Foreign tax credit under the India-Japan DTAA was denied where partnership-firm professional receipts could reasonably be taxed in Japan.

Foreign tax credit under section 90 was examined for Japanese withholding on professional receipts under the India-Japan DTAA. The Tribunal held that Article 12(4) excludes only payments to an individual for independent personal services under Article 14, so partnership-firm receipts could reasonably be taxed in Japan as fees for technical services. It further applied Article 23(2)(a) to allow Indian credit where the income may be taxed in Japan under the Convention, and treated the Japanese withholding position as a reasonable treaty interpretation.

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Issues: Whether foreign tax credit was allowable under section 90 of the Income-tax Act, 1961 in respect of taxes withheld in Japan on the assessee's professional receipts, having regard to the interaction between Article 12, Article 14 and Article 23(2)(a) of the India-Japan DTAA.

Analysis: The dispute turned on whether the Japanese withholding represented taxation of the receipts in accordance with the treaty so as to trigger credit relief in India. The Tribunal followed the coordinate bench decision in the principal firm's case and held that, on the scheme of the India-Japan DTAA, Article 12(4) excludes only payments to an individual for independent personal services referred to in Article 14, and that the professional receipts of a partnership firm could reasonably be subjected to tax in Japan as fees for technical services. It further held that Article 23(2)(a) obliges India to allow credit where income may be taxed in Japan under the Convention, and that the Japanese authorities' view was a reasonable treaty interpretation, not manifestly erroneous.

Conclusion: The assessee was not entitled to dispute the denial of foreign tax credit, and the relief granted by the first appellate authority was upheld.

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