Assessee wins Foreign Tax Credit claim despite late Form 67 filing under Rule 128(9)

ITAT Hyderabad allowed the assessee's appeal regarding rejection of Foreign Tax Credit claim. The CIT(A) had rejected the FTC claim because the assessee failed to file Form 67 within the prescribed due date under Rule 128(9). However, ITAT held that since Form 67 was filed before the AO passed the assessment order under section 143(3), the credit should have been allowed despite belated filing. The tribunal relied on precedent establishing that FTC cannot be denied solely due to delay in filing Form 67, emphasizing substance over procedural timing requirements.

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The core legal questions considered in this appeal pertain to the eligibility and entitlement of the assessee to claim Foreign Tax Credit (FTC) under the Income Tax Act, specifically:

1. Whether the assessee is entitled to claim FTC when Form 67, required for claiming such credit, was filed after the due date prescribed under section 139(1) of the Income Tax Act but before the issuance of the assessment order under section 143(1).

2. The mandatory or directory nature of the requirement under Rule 128(9) of the Income Tax Rules regarding the filing of Form 67 on or before the due date of filing the return of income.

3. The interplay and overriding effect of the provisions of the Double Taxation Avoidance Agreement (DTAA) vis-`a-vis the procedural requirements under the Income Tax Act and Rules in relation to the claim of FTC.

4. The applicability of precedents and judicial interpretations regarding the timing and procedural compliance for claiming FTC, including the scope of discretion available to the Assessing Officer and appellate authorities in allowing FTC despite procedural delays.

Issue-wise detailed analysis:

Issue 1: Entitlement to FTC when Form 67 is filed after due date but before assessment order

The relevant legal framework includes section 91 of the Income Tax Act, which allows credit for foreign taxes paid, and Rule 128(9) of the Income Tax Rules, which prescribes that Form 67 must be furnished on or before the due date for filing the return under section 139(1).

The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] denied the FTC claim on the ground that the assessee failed to file Form 67 within the due date prescribed under section 139(1), which was held to be mandatory under Rule 128(9). The AO processed the return under section 143(1) and rejected the FTC claim accordingly.

The Tribunal examined the facts that the assessee had filed the revised return and Form 67 on 01.03.2021, which was after the due date under section 139(1) but before the assessment order dated 24.12.2021 under section 143(1). It was held that the AO ought to have allowed the FTC claim on the basis of the Form 67 filed before passing the assessment order.

The Tribunal relied heavily on a prior decision under identical facts, where it was held that the filing of Form 67 after the due date but before the assessment order is sufficient to entitle the assessee to FTC. The Tribunal emphasized that the procedural requirement of filing Form 67 is not an absolute bar to claiming FTC if the form is filed before the assessment order.

The Tribunal's reasoning was supported by a series of decisions from coordinate benches and High Courts, which consistently held that the filing of Form 67 is a procedural requirement that can be considered directory rather than mandatory in nature.

Issue 2: Mandatory versus directory nature of Rule 128(9) requirement

Rule 128(9) uses the word "shall" regarding the filing of Form 67 on or before the due date of filing the return. The CIT(A) and AO treated this as mandatory, leading to disallowance of FTC for late filing.

The Tribunal, however, referred to several judicial precedents including decisions of coordinate benches and the Hon'ble Supreme Court, which have held that such procedural requirements are directory and not mandatory. The rationale is that the DTAA provisions, which grant FTC rights, override the procedural rules under the Income Tax Act and Rules.

In particular, the Tribunal cited decisions where denial of FTC was held to be impermissible merely on account of procedural non-compliance, especially when the substantive right to credit under DTAA and section 91 exists. The Tribunal noted that Rule 128(9) does not explicitly provide for disallowance of FTC due to delay in filing Form 67, and hence the provision cannot be construed to override the substantive right of the assessee.

Issue 3: Overriding effect of DTAA over Income Tax Act and Rules

The Tribunal extensively analyzed the principle that DTAA provisions override domestic law provisions in case of conflict, as held by the Hon'ble Supreme Court in various judgments. Section 90(2) of the Income Tax Act explicitly provides that the provisions of the Act shall apply to the extent they are more beneficial to the assessee, and DTAA provisions have overriding effect.

The Tribunal referred to Article 24 of the India-Italy DTAA and similar provisions in other DTAAs, which mandate allowance of credit for foreign taxes paid. The denial of FTC on mere procedural grounds was held to be contrary to the treaty rights and thus impermissible.

The Tribunal also cited decisions holding that procedural requirements under the Act and Rules are subordinate to the substantive rights conferred by DTAA and cannot be used to deny FTC.

Issue 4: Precedents and judicial interpretations on timing and procedural compliance for FTC claim

The Tribunal relied on a series of decisions from various benches of the Tribunal, High Courts, and the Supreme Court, which consistently held that:

• Filing of Form 67 is a procedural formality and delay in filing does not ipso facto disentitle the assessee from claiming FTC.
• The substantive right to claim FTC under section 91 and DTAA cannot be denied on technical grounds.
• The AO and appellate authorities have the discretion to accept late filed Form 67 if it is filed before the assessment order.
• The denial of FTC on procedural grounds alone is not justified where the foreign tax paid is verifiable and genuine.

The Tribunal also noted that the CIT(A) failed to appreciate these precedents and the facts that Form 67 was filed before the assessment order, leading to an erroneous rejection of the FTC claim.

Further, the Tribunal emphasized the principle of consistency in judicial decisions and followed the precedent favorable to the assessee, as mandated by the Hon'ble Supreme Court in the Vegetable Products Ltd. case.

Significant holdings:

"In our considered view, the AO ought to have allowed credit for FTC on the basis of relevant Form 67 by the assessee. This view is supported by the decision of Sri Sridharan Venkatanarayanan Vs. DCIT where under identical facts, the Tribunal held that filing of Form 67 after the due date but before the assessment order entitles the assessee to FTC."

"Rule 128(9) of the Rules does not provide for disallowance of FTC in case of delay in filing Form No. 67. The provisions of DTAA override the provisions of the Act and Rules, and denial of FTC on grounds of procedural non-compliance is impermissible."

"The filing of Form 67 is only directory in nature and the substantive right to claim FTC under section 91 and DTAA cannot be denied merely on account of delay in filing such form."

"The Assessing Officer is directed to verify the details of foreign tax paid and allow the FTC claim in accordance with law, notwithstanding the delay in filing Form 67."

"In view of the facts and circumstances as well as judicial precedents, Foreign Tax Credit cannot be denied merely because there is a delay in filing Form 67."

"The appeal filed by the assessee is allowed and the order of the CIT(A) is set aside."

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