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TMI Blog2024 (11) TMI 556X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - Smt Beena Pillai, Judicial Member And Shri Ratnesh Nandan Sahay, Accountant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n.com 176 (Delhi) had merely held that the CIT(A) had the powers to enhance the income if the addition/disallowance forming part of the subject matter of appeal. In the instant case, the 'subject matter of appeal was not dealing with the aspect of whether the taxpayer was required to file return of income in the foreign jurisdiction to claim foreign tax credits in India and, therefore, the Ld. CIT(A) ought not to have adopted the said ground to deny the foreign tax credits to the Appellant. 3. The Ld. CIT(A) ought to have followed the decision of Hon'ble ITAT in the Appellant's own case pertaining to AY 2014-15 and AY 2017-18 (in (2020) 122 taxmann.com 248 (Mumbai))), thereby disregarding the principle of judicial hierarchy. 3.1. The Ld. CIT(A) being a lower body ought to have followed the decision of Hon'ble ITAT in the earlier year and the subsequent year. 3.2. The Ld. CIT(A) ought to have appreciated that the issue of providing foreign tax credits to the Appellant had already been considered by the Hon'ble ITAT two other appeals pertaining to AY 2017-18 and 2018- 19 in case of an affiliate of the Appellant, M/s Cyril AmarchandMangaldas which were reported in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'liable to tax' in respect of foreign branch offices of Indian bank, which were required to pay taxes on net basis in the foreign respective foreign jurisdictions. 4.6. The Ld. CIT(A) erred in holding that tax deducted at source on gross basis did not amount to taxes paid on the income portion of such gross sum in that jurisdiction, ignoring the fact that the payments in the nature of 'fees for technical services' had to be offered for taxation on gross basis and not on net basis as per Article 12 of the DTAA, which is a settled position of law and also had been confirmed in the Appellant's own case by this Hon'ble ITAT. 4.7. The Ld. CIT(A) erred in disregarding the provisions of Article 23 of the India-Japan DTAA and other relevant DTAAs, which categorically states that India shall provide foreign tax credit to its resident taxpayers so long as the taxes are paid in other direction either directly or by deduction . 4.8. The Ld. CIT(A) ought to have appreciated that Indian tax authorities cannot mandate its taxpayers to file return of income in the foreign jurisdictions, especially when neither the relevant DTAAs nor the Act imposes any such conditions. 4.9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered in Japan. Since, the receipt was in the nature of independent personal services, it is not taxable in Japan, the tax was not required to be withheld there. Thus, the credit of such withholding tax is not allowable to the assessee in India. The AO, therefore, asked the assessee to justify why tax was withheld in Japan? In response to that the assessee, vide its letter dated 15.12.2018 submitted as under: - 1. As mentioned in the preliminary submission, the legal services provided by the assessee would squarely fall within the ambit of 'consultancy services in view of the decision of the Hon'ble Supreme Court in the case of GVK Industries Lid. vs. ITO (2015) 371 ITR 453 as provision of legal services requires skill, acumen and knowledge in the specialized field. Therefore, in accordance to Article 12 of the India- Japan Double Taxation Avoidance Agreement ( DTAA ), the legal services rendered by the assessee to the Japanese residents would be taxable in Japan at the rate of 10%. Since the taxes have already been paid in Japan, the same should be allowed as admissible tax credits. 2. It is pertinent to highlight that the provisions of Article 14 of the DTAA states that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to claim credit of taxes paid in Japan is not disputed as per Article 23 of the DTAA, the credit cannot be denied to the assessee. As your goodself has acknowledged that taxes have been withheld and deposited in Japan, credit should be made available to the assessee under Article 23 of the DTAA. 7. Without prejudice, we would also like to submit here that it is a settled legal position that the provisions of the DTAA cannot be used to the detriment of the assessee. The CBDT Circular No. 621 dated December 19, 1991provides as under: Since the tax treaties are intended to grant relief and not put residents of a Contracting State at a disadvantage vis-a-vis other taxpayers, section 90 of the Income-tax Act had been amended to clarify any beneficial provisions in the lave will not be denied to a resident of a contracting country merely because corresponding provisions in a tax treaty is less beneficial. 8. In this regard, it must be noted that as per the provisions of section 90 of the IT Act, credit to the income taxes paid in the other countries should be provided on the income in respect of which the assessee is liable to pay tax in India, Section 901)(a)(i) of the IT Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the taxes withheld in Japan. In case credit for the taxes withheld in Japan is not allowed, then the taxes withheld in Japan should, at least, be allowed as a tax deductible expense. It is pertinent to note that the amounts withheld in Japan towards taxes had neither accrued nor deemed to be accrued to the assessee under the provisions of the IT Act. 12. It is pertinent to note that provisions of section 40(a)(ii) of the IT Act, which lays down a bar for claiming the payment of taxes is deduction, could not be pressed into service in the instant case in view the said