Wipro’s fight for foreign tax deductions

The Karnataka High Court will soon decide whether Wipro Ltd. is eligible to claim foreign taxes as expenditure. The company has claimed that deduction should be available for overseas taxes paid by it against which no credit is allowed under the income tax law.

The law says that any amount which is paid as a tax is not a deductible expense, Sumit Singhania, partner at Deloitte India, highlighted. The literal interpretation of the law does not permit the taxes paid in foreign jurisdictions as a deductible expense, he said. “The issue has also seen conflicting judicial views.”

With the new judicial development in Wipro’s case, it would be quite a significant outcome if the Karnataka High Court can discern this historical tax controversy in reaching the ratio of its pronouncement. Sumit Singhania, Partner, Deloitte India

The question before the high court is whether taxes paid by Wipro to foreign governments, for which credit is disallowed under the Income Tax Act of 1961 and the applicable Double Taxation Avoidance Agreements, should be allowed as a deduction from its business income.

Wipro’s argument is that it should be allowed since the money was spent only for the purposes of its business. BQ Prime has reviewed a copy of Wipro’s petition.

The company has claimed the balance of foreign tax paid by it—which could not be claimed or was ineligible to be claimed as foreign tax credit—as a deduction of business expenditure from its income.

Hitesh Sawhney, partner at PwC, said these taxes are neither an expenditure incurred for the purposes of business nor taxes which help in earning any profit or gains. “Thus, these taxes, at best, are an application of income earned by the company, which may not be an allowable deduction. Typically, taxes on income are not a deductible expenditure.”

The judiciary, too, is divided on this issue.

In Reliance Infrastructure Ltd.’s case, the Bombay High Court ruled against the tax department. It said that to arrive at the global income taxable in India, taxes paid abroad have to be considered as an expenditure incurred to earn income, and therefore would be allowed as a deduction.

But the Karnataka High Court took a contrary view in the case of Kirloskar Electric Co. Since Wipro is also before the same high court, it may get impacted by this adverse conclusion.

Sawhney said that generally, a high court would not overrule a precedent that was set by it. “Having said that, if the taxpayer is able to prove that a certain provision of law was not adequately analyzed in the previous judgement, then the court might take a stand different to what was held earlier.”

Wirpo’s appeal has been admitted by the division bench comprising Justices PS Dinesh Kumar and CM Poonacha. Bloomberg