Mumbai Tribunal grants tax credit for taxes withheld in Japan on professional income; endorses uniform interpretation of tax treaty

 

This Tax Alert summarizes a ruling of the Mumbai Income Tax Appellate Tribunal (Tribunal), dated 18 December 2020, in the case of Amarchand & Mangaldas & Suresh A Shroff & Co. (Taxpayer), a partnership firm in India, on the issue of 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).

 

In the present case, 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 the DTAA has to be read as a whole and its provisions should be construed in harmony with each other. Basis this, income from professional services of individuals qualifies as IPS under the DTAA and that of the partnership firm is rightly taxed as FTS in Japan under the DTAA. Furthermore, 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