From The Judiciary

Can an Indian resident claim Foreign Tax Credit for taxes withheld in foreign countries on income which is allegedly not taxable in the foreign country?

AZB and Partners [TS-819-ITAT-2024(Mum)]

Facts

AZB and Partners (Assessee) a professional services provider firm based in India, earned income from services and claimed a Foreign Tax Credit (FTC) for taxes that were withheld in Japan, Singapore, Mauritius, and Nepal. The AO raised objections to the FTC claim, arguing that in present case under Article 14 of the tax treaty, independent professional services are not taxable in these foreign jurisdictions. The AO also contended that FTC can only be granted when the income in question is taxable in the foreign jurisdiction, which was allegedly not the case here.

Held

The Tribunal examined the powers of the AO to decide whether the foreign tax withheld was in alignment with the relevant provisions of the Double Tax Avoidance Agreement (DTAA). The Tribunal clarified that the AO has the authority to decline the FTC under Article 23(2)(a) of DTAA, if the foreign tax is not in accordance with the tax treaty. However, in this case, the only reason for which exclusion from article 12 was canvassed by the AO was that rather specific provision of article 14 must make way for rather general provision of article 12.

Further tribunal had referred the case of Amarchand Mangaldas & Suresh A Shroff & Co. and found that the taxes withheld in Japan, Singapore, and Nepal were neither unreasonable nor incorrect as the issue stemmed from a misinterpretation of Articles 12 and 14 of the DTAA, which led to confusion regarding the taxation of professional services in those countries.

The Tribunal concluded that the income earned by AZB and Partners was indeed taxed in the respective foreign jurisdictions, and as a result, the FTC should be granted. The appeal filed by the Revenue was dismissed, and the Tribunal directed the AO to allow the FTC as claimed by the assessee.

Our Comments

The case highlights that FTC can be granted if the income is taxed in foreign jurisdictions, even if it is misinterpreted, by resident contracting state.

Can a foreign company be deemed to have a Permanent Establishment (PE) in India if its Liaison Office (LO) is closed?

Bently Nevada LLC [TS-805-ITAT-2024(DEL)]

Facts

Bently Nevada LLC (the Assessee) a US-based company made certain sale of goods and sale of software and related support services to its various customers in India.

The Assessee submitted that its LO in India had been closed during the relevant AY and, as such, no business activity was carried out in India. The closure of the LO was substantiated by the Assessee through a copy of the Annual Statement in Form 49C under Section 285 and copy of Form No. 52 filed with the Registrar of Companies. The AO observed that there was no change in the business activities of the Assessee compared to prior years, implying that the liaison Office was still active. The AO did not consider the documents provided by the Assessee and concluded that the Assessee continued to have a PE in India during the relevant period.

Held

The ITAT observed that the assessee had provided sufficient documentary evidence to substantiate the closure of the LO and the non-engagement of expatriates. Once the Assessee provided such documentation, the onus shifted to the Revenue to prove otherwise. The Revenue failed to investigate or challenge the authenticity of these documents.

The Tribunal also relying in the case of co-ordinate bench order in case of Assessee’s group concern GE Energy Parts, and Nuovo Pignone International SRL wherein it was held that since nothing is found amiss or adverse in the facts and material brought on record by the Assessee, it is concluded that assessee did not have any PE in India.

Our Comments

This case highlights that once sufficient information regarding the facts of the case is furnished to the department, the onus shifts to the Revenue to prove otherwise.

Holds no separate benchmarking of royalty payment required; follows Assessee’s earlier order

Toyota Kirloskar Motor P. Ltd [TS-473-ITAT-2024(Bang)-TP]

Facts of the case

Assessee is a subsidiary company of Toyota Motor Corporation. The assessee’s case was picked up for assessment and a reference u/s. 92CA of the act was made to the TPO. The TPO after evaluating the segmental results, had concluded that both the trading and manufacturing segment are at arms’ length. The TPO, thereafter, proceeded to evaluate the arms’ length character of technical assistance fee and the royalty separately. Though the international transaction relating to payment of technical assistance fee by the assessee to its AE is at arms’ length, the TPO had concluded that the assessee had not demonstrated any economic benefit while making payment towards royalty and therefore he computed the arms’ length price at Nil and made transfer pricing adjustment of INR ~98 crores. As against the said order, the assessee filed an appeal before the Ld. CIT(A) and contended that the TP adjustment made by the AO without appreciating the fact that the ITAT, Bangalore had set aside the similar TP adjustment made for the A.Y. 2008- 09 and therefore the present order is liable to be set aside.

