TaxTMI 
TaxTMI 
2026 (7) TMI 1876
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.... Avoidance Agreement ("DTAA"), the true import of the expression "may be taxed", the relationship between source-based and residence-based taxation, and the extent to which a resident State may independently compute income arising from immovable property situated in another Contracting State. The grievance of the assessee is that both the Assessing Officer as well as the learned CIT(A) have denied FTC solely on account of delayed furnishing of Form No. 67 and non-disclosure of the rental income in the original return of income, without appreciating that the substantive right to claim relief against double taxation emanates from section 90(2) of the Act read with the applicable treaty provisions and cannot be defeated by procedural technicalities. 2. The relevant facts, as borne out from the assessment records, are that the assessee is a citizen of France who came to India in connection with his assignment as Managing Director of L'Oréal India Private Limited. During the relevant previous year, the assessee was admittedly resident and ordinarily resident in India and accordingly filed his return of income on 06.07.2018 declaring total income of Rs. 8,15,12,760/-. The retur....
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....ing Officer, however, did not accept the aforesaid explanation. After referring to the provisions of section 5(1)(c) of the Act, he observed that the assessee was admittedly resident and ordinarily resident in India and therefore his global income was liable to tax in India irrespective of the place of accrual or receipt. The Assessing Officer further relied upon CBDT Circular No. 91/2008 dated 28.08.2008 dealing with interpretation of treaty provisions employing the expression "may be taxed" and concluded that Article 6 merely enabled taxation in France but did not prohibit taxation in India. According to him, the rental income from the French property formed part of the total income chargeable to tax in India and therefore had to be independently computed under the provisions of the Income-tax Act. Proceeding on this basis, the Assessing Officer converted the rental receipts of Euro 9,000 into Indian currency, computed the income under the head "Income from House Property", granted deduction admissible under section 24 and ultimately determined taxable income at Rs. 4,86,070. Simultaneously, while acknowledging that taxes had been paid in France, he declined to grant FTC on the g....
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....property, the receipt of rental income therefrom, the payment of taxes in France or the applicability of the DTAA. The assessee had throughout maintained that the rental income was governed by Article 6 and was taxable in France and therefore the omission to furnish Form No. 67 within the prescribed period was neither deliberate nor intended to evade taxes. It was submitted that once the Assessing Officer chose to bring the income to tax in India, the inevitable consequence under the treaty framework was grant of corresponding relief against double taxation and therefore denial of FTC merely because of delayed filing of Form No. 67 would amount to elevating procedure over substance and form over justice. 8. Elaborating his submissions, the learned counsel invited our attention to Article 6 of the India-France DTAA and submitted that the provision is founded upon the universally recognised situs principle which accords taxing rights in respect of income from immovable property to the State in which such property is situated. It was submitted that unlike business profits, dividends, interest or royalties, income from immovable property bears an exceptionally close territorial and ....
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....t that the Income-tax Act recognises concepts such as annual letting value, deemed rental income and notional rent under sections 22 and 23. If an immovable property situated in France remains vacant throughout the year and French domestic law does not recognise any concept analogous to deemed annual letting value, serious questions would arise as to whether an Indian Assessing Officer can nevertheless determine notional rental income and, if so, by reference to which valuation data, municipal records, comparable rentals or local regulations. It was submitted that such examples reveal that the controversy extends beyond allocation of taxing rights and enters the domain of computational jurisdiction. According to the learned counsel, these issues have not yet received comprehensive judicial examination in India and therefore deserve consideration in an appropriate case. 11. Coming to the immediate issue of foreign tax credit, the learned counsel submitted that the entitlement to FTC flows from section 90(2) of the Act read with the relevant provisions of the DTAA and constitutes a substantive right intended to eliminate double taxation. Rule 128 and Form No. 67 merely prescribe t....
