ASST COMMISSIONER OF INCOME TAX-16(2), MUMBAI vs. AZB AND PARTNERS, MUMBAI

3 ITAs No.3381 & 3382/Mum/2024 AZB and Partners, Mumbai. A.Ys 2020-21 & 2017-18 services to clients in Japan, Nepal and Singapore, but, it did not have a fixed base or persons for more than 183 days in Japan and Nepal and 90 days in the case of Singapore. However, TDS had been deducted by the entities of these countries and the assessee had claimed credit of Rs.79,78,570/- in the income-tax return filed in India. The AO was of the view that credit of such withholding tax was not allowable to the assessee in India as these receipts were not taxable in those countries. The AO also noticed that as per Article 14 of DTAA with Japan, Nepal and Singapore, the income derived by a resident of a contracting State in respect of the professional services or other activities of an independent character shall be taxable only in that contracting State if the assessee has a fixed base regularly available to him or his presence in other contracting State exceeds 183 days in Japan, Nepal and 90 days in the case of Singapore during the relevant year. The AO stated that since the income of the assessee was not subject to tax in Japan, Nepal and Singapore, therefore, credit for withholding tax of Rs.78,26,428/- from Japan, Rs.67,335/- from Singapore and Rs.84,807/- from Nepal were not allowed to the assessee.

4 ITAs No.3381 & 3382/Mum/2024 AZB and Partners, Mumbai. A.Ys 2020-21 & 2017-18 “6.1.3 I have perused submissions of the appellant and the decisions cited therein. It is noted that the facts of the case of the appellant are identical to the case of M/s.Cyril Amarchand Mangaldas ITA no.1046/Mum./2023 (AY 2017-18) & 7/Mum./2023 (AY 2018-19), common order dated 28/06/2023 wherein relying upon the decision, dated 18/12/2020, of coordinate bench of Hon’ble ITAT, Mumbai in case of Amarchand and Mangaldas and Suresh A Shroff & Co. v/s ACIT, in ITA No. 2613/Mum./2019 (AY 2014-15), it was noted that the Japanese authorities had interpreted Article 14 of the India-Japan DTAA differently holding that the provisions of Article 14 shall be applicable only in case of professionals working in the individual capacity, i.e. independent lawyers, and not to entities engaged in rendering professional services like corporate law firms, such as the assessee and therefore, its clients in Japan were directed by Japanese tax authorities to deduct tax under Article 12 of the India-Japan DTAA and deposit the taxes to its credit while making the payments to the assessee. The AO therein had held that the credit of such withholding tax was not allowable to the assessee in India as the receipt was not taxable in Japan and thus, the tax was not required to be withheld, as it was in the nature of independent personal services and accordingly, the AO had denied the foreign tax credit claimed by the assessee under section 90 of the Act. Further, the AO had also rejected the alternative claim of the assessee of reducing the turnover to the extent of the foreign tax credit, as the assessee had received the net amount in India. In that case, Hon’ble Tribunal had discussed the provisions of the relevant DTAAs & then pondered over the core issue as below: “Essentially, therefore, it is open to the Assessing Officer to take a call on whether the taxes withheld in the treaty partner jurisdiction could be reasonably said to be in harmony with or in conformity with the provisions of the related tax treaty, and in a case in which he comes to the conclusion that the taxes so withheld in the treaty partner jurisdiction could indeed be reasonably said to be not in harmony with the scheme of taxation in that tax treaty, he can decline the foreign tax credit under article 23(2)(a). The question, therefore, that we really need to adjudicate upon is whether the assessee could reasonably be said to be taxable in Japan under article 12, in respect of the professional income earned in Japan, of the Indo Japanese tax treaty. It is when the answer to this question is 5 ITAs No.3381 & 3382/Mum/2024 AZB and Partners, Mumbai. A.Ys 2020-21 & 2017-18 in the affirmative that the granting of the tax credit in respect of taxes so paid abroad could be considered, of course on merits, in the hands of the assessee. ….………… ….………. Suffice to say, 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 of Rs.80,55,856 on the facts of this case. We, therefore, direct the Assessing Officer to grant the said tax credit to the assessee. As we have upheld the plea of the assessee with respect to the admissibility of the foreign tax credit, we see no need to deal with the alternate plea of the assessee seeking deduction of the taxes so withheld abroad in the computation of its income.” Facts of the case of present appellant are identical as in the cases cited above. It is not the case of the AO that in India, the appellant has not offered the income received from Japan on which tax was withheld there. The similar provisions for India- Singapore applied by the AO in the present case are also cited below: ARTICLE 14: INDEPENDENT PERSONAL SERVICES - 1. Income derived by an individual who is a resident of a Contracting State from the performance of professional services or other independent activities of a similar character shall be taxable only in that State except in the following circumstances when such income may also be taxed in the other Contracting State : (a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State ; or (b) if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant fiscal year, in that case, only 6 ITAs No.3381 & 3382/Mum/2024 AZB and Partners, Mumbai. A.Ys 2020-21 & 2017-18 so much of the income, as is derived from his activities, performed in that other State may be taxed in that other State.