restriction is applicable only in respect of the taxes paid under the provisions of the fact that the said re the IT Act or Act in respect of the sums of taxes which are eligible for relief of tax under section 90 of the IT Act. 4. The submissions made as above were considered by the AO but the tax credit was not allowed to the assessee on the ground that the 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. However, TDS has been deducted by Japanese entities and credit of Rs. 1,10,93,772/- was claimed in Income Tax return file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established under the provisions of the Indian Partnership Act and is engaged in the business of providing legal services. The Appellant receives professional legal fees from its clients situated in India as well as outside India. Certain overseas clients had withheld taxes in accordance with the relevant Double Taxation Avoidance Agreements ( DTAA ) before making payments to the Appellant. For the relevant years, the Appellant had received professional fees from clients situated in Japan, Malaysia, Brazil, China and Nepal and taxes were withheld by them in the range of 6% to 15%. It must be noted that the Appellant was liable to tax in India at the rates of 33.99% and 34.608% for the AYs 2015-16. The details of the taxes withheld by overseas clients for the relevant years are as follows: Assessment Year - 2015-16 Country Taxes withheld Japan Rs. 1,10,93,772 Brazil Rs. 2,09,074 China Rs. 46,404 Nepal Rs. 18,82,368 The Appellant claimed Foreign Tax Credit ( FTC ) with respect to the above income in accordance with the provisions of the DTAA (ie., under Article 23 of India-Japan, India-Brazil, India-China and India-Nepal DTAAs and under Article 24 of India-Malaysia DTAA respectively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ITAT were submitted during the course of hearing. 4. Before the Ld. CIT(A), the Appellant relied on the aforementioned compilation of orders. However, the Ld. CIT(A) refused to grant/allow FTC for the taxes withheld in Japan. Instead, he issued an enhancement notice stating as to why FTC should not be denied in India since the Appellant had not filed return of income in Japan and therefore, it could not be said to have been subjected to tax in Japan. This rationale was adopted by the Ld. CIT(A) in both its orders dated 28.12.2023 concerning AY 2015-16. Further, in Paras 11, 13 and 18 (page 13 and 17 of AY 2015-16 order), the Ld. CIT(A) held that he is not bound by the order of Hon'ble ITAT since the above aspects had not been looked into by the Hon'ble ITAT. Further, in para 25 (page 19 of AY 2015-16 order), Ld. CIT(A) has referred to and quoted extract of the decision of Bank of India (2021) 125 taxmann.com 155 despite conceding that the facts of it were different (as Bank of India had incurred losses and wanted to claim refund in India of the taxes paid abroad which is evident from the Page 20 22 of the CIT(A) order, which is not so in the instant case. Further, nowhere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abroad has not even been used in any of the five DTAAs relevant to the instant case). In light of the above, it is submitted that the Ld. CIT(A) ought to have followed the order of the Hon'ble ITAT in the case of the Appellant (and its affiliate) referred to in para 3 above. 6. With respect to the submissions made by the Learned Departmental Representative ( Ld. DR ) that the Appellant would not be entitled FTC without filing of return of income as taxes withheld cannot be construed as taxes paid in the foreign jurisdiction, reference may be drawn to the commentary on OECD Model Convention on Article 2 (dealing with Taxes Covered), which is extracted hereunder: 3. This paragraph states that the Convention applies to taxes on income.... irrespective of the method by which the taxes are levied (e.g. by direct assessment or by deduction at the source, in the form of surtaxes or surcharges or as additional taxes). Reliance is placed on the judgement of the Hon'ble Supreme Court in the case of Engineering Analysis Centre for Excellence (P.) Ltd. v. CIT (2021) 432 ITR 471 wherein the Apex Court placed heavy reliance on the commentary of OECD Model Convention (while deciding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nn.com 248/[2021] 187 ITD 750 where in para 10 at page 8 therein, the Hon'ble Bench held that DTAA provisions don't require that state of residence 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. 9. In light of the aforesaid facts and submissions, it is humbly prayed before this Hon'ble Bench to allow the appeals of the Appellant by directing the Ld. AO to provide FTC in full for the taxes withheld in Japan, Nepal, Brazil, China and Malaysia and oblige. It is respectfully submitted before your Honours that the above submissions may kindly be taken on record and appropriate relief may kindly be granted to the Appellant. 7. The Ld. CIT (DR) on the other hand relied on the orders of the Ld. CIT (A) and submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the coordinate benches in the case of the appellant and its affiliate, we hold that the appellant is entitled to get Foreign Tax Credit (FTC) in respect of tax withheld in Japan. 9. As regards FTC with respect to the other countries (namely Nepal, Brazil, China and Malaysia), 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. 10. Thus, respectfully following the decision of the coordinate bench, we also hold that the appellant is entitled to FTC on the taxes withheld in these jurisdictions also. 11. In the result, appeal is allowed. Order pronounced in the open court on 30.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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