The assessee had challenged before the ITAT and the case was remitted back to TPO for adjudication. TPO had reduced the adjustment of royalty payment to INR 14 crores which was challenged by the assessee before the Ld. CIT(A), on the ground that once the margin was accepted by the TPO to be at arms’ length price, the royalty could not be separately benchmarked. In support of their contention, the assessee relied on their own case of the ITAT, Bangalore in respect of the A.Ys. 2015-16 and 2016-17. The Ld. CIT(A) considered the decisions of the assessee for the A.Ys. 2012-13 to 2016-17 in which the Tribunal had decided the issue in favour of the assessee by holding that royalty cannot be separately benchmarked, and allowed the appeal filed by the assessee for A.Y. 2008-09 also.

The revenue had appealed to the Income Tax Appellate Tribunal (ITAT) against the order of CIT(A) on the ground that CIT(A) was wrong to hold that royalty cannot be benchmarked separately. The Assessee had filed the compilation of its own cases in respect of AY 2007-08, AY 2012-13 to AY 2018- 19, wherein the same issue was covered in favor of the assessee.

ITAT order

The Tribunal held that the issue involved in this appeal is similar to the facts and circumstances found in the earlier orders of the Tribunal in the assessee’s own case and therefore the Ld. CIT(A) had rightly allowed the appeal filed by the assessee challenging the order of the TPO in which the royalty was separately benchmarked even after the margin is accepted to be at arms’ length price by the TPO and hence the appeal filed by the revenue was dismissed.

Our Comments

The Tribunal had held that no separate adjustment is required for the payment of royalty if the Transactional Net Margin Method (TNMM) approach has been adopted at entity level as decided by the coordinate bench of the Tribunal in the assessee's own case.

Finds no infirmity in order of CIT(A), following binding precedent to delete Sec.271G-penalty

Blue Star Diamonds Pvt Ltd [TS-467-ITAT-2024(Mum)-TP]

Facts of the case

The Assessee is mainly engaged in the business of trading/manufacturing of rough and polished diamonds. During the proceedings before the TPO, the assessee was unable to submit the segmental results of the assessee for its AE and non-AE segment, as requested by the TPO. The Ld. TPO rejected the contention of the assessee and levied penalty invoking section 271G of the Act for all the three assessment years involved in the appeal.

The aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A), considering the submission of the assessee deleted the penalty and appeal of the assessee was allowed. Aggrieved with the appeal order, the revenue filed an appeal before the ITAT.

Revenue’s contention before ITAT

Revenue argued that the CIT(A) erred in deleting penalty under section 271G by holding that the assessee had made substantial compliance, failing to note that under TNMM adopted by the assessee, the profit including segmental account of the international transaction has to be furnished as asked for, whereas the assessee has only furnished the entity level margin.

Held by ITAT

The ITAT dismissed the appeal of the revenue basis the facts and circumstances of levy of penalty u/s 271G for AY 2013-14, AY 2014-15, and AY 2015-16, being identical to that for AY 2012-13. The Assessee had benchmarked the transaction of purchase and sale of rough and polished diamonds by taking TNMM as the most appropriate method.

ITAT observed that, keeping in view of the nature of diamond business in which assessee is engaged, it has substantially complied with the transfer pricing requirements and accepted assessee’s contention of inability to submit the segmental accounts in view of the intricacies involved in the diamond industry and due to the practical difficulty to furnish the segmental results.

Our Comments

The ITAT upheld the decision of CIT(A) and highlighted that there is no infirmity in the order of the Ld. CIT(A) in following the binding precedent in the case of the assessee itself, unless reversed or stayed by the Hon’ble High Court.