Date of Judgement:
18 December 2020
Bench:
Pramod Kumar (Vice President)
Pavan Kumar Gadale(Judicial Member)
Parties:
Appellant - Amarchand &Mangaldas& Suresh A. Shroff & Co.
Respondent – Assistant Commissioner of Income Tax
Subject
The following judgement is a case that involves Amarchand & Mangaldas, which is one of the top leading firms in India and their plea for the foreign tax credit in reference to taxes withheld in Japan.
Overview
- While filing income tax returns, the appellant was, under Section 143(3) of the Income Tax Act, subjected to scrutiny assessment proceedings. At this point, it was noticed that they had claimed a foreign tax credit (FTC) of 80,55,856 Rs, which was withheld by their clients residing in Japan.
- The taxes that were withheld were at 10 % rate on gross billing amounts. This was done under Article 12 of Indo-Japanese tax treaty. However, the Assessing Officer opined that it was inadmissible because the assessee (appellant) could only be taxed under Article 14 of ‘Independent Personal Services.’
- In addition to this, the Assessing Officer also said that conditions under the said Article 14 were not satisfied and therefore theassessee was not entitled to FTC under the same.Hence, the request was rejected.
- Aggrieved by this, the appellant also appealed before the learned Commissioner (Appeals) but failed nevertheless.
- Alternatively, the appellant had also pleaded that if they are being declined with respect to FTC, then they should at least be allowed a deduction for the aforementioned amount, in accordance with their professional income.
Issues
- Whether the declining of tax credit under Article 23(2) of India Japan Double Taxation Avoidance Agreement is justified?
- Whether the assessee can be reasonably taxed in Japan under Article 12, in accordance with the Indo-Japanese tax treaty, with respect to their professional income earned in Japan?
Legal Provisions
- Indo Japanese tax treaty Article 12- Royalties and fees for technical services
- Independent Personal Services Article 14- Person should be subjected to tax in the country where he carries on his profession and not his resident country.
Analysis of the Judgement
- The Tribunal held that there is no question about the fundamental legal position regarding Article 23(2)(a) of Indo Japanese tax treaty. It states that when a resident of India derives income which, may be taxed in Japan, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Japanese tax paid in Japan, either by making deduction or directly.
- In simple terms, any income of an Indian resident which is taxed in Japan, the Indian resident will get the deduction, in the computation of his tax liability in India.
- The Tribunal also pointed out that there are overlapping areas in the definition of fees for technical services enumerated under Article 12(4) and Article 14 of the Independent Personal Services.
- The treaty approach is in agreement with the already established principle of law specified in the Latin maxim generaliaspecialibus non derogant, i.e., general provisions do not override the specific provisions.
- Pramod Kumar, who was the Vice President of the Bench, reiterated that Article 14 for Independent Personal Services holds the field for the individuals only- particularly in the light of the clause of exclusion given under Article 12(4) that is being restricted to payment of fees for professional services to individuals alone.
- Lastly, the Tribunal concluded that the act of Japanese tax authorities, directing tax withholdings from the payments made to the assessee by its Japanese clients cannot be declared as unreasonable or incorrect. It held that the assessee was wrongfully declined tax credit of Rs 80,55,856 on the facts of this case.
- The Tribunal also took notice of the fact that the appellant was a partnership firm and can be subjected to tax under Article 12 of the tax treaty. Therefore, the taxpayer (appellant) is eligible for tax credit in India.
- Keeping in mind the above judgement, the Tribunal also made an order directing the Assessing Officer to grant the said foreign tax credit to the assesseethereby providing relief to the appellant.
- The Tribunal also reiterated that a tax treaty should always be interpreted as a whole, which clearly implies that the provisions of the treaty are essentially required to be construed in harmony with each other. This is the basic rule of interpretation of statutes.
Conclusion
The interpretation of tax laws largely depends on the laws of the state and treaties governing them.
In this case,the Tribunal made an observation that in a scenario wherein a transaction by a resident of one of the contracting states is to be examined in both the treaty partner jurisdictions, from the point of view of taxability of income arising therefrom, different treatments being given by the treaty partner jurisdictions will only result in incongruity and undue hardship to the assessee.
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