2024 (11) TMI 556 - AT - Income Tax

Partnership firm entitled to foreign tax credit despite differing treaty interpretations on professional services taxation

Amarchand Mangaldas & Suresh A Shroff & Co. Versus Assistant Commissioner of Income Tax, Circle 16 (2), Mumbai

Amarchand Mangaldas & Suresh A Shroff & Co. Versus Assistant Commissioner of Income Tax, Circle 16 (2), Mumbai - TMI Issues Involved:1. Denial of Foreign Tax Credit (FTC) by the CIT(A) for taxes withheld in foreign jurisdictions.2. CIT(A)'s power to enhance assessment and deny FTC based on different grounds.3. Requirement of filing a return of income in the foreign jurisdiction to claim FTC.4. Applicability of judicial precedents and principles of judicial hierarchy.5. Interpretation and application of Double Taxation Avoidance Agreements (DTAAs) and relevant provisions of the Income Tax Act.Detailed Analysis:1. Denial of Foreign Tax Credit (FTC) by the CIT(A):The appellant challenged the denial of FTC for taxes withheld by clients in Japan, Brazil, China, and Nepal. The CIT(A) disallowed the FTC claims, arguing that the appellant had not filed returns in the respective foreign jurisdictions, thus not 'subjected to tax' there. The appellant contended that taxes were withheld as per the DTAAs, and thus, FTC should be granted under Article 23 of the India-Japan DTAA and similar provisions in other DTAAs. The ITAT upheld the appellant's claim, stating that the withholding of taxes in the source country suffices for FTC eligibility in India, as per the DTAAs.2. CIT(A)'s Power to Enhance Assessment:The CIT(A) enhanced the assessment by rejecting all FTC claims, which the appellant argued was beyond the scope of CIT(A)'s powers. The appellant cited previous ITAT decisions in its favor, which were not adhered to by the CIT(A). The ITAT noted that the CIT(A) should not have adopted a different ground for denying FTC when the AO's decision was found erroneous. The ITAT emphasized the principle that the CIT(A) should follow the decisions of higher judicial authorities.3. Requirement of Filing a Return of Income in the Foreign Jurisdiction:The CIT(A) held that filing a return in the foreign jurisdiction was necessary for FTC eligibility, which the appellant disputed. The ITAT clarified that there is no requirement under the relevant DTAAs or the Income Tax Act for filing a foreign return to claim FTC. The ITAT referenced the OECD Model Convention and previous judicial decisions to support this interpretation, emphasizing that taxes withheld should be treated as taxes paid.4. Applicability of Judicial Precedents and Principles of Judicial Hierarchy:The appellant argued that the CIT(A) disregarded the principle of judicial hierarchy by not following ITAT's previous rulings in the appellant's own case and related cases. The ITAT reiterated the importance of consistency and adherence to higher judicial decisions. It cited the Supreme Court's directive on maintaining judicial hierarchy and consistency in tax matters, thereby supporting the appellant's position.5. Interpretation and Application of Double Taxation Avoidance Agreements (DTAAs):The appellant relied on DTAAs to claim FTC, arguing that the taxes withheld abroad should be credited in India. The ITAT agreed, stating that the DTAAs do not require filing of returns in the foreign jurisdiction for FTC. The ITAT emphasized that the source country's reasonable and bona fide view on withholding taxes should be respected, and FTC should be provided in India accordingly. The ITAT's decision was consistent with previous rulings, including those involving the appellant's affiliate.Conclusion:The ITAT allowed the appeal, granting FTC for taxes withheld in Japan, Brazil, China, and Nepal. It reinforced that the CIT(A) should adhere to judicial precedents and the principles of judicial hierarchy. The decision underscored that FTC eligibility does not require filing of returns in the foreign jurisdiction, aligning with the DTAAs' provisions and established judicial interpretations.