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....itted that Article 6 of the DTAA merely permits taxation in the State where the property is situated but does not confer exclusive taxing rights upon that State. Reliance was placed upon CBDT Circular No. 91/2008 to contend that where a treaty employs the expression "may be taxed", the income nevertheless forms part of the taxable income of the resident State and the relief contemplated by the treaty is only in the nature of credit or exemption as provided under the relevant article dealing with elimination of double taxation. 14. The learned Departmental Representative further submitted that considerable reliance had been placed by the assessee upon OECD Commentary, United Nations Commentary and Klaus Vogel's observations. However, according to him, none of these authorities support the proposition that the residence State loses its jurisdiction to compute and tax such income under its domestic law. It was submitted that the OECD Commentary itself recognises that Article 6 does not interfere with domestic computational provisions and therefore there is nothing impermissible in the Assessing Officer independently determining the rental income under sections 22 to 27 of the Incom....
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....e can be denied to the assessee merely because Form No. 67 was not furnished within the time contemplated under Rule 128(9) of the Income-tax Rules. However, before we advert to this narrower controversy, it is necessary to first notice the larger treaty issue which was elaborately argued before us, because the assessee's conduct in not initially offering the French rental income to tax in India and not furnishing Form No. 67 within time emanates from his understanding of Article 6 of the India-France DTAA. That understanding may ultimately be accepted or rejected in an appropriate case, but it cannot be brushed aside as frivolous, fanciful or contrived, for it is rooted in a significant and long-standing debate in international tax jurisprudence concerning the taxation of income from immovable property situated in another Contracting State. 18. Article 6 of the India-France DTAA deals with income from immovable property. Article 6(1) provides that income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State. Article 6(2) defines the expression "immovable property" by reference to the law of ....
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....ses the strong territorial connection between immovable property and the State in which it is located. Klaus Vogel, in his celebrated commentary, also describes Article 6 as a distributive rule which assigns taxing authority to the situs State because the existence of immovable property in the other Contracting State shifts primary taxation from the residence State to the State in whose territory the property is situated. 20. This situs principle also explains why Article 6 occupies a distinct place in treaty architecture. Income from immovable property is not treated in the same manner as dividends, interest, royalties, fees for technical services or business profits. In the case of business profits, the residence State ordinarily retains taxing rights unless the enterprise carries on business in the other Contracting State through a permanent establishment. In the case of dividends, interest and royalties, the treaty often permits source taxation subject to limitations while preserving residence State taxation with credit. But income from immovable property stands on a different footing because the source is not merely economic but territorial and legal. The property is physic....
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....ay be taxed" in the source State, because such income may arise through contractual or corporate relationships and may not carry an exclusive territorial nexus. It is quite another to say that income from immovable property "may be taxed" in the State where the property is situated, because the very subject matter of the income is embedded in that jurisdiction. Under this approach, Article 6 is not merely an enabling provision allowing the situs State to tax; it is a recognition of the primacy of the situs State in respect of income arising from property situated within its territory. This is the debate which has been highlighted before us with reference to the OECD Commentary, UN Commentary and Klaus Vogel. Vogel notes that Article 6, viewed in isolation, uses the language of an open distributive rule and does not by itself exclude taxation in the residence State, but its practical effect must be understood along with the relief article. At the same time, the commentary recognises that the taxing authority over immovable property income is allocated to the situs State owing to the strong territorial connection of such property. 23. The India-France DTAA has its own protocol and....
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....possible distortions. 25. The illustration given during the course of arguments is apposite. Under Indian law, income from house property may in certain situations be determined not merely on the basis of actual rent received but also on the basis of annual letting value or deemed rent. Section 23 contains its own statutory assumptions and computational devices. Now consider a property situated in France which remains vacant throughout the year and under French domestic law no taxable rental income is imputed. Can an Indian Assessing Officer nonetheless determine a deemed annual letting value under the Indian Income-tax Act? If yes, by reference to what material? Would he adopt French municipal valuation? Would he call for local comparable rentals in France? Would he apply Indian municipal valuation principles to a property situated in France? Would he examine local French rent control laws, market restrictions, vacancy conditions, property taxes, maintenance obligations and permissible deductions? These questions are not rhetorical flourishes; they demonstrate the real administrative and jurisprudential difficulties that may arise when the residence State seeks to independently....
