Karnataka High Court remands Wipro’s foreign tax deduction issue to ITAT for de novo adjudication

Background and context

Wipro Limited, a resident Indian company, is liable to income tax in India on its global income for the Assessment Years (AYs) 2009-10 to 2014-15. During these years, Wipro earned income from various overseas jurisdictions and discharged tax in those foreign countries in accordance with the respective local tax laws.

In its Indian income-tax proceedings, Wipro claimed that:

  • Certain portions of its income were taxed in foreign jurisdictions;
  • For some of those foreign taxes, no relief was available in India under Section 90 or Section 91 of the Income Tax Act 1961, even after considering the applicable Double Taxation Avoidance Agreements (DTAAs); and
  • The foreign taxes so paid, for which credit could not be obtained under the treaty or domestic relief provisions, should be allowed as a deduction in computing business income under Section 37(1).

The Assessing Officer (AO) as well as the Dispute Resolution Panel (DRP) rejected this claim for deduction. Wipro carried the matter to the Income Tax Appellate Tribunal (ITAT). However, the Tribunal did not deal with this specific ground relating to deductibility of foreign taxes under Section 37(1).

Wipro thereafter filed a Miscellaneous Petition before the ITAT, pointing out that the ground on foreign tax deduction had not been considered. The Tribunal dismissed this petition as well. Consequently, Wipro approached the Karnataka High Court challenging the ITAT’s order dated 05.10.2020 in IT (TP) A No.222/Bang/2016.

Substantial question of law framed

The High Court admitted the appeal to examine the following significant question of law:

“Whether, on the facts and circumstances of the case and on the grounds raised, the taxes paid by the Appellant to foreign Governments and authorities, in respect of which credit has not been given under Sections 90 and 91 of the Act read with the Applicable DTAAs, should be allowed as a deduction from the business income of the Appellant given that is unquestionable expenditure which has been incurred by the Appellant wholly and exclusively for the purposes of its business and is, therefore, eligible for deduction under Section 37 of the Act?”

This question focuses specifically on whether foreign taxes, for which no credit is admissible under the treaty or under Section 90/Section 91, can still be allowed as a business deduction under Section 37(1) on the premise that such payments are laid out wholly and exclusively for the purposes of business.

Key facts as noted by the Court

The Karnataka High Court recorded the following undisputed factual matrix:

  1. Wipro is a resident assessee in India and is taxable on its global income for AYs 2009-10 to 2014-15.
  2. The assessee had earned income outside India during these years and paid tax on such income in the respective foreign jurisdictions, in accordance with the prevailing foreign tax laws.
  3. For a part of these foreign tax payments, Wipro claimed that no tax credit was available in India under Section 90 or Section 91 read with the applicable DTAAs.
  4. Wipro therefore sought to treat such foreign taxes as deductible expenditure under Section 37(1) in computing its business income.
  5. The AO and DRP disallowed this claim for deduction.
  6. In Wipro’s appeal, the ITAT failed to examine or adjudicate this specific ground regarding the foreign tax deduction.
  7. On a Miscellaneous Petition filed by Wipro, the ITAT refused to reopen the matter or to consider the omitted ground.

These developments led Wipro to file an appeal before the Karnataka High Court challenging both the non-consideration of the ground by the Tribunal and the subsequent rejection of the Miscellaneous Petition.

Assessee’s submissions before the High Court

On behalf of Wipro, it was contended that: