Foreign Tax Credit - Overview and related issues
Foreign Tax Credit (FTC) is allowed to a resident of India in respect of the tax paid by him in a source country or specified territory outside India either by way of deduction or otherwise. The overview of the regulations relating to the claim of FTC in India and the related key tax issues are as under:
- FTC is allowed in respect of tax paid outside India irrespective of whether India has entered into a Double Taxation Avoidance Agreement (DTAA) with such country or specified territories or not. FTC is allowed in the year in which the corresponding income is offered to tax in India.
- FTC is restricted to the amount of tax payable in India on the corresponding income. FTC can be claimed only against the tax, surcharge and cess payable on the corresponding income in India.
- For claiming the FTC, the taxpayer is required to file the prescribed form online - Form 67 by the end of the relevant assessment year in which the corresponding income is offered to tax.
Over the years, there have been various issues relating to the eligibility to claim FTC, the amount that can be claimed as a credit, relating to filing of Form 67, which we have covered in the ensuing paragraphs.
Relief against State Taxes
In certain countries (for example, the USA), income taxes are levied by the State as well as the Central Government. The eligibility to claim FTC for State taxes is a subject matter of dispute.
In the case of Wipro Ltd1, the Karnataka High Court has held that where DTAA does not cover taxes like state taxes payable on income, FTC can be availed under Section 91 of the ITA. In the case of Tata Sons Ltd2, the Mumbai Tribunal has held that Section 91 of ITA does not discriminate between State and Federal taxes and, in effect, provides for both types of Income-taxes to be considered for the purpose of tax credits against Indian Income-tax liability.
Hence, the taxpayer is, in principle, entitled to tax credits in respect of the State as well as Central tax payable outside India.
Allowability of FTC where income is exempt from tax in India
Where an income is subject to profitlinked deduction and no tax is payable on the same in India, a question arises whether the taxpayer shall be eligible to claim FTC in respect of such income. Here the language of the DTAA Article on the elimination of double taxation is very important.
In this context, the decision of the Karnataka High Court in the case of Wipro Ltd (supra) is relevant. The taxpayer had claimed a deduction under Section 10A of the ITA and claimed FTC for the taxes paid in USA and Canada. The FTC claim was disputed as to whether the taxpayer is eligible to claim FTC where no tax is paid on the income in India. The Hon’ble High Court relying on the double tax treaty between India and USA, held that the income derived by an Indian resident, which is taxable in the USA (directly or by deductions), would get FTC in India for the entire amount of income tax paid in the USA. The Revenue’s appeal against the Karnataka High Court’s ruling in Wipro (Supra) has been granted a Special Leave for Appeal3, leaving the decision of the High Court to be adjudicated upon by the Supreme Court.
It will be interesting to see how the Apex Court interprets India-USA DTAA.
Whether FTC can be claimed as a business deduction
Section 40(a)(ii) of the ITA states that any sum paid on account of any rate or tax levied on the profits or gains of any business is not allowed as a deduction. Explanation to Section 40(a) (ii) of the ITA clarifies that any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under Section 90 of the ITA or, as the case under Section 91 of the ITA. In view of the above, it appears that the taxes paid abroad are not eligible for deduction under Section 40(a)(ii) of ITA, where relief under Section 90 or 91 is claimed.
In the case of Reliance Infrastructure v CIT4, the Hon'ble Bombay HC held that where the taxpayer is not entitled to claim FTC, it is entitled to claim a deduction of such expense while computing its income from business and profession. Similarly, in the case of the Bank of India5, the Mumbai Tribunal denied a refund of foreign taxes but allowed it as a business expense deduction in the absence of Indian tax liability on foreign incomes.
Filing of Form 67
For claiming FTC, the taxpayer is required to file online Form 67. The Hon’ble Bangalore Tribunal in the case of Hertz Software India (P.) Ltd6 and Mumbai Tribunal, in the case of Sonakshi Sinha7 held that FTC cannot be denied merely on delay in filing Form 67. The Tribunals held that submission of Form No. 67 before the filing of returns is not mandatory, but a directory requirement and there is no condition prescribed in DTAA that the FTC can be disallowed for non-compliance of any procedural provision.
Based on the above judicial decisions, FTC should be available even if there is a delay in filing Form 67.
The Centralized Processing Center (CPC) processes the tax return and where there is a delay in filing Form 67, the FTC is denied. The taxpayer has the option to file an application for rectification or file an appeal against the CPC order. Given the litigation costs, it is recommended that the taxpayer files Form 67 within the prescribed timelines.
Concluding Remarks
The taxpayers need to be vigilant while claiming FTC and ensure that the language of the Treaty is examined carefully, where DTAA covers FTC. In case of no DTAA, the FTC claim may be considered as per the provisions of Section 91 of the ITA. On the amount of FTC to be claimed, the treaty wordings would be relevant and it may be possible to claim credit for full taxes paid outside India. Reliance in this regard may be placed on the Karnataka High Court decision in the case of Wipro (supra). However, it may be noted that the tax department has preferred an appeal against the Karnataka High Court decision in the Supreme Court. It would be interesting to see the verdict of the Apex Court in the case of Wipro (supra), especially after the introduction of Rule 128 of the Income tax Rules, 1962. Furthermore, where FTC is not available, there is a possibility to claim the foreign taxes as a deduction. However, such a claim shall not be free from litigation. While FTC should not be denied merely because Form 67 has been filed late, given the litigation costs, it is recommended that the taxpayer files Form 67 within the prescribed timelines.
1. [2015] 62 taxmann.com 26, [2016] 382 ITR 179
2. [2011] 10 taxmann.com 87 (Mum.)
3. [2018] 95 taxmann.com 107 (SC)
4. 390 ITR 271
5. ITA 869/Mum/2018
6. [2022] 139 taxmann.com 448
7. [2022] 197 ITD 263