The Delhi Income Tax Appellate Tribunal recently issued a decision on the conditions that must be met for an Indian resident recipient of dividends to claim a tax sparing credit under the 1985 income tax treaty with Thailand (since replaced by 2015 treaty).
The case involved India-based Polyplex Corporation Ltd., which during the years of assessment 2010-11 to 2013-14 received dividend payments from a Thai subsidiary that were exempt from Thai tax based on the provisions of the Thai Investment Promotion Act. In respect of the dividend income, Polyplex claimed a tax sparing credit according to the provisions of Article 23 (Elimination of Double Taxation) of the 1985 treaty, which includes that "Thai tax payable shall be deemed to include any amount which would have been payable as Thai tax for any year but for an exemption or reduction of tax granted for that year or any part thereof under the provisions of the Investment Promotion Act…". However, the assessing office denied the claim, essentially holding that a credit may not be claimed if no tax was payable at all in Thailand.
In its decision, the Appellate Tribunal ruled in favor of Polyplex. In coming to its decision, the Tribunal reviewed the OECD and UN Model commentaries and found that for the purpose of the 1985 India-Thailand tax treaty, "it is clear that concept of 'tax sparing credit' shall be applicable to an assessee, only if dividend received by assessee is taxable in the hands of assessee as per "Thai tax laws" and exemption is available to assessee either as per the 'Revenue Code of Thailand' or as per 'Investment Promotion Act". In this regard, the Tribunal reviewed the relevant Thai tax laws, finding that dividend income would be taxable in Thailand at a rate of 10% and that the dividend income is exempt due to being derived from a promoted business undertaking. As such, the conditions for the sparing credit is met and Polyplex's credit claim is allowed.
Although the 1985 treaty with Thailand no longer applies, the Tribunal's position on sparing credit serves as a reference in respect of claiming a sparing credit under India's other tax treaties that are still in force and contain similar sparing provisions.
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