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2023 (6) TMI 1445 - AT - Income Tax


Issues:
1. Denial of credit for tax withheld by Japanese clients.
2. Consideration of previous ITAT order for the same issue.
3. Allowance of foreign tax credit to the assessee.

Analysis:

Issue 1: Denial of credit for tax withheld by Japanese clients
The appeal was filed against the order passed by the CIT(A) regarding the denial of credit of Rs. 3,58,088/- being tax withheld by Japanese clients. The assessing officer disallowed the claim of credit of foreign tax withholding made by the Japanese clients of the assessee. The AO's stance was that since the income was not taxable in Japan, the credit of withholding tax was not allowable in India. The AO referred to Article 14 of the Double Taxation Avoidance Agreement (DTAA) with Japan, stating that income derived by a resident of a contracting state for professional services shall be taxable only in that state. The AO concluded that since the income was not taxable in Japan, the claim of foreign tax credit was denied.

Issue 2: Consideration of previous ITAT order
The assessee argued that a similar issue was decided in their favor by a coordinate bench of the ITAT Mumbai for the assessment year 2014-15. The ITAT Mumbai held that in the context of the Indo-Japanese tax treaty, Article 14 applies only to individuals, not to partnership firms like the assessee. The ITAT directed the Assessing Officer to grant the tax credit to the assessee, as the payments were rightly subjected to tax withholding in Japan. The ITAT distinguished the provisions of the Indo-Japanese tax treaty from other tax treaties and upheld the plea of the assessee for foreign tax credit.

Issue 3: Allowance of foreign tax credit
Based on the decision of the coordinate bench of the ITAT for the assessment year 2014-15, the ITAT Mumbai directed the Assessing Officer to allow the claim of foreign tax credit to the assessee. The ITAT held that the assessee was wrongly declined tax credit and directed the AO to grant the tax credit to the assessee. Consequently, the ITAT allowed the ground of appeal of the assessee and allowed the appeal, pronouncing the order in favor of the assessee on 30.06.2023.

This judgment highlights the importance of analyzing specific provisions of tax treaties, such as the DTAA, and how judicial precedents play a crucial role in interpreting and applying such provisions to determine the tax treatment of income earned in different jurisdictions.

 

 

 

 

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