Canon India Pvt Ltd vs. The Dy. C.I.T [ITA No. 585/DEL/2021]
Background of the Case
The dispute arose from Canon India’s claim for Foreign Tax Credit (FTC) on taxes withheld in Japan on income that formed part of its total income in India. For the relevant years, the assessee’s domestic tax computation resulted in a nil tax liability due to deductions under Section 10A or set-off of brought-forward losses and unabsorbed depreciation. The Assessing Officer denied the FTC, holding that credit could not be granted when the final tax payable in India was zero. The CIT(A) reversed the denial and held that FTC was allowable once the foreign income was included in total income and supported by valid Japanese withholding tax certificates. The Revenue appealed to the ITAT, and the assessee filed a cross-objection seeking interest on refunds under Section 244A.
Arguments by the Appellant
The Revenue argued that FTC arises only when the assessee has a tax liability in India against which the foreign tax paid can be credited. When domestic computation results in a nil tax outcome due to Section 10A or loss set-off, there is no tax available for adjustment, and therefore no FTC should be granted. It contended that neither Section 90 nor the India–Japan DTAA allows granting of FTC that leads to a refund of foreign taxes, as the mechanism is designed solely to prevent double taxation—not to generate cash refunds. According to the Department, allowing FTC in loss or exempt years would distort the purpose of the DTAA and create unintended refunds in India. The Revenue therefore sought restoration of the AO’s order denying FTC.
Respondent’s Response
Canon India submitted that FTC is a substantive treaty right under the DTAA and cannot be denied merely because tax computation in India results in nil tax. The income had indeed been taxed in Japan and was included in total income in India, meaning it fell within the scope of Article 23 of the India–Japan DTAA. The assessee argued that deductions like Section 10A or set-off of accumulated losses are computation mechanisms and do not alter the nature of the income or the right to claim FTC. Denial would lead to economic double taxation, which the treaty explicitly seeks to avoid. On Section 244A, the assessee claimed that interest must be paid on any refund arising from tax adjustments, including foreign tax credits.
Court Findings and Decision
The ITAT Delhi upheld the CIT(A)’s decision and confirmed that FTC cannot be denied merely because the assessee’s final tax liability in India is nil. Once foreign-sourced income forms part of the total income and has suffered tax abroad, the DTAA mandates granting of credit, irrespective of domestic tax outcomes. The Tribunal observed that refusal to grant FTC would cause double taxation, which contradicts treaty provisions. It also accepted the Japanese tax certificates as valid and reliable evidence. However, on the assessee’s cross-objection, the ITAT held that interest under Section 244A is not allowable on refunds arising due to FTC, as such refunds do not constitute tax paid in excess under domestic law. Accordingly, the Revenue’s appeal was dismissed, while the assessee’s cross-objection on Section 244A was rejected.
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