ITAT Allows Tax Sparing Credit to TCS; Grants Relief on SEZ FTC and Overseas State Taxes

Tata Consultancy Services Ltd. (TCS) and the Revenue filed cross-appeals for AYs 2016-17 to 2018-19, raising multiple international tax issues, including tax sparing credit on Singapore dividends, foreign tax credit (FTC) on SEZ income exempt under Section 10AA, deductibility of overseas State Taxes, characterization of software payments and commission to non-resident agents, and large transfer pricing adjustments on alleged brand royalty for use of the “TCS” brand.

Main Issue: Whether TCS was entitled to tax sparing credit under the India-Singapore DTAA, FTC under Sections 90/91 despite Section 10AA exemption, deduction of overseas State Taxes, and deletion of brand royalty TP adjustments; and whether certain cross-border payments constituted royalty or taxable commission in India.

ITAT Decided: The ITAT partly allowed the appeals of both sides, granting substantial relief to TCS. The Tribunal upheld TCS’s entitlement to tax sparing credit under Article 25(3) of the India-Singapore DTAA and directed computation on a FIFO basis. It held that FTC under Sections 90/91 is available even where the underlying income is exempt under Section 10AA.

The Tribunal further held that overseas State Taxes paid in the USA and Canada, where not eligible for treaty credit, are allowable as a deduction and are not hit by Section 40(a)(ii). The Revenue’s challenge to deletion of massive transfer pricing adjustments on alleged brand royalty was rejected, affirming that Tata Sons Ltd. is the legal brand owner and has already been compensated.

Payments for software imports were held not to be “royalty,” and commission paid to non-resident agents for services rendered outside India was held not taxable in India.

To Read Full Judgment, Download PDF Given Below