Denial of tax credit of foreign taxes to a firm of
lawyers
Facts:
Assessee
a law firm claimed tax credit of taxes paid in Japan by its clients on the
revenue what they offered to tax in India as well. It was the case of the
revenue that as per Indo-Japan DTAA the amounts paid by the clients did not
fall in the scope of Article 14A (Independent Personal services) as they were a
firm and the article was limited only to individuals. On that contrary it is
quite likely that the said fee was taxable as FTS under Article 12(4) of
the DTAA. Since the income was not taxable at all in Japan under the DTAA with
the debate between these two sections and in the absence of a PE for the
assessee in Japan no TDS was first required to be done in Japan. In that
reasoning the tax credit was denied by the AO. On appeal the CIT(A)
allowed the tax credit based on the ITAT order of the related entity
of the assessee. On further appeal by the revenue -
Held
against the revenue that the assessee was entitled to tax credit of taxes paid
in Japan.
Applied:
Amarchand and Mangaldas and Suresh A Shroff & Co. v.
ACIT, in [ITA No.2613/Mum./2019, dt. 18-12-2020] : 2020 TaxPub(DT) 5486
(Mum-Trib)
K.P. Varghese v. ITO (1981) 131 ITR 597 (SC) : 1981
TaxPub(DT) 0972 (SC) and even
in the context of the interpretation of taxing statutes, have held that the
task of interpretation is not a mechanical task and, quoted with approval;
Justice Hand's observation that "it is one of the surest indexes of a
mature and developed jurisprudence not to make a fortress out of the dictionary
but to remember that statutes always have some purpose or object to accomplish,
whose sympathetic and imaginative discovery is the surest guide to their
meaning".
Linklaters LLP v. ITO (2011) 9 ITR (T) 217 (Mum) : 2010
TaxPub(DT) 2106 (Mum-Trib) held
that -
"105.
Learned counsel has also contended that the professional services can only be
taxed under the head Article 15 and in case chargeability under Article 15
fails, that is end of the road. It cannot be open to revenue authorities to tax
income from professional services under article 7". This was under
Indo-UK DTAA (Article 15 is Independent personal services)
Ed. Note:
If one were to say that the income was not taxable at all in the DTAA, then the
taxes that were paid ought to be given relief on the doubly taxed income in
India. It cannot be that they end up paying taxes on both countries. In the
event a fee is not falling in the scope of Article 12 or 14 (which might be
overlapping in many ways) the income will fall in the scope of PE taxation
Article 5 or 7 in which case it can be taxed as business profits only if there
exists a PE for the assessee. It is for this reason that Article 14/15 on IPS
has been omitted from most DTAA's as what is taxable as business
profits need not have a special article/clause called IPS in the first place.
Case: Dy. CIT v. Cyril Amarchand Mangaldas 2023 TaxPub(DT) 3977 (Mum-Trib)