2023 (7) TMI 81 - AT - Income Tax

Allowance of credit of taxes as withheld by the clients domiciled in Japan - legal services provided by the assessee to the Japanese residents - scope of Indo Japanese tax treaty - as per AO as the 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 - HELD THAT - We find that the coordinate bench of the Tribunal in Amarchand and Mangaldas and Suresh A Shroff Co. 2020 (12) TMI 776 - ITAT MUMBAI we hold that, in the context of Indo Japan tax treaty, article 14 comes into play only for individuals, this proposition ceases to hold good in the present context. As a corollary to this legal position, and the exclusion clause under article 12(4) not being triggered on the facts of this case as such, it is indeed reasonably possible to hold that the payments in question were rightly subjected to tax withholding in Japan. The judicial precedents cited by the authorities below are in the context of the tax treaties other than Indo Japan tax treaty, and the provisions of the Indo Japan tax treaty are not in pari materia with the provisions of those tax treaties. On the facts of this case, the conclusions arrived at by the Japanese tax authorities, directing tax withholdings from the payments made to the assessee by its Japanese clients, cannot be said to unreasonable or incorrect. In the light of these discussions, as also bearing in mind entirety of the case, we hold that the assessee was wrongly declined tax credit on the facts of this case. These are the cases in which the treaty partner source jurisdiction has taken a reasonable bonafide view which is not manifestly erroneous- even though it is not the same as is the view taken by the residence jurisdiction. Decided against revenue.

Summary

Issues Involved:
1. Allowance of tax relief for income earned in Japan under Article 14A of the India-Japan DTAA.
2. Whether the credit of taxes withheld by Japanese clients should be allowed.

Summary:

Issue 1: Allowance of Tax Relief for Income Earned in Japan under Article 14A of the India-Japan DTAA

The Revenue challenged the allowance of tax relief for income earned in Japan, arguing that the learned CIT(A) did not consider the provisions of Article 14A of the India-Japan DTAA, which deals with Independent Personal Services. The Revenue contended that the income itself is not taxable, and thus, the tax credit in respect thereof is not allowable.

The assessee, a law firm, filed its return declaring income and claimed relief under section 90 of the Act for services rendered in Japan, arguing that the legal services fall within "consultancy services" as per the Hon'ble Supreme Court's decision in GVK Industries v/s ITO (2015) and are taxable in Japan at 10% under Article 12 of the India-Japan DTAA. The Japanese tax authorities directed the clients to deduct tax under Article 12, not Article 14.

The AO denied the foreign tax credit, asserting that the receipt is not taxable in Japan under Article 14. However, the learned CIT(A) allowed the foreign tax credit, following the Tribunal's decision in the case of the principal firm for the assessment year 2014-15, which had similar facts.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the Japanese tax authorities' interpretation that Article 14 applies only to individuals and not entities like corporate law firms was reasonable. The Tribunal noted that the exclusion clause under Article 12(4) applies only to individuals, and therefore, the legal fees received by the assessee were rightly subjected to tax withholding in Japan under Article 12. The Tribunal referenced its previous decision in Amarchand and Mangaldas and Suresh A Shroff & Co. v/s ACIT, which supported the allowance of foreign tax credit.

Issue 2: Credit of Taxes Withheld by Japanese Clients

The Revenue's grievance was against the allowance of credit for taxes withheld by Japanese clients. The Tribunal found that the taxes were rightly withheld under Article 12 of the India-Japan DTAA, following the precedent set in the case of the principal firm. The Tribunal directed the AO to grant the foreign tax credit to the assessee.

For the assessment year 2018-19, the Tribunal applied the same reasoning and dismissed the Revenue's appeal, affirming that the allowance of credit for taxes withheld by Japanese clients was appropriate.

Conclusion:

Both appeals by the Revenue for the assessment years 2017-18 and 2018-19 were dismissed. The Tribunal upheld the CIT(A)'s decision to allow foreign tax credit for taxes withheld by Japanese clients, emphasizing the reasonable interpretation of the India-Japan DTAA provisions and the precedent set by the Tribunal in similar cases.