DENIAL OF FOREIGN TAX CREDIT

[Mr. M. GOVINDARAJAN]

Foreign tax credit

Rule 128 (1) of the Income tax Act Rules, 1962 (‘Rules’ for short) provides that an assessee, being a resident shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India, by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the extent as specified in this rule. 

The foreign tax means-

•  in respect of a country or specified territory outside India with which India has entered into an agreement for the relief or avoidance of double taxation of income in terms of section 90 or section 90A, the tax covered under the said agreement;
• in respect of any other country or specified territory outside India, the tax payable under the law in force in that country or specified territory in the nature of income-tax referred to in clause (iv) of the Explanation to section 91.

The Foreign Trade Credit (‘FTC’ for short) shall be available against the amount of tax, surcharge and cess payable under the Act but not in respect of any sum payable by way of interest, fee or penalty.

The credit of foreign tax shall be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country or specified territory outside India and shall be given effect to in the following manner-

• the credit shall be the lower of the tax payable under the Act on such income and the foreign tax paid on such income;
• the credit shall be determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which such tax has been paid or deducted.

Rule 128 (8) provides that the credit of any foreign tax shall be allowed on furnishing the following documents by the assessee,-

• a statement of income from the country or specified territory outside India offered for tax for the previous year and of foreign tax deducted or paid on such income in Form No.67 and verified in the manner specified therein;
• certificate or statement specifying the nature of income and the amount of tax deducted there from or paid by the assessee-

• from the tax authority of the country or the specified territory outside India; or
• from the person responsible for deduction of such tax or signed by the assessee.

The statement furnished by the assessee shall be valid if it is accompanied by,—

• an acknowledgement of online payment or bank counter foil or challan for payment of tax where the payment has been made by the assessee
• proof of deduction where the tax has been deducted.

Rule 128 (9) provides that Form No. 67 and the certificate or the statement shall be furnished on or before the end of the assessment year relevant to the previous year in which the income has been offered to tax or assessed to tax in India and the return for such assessment year has been furnished within the time specified under section 139 (1) or (4).

The FTC will be granted if Form 67 is filed along with other documents is filed within the due date.  Otherwise the same will be rejected by the Departmental officers. In the following case laws it was held that filing form 67 is not mandatory and directory.  Delay in filing Form 67 will not be a ground for denying FTC. 

Belated filing of Form 67

In SUMEDHA ARORA VERSUS ITO, WARD-67 (1) , NEW DELHI. - 2023 (3) TMI 719 - ITAT DELHI the assessee an individual, an ordinary resident of India, worked with Bending Spoons in Milano, Italy for a brief period between 05.12.2018 till 31.03.2019 during the Assessment Year 2019-20. The assessee included the salary derived from services rendered in Italy in its return of income and simultaneously claimed FTC of Rs.1,52,602/- through Income Tax Return filed on 23.07.2019.  The assessee did not file Form 67 before the due date and she filed the same on 08.03.2021.  An intimation dated 08.03.2021 was issued by the Income Tax Department wherein the benefit of FTC claimed against salary earned in Italy was denied.   The assessee sought rectification under Section 154 of the Act vide application dated 02.04.2021. Rectifications order dated 22.05.2021 was issued maintaining the original position and thus the foreign tax credit was continued to be denied.   The assessee, thereafter, complied with Rule 128 of the Income Tax Rules and filed Form 67 on 15.07.2021.  The assessee filed an application before the Commissioner of Income Tax (Appeals) for relief.   The Commissioner refused to entertain the application for relief.  The Commissioner (Appeals) held that the requirement of filing of Form 67 online before the due date of filing of return for the purposes of seeking foreign tax credit is a mandatory requirement laid down by Rule 128 of the Income Tax Rules 1962.  Since the assessee has admittedly not complied with the mandatory requirement, she is not entitled to the credit of foreign tax claimed.

The assessee has challenged the denial of FTC of Rs.1,52,602/- under Section 90 of the Act due to late filing of Form 67 prescribed for eligibility of such credit under Rule 128 of the Income Tax Rules, 1962.  The assessee contended that-

• she is entitled to FTC and has vested right to make such claim under Section 90 of the Act read with Article 24 of India-Italy Tax Treaty.
• a combined reading of Section 90 of the Act read with Article 24(3)(a) of DTAA provides in no uncertain terms that Italian tax paid shall be allowed as credit against Indian Tax
• FTC is assessee’s vested right as per Article 24(3)(a) of the Double Taxation Avoidance Agreement (‘DTAA’ for short) read with  Section 90 of the Act and such FTC approved to the assessee cannot be denied on the grounds of non compliance of procedural requirements prescribed in the Rules 
• The provisions of DTAA override the provisions of the Income Tax Act and thus denial of vested right to claim the FTC is in direct infringement of the tax treaty.
• Rule 128 provides machinery for seeking relief and compliance thereof are the procedural formality which has been duly complied with, albeit with some delay.
• The provisions of Sections 90, Section 91 and DTAA does not provide for denial of exemption merely on account of delay in filing of certain forms / reports.

The Tribunal noticed filing of Form 67 is a directory requirement and having regard to the position that DTAA overrides the provisions of the Act and Rule cannot be contrary to the Act, the assessee is fully entitled to the FTC. The Tribunal held that claim of FTC does not get controlled solely by the delay in filing of Form 67 prescribed under Rule 128(9) of the Income Tax Rules.    The Tribunal set aside the action of the Commissioner of Income Tax (Appeals) and directed the Assessing Officer to take cognizance of Form 67 so filed and grant FTC as may be entitled to the assessee in accordance with law.

