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Companies can’t evade tax on profit from overseas office after ITAT ruling

Companies can’t evade tax on profit from overseas office after ITAT ruling

For years, many companies, including some public sector banks, have interpreted India’s treaty provisions with other countries in a way to escape tax on profits from foreign offices. A ruling this month by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) will put an end to this.
The practice continued even after 2008 when the tax law was amended to clarify that India may tax earnings of overseas branches. Several companies still avoided tax by citing earlier court decisions that seemed to favour their interpretation.

“This will change. The recent decision by the ITAT, Mumbai may impact the valuation of some of the nationalised banks which are undergoing merger. Till now, these banks have been disputing the position in the law and not paying tax on earnings of overseas branches,” said senior chartered accountant Dilip Lakhani.

For instance, an entity with Rs 100 crore profits from Indian operations and Rs 20 crore from its Dubai branches paid tax in India only on Rs 100 crore (and not Rs 120 crore) on the back of the argument that since its foreign branches create ‘permanent establishments’ in UAE and the income from the same is liable to tax in the foreign country, the income from overseas offices should be exempt in India.

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