Article 12(4), Article 14, Article 23(2) of India-Japan DTAA – The words ‘tax deducted in accordance with the provisions’ of Article 23 of DTAA mean taxes withheld by source state which are in harmony, or in conformity, with provisions of DTAA – Article 12(4), read with Article 14, of DTAA as exclusion of FTS in Article 12(4) is attracted only if services were covered under Article 14, scope of which is limited to individuals – Income earned by partnership firm was plausibly taxable under Article 12 and bona fide view adopted by a source country is binding on country of residence while evaluating tax credit claim

Article 12(4), Article 14, Article 23(2) of India-Japan DTAA – The words ‘tax deducted in accordance with the provisions’ of Article 23 of DTAA mean taxes withheld by source state which are in harmony, or in conformity, with provisions of DTAA – Article 12(4), read with Article 14, of DTAA as exclusion of FTS in Article 12(4) is attracted only if services were covered under Article 14, scope of which is limited to individuals – Income earned by partnership firm was plausibly taxable under Article 12 and bona fide view adopted by a source country is binding on country of residence while evaluating tax credit claim

FACTS
The assessee was a law firm assessed as a partnership firm in India. It had received fee from Japanese clients after withholding tax @10% under Article 12 of the India-Japan DTAA.

The A.O. denied Foreign Tax Credit (FTC) on the ground that the income was covered under Article 14 – Independent Personal Service (IPS) Article. In terms of Article 14, income from professional services can be taxed in Japan only if the assessee has a fixed base in Japan. Since the assessee did not have a fixed base in Japan, the A.O. held that withholding of tax was not in accordance with the DTAA provisions.

On appeal, the CIT(A) upheld the order of the A.O. Being aggrieved, the assessee appealed before the Tribunal.

HELD
•        Article 23(2)(a) of the India-Japan DTAA requires India to grant credit for tax deducted in Japan in accordance with the provisions of the DTAA. The words ‘in accordance with the provisions’ would mean taxes withheld in the source state which could be reasonably said to be in harmony, or in conformity, with provisions of the DTAA.
•        While interpreting the above words, one is required to take a judicious call as to whether the view adopted by the source jurisdiction was reasonable and bona fide, though such a view may be or may not be the same as the legal position in the residence jurisdiction.
•        Article 12 and Article 14 overlap as regards coverage of professional service. However, Article 12(4) excludes payment made to an individual for independent personal services mentioned in Article 14.
•        Since the income was received by a partnership firm, exclusion in Article 12(4) was not applicable. Therefore, income was rightly subjected to tax in Japan. Accordingly, the assessee was qualified to claim FTC under the India-Japan DTAA.