In MS. ANJU AGAST SRIVATS VERSUS THE INCOME TAX OFFICER NFAC, DELHI - 2023 (3) TMI 662 - ITAT BENGALURU  the assessee is an individual who is employed with HP India. For AY 2018-19 return of income was filed on 27.08.2018, declaring income under the head ‘Salary’, ‘House Property’ and ‘other sources’.  The assessment was selected for limited scrutiny regarding ‘foreign financial interest’.  The Department noticed that foreign dividend income of USD 2720 received by the assessee was not declared in the return of income nor she had filed revised return.  She claimed that she had paid taxes on dividend income (foreign tax) and claimed credit for foreign tax credit by filing Form 67 on 23.01.2021   The Assessing Officer   did not allow the credit for FTC on the ground that the assessee did not furnish form 67 on or before filing return of income within the prescribed due date.

The assessee, aggrieved against the order of Assessing Officer, filed an appeal before the Commissioner of Income Tax (Appeals).  The Commissioner of Income Tax upheld the order of Assessing Officer and dismissed the appeal.  The Commissioner of Income Tax (Appeals) held that since the Appellant has not complied with the mandatory condition as mentioned in the sub rules (8) & (9) of Rule 128 of the Rules and the delay in submission of form 67 does NOT stand condoned, the appellant cannot be granted credit of the FTC as claimed. The claim itself was not made in the return of income filed. Therefore, the Assessing Officer, after a detailed discussion of the issue and contention raised by the appellant, held that FTC cannot be granted to the appellant for failure to comply with mandatory requirement under Rule 128.

The assessee filed the present appeal before the Tribunal against the order of Commissioner of Income Tax (Appeals).    The appellant submitted the following before the Tribunal-

• She had inadvertently omitted to disclose the dividend received from securities (held outside India) under the scheme of Employees Stock Option in the return filed.
• This was a bona fide mistake and the said dividend income has already been taxed outside India.
• Since the due date for filing the revised return of income was lapsed the assessee could not file the revised return of income.
• However, she recomputed the total income and filed Form 67 and also duly remitted the tax on the said income and requested the Assessing Officer to allow the due FTC.
• The same has been denied solely for the reason that Form 67 has not been filed within the due date prescribed for filing return under Section 139(1) of the Act. 
• Filing of Form 67 is a procedural/directory requirement and is not a mandatory requirement. 
• Violation of procedural norm does not extinguish the substantive right of claiming the credit of FTC.

The appellant relied on the order of the Tribunal, Bangalore in SHRI. SHASHIDHAR SEETHARAM SHARMA VERSUS ITO, CPC, BENGALURU - 2022 (9) TMI 1430 - ITAT BANGALORE in which the Tribunal held that  Rule 128(9) of the Rules does not provide for disallowance of FTC in case of delay in filing Form No. 67;  filing for Form No. 67 is not mandatory but a directory requirement and  DTAA overrides the provision of the Act and the rules cannot be contrary to the Act.  Non-furnishing of Form No. 67 before the due date under Section 139(1) of the Act is not fatal to the claim for FTC.

The Revenue submitted the following before the Tribunal-

• The Board has power to prescribe procedure to granting FTC.
• The Board does not have power to prescribe a condition or provide for disallowance of FTC.
• The procedure prescribed in Rule 128 should therefore be interpreted in this context.  Rule 128 is therefore a procedural provision and not a mandatory provision.
• Rule 128(9) provides that Form 67 should be filed on or before the due date of filing the return of income as prescribed u/s 139(1) of the Act.

The Tribunal considered the submissions put forth by the parties to the present appeal and also the judgments relied on by the parties.   The Tribunal held that-

• Rule 128(9) of the Rules does not provide for disallowance of FTC in case of delay in filing Form No.67; 
• filing of Form No.67 is not mandatory but a directory; requirement and 
• DTAA overrides the provisions of the Act and the Rules cannot be contrary to the Act.

The Tribunal allowed the appeal filed by the appellant. The Tribunal held that the assessee is entitled to FTC and the Assessing Officer is directed to allow the claim.

In RAVINDER BANSAL, RAHUL GUPTA VERSUS ACIT, CIRCLE-70 (1) , NEW DELHI - 2023 (3) TMI 264 - ITAT DELHI the assessee qualified as a ‘Resident and Ordinarily Resident’ of India for AY 2014-15, and duly offered his worldwide income to tax in India. the appellant filed his return of income for AY 2014-15 in India duly reporting his Kenya sourced salary income and claimed relief under the provisions of Section 90 of the Act read with Article 25 sub article 2(a) of the India Kenya DTAA.  The assessee claim the refund of FTC vide her letter dated 09.09.2016.  She produced the following details in support of the foreign tax credit claimed.-

• Copy of the relevant provisions of Article 25 of the India Kenya DTAA;
• Computation of foreign tax credit claimed; and
• Proof of payment of taxes in Kenya i.e. Kenya tax return for 2013.

The Assessing Officer rejected the claim of FTC.  Against this order the appellant filed an appeal before the Commissioner (Appeals). The Commissioner of Income Tax (Appeals) dismissed the appeal of the assessee on the grounds that the employer has not at revised his TDS return and hence the order of the Assessing Officer is affirmed.   Against this order the appellant filed the present appeal before the Tribunal.

The Tribunal observed that the Assessing officer while including the overseas income has omitted to grant the excess foreign tax credit amounting to Rs.21,89,295/- (Rs.66,74,802/- less Rs.44,85,507/-), due to the assessee.   The Tribunal directed the Assessing Officer to consider the entire taxes paid in India and Tanzania and give due credit to the taxes deposited of Rs.19,26,610/- as per Form 26AS.   The Assessing Officer shall also accord foreign tax credit as per the revised claim filed by the assessee. The tax credit to the assessee cannot be denied merely on the grounds that the deductor has not filed its revised TDS return which is beyond the control of the assessee.