Form 67 and Foreign Tax Credit: Balancing Compliance and Rights in Indian Tax Law

Introduction

In the more and more globalized economy, many Indian earns income from foreign sources, which can be taxed both in the country of origin and in India, leading to double taxation. To ease this, the Indian tax system allows for the claiming of Foreign Tax Credit , enable taxpayers to equalize taxes paid abroad against their Indian tax liabilities. However, process of claiming FTC is governed by definite routine requirements, including the timely filing of Form 67. The question arises as to whether a delay in meeting these procedural requirements, such as filing Form 67 after the stipulated deadline, can justify the rejection of an FTC claim. Issue has been at center of various legal dispute, where taxpayers have challenge denial of their FTC claims on practical grounds, in dispute that such delays should not overrule their related right to avoid double taxation.

1. Foreign Tax credits Legislative framework

For claiming Foreign Tax Credit in India is primarily governed by Sections 90, 90A, and 91 of the Income Tax Act. These sections empower Indian taxpayers to claim credit for taxes paid overseas, thereby averting same income from being taxed twice-once in origin country and again in India.

• Section 90: Deals with where India has entered into Double Taxation Avoidance Agreements (DTAAs) with other countries. Section 90 allows taxpayers to benefit from lower tax rates or exemptions provided under such agreements, while also claiming FTC for taxes paid in foreign jurisdiction.
• Section 90A: addresses cases where specific organizations or associations in India have entered into DTAAs with foreign organizations or associations. Similar to Section 90, this section ensures that taxpayers can claim FTC based on provisions of these agreements.
• Section 91: When there is no DTAA between India and the foreign country. In such cases, FTC is still available under Indian tax laws, based on the principle of unilateral relief, ensuring that taxpayers do not suffer double taxation even in absence of agreement.

Explanation: The statutory framework provides strong mechanism for taxpayers to avoid double taxation and ensures that their worldwide income is taxed fairly. These sections importance lies in their ability to offer relief across various scenarios-whether or not DTAA exists covering a wide scale of international transactions. Understanding this framework is essential for taxpayers and tax professionals, as it forms foundation of FTC claims.

2. Guidelines for Claiming FTC

The Income Tax Rules, 1962, specifically Rule 128, set down detailed guidelines for claiming FTC. These guidelines are crucial for ensuring that FTC claims are made in consistent and transparent manner.

• Eligibility: Only resident taxpayers can claim FTC, which underscores the importance of residency status in determining tax obligations under Indian law.
• Scope of FTC: The credit is available only against Indian taxes, excluding interest, fees, or penalties. This limitation ensures that FTC is strictly applied to offset income tax liabilities and not other financial obligations.
• Timing of Claims: FTC must be claimed in the year in which the corresponding income is assessed in India. This emphasizes the need for timely compliance and accurate reporting to avoid disputes with tax authorities.
• Undecided Income: FTC is not available for income that is under dispute unless dispute is resolved. This provision highlights the importance of clear and undisputed tax assessments before claiming FTC.
• Calculation of FTC: The FTC amount is calculated separately for each source of income from each country. This meticulous approach ensures that the credit is accurately computed and prevents over-claiming of credits.
• Limit of FTC: The credit is capped at the lower of the Indian tax payable or the foreign tax paid. This ensures that the taxpayer does not receive excess credit, which could lead to unintended benefits.

Explanation: These guidelines ensure that FTC claims process is orderly and fair, protecting the taxpayer and the tax authorities. The guidelines are designed to prevent misuse of the FTC provisions while also ensuring that legal claims are honored. Taxpayers must adhere to these guidelines to maximize their tax relief benefits without falling foul of procedural requirements.

3. Form no 67 and its Importance

Form 67 is a critical document required for claiming FTC under Indian tax laws. It is a practical formality mandated by Rule 128(9) of the I.T Rules, which must be submitted to legalize FTC claim.

• Filing Requirement: Form 67 must be filed with the I.T Department as part of t FTC claim process. It acts as declaration of taxes paid abroad and the income on which those taxes were levied.
• Amendment Impact: The amendment effective from 1st April 2022 changed filing deadline for Form 67 from due date of the return of income to end of relevant assessment year. This extension provides taxpayers with additional time to comply with filing requirement but also introduces layer of complexity in terms of timing.
• Compliance difficulty: The requirement to file Form 67, particularly after the amendment, has added to the practical burden on taxpayers. However, it also highlights importance of keeping accurate records and ensuring that all procedural requirements are met to avoid disputes.

Explanation: While Form 67 is a routine requirement, its significance cannot be overstated. It serves as vital link between the taxpayer's foreign income and Indian tax system, ensuring that the FTC claim is properly documented and verified. However, as emphasize by various court rulings, the late filing of Form 67 should not nullify a taxpayer's substantive right to claim FTC, provided that delay does not affect the accuracy or validity of the claim.

