Foreign tax credit under treaty upheld where Japanese withholding on professional fees rested on a reasonable, harmonious reading of treaty provisions.

Foreign tax credit under the India-Japan treaty could not be denied where Japan withheld tax on an Indian partnership firm's professional fees on a reasonable treaty-based interpretation. Article 23(2)(a) was read with Articles 12(4) and 14 harmoniously, and Article 14 was treated as applying to individuals, so the Article 12(4) exclusion did not override the source-state taxation. The source-country levy was therefore treated as tax paid in accordance with the treaty, entitling the assessee to foreign tax credit. The denial of credit was set aside and the assessee's appeal succeeded.

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Issues: Whether foreign tax credit could be denied in respect of tax withheld in Japan on professional fees received by an Indian partnership firm under the India-Japan tax treaty.

Analysis: The entitlement to credit under Article 23(2)(a) depends on whether the income was taxed in Japan in accordance with the treaty. The treaty had to be read as a whole, and Article 12(4) was construed harmoniously with Article 14. On that construction, Article 14 was treated as applying to individuals, so the exclusion in Article 12(4) did not defeat the Japanese withholding on the assessee's fees. The Japanese view was held to be a reasonable treaty-based view and not manifestly erroneous, so the source-country tax could not be disregarded for foreign tax credit purposes.

Conclusion: The assessee was entitled to foreign tax credit for the Japanese tax withheld on its professional receipts.

Final Conclusion: The denial of foreign tax credit was set aside and the assessee's appeal succeeded.

Ratio Decidendi: Foreign tax credit under a tax treaty cannot be denied where the source state has levied tax on a reasonable and bona fide interpretation of the treaty and the relevant treaty provisions, read harmoniously, permit such source-state taxation.

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