2024 (11) TMI 556 - AT - Income Tax

Denial of foreign tax credit - income received for services rendered in Japan -claim denied as assessee has provided professional services to clients in Japan and do not have a fixed base or presence for more than 183 days in Japan HELD THAT - It is found that the Hon ble ITAT, Mumbai has already decided the identical issue in favour of the Appellant in AY 2014-15 reported in 2020 (12) TMI 776 - ITAT MUMBAI as has held that Article 14 of the India-Japan DTAA was applicable only to individuals and thus not applicable to the Appellant, which is a partnership firm. It further held that the fees earned by the Appellant firm in Japan was taxable as fees for technical services under Article 12 and that the FTC ought to have been granted to the Appellant firm for the taxes withheld in Japan - Also when the source jurisdiction has taken a reasonable and bonafide view, which is not manifestly erroneous, that taxes should be withheld at source, FTC should be provided by the resident jurisdiction even though the legal position in the residence jurisdiction may not be the same. Accordingly, the Hon'ble ITAT held that India should provide FTC for the taxes withheld in Japan. Thus we hold that the appellant is entitled to get Foreign Tax Credit (FTC) in respect of tax withheld in Japan. FTC with respect to the other countries (namely Nepal, Brazil, China and Malaysia) - As again Hon'ble Mumbai ITAT in the case of the appellant itself (supra.) has held that DTAA provisions don't require that state of residence and eliminate the double taxation in all cases where state of source has imposed its tax by applying to an item of income, a provision of convention that is different from state of residence considers to be applicable. Therefore, in all cases in which interpretation of residence country about applicability of a treaty provision is not the same as that of source jurisdiction about the provision and yet the source country levied taxes whether directly or by way of tax withholding, tax credit cannot be declined. Assessee appeal allowed.

Summary

Issues Involved:

1. Denial of Foreign Tax Credit (FTC) by the CIT(A) for taxes withheld in foreign jurisdictions.
2. CIT(A)'s power to enhance assessment and deny FTC based on different grounds.
3. Requirement of filing a return of income in the foreign jurisdiction to claim FTC.
4. Applicability of judicial precedents and principles of judicial hierarchy.
5. Interpretation and application of Double Taxation Avoidance Agreements (DTAAs) and relevant provisions of the Income Tax Act.

Detailed Analysis:

1. Denial of Foreign Tax Credit (FTC) by the CIT(A):

The appellant challenged the denial of FTC for taxes withheld by clients in Japan, Brazil, China, and Nepal. The CIT(A) disallowed the FTC claims, arguing that the appellant had not filed returns in the respective foreign jurisdictions, thus not "subjected to tax" there. The appellant contended that taxes were withheld as per the DTAAs, and thus, FTC should be granted under Article 23 of the India-Japan DTAA and similar provisions in other DTAAs. The ITAT upheld the appellant's claim, stating that the withholding of taxes in the source country suffices for FTC eligibility in India, as per the DTAAs.

2. CIT(A)'s Power to Enhance Assessment:

The CIT(A) enhanced the assessment by rejecting all FTC claims, which the appellant argued was beyond the scope of CIT(A)'s powers. The appellant cited previous ITAT decisions in its favor, which were not adhered to by the CIT(A). The ITAT noted that the CIT(A) should not have adopted a different ground for denying FTC when the AO's decision was found erroneous. The ITAT emphasized the principle that the CIT(A) should follow the decisions of higher judicial authorities.

3. Requirement of Filing a Return of Income in the Foreign Jurisdiction:

The CIT(A) held that filing a return in the foreign jurisdiction was necessary for FTC eligibility, which the appellant disputed. The ITAT clarified that there is no requirement under the relevant DTAAs or the Income Tax Act for filing a foreign return to claim FTC. The ITAT referenced the OECD Model Convention and previous judicial decisions to support this interpretation, emphasizing that taxes withheld should be treated as taxes paid.

4. Applicability of Judicial Precedents and Principles of Judicial Hierarchy:

The appellant argued that the CIT(A) disregarded the principle of judicial hierarchy by not following ITAT's previous rulings in the appellant's own case and related cases. The ITAT reiterated the importance of consistency and adherence to higher judicial decisions. It cited the Supreme Court's directive on maintaining judicial hierarchy and consistency in tax matters, thereby supporting the appellant's position.

5. Interpretation and Application of Double Taxation Avoidance Agreements (DTAAs):

The appellant relied on DTAAs to claim FTC, arguing that the taxes withheld abroad should be credited in India. The ITAT agreed, stating that the DTAAs do not require filing of returns in the foreign jurisdiction for FTC. The ITAT emphasized that the source country's reasonable and bona fide view on withholding taxes should be respected, and FTC should be provided in India accordingly. The ITAT's decision was consistent with previous rulings, including those involving the appellant's affiliate.

Conclusion:

The ITAT allowed the appeal, granting FTC for taxes withheld in Japan, Brazil, China, and Nepal. It reinforced that the CIT(A) should adhere to judicial precedents and the principles of judicial hierarchy. The decision underscored that FTC eligibility does not require filing of returns in the foreign jurisdiction, aligning with the DTAAs' provisions and established judicial interpretations.