2023 (6) TMI 1445 - AT - Income Tax

Partnership firm wins appeal for foreign tax credit on Japanese client payments under DTAA Article 12

ITAT Mumbai allowed the assessee partnership firm's appeal regarding foreign tax credit denial. The firm provided legal services to Japanese clients who ... Disallowance of credit of foreign tax withholding made by the Japanese clients of the assessee - assessee firm has provided legal services to certain clients based in Japan for which the clients paid legal fees after withholding tax @ 10% under Article 12 of the India Japan Double Taxation Avoidance Agreement (DTAA) - HELD THAT:- Article 12 of the DTAA provides that income from professional services or other activities of independent character would be taxable in the resident country i.e India. However, clause 4 of Article 12 provides that such payments would not be constitute as fees for technical services only if such payment is made to an individual for carrying out independent personal services referred to in Article 14. Since, assessee is a partnership firm and exception for payment referred in Article 14 would be applicable only for individual, therefore, the fees received by the assessee would not be covered under the such exception and accordingly would be subject to withholding tax in Japan. As perused the decision of coordinate bench of ITAT in the case of the assessee for AY. 2014-15 [2020 (12) TMI 776 - ITAT MUMBAI] conclusions arrived at by the Japanese tax authorities, directing tax withholdings from the payments made to the assessee by its Japanese clients, cannot be said to unreasonable or incorrect. In the light of these discussions, as also bearing in mind entirety of the case, we hold that the assessee was wrongly declined tax credit. Thus direct the Assessing Officer to grant the said tax credit to the assessee. Following the decision supra we direct the Assessing Officer to allow the claim of foreign tax credit. Assessee appeal allowed. Issues:1. Denial of credit for tax withheld by Japanese clients.2. Consideration of previous ITAT order for the same issue.3. Allowance of foreign tax credit to the assessee.Analysis:Issue 1: Denial of credit for tax withheld by Japanese clientsThe appeal was filed against the order passed by the CIT(A) regarding the denial of credit of Rs. 3,58,088/- being tax withheld by Japanese clients. The assessing officer disallowed the claim of credit of foreign tax withholding made by the Japanese clients of the assessee. The AO's stance was that since the income was not taxable in Japan, the credit of withholding tax was not allowable in India. The AO referred to Article 14 of the Double Taxation Avoidance Agreement (DTAA) with Japan, stating that income derived by a resident of a contracting state for professional services shall be taxable only in that state. The AO concluded that since the income was not taxable in Japan, the claim of foreign tax credit was denied.Issue 2: Consideration of previous ITAT orderThe assessee argued that a similar issue was decided in their favor by a coordinate bench of the ITAT Mumbai for the assessment year 2014-15. The ITAT Mumbai held that in the context of the Indo-Japanese tax treaty, Article 14 applies only to individuals, not to partnership firms like the assessee. The ITAT directed the Assessing Officer to grant the tax credit to the assessee, as the payments were rightly subjected to tax withholding in Japan. The ITAT distinguished the provisions of the Indo-Japanese tax treaty from other tax treaties and upheld the plea of the assessee for foreign tax credit.Issue 3: Allowance of foreign tax creditBased on the decision of the coordinate bench of the ITAT for the assessment year 2014-15, the ITAT Mumbai directed the Assessing Officer to allow the claim of foreign tax credit to the assessee. The ITAT held that the assessee was wrongly declined tax credit and directed the AO to grant the tax credit to the assessee. Consequently, the ITAT allowed the ground of appeal of the assessee and allowed the appeal, pronouncing the order in favor of the assessee on 30.06.2023.This judgment highlights the importance of analyzing specific provisions of tax treaties, such as the DTAA, and how judicial precedents play a crucial role in interpreting and applying such provisions to determine the tax treatment of income earned in different jurisdictions.