Foreign tax credit cannot be denied for non-filing abroad where treaty relief applies and tax was withheld in source jurisdictions.

Foreign tax credit under section 90 and the applicable DTAAs cannot be denied merely because the assessee did not file returns in the source country, where tax was actually withheld or paid abroad and the treaty framework does not make foreign return filing a condition for relief. Applying earlier coordinate bench rulings and the relevant treaty provisions, the Tribunal also recognised credit for taxes withheld in Japan and other treaty jurisdictions, including Nepal, Brazil, China and Malaysia, where withholding occurred on a bona fide view of taxability. The order rejecting the credit claim was therefore not sustainable, and relief was granted.

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Issues: (i) Whether foreign tax credit could be denied on the ground that the assessee had not filed returns in the foreign jurisdictions and that the taxes withheld abroad were not taxes paid for the purpose of relief in India; (ii) Whether the assessee was entitled to foreign tax credit for taxes withheld in Japan and other treaty jurisdictions in view of the earlier coordinate bench decisions and the relevant DTAA provisions.

Issue (i): Whether foreign tax credit could be denied on the ground that the assessee had not filed returns in the foreign jurisdictions and that the taxes withheld abroad were not taxes paid for the purpose of relief in India.

Analysis: The dispute concerned grant of relief for taxes deducted at source by overseas clients in treaty partner countries. The earlier view denying credit proceeded on the assumption that, without filing returns in the source country, the assessee could not be regarded as having suffered tax there. The record also showed that the assessee had already offered the income in India and claimed relief under the applicable treaty and section 90 of the Income-tax Act, 1961. The governing treaty framework did not prescribe filing of a foreign return as a condition precedent for foreign tax credit, and the decisive fact remained whether tax had in fact been withheld or paid in the source jurisdiction.

Conclusion: The denial of foreign tax credit on the ground of non-filing of returns abroad was not sustainable.

Issue (ii): Whether the assessee was entitled to foreign tax credit for taxes withheld in Japan and other treaty jurisdictions in view of the earlier coordinate bench decisions and the relevant DTAA provisions.

Analysis: The Tribunal noted that identical questions had already been decided in the assessee's favour in earlier years, including the treatment of legal fees under the India-Japan DTAA and the availability of credit where tax had been withheld by the source jurisdiction on a bona fide view of taxability. The same reasoning had subsequently been followed in connected matters. Respectfully following those coordinate bench rulings, and applying the treaty provisions governing relief from double taxation, the Tribunal held that taxes withheld in Japan as well as in Nepal, Brazil, China and Malaysia were eligible for credit in India.

Conclusion: The assessee was entitled to foreign tax credit for the taxes withheld in Japan and the other foreign jurisdictions.

Final Conclusion: The appellate order rejecting the foreign tax credit claim could not be sustained, and relief was granted by accepting the assessee's entitlement to credit for taxes withheld abroad.

Ratio Decidendi: Where tax is withheld in a treaty partner jurisdiction on a bona fide view of taxability, foreign tax credit cannot be denied in India merely because the assessee did not file a return in the source jurisdiction, if the treaty and section 90 otherwise permit relief against double taxation.

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