INCOME TAX ACT, 1961

Section 90

Double taxation relief - Agreement between India and Japan - Indian law firm sought credit for taxes withheld by Japanease clients - AO denied assessee's claim in view of Articles 12(4) and 14 of DTAA

Assessee was one of India's well-known law firms and was assessed to tax in the status of a partnership-firm. It claimed foreign tax credit of Rs. 80,55,856 in respect of taxes withheld by its clients in Japan. The taxes so withheld were at the rate of 10% on gross billing amounts, by treating the professional fees earned by assessee in Japan as taxable in Japan, i.e., the source country, under article 12 of Indo-Japanese DTAA. AO took the view that credit for such taxes withheld in Japan was not admissible to assessee, for the reason that income so earned by assessee could only have been taxable under article 14 for 'independent personnel services' but then since assessee admittedly did not have any fixed place in Japan, the condition precedent for taxability even under article 14 was not at all satisfied, therefore, held that taxes were wrongly withheld in Japan, and, therefore, assessee was not entitled to a foreign tax credit in respect of the same. Held: In the scheme of Indo-Japanese DTAA, article 14 for independent personal services holds the field for individuals only- particularly in the light of exclusionary clause under article 12(4) being restricted to payment of fees for professional services to individuals alone. There is no dispute that 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 definition of '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 AO was that rather specific provisions of article 14 had to make way for rather general provisions of article 12, but when in the context of Indo-Japan Tax Treaty, article 14 comes into play only for individuals, this proposition of law ceases to hold good in assessee's case . As a corollary to this legal position, and exclusionary clause under article 12(4) not being triggered on the facts of assessee case as such, it was indeed reasonably possible to hold that legal fees paid to a partnership-firm of lawyers was rightly subjected to tax withholding in Japan and therefore, AO was directed to grant tax credit to assessee.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2014-15

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