Mumbai Tribunal grants tax credit for taxes withheld in Japan on professional income under India- Japan tax treaty;
A ruling of the Mumbai Income Tax Appellate Tribunal (Tribunal), dated 18 December 2020 on the Issue- Whether foreign tax credit (FTC) should be granted in India on the Taxpayer’s professional income earned and taxed in Japan under the India-Japan Double Taxation Avoidance Agreement (DTAA).
The facts in brief- The Taxpayer’s income from professional services was subject to tax withholding as fees for technical services (FTS) in Japan under the DTAA. The Indian tax authority denied FTC stating that the income of the Taxpayer qualified as income from personal services (IPS) under the DTAA, not subject to tax in Japan in the absence of the Taxpayer’s fixed base in Japan. Hence, taxes withheld in Japan are not in accordance with the DTAA and FTC was denied.
The Tribunal observed that where assessee, a law firm in India, rendered professional services to its clients in Japan, the said professional fees would be taxable as FTS in Japan under Article 12 of the India-Japan DTAA and would not fall within the purview of Article 14 of the India-Japan DTAA which was applicable only to individuals and not partnership firms. Consequently, the assessee firm was eligible to claim credit of taxes, withheld in Japan by its Japanese clients from the fees remitted to India. Further, if the source jurisdiction has adopted a reasonable and bona fide view which is not ”manifestly erroneous”, the same may be followed in the resident country to achieve a uniform interpretation of the DTAA. Accordingly, taxes withheld in Japan are in accordance with the DTAA and, hence, eligible for FTC in India.