DTAA Benefit To Amarchand Mangaldas

The Mumbai Bench of Income Tax Appellate Tribunal (CESTAT) while granting the (Double Taxation Avoidance Treaty) DTAA benefit to Amarchand Mangaldas held that residence countries cannot deny credit on taxes levied by Source Country.

The bench of Beena Pillai (Judicial Member) and Ratnesh Nandan Sahay (Accountant Member) has observed that DTAA provisions don’t require that state of residence and eliminate the double taxation in all cases where state of source has imposed its tax by applying to an item of income, a provision of convention that is different from state of residence considers to be applicable.

Background – Amarchand Mangaldas

The appellant/assessee has provided professional services to clients in Japan and do not have a fixed base or presence for more than 183 days in Japan. However, TDS has been deducted by Japanese entities and credit of Rs.1,10,93,772/- was claimed in Income Tax return filed in India by the assessee.

The credit of such withholding tax is not allowable to assessee in India as a receipt is not taxable in Japan and thus, the tax was not required to be withheld, as it was in the nature of independent personal services.

The appellant filed an appeal before the CIT(A). The CIT(A) held that The assessment for the impugned AY 2016-17 is enhanced by rejecting all the foreign tax credit claims, in respect of the taxes withheld abroad in treaty partner jurisdictions. Therefore, the Assessing Officer is directed to disallow the foreign tax credit claim of Rs.1,32,31,618/- relating to taxes withheld in Japan, and Malaysia.

Arguments

The department contended that the Appellant would not be entitled for FTC without filing of return of income as taxes withheld cannot be construed as taxes paid in the foreign jurisdiction. Article 14 of the India-Japan DTAA was applicable only to individuals and thus not applicable to the Appellant, which is a partnership firm. It further held that the fees earned by the Appellant firm in Japan was taxable as fees for technical services under Article 12 and that the FTC ought to have been granted to the Appellant firm for the taxes withheld in Japan.

Conclusion

The Tribunal held that the appellant is entitled to get Foreign Tax Credit (FTC) in respect of tax withheld in Japan.

The tribunal ruled that in all cases in which interpretation of residence country about applicability of a treaty provision is not the same as that of source jurisdiction about the provision and yet the source country levied taxes whether directly or by way of tax withholding, tax credit cannot be declined.