxation" - of Article 23 of DTAA with Nepal, allowable relief u/s 90 needs to be worked out with reference to "income" and not "receipts". Here, it is also pertinent to note that deduction u/s 90/91 cannot exceed the part of income tax which is attributable to the income which may be taxed in other country. For example, the relevant portion of the DTAAs with Nepal is reproduced as under:
ARTICLE 23
METHODS FOR ELIMINATION OF DOUBLE TAXATION
"1.The laws in force in either of the Contracting States shall 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.Double Taxation shall be eliminated as follows:
In India:
(a)Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Nepal, India shall allow as a deduction from the tax on the income of that resident, an amount equal to the tax paid in Nepal.
Such deduction shall not, however, exceed that portion of the tax as computed before the deduction is given, which is attributable, as the case may be, to the income which may be taxed in Nepal.
(b)Where in accordance with any provision of the Agreement income derived by a resident of India is exempt from tax in India may nevertheless, in calculating theamount of tax on the remaining income of such resident, take into account the exempted income.
In view of the above remarks, it is clear that the mistake pointed out in the notice dated 08.03.2024 u/s 154 regarding the excess foreign credit allowed still persists. Therefore, the submission filed by assessee is not found tenable and thus rejected.
5.In conclusion, excess credit of foreign tax allowed u/s 90 amounting to Rs. 19,45,413/- is disallowed and total tax relief u/s 90 is restricted to Rs. 23,80,293/-.”
The Ld. CIT(A) while upholding the order passed by the Ld. AO observed as follows:
“5.1.3After perusal of the assessment order, the written submissions of the appellant, and the material on record, it is seen that the Assessing Officer (AO) has correctly disallowed the excess foreign tax credit (FTC) of Rs. 19,45,413/- claimed by the appellant u/s 90/91 of the Act. The appellant's claim was based on total receipts from Nepal amounting to Rs. 8,65,14,112/-, rather than the net taxable income attributable to such receipts. This approach is inconsistent with the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Nepal, specifically Article 23, which mandates that the FTC be computed with reference to income and not receipts. The DTAA stipulates that the credit shall not exceed that portion of the tax computed before the deduction which is attributable to the income that may be taxed in Nepal. The appellant's contention that the net profit margins on export sales to Nepal are higher than those on domestic sales in India was supported by sample invoices. However, these invoices reflected only revenue figures without detailing theassociated costs, rendering them insufficient to substantiate the claimed net profit. The appellant's failure to provide comprehensive cost data undermines the validity of the claimed FTC. Furthermore, the appellant's attempt to apply the FTC against net profits from Indian operations, rather than profits earned from Nepal, contravenes the statutory provisions. The Income Tax Act and the DTAA require that the FTC be computed based on net income earned from foreign operations, not on global net profits. The appellant's methodology of applying the FTC against Indian profits is therefore impermissible. In light of the above, the appellate authority concurs with the AO's findings and upholds the disallowance of the excess FTC of Rs. 19,45,413/-. The total tax relief under Sections 90/91 is accordingly restricted to Rs. 23,80,293/-, as computed by the AO. The appellant's submissions do not provide sufficient grounds to overturn the AO's decision. Therefore, the appeal on these grounds is hereby dismissed.”
The Learned Counsel appearing for the assessee submitted before us that making this addition warrants for calling out of new records outside the assessment record which is not permissible under the provision of Section 154 of the Act for rectification of any error apparent on the face of the order passed by Ld. AO. The Ld. DR relied upon the order passed by the authorities.
We have heard the parties and perused the records.
In this regard, the Ld AR has relied upon the judgement passed in the matter of Asian Art Printers (P.) Ltd. Vs. IAC, reported at 38 TTJ 371 passed by the Coordinate Bench wherein the ITO made enquiries about the expenditure in question and upon considering the explanation rendered by the assessee didn’t find the expenditure or any portion thereof as disallowable. It appears that the Ld. AO actually applied his mind and the facts and circumstances of the matter and allowed the expenditure. In any case he has to be deemed to have allowed the expenditure and therefore, could not revise his opinion and initiate action under Section 154 of the Act. The ITO’s action in taking recourse under Section 154 of the Act is based on mere change of opinion and did not confer any jurisdiction on him to act under the provision of Section 154 of the Act as further held by the Bench.
We have further considered the judgement passed by the Hon’ble Supreme Court in the case of T.S. Balaram, Income tax officer reported in [1971] 82 ITR 50 (SC), as relied by the Ld AR wherein it has been held that a mistake apparent on the record must be an obvious patent mistake and not something which can be established by a longdrawn process of listening on points on which there may conceivably by two opinions. The judgement passed by the Hon’ble Supreme Court in the case of Keshri Metal Private Limited, reported in (1999)104 taxmann 360 (SC)as relied upon by the Ld AR is also considered by us wherein it has been held that it was not in error in coming to the conclusion that there was no occasion for rectification. Under the provision of Section 154 of the Act, there has to be a mistake apparent from the record. In other words, a look at the record must show that there has been an error and that the error may be rectified.
In the case in hand it appears that the Ld. AO in the proceeding initiated under Section 143(3) of the Act duly considered the reply given by the assessee on the issues as already discussed above and then only upon application of mind accepted the returned income filed by the assessee on 28.09.2019. Further that the show cause issued after a prolonged period of four years that too not mentioning the definite mistake apparent on the face of the record which sought to be rectified and further that the order dated 18.03.2024 under section 154 of the Act is not found to be rectification an error apparent on the face of the records rather it has considered further calculation which was not submitted by the assessee as per his opinion.
The Ld. Counsel for the Revenue has not been able to satisfy as that it shows any apparent errors from the record. Reference to documents outside the record and the law is impermissible when applying the provision of section 154 of the Act.
Under the facts and circumstances of the matter, the order passed under section 154 of the Act cannot be said to be an rectification of an error apparent on the record particularly when upon due application of mind on the reply given by the assessee along with the documents as sought for the order of assessment was passed by the Assessing Officer accepting the returned income filed by the assessee. TheLd.AO in our considered opinion has over exercised its power provided under Section 154 of the Act and therefore, the same is liable to be quashed. Ordered accordingly.
In the result, the assessee’s appeal is, thus, allowed.