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....ples of administrability. It is for this reason that we consider the matter fit to be left open rather than determined incidentally in a case where the relief can be granted on a narrower and less controversial ground. 28. We may also briefly notice the relevance of Article 23 and Article 24 in this context. Article 23, dealing with other income, is a residuary article and applies only to items of income not dealt with in the preceding articles of the Convention. The fact that income from immovable property is specifically carved out and dealt with under Article 6 shows that the treaty treats it as a special category and not as residuary income. Article 24, in so far as it deals with capital gains from immovable property, also gives importance to the situs of the property. Thus, the treaty architecture consistently recognises that income or gains arising from immovable property have a distinctive territorial character. This supports the assessee's submission to the extent that the situs principle is deeply embedded in the treaty scheme. At the same time, the use of the expression "may be taxed" and the presence of separate articles for elimination of double taxation indicate tha....
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....rsy narrows down to the allowability of FTC. 31. We now turn to the statutory and procedural framework governing FTC. Section 90 empowers the Central Government to enter into agreements with foreign countries for avoidance of double taxation and for granting relief in respect of income on which tax has been paid both in India and in the foreign country. Section 90(2) provides that where such an agreement applies to an assessee, the provisions of the Act shall apply only to the extent they are more beneficial to the assessee. Thus, treaty relief is not a matter of administrative grace. It is a substantive statutory recognition of the taxpayer's entitlement to be governed by the more beneficial provisions of the applicable DTAA. Article 25 of the India-France DTAA provides the mechanism for elimination of double taxation. Once the same income is taxed in France and is also brought to tax in India, the treaty mechanism requires that appropriate relief be granted in India in respect of taxes paid in France, subject to the limitations and conditions prescribed therein. 32. Rule 128 of the Income-tax Rules prescribes the manner of granting FTC. Form No. 67 is the prescribed form th....
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....rom double taxation. The underlying rationale is simple and compelling: the purpose of a DTAA is to avoid double taxation, not to create procedural traps by which the same income remains taxed twice despite availability of proof of foreign tax payment. 35. The learned Departmental Representative has attempted to distinguish some of the judicial precedents on the ground that, in those cases, Form No. 67 had been filed before completion of assessment whereas in the present case it was filed after the assessment order dated 05.03.2021, namely on 30.03.2021. We have considered this objection. The distinction, though factual, cannot be treated as decisive in the present case. The appellate proceedings are continuation of the assessment proceedings and the claim of the assessee is available for verification before the appellate authority as well as before the Assessing Officer pursuant to directions of the Tribunal. If the substantive conditions for FTC are satisfied, and if the taxes paid in France are verifiable, the mere fact that the form was filed after the assessment order cannot, by itself, extinguish the claim. What is material is not the ritualistic timing of the form but the....
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....reign tax payment and the doubly taxed income are otherwise verifiable. 38. It is also relevant that the tax paid in France is stated to be Rs. 2,08,038, whereas the FTC claimed in India is Rs. 1,72,725, being the Indian tax attributable to the rental income brought to tax by the Assessing Officer. Thus, the assessee is not seeking any windfall or double benefit. On the contrary, he seeks only credit to the extent of Indian tax payable on the very same income which has already suffered tax in France. If the figures are found correct on verification, the foreign taxes paid exceed the Indian tax attributable to the doubly taxed income. In such circumstances, no prejudice can be said to be caused to the Revenue by grant of FTC in accordance with law. Denial of such credit would result in taxation of the same income twice, contrary to the raison d'être of the DTAA. 39. The learned CIT(A), in our view, erred in treating the delay in filing Form No. 67 as fatal without examining the substantive treaty entitlement of the assessee and without appreciating the judicial view that the requirement is directory. The Assessing Officer also proceeded on the premise that the absence of....