1. 1. The laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where express provision to the contrary is made in this Agreement.

3. Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Singapore, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Singapore tax paid, whether directly or by deduction. Where the income is a dividend paid by a company which is a resident of Singapore to a company which is a resident of India and which owns directly or indirectly not less than 25 per cent of the share capital of the company paying the dividend, the deduction shall take into account the Singapore tax paid in respect of the profits out of which the dividend is paid. Such deduction in either case shall not, however, exceed that part of the tax (as computed before the deduction is given) which is attributable to the income which may be taxed in Singapore.

4. For the purposes of paragraph 2 of this Article, “Singapore tax paid” shall be deemed to include any amount of tax which would have been payable but for the reduction or exemption of Singapore tax granted under : (a) the provisions of the Economic Expansion Incentives (Relief from Income-tax) Act and the provisions of sections 13(1)(t), 13(1)(u), 13(1)(v), 13(2), 13A, 13B, 13F, 14B, 14E, 43A, 43C, 43D, 43E, 43F, 43G, 43H, 43-I, 43J and 43K of the Income-tax Act, insofar as they were in force and have not been modified since the date of signature of this Agreement, or have been modified in minor respects so as not to affect their general character. (b) any other provision which may subsequently be enacted granting an exemption or 7 ITAs No.3381 & 3382/Mum/2024 AZB and Partners, Mumbai. A.Ys 2020-21 & 2017-18 reduction of tax which is agreed by the competent authorities of the Contracting States to be of a substantially similar character to any provision referred to in sub-paragraph (a) of this paragraph, if such provision has not been modified thereafter or has been modified only in minor respects so as not to affect its general character.

10 ITAs No.3381 & 3382/Mum/2024 AZB and Partners, Mumbai. A.Ys 2020-21 & 2017-18 It is also noted that decision of Ershisanye Construction Group India Pvt. Ltd. (supra) cited by the AO is not applicable in present case as in that case involving DTAA of India-China and the issue was whether payment made by an Indian resident to a resident law firm of China would constitute FTS within the meaning of India China DTAA. � In fact, a perusal of above-cited provisions of the three DTAAs with reference to facts of the case of present appellant show that in this case, the decision of Hon’ble ITAT in case of Amarchand and Mangaldas and Suresh A Shroff & Co. (Supra) applies for DTAAs with Singapore and Nepal too. Considering the above discussion, it is hereby held that the credit for taxes of Rs.78,26,428/- paid by the appellant in Japan, Rs. 84,807/- paid in Nepal & Rs. 67,335/- paid in Singapore is allowable in India u/s 90 of the Act.”

i. Amarchand & Mangaldas & Suresh A. Shroff & Co. v. Assistant Commissioner of Income Tax Circle 16(2), Mumbai [2020] 122 taxmann.com 248 (Mumbai - Trib.) ii. Deputy Commissioner of Income-tax v. Cyril Amarchand Mangaldas [2023] 154 taxmann.com 99 (Mumbai - Trib.)

11 ITAs No.3381 & 3382/Mum/2024 AZB and Partners, Mumbai. A.Ys 2020-21 & 2017-18 iii. Amarchand & Mangaldas & Suresh A. Shroff & Co. v. Commissioner of Income Tax (Appeals) National Faceless Appeal Centre Delhi [ITA No. 982/Mum/2023 AY 2017-18]

