Eligibility Conditions are met by withholding of Tax by Source Country: ITAT allows FTC Claim under India-Japan DTAA [Read Order]
The tribunal emphasized that when the source jurisdiction withholds tax, the residence jurisdiction must provide FTC, regardless of differing interpretations of tax obligations
ITAT – India-Japan DTAA – Income Tax – Double Taxation Avoidance Agreement – Foreign Tax Credit – taxscan
ITAT – India-Japan DTAA – Income Tax – Double Taxation Avoidance Agreement – Foreign Tax Credit – taxscan
The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that eligibility conditions for claiming Foreign Tax Credit ( FTC ) under the India-Japan Double Taxation Avoidance Agreement ( DTAA ) were met by the withholding of tax by the source country, Japan.
Amarchand Mangaldas and Suresh A Shroff & Co.,the appellant-assessee, was a partnership firm that provided legal services and earned fees from clients based in Japan and other jurisdictions during the relevant assessment year (AY). The firm claimed that the taxes withheld from its earnings in Japan should be eligible for FTC under the provisions of the DTAA.
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The Assessing Officer (AO) rejected the assessee's claim for FTC, arguing that the appellant was not entitled to it without filing a return of income, as taxes withheld abroad could not be considered taxes paid in the foreign jurisdiction. The appellant subsequently appealed to the Commissioner of Income Tax (Appeals)[CIT(A)], who upheld the AO's decision, further supporting the stance that the appellant was ineligible for FTC without a filed return.
The tribunal responded to the Departmental Representative (DR) supporting the AO's view by reviewing the facts, submissions, and relevant judicial precedents. It noted that the Mumbai ITAT had previously ruled in favor of the assessee for the AY 2014-15, establishing that Article 14 of the India-Japan DTAA applied only to individuals and not to partnership firms. The tribunal confirmed that the fees earned in Japan were taxable as fees for technical services under Article 12 and asserted that FTC should be granted for taxes withheld in Japan.
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The appellate tribunal emphasized that when the source jurisdiction reasonably determines the necessity for withholding tax, the residence jurisdiction must provide FTC, regardless of differing legal positions.
Moreover, the ITAT reaffirmed its previous decision by referencing a related case involving the appellant's affiliate for the assessment years 2017-18 and 2018-19. It also cited the ruling in ITTIAM Systems P. Ltd. v. ITO, which allowed FTC for taxes withheld abroad based on the India-Japan DTAA, supported by the Karnataka High Court's ruling in Wipro Ltd.
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The tribunal addressed the foreign tax credit ( FTC ) for countries like Nepal, Brazil, China, and Malaysia, reiterating that DTAA provisions did not require the state of residence to eliminate double taxation in every case where the source state imposed tax. It concluded that if the source country had levied taxes, the tax credit could not be denied, regardless of differing interpretations of treaty provisions between the residence and source jurisdictions.
The two member bench comprising Beena Pillai (Judicial Member) and Ratnesh Nandan Sahay (Accountant Member) held that the assessee was entitled to foreign tax credits ( FTC ) for taxes withheld in Japan and the other mentioned jurisdictions.
Consequently, the assessee's appeal was allowed.
To Read the full text of the Order CLICK HERE
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