Understanding the Denial of Foreign Tax Credit (FTC) Due to Delay in Filing Form 67: A Case Study of the Tribunal’s Ruling
In the realm of international taxation, the issue of Foreign Tax Credit (FTC) has always been a critical concern for taxpayers with income earned outside India. The FTC provision allows taxpayers to claim a credit for taxes paid in a foreign country to avoid the risk of double taxation. However, a recent case involving the denial of FTC due to a delay in filing Form 67 brings to light the intricacies of the process and sheds light on the important legal principles surrounding the issue. This article delves into a specific case law (ITA No. 81/PUN/2024) decided by the Income Tax Appellate Tribunal (ITAT), which revolves around the eligibility of FTC despite the delay in submitting the prescribed Form 67.
The Issue at Hand
The assessee in the case filed a return for the Assessment Year (AY) 2021-22, declaring an income of Rs. 28,88,780. The assessee had duly paid taxes on his income earned in the United States and the Netherlands and sought to claim a Foreign Tax Credit (FTC) of Rs. 1,48,111 under Section 90 of the Income Tax Act, 1961 (the “Act”) read with the Double Taxation Avoidance Agreements (DTAAs) between India-USA and India-Netherlands. However, the claim for FTC was denied by the Centralized Processing Center (CPC), Bengaluru, as the assessee filed Form 67—a document essential for claiming FTC—on January 8, 2022, which was beyond the due date prescribed under Rule 128(9) of the Income Tax Rules, 1962 (the “Rules”).
The assessee contended that the delay in filing Form 67 should not lead to the denial of FTC as the claim was based on the provisions of the DTAA, and the rules regarding Form 67 filing were procedural and not mandatory. The matter ultimately reached the Tribunal, which examined various judicial precedents and relevant provisions of the law before rendering its decision.
Key Legal Provisions
Section 90 of the Income Tax Act, 1961
Section 90 of the Act provides that taxpayers can avail themselves of relief from double taxation through DTAAs that India has signed with other countries. In this case, the taxpayer was seeking relief under the India-USA and India-Netherlands DTAAs.
Section 90(2) specifically clarifies that the provisions of the Act shall apply to the extent they are more beneficial to the assessee, even when there are provisions under the DTAA that might provide relief. The assessee argued that the DTAAs between India and the two foreign nations should override the provisions of the Act, particularly those dealing with procedural compliance.
Rule 128 of the Income Tax Rules
Form 67 is prescribed under Rule 128 of the Income Tax Rules, which outlines the process for claiming FTC. Rule 128(9) mandates that Form 67 must be filed before the due date for filing the income tax return under Section 139(1). The Rule sets a specific deadline for the filing of the form, and non-compliance with this requirement has led to the disallowance of FTC claims by the authorities.
The CBDT Notification
In this case, the assessee cited a CBDT notification (No. 100/2022), which amended Rule 128(9) to allow taxpayers to file Form 67 by the end of the assessment year. The notification, which came into effect on April 1, 2022, aimed to provide relief to taxpayers facing delays in filing Form 67 due to various reasons. The assessee argued that the notification should apply to cases pertaining to earlier periods as well, as it was meant to provide relief.
Proceedings Before the CIT(A)
Aggrieved by the denial of FTC by the CPC, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], Patna. The assessee submitted that Section 90 and the relevant provisions of the DTAAs should take precedence over Rule 128(9) of the Income Tax Rules, and the delay in filing Form 67 should not affect the claim for FTC. The assessee also referred to several tribunal decisions, including those from the Mumbai and Bangalore benches, which held that filing Form 67 is a directory requirement and not a mandatory one.
The CIT(A), however, dismissed the appeal and upheld the decision of the CPC. He ruled that the filing of Form 67 before the due date was a mandatory requirement under Rule 128(9) and that the assessee’s failure to comply with the deadline resulted in the disallowance of the FTC. The CIT(A) also referred to a Supreme Court ruling in the case of PCIT-III, Bengaluru v. Wipro Ltd., where it was held that the failure to comply with mandatory statutory provisions cannot be overlooked, regardless of any beneficial provisions under the DTAAs.
Tribunal’s Ruling
The matter was then taken up by the Income Tax Appellate Tribunal (ITAT). The Tribunal carefully examined the arguments put forth by both the assessee and the Department. The Tribunal observed that the only issue for consideration was the delay in filing Form 67, which was required for the claim of FTC. It was noted that the assessee had filed Form 67 on January 8, 2022, before the end of the relevant assessment year (AY 2021-22).
The Tribunal also acknowledged that the CBDT notification (No. 100/2022) allowed taxpayers to file Form 67 by the end of the assessment year, which should have been applicable in this case. The Tribunal emphasized that the filing of Form 67 was a procedural requirement and not a mandatory one. The Tribunal relied on various judicial precedents, including the decisions of the Hyderabad Bench and the Bangalore Bench of the Tribunal, which had ruled that delays in filing Form 67 should not result in the denial of FTC, as the filing of the form was directory in nature.
In particular, the Tribunal referred to the case of M/s. 42 Hertz Software India Pvt. Ltd., where the Bangalore Bench held that the filing of Form 67 was not a mandatory requirement but a procedural one. The Tribunal also referred to the decision in Baburao Atluri v. DCIT, where the delay in filing Form 67 was condoned, and FTC was allowed despite the delay. The Tribunal further noted that the DTAAs between India and the USA and the Netherlands take precedence over the provisions of the Act, and taxpayers should not be deprived of FTC due to a procedural lapse.
Conclusion and Remand
Ultimately, the Tribunal directed the Assessing Officer (AO) to verify Form 67 and allow the FTC in accordance with the law, after conducting the necessary verification. The case was restored to the file of the AO for this purpose, and the grounds raised by the assessee were allowed for statistical purposes.
This case underscores the importance of procedural requirements such as the filing of Form 67 for claiming FTC. However, it also highlights the flexibility in interpreting these requirements, especially when taxpayers face reasonable delays. The ruling serves as a reminder that administrative rules should not deprive taxpayers of substantial relief provided under international treaties like the DTAAs, particularly when such delays are minimal and justified.
Key Takeaways:
- Directory vs. Mandatory Requirements: The ruling emphasizes that procedural requirements like the filing of Form 67 should be considered directory rather than mandatory, particularly when the delay is minimal and reasonable.
- DTAA Overrides the Act: Taxpayers can claim FTC under the DTAAs, and such claims should not be denied solely based on a procedural lapse, especially when the delay is reasonable.
- Importance of CBDT Notifications: The CBDT’s notification offering extended time for filing Form 67 is a significant relief, and taxpayers should be able to benefit from it even for periods preceding its issuance.
This case provides valuable guidance on the balance between procedural compliance and substantial rights under the DTAAs, offering clarity for future taxpayers facing similar issues.