“5. Heard both the sides and perused the material on record. During the course of assessment the AO has disallowed the claim of credit of foreign tax withholding made by the Japanese clients of the assesse. The assesse firm has provided legal services to certain clients based in Japan for which the clients paid legal fees after withholding tax @ 10% under Article 12 of the India Japan Double Taxation Avoidance Agreement (DTAA). Article 12 of the DTAA provides that income from professional services or other activities of independent character would be taxable in the resident country i.e India. However, clause 4 of Article 12 provides that such payments would not be constitute as fees for technical services only if such payment is made to an individual for carrying out independent personal services referred to in Article 14. Since, assessee is a partnership firm

12 ITAs No.3381 & 3382/Mum/2024 AZB and Partners, Mumbai. A.Ys 2020-21 & 2017-18 and exception for payment referred in Article 14 would be applicable only for individual, therefore, the fees received by the assessee would not be covered under the such exception and accordingly would be subject to withholding tax in Japan. In this regard we have perused the decision of coordinate bench of ITAT in the case of the assessee for AY. 2014-15. The relevant operating part of the decision is reproduced as under:

“9. In view of these discussions, there is a valid school of thought that in the scheme of the Indo Japanese to creaty, article 14 for independent personal services holds the field for the individuals only particularly in the light of the exclusion clause under article 12(4) being restricted to payment of fees for professional services to individuals balone There is no dispute that the provisions of article 14 and article 12 are overlapping inasmuch as what is termed as professional service could also be covered by the fees for technical service particularly as the definition of the fees for technical services is on classical model of much wider scope and not on the 'make available model now in vogue in many tax treaties. The only reason for which exclusion from article 12 was canvassed by the Assessing Officer was that rather specific provisions of article 14 have to make way for rather general provisions of article 12, but then when 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. These judicial precedents deal with the tax treaties that India has entered into with China, U.K. and the USA, but then all the three treaties are, in the material respects, differently worded vis-à-vis the Indo-Japanese tax treaty that we are presently dealing with. It is, therefore, not even necessary, even if we have our reservations on correctness of these decisions, to refer the matter to the larger bench for reconsideration of the principle laid down therein.

13 ITAs No.3381 & 3382/Mum/2024 AZB and Partners, Mumbai. A.Ys 2020-21 & 2017-18 Suffice to say, 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 of Rs.80,55,856 on the facts of this case. We, therefore, direct the Assessing Officer to grant the said tax credit to the assessee. As we have upheld the plea of the assessee with respect to the admissibility of the foreign tax credit, we see no need to deal with the alternate plea of the assessee seeking deduction of the taxes so withheld abroad in the computation of its income."

8. Similarly, the decision of the ITAT in the case of Amarchand & Mangaldas & Suresh A. Shroff & Co. v. Commissioner of Income Tax (Appeals) National Faceless Appeal Centre Delhi [ITA No. 982/Mum/2023 AY 2017-18 discussed as supra also applies to DTAAs with Singapore and Nepal too as discussed in the findings of the ld.CIT(A).

9. We have perused the decision of ITAT, Mumbai in the case of Dynamic Drilling & Services (P) Ltd. vs ACIT (2022) 140 taxmann.com 102 (Delhi-Trib.) as referred by the ld. Counsel wherein it is held in para 19 of the order after referring the decision of ITAT, Mumbai in the case of Amarchand & Mangaldas Suresh A. Shroff & Co. v. Asstt. CIT [2020] 122 taxmann.com 248/12021] 187 ITD 750 as under:-

14 ITAs No.3381 & 3382/Mum/2024 AZB and Partners, Mumbai. A.Ys 2020-21 & 2017-18

“19. While arriving to our aforesaid conclusion we also draw our guidance in support from the decision of Hon'ble Mumbai ITAT in the case of Amarchand & Mangaldas Suresh A. Shroff & Co. v. Asstt. CIT [2020] 122 taxmann.com 248/12021] 187 ITD 750 where in para 10 at page 8 therein, the Hon'ble Bench held that DTAA provisions don't require that state of residence eliminate the double taxation in all cases where state of source has imposed its tax by applying to an item of income, a provision of convention that is different from state of residence considers to be applicable. Therefore, in all cases in which interpretation of residence country about applicability of a treaty provision is not the same as that of source jurisdiction about the provision and yet the source country levied taxes whether directly or by way of tax withholding, tax credit cannot be declined."

15 ITAs No.3381 & 3382/Mum/2024 AZB and Partners, Mumbai. A.Ys 2020-21 & 2017-18 therefore, applying the findings in that appeal, the grounds of appeal of the Revenue in the instant appeal are also dismissed.

Order pronounced in the open court on 21.10.2024.