Foreign Tax Credit is allowed even if Form 67 is not Filed: Hertz Software India Private Limited vs Asst(CIT)

The assessee has filed an appeal against the order dated 18/03/2020 passed by the Ld. CIT(A)-3, Bangalore for the assessment year 2017-18. The grounds for appeal are as follows:

Grounds of Appeal:

1. The Appellate Order is bad and erroneous both in fact and law, with a tax effect of 43,46,900/-.
2. The Ld. Commissioner of Income Tax (Appeals) erred in denying Foreign Tax Credit (FTC) due to a minor technical lapse in filling Form 67, with a tax effect of 43,46,900/-.
3. The Ld. Commissioner of Income Tax (Appeals) erred in denying Foreign Tax Credit (FTC) by ignoring that subordinate legislation cannot override the provisions of the statue, with a tax effect of 43,46,900/-.
4. The Ld. Commissioner of Income Tax (Appeals) erred in denying Foreign Tax Credit (FTC) by ignoring that provisions of DTAA and Article 23 of the DTAA with Japan cannot be overridden, with a tax effect of 43,46,900/-.
5. Any other grounds that may be argued during the hearing, with a total tax effect of 43,46,900/-.

Brief facts of the case are as under:

The company in question is a private limited company operating in the software publishing, consultancy and supply industry, offering products such as operating system software, business and other application software, and computer games. It filed its income return on 11/29/2017, declaring a total income of Rs. 1,36,89,850. The Assessing Officer noticed that the company claimed a Foreign Tax Credit of Rs. 43,46,900 under sections 90/91 of the India-Japan Double Taxation Avoidance Agreement. The Assessing Officer requested the company to provide the necessary details for the claimed Foreign Tax Credit (FTC).

On 22/07/2019, the Assessee filed a reply stating TDS was deducted in the AY 2016-17 but invoicing was done in AY 2017-18. However, the Assessing Officer (AO) noted that the Assessee failed to file Form 67 before filing the return of income, which is mandatory for claiming a Foreign Tax Credit (FTC). Later, the Assessee filed Form 67 on 30/07/2019 during the assessment proceedings, but the AO rejected it. The AO disallowed the Foreign Tax Credit (FTC) claim as the Assessee failed to submit Form 67 by the due date of furnishing the return of income. The Assessee appealed the assessment order to the Commissioner of Income Tax (Appeals) (CIT(A)), who confirmed the AO’s order. The CIT(A) held that the Assessee failed to file Form 67 within the time limit set by section 139(5) of the Act and considered it non-existent in law. The CIT(A) also rejected the Assessee’s argument that filing Form 67 is a procedural requirement and non-compliance does not disentitle them from the Foreign Tax Credit (FTC).

Tribunal Decision:

The Assessee then appealed to the Tribunal and filed an application for condonation of 257 days’ delay in filing the appeal. The Assessee argued that the appeal was supposed to be filed on 17.05.2020 but was filed on 29.01.2021, due to the extension of the limitation period due to COVID-19, which was withdrawn by the Honorable Supreme Court on 23.09.2021. The Tribunal considered the appeal to be filed within the period of limitation and heard both sides’ arguments.

The Assessee argued that there is no condition in the Double Taxation Avoidance Agreement (DTAA) that the Foreign Tax Credit (FTC) can be disallowed for non-compliance with a procedural provision and the DTAA overrides the provisions of the Act. The Department of Revenue (DR) argued that fulfillment of the requirement under Rule 128(9) of the Rules is mandatory and the revenue authorities were justified in denying the Foreign Tax Credit (FTC). The Tribunal perused the submissions and found that the Assessee is entitled to claim the Foreign Tax Credit (FTC). However, the requirement of filing Form 67 is a directory in nature as Rule 128(9) does not provide for disallowance of Foreign Tax Credit (FTC) in case of delay in filing Form 67. The Tribunal relied on a coordinate bench decision in case of Ms. Brinda Kumar Krishna vs. ITO and held that the DTAA overrides the provisions of the Act and Rules.

The Tribunal, therefore, held that the Foreign Tax Credit (FTC) cannot be denied to the Assessee and directed the AO to consider the Assessee’s claim in accordance with law, based on the supporting documents filed by the Assessee.

The appeal filed by the Assessee was allowed for statistical purposes.