Delhi ITAT Allows Full Foreign Tax Credit to Canon India for Taxes Withheld in Japan Despite Nil Indian Tax Liability
Pranav B Prem
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that Canon India Pvt. Ltd. is entitled to claim full Foreign Tax Credit (FTC) under Section 90 of the Income Tax Act, read with Article 23 of the India-Japan Double Taxation Avoidance Agreement (DTAA), in respect of taxes withheld in Japan on its export income, even though the corresponding income was exempt under Section 10A or neutralized due to brought-forward losses. The Bench comprising Challa Nagendra Prasad (Judicial Member) and Naveen Chandra (Accountant Member) ruled that Canon India must be granted complete credit of taxes withheld in Japan, and the credit cannot be restricted merely on the ground that no taxable income remained in India after statutory exemptions.
Canon India, engaged in the trading and distribution of imaging and optical products, had exported software to Japan, where taxes were withheld at source as per Japanese domestic law. In its Indian return of income, the company claimed FTC under Section 90 of the Act, read with India-Japan DTAA. However, the Assessing Officer denied the FTC claim by reasoning that since the Japanese-source income was either exempt under Section 10A or absorbed by business losses, there was no tax liability in India against which FTC could be granted. The Dispute Resolution Panel upheld the AO’s findings.
Before the Tribunal, Canon India relied heavily on the Karnataka High Court's ruling in Wipro Ltd. v. DCIT [(2015) 236 Taxman 209], where it was held that a taxpayer is entitled to FTC even when the Indian tax liability becomes nil due to Section 10A deduction or brought-forward losses. The Tribunal took note that Canon India had already succeeded on an identical issue before the Delhi ITAT for AY 2004–05. The assessee further drew attention to the Delhi High Court decision in HCL Comnet Systems and Services Ltd, which endorsed the reasoning in Wipro Ltd., holding that FTC cannot be denied merely because the income becomes non-taxable in India due to Section 10A.
Extracting the reasoning of the Karnataka High Court, the Tribunal noted that the right to FTC flows from the DTAA itself, and Article 23 does not impose any condition that FTC is allowable only when a positive tax liability exists in India. Referring to the prior ruling in Canon’s own case, the Bench emphasized that “the assessee is eligible for the entire credit of foreign taxes deducted in Japan, even if the taxability was nil consequent to the deduction under Section 10A or brought-forward losses.”
The Revenue argued that FTC is strictly limited to the extent of Indian tax payable and cannot result in a refund. It cited the ITAT Mumbai decision in Bank of India, wherein FTC was denied when the Indian tax liability was nil. The Tribunal rejected the Revenue’s stand, observing that the Mumbai decision was distinguishable and, in any event, was contrary to the binding jurisdictional precedent of the Delhi High Court in HCL Comnet. The Tribunal held that “now that a jurisdictional High Court decision is before us, the question of following binding judicial precedent no longer exists.”
The Tribunal ultimately concluded that Canon India must be granted full credit of foreign taxes paid in Japan on export revenues, without any reduction on account of losses or Section 10A relief. The AO was therefore directed to allow the FTC claimed. The Tribunal also addressed the assessee’s alternative claim regarding credit of TDS deducted in India, treating it as consequential.
Regarding the assessee’s plea for interest under Section 244A on refund arising from FTC, the Tribunal rejected the claim. It held that interest under Section 244A is available only when excess tax has been paid to the Indian exchequer by way of advance tax, TDS, TCS, or other tax payments. The Bench noted that Canon India had not made any additional tax payment in India apart from claiming FTC, and therefore the refund arising due to allowance of FTC could not be treated as excess payment of Indian tax. As observed in the judgment, “there is no further tax paid; no further advance tax has been paid to the Indian exchequer; no further TDS has been deducted by Indian deductor.” The Tribunal held that the decision of the Bombay High Court in Tech Mahindra Ltd. did not apply since that case involved actual excess payment of Indian taxes.
In conclusion, the Tribunal allowed Canon India’s appeal on the core issue of FTC, directing the Assessing Officer to grant complete credit for taxes paid in Japan. The Revenue’s appeal on the same issue for AY 2005–06 was dismissed on parity of reasoning. The cross-objection filed by the assessee seeking interest under Section 244A was rejected. With these findings, the appeal was partly allowed.
Appearance
Assessee By: Shri Himanshu Sinha, Adv Shri Jainender Singh Kataria, Adv Shri Prashant Meherchandani, Adv
Department By: Shri Vijay B. Basanta, CIT
Cause Title: Canon India Pvt Ltd V. The Dy. C.I.T
Case No: ITA No. 585/DEL/2021 [A.Y. 2003-04]
Coram: Challa Nagendra Prasad (Judicial Member), Naveen Chandra (Accountant Member)
