ITAT permits Foreign Tax Credit under Indo-Japanese Tax Treaty

ITAT permits Foreign Tax Credit under Indo-Japanese Tax Treaty

The Income Tax Appellate Tribunal (ITAT/Appellate Tribunal), Mumbai Bench ruled in favour of Amarchand & Mangaldas & Suresh A Shroff & Co. wherein it permitted Foreign Tax Credit (FTC) under Indo-Japanese tax treaty

Amarchand & Mangaldas & Suresh A Shroff & Co. (the assessee) is a renowned law firm in India. The assessee was assessed to tax in the status of a partnership firm. They filed a return that was subject to scrutiny assessment proceedings.

Under the proceedings, it was found that the assesse claimed foreign tax credit of Rs.80,55,856 regarding taxes that were withheld by the assessee's clients in Japan. The withheld taxes by the Japanese client were at the rate of 10 per cent on gross billing amounts of the professional fees charged by the accessee that is taxable in Japan. This provision is contained under Article 12 of the Indo-Japanese Tax Treaty (treaty).

According to the Assistance Commissioner of Income Tax (assessing officer), the credit for the taxes that were withheld by the Japanese client was not admissible to the assessee.

The Assessing Officer reasoned that as the income earned by the assessee could only be taxed under Article14 of the said treaty for the 'independent personnel services'. But in the instant case, the assessee had not been fixed in Japan hence the condition for applying tax was not satisfied. The Assessing Officer opined that the said taxes were wrongfully held in Japan and hence the assesse could not seek entitlement for a foreign tax credit.

The Appellate Tribunal decided the issue, whether the assessing officers reasonably declined the foreign tax credit under Article 23(2) of India Japan Double Taxation Avoidance Agreement regarding taxes of Rs 80,55,856 that are withheld by the Japanese clients of the assessee. The Assesse pleaded that they should be permitted for a deduction of Rs. 80,55,856 while computing its professional income.

The matter was listed before the Coram of the Appellate Tribunal that was headed by the Vice President named Pramod Kumar. The Vice-President concluded that according to Article 14 of the treaty 'independent personal services' deals with the individuals only.

It further clarified that according to the exclusion clause provisioned under Article 12(4) of the treaty, it put restrictions on the payment of fees for professional services to individuals alone. Hence, in this case, there is no dispute regarding the overlapping of Article 14 and Article 12 of the treaty.

It stated, "Professional service could also be covered by the fees for technical service- particularly as the definition of the fees for technical services is on 'classical model' of much wider scope and not on the 'make available model' now in vogue in many tax treaties."

The Appellate Tribunal referred to the foreign judgment, Canadian Pacific Ltd. v. Queen 76 DTC 6120 where the Canada-US Treaty, 1942 was interpreted and the Court said, "While it is true that this Court has the right to interpret the Canada-US Tax Convention and Protocol itself and in no way bound by the interpretation given to it by the United States Treasury, the result would be unfortunate if it were interpreted differently in the two countries when this would lead to double taxation. Unless, therefore, it can be concluded that the interpretation given in the United States is manifestly erroneous it is not desirable to reach a different conclusion, and I find no compelling reason for doing so."

It gave directions to the Assessing Officer for grantinga tax credit to the asses see. The plea of the assesse regarding the admissibility of the foreign tax credit was granted by Appellant Tribunal.