2023 (10) TMI 255 - AT - Income Tax

NRI wins appeal on foreign tax credit denial, Tribunal supports timely Form-67 filing

Asst. Commissioner of Income Tax, Circle-3 (1), Visakhapatnam, Versus Sri Venkateswara Rao Thotakura,

Asst. Commissioner of Income Tax, Circle-3 (1), Visakhapatnam, Versus Sri Venkateswara Rao Thotakura, - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether failure to file Form-67 within the time specified in Rule 128(9) of the Income Tax Rules, 1962 disentitles a taxpayer to claim foreign tax credit under section 90/90A of the Income-tax Act, 1961. 2. Whether the procedural requirement of furnishing Form-67 is mandatory in the sense of creating a substantive bar to relief, or directory/ procedural such that retrospective or beneficial amendments and equitable considerations permit allowance of foreign tax credit despite non-compliance with the original timeline. 3. Whether a subsequent executive amendment/notification altering the time for furnishing Form-67 can be applied retrospectively to benefit a taxpayer who filed Form-67 within an extended timeframe but not within the original Rule 128(9) deadline. ISSUE-WISE DETAILED ANALYSIS Issue 1: Effect of non-filing of Form-67 within Rule 128(9) - Legal framework Legal framework: Section 90/90A provides relief by way of credit for foreign taxes; section 295 empowers the Central Board of Direct Taxes (CBDT) to prescribe rules; Rule 128(9) prescribes filing of Form-67 'on or before the due date' for filing return under section 139(1). Precedent treatment: The Tribunal considered earlier decisions and administrative pronouncements but did not treat any single prior decision as conclusively overriding the rule; it accepted that some earlier orders had disallowed credit where Form-67 was filed late in scrutiny proceedings. Interpretation and reasoning: The Court held that Rule 128(9) prescribes a procedural timeline but does not expressly state that failure to comply effects substantive forfeiture of the relief under section 90/90A or under the relevant DTAA. Where the statement in Form-67 was filed prior to processing under section 143(1) and before filing of the return (in the facts: Form-67 filed 28/10/2019; return filed 29/10/2019), the procedural non-compliance with the original Rule timing did not justify denial of foreign tax credit. Ratio vs. Obiter: Ratio - procedural non-compliance with Rule 128(9) does not automatically extinguish substantive right to foreign tax credit absent express statutory language or treaty provision to that effect. Obiter - commentary on cases where Form-67 was filed years later during scrutiny (distinguished on facts). Conclusion: Denial of foreign tax credit solely on ground of non-adherence to Rule 128(9) timeline was not sustained; credit allowable where Form-67 was filed before processing and within extended allowable period under section 139(4) in the facts. Issue 2: Nature of Form-67 filing requirement - mandatory vs. procedural/directory Legal framework: Section 295(2)(ha) permits rules for procedure for granting relief of foreign tax paid outside India; Rule 128(9) prescribes timing; administrative Notification amended timing and explanatory memorandum allowed retrospective application where no person adversely affected. Precedent treatment: The Court applied the principle that beneficial provisions should be given retrospective effect where they do not adversely affect others and relied on established interpretive canon favoring the taxpayer where two reasonable constructions exist. Interpretation and reasoning: The Tribunal construed filing of Form-67 as procedural/directory rather than a substantive pre-condition whose non-compliance nullifies treaty or statutory credit. It found that absent express language linking non-filing to denial of credit (statutory or treaty), the requirement should not be read as mandatory in the forfeiture sense. The administrative Notification and its explanatory memorandum supporting retrospective application reinforced this construction as a beneficial measure. Ratio vs. Obiter: Ratio - Form-67 filing requirement is procedural/directory such that retrospective application of a beneficial amendment/notification can cure timing non-compliance where no prejudice is caused; Obiter - remarks distinguishing scenarios of extreme delay (e.g., filing years later during assessment) as factually different. Conclusion: Filing of Form-67 is a procedural requirement; where Form-67 was filed within the belated return timeframe and before processing, foreign tax credit could not be denied on that ground. Issue 3: Retrospective applicability of CBDT notification amending Form-67 timeline Legal framework: CBDT issued notification amending the timeframe for furnishing Form-67 and provided in explanatory memorandum that retrospective application is permissible where no person is adversely affected. Precedent treatment: The Tribunal invoked the principle favoring the taxpayer where two reasonable constructions exist and accepted retrospective application of beneficial administrative measures in appropriate circumstances. Interpretation and reasoning: The Tribunal found the notification to be beneficial and applicable retrospectively to avoid adverse consequences to the taxpayer who had paid foreign tax and filed the statement within the extended period (section 139(4) belated return deadline). The Tribunal noted absence of treaty provision conditioning credit on strict compliance with the original filing date. Ratio vs. Obiter: Ratio - beneficial administrative amendments to procedural rules may be applied retrospectively to allow foreign tax credit where no third-party prejudice results and where the taxpayer satisfies the amended timeline; Obiter - specific limits of retrospective application in other factual permutations. Conclusion: The CBDT notification's beneficial amendment can be applied retrospectively in the present facts; consequently, foreign tax credit was allowable and the Revenue's grounds were dismissed.