Judicial decisions regarding Foreign Tax Credit

1. M/s. Bharat Oman Refineries Ltd. v. Pr. CIT (Bombay High Court) [2023] 152 taxmann.com 288

Facts of the Case

M/s. Bharat Oman Refineries Ltd. filed for Foreign Tax Credit (FTC) for taxes paid in a foreign country during the relevant assessment year. However, the company submitted Form 67, a mandatory requirement for claiming FTC, after the due date prescribed under the Income Tax Rules. The Assessing Officer (AO) denied the FTC solely based on the delayed submission of Form 67, without disputing the genuineness of the foreign tax payment. The company appealed against the AO's order, arguing that FTC is a substantive right and should not be denied due to a procedural lapse.

Submissions by the Assesses

1. Substantive Right: The assesses contended that FTC is statutory right granted u/s. 90 of the I.T act and relevant Double Taxation Avoidance Agreements (DTAAs). The delay in filing Form 67 was a procedural oversight and should not result in denial of this right.
2. Reasonable Cause for Delay: The assessee provided reasons for delay, such as difficulties in obtaining necessary documentation from foreign tax authorities. The delay was not intentional and did not result in any revenue loss.
3. No Revenue Loss: The assessee emphasized that taxes had been actually paid in the foreign jurisdiction, and the denial of FTC would lead to double taxation, which the DTAA aims to prevent.
4. Citing Precedents: The assessee cited several judicial precedents, including the rulings in M/s. Wipro Ltd. v. Dy. CIT and M/s. Vodafone Idea Ltd. v. ACIT, to argue that procedural delays should not result in the denial of substantive tax benefits like FTC.

Observations by the Income Tax Officer (AO)

1. Strict Adherence to Procedure: The AO argued that rules clearly mandate timely submission of Form 67 for claiming FTC. The AO held that non-compliance with this procedural requirement repeatedly disqualifies assessee from claiming FTC.
2. Lack of Jurisdiction to overlook Delay: The AO stated that he did not have the jurisdiction to condone delays in filing Form 67 and that adherence to procedural requirements was necessary for maintaining order in the administration of tax laws.

Observations by the Commissioner of Income Tax

1. Support for AO's Decision: The Commissioner of Income Tax (Appeals) upheld the AO's decision, emphasizing the importance of procedural compliance in tax administration. The Commissioner observed that the rules clearly required the timely filing of Form 67, and the assessee's failure to comply with this requirement justified the denial of FTC.
2. Lack of Flexibility: The Commissioner noted that there was no provision in the rules to condone the delay in filing Form 67, and as such, the denial of FTC was warranted under the circumstances.

Analysis by the Court

1. Procedural vs. Substantive Rights: The Bombay High Court analyzed whether procedural lapses, such as the delayed filing of Form 67, should override substantive rights like FTC. The court observed that the primary objective of FTC is to prevent double taxation, and this objective should not be defeated by procedural non-compliance unless there is a clear legislative mandate to do so.
2. Intent of the Legislation: The court highlighted that the intent behind the DTAA and the provisions of Section 90 is to grant relief from double taxation. The denial of FTC due to a procedural lapse, in this case, would result in unjust double taxation, which is contrary to the purpose of the law.
3. Judicial Precedents: The court referred to similar cases, such as M/s. Wipro Ltd. v. Dy. CIT and M/s. Vodafone Idea Ltd. v. ACIT, where the courts had ruled that procedural lapses should not lead to the denial of substantive tax benefits. The court noted that these precedents supported the assessee's position.
4. Condonation of Delay: The court observed that while the rules require timely filing of Form 67, the delay in this case was due to a reasonable cause and did not indicate any malafide intent. The court held that such procedural lapses should be condoned to uphold the substantive rights of the taxpayer.

Decision

The Bombay High Court ruled in favor of the assessee, holding that the denial of FTC due to the delayed filing of Form 67 was not justified. The court directed the tax authorities to allow the FTC claim, despite the procedural lapse. The judgment reinforced the principle that substantive rights should not be denied due to minor procedural lapses, especially when there is no adverse impact on revenue.

particularly the case of Manoj Kumar Srivastava v. ACIT.

2. Manoj Kumar Srivastava v. ACIT 2024 TaxPub(DT) 2777 (Del-Trib).

• Case Background: The taxpayer, Manoj Kumar Srivastava, earned income from the USA but filed Form 67 late, leading to the initial denial of his FTC claim.
• Taxpayer's Argument: Srivastava contended that the filing of Form 67 is a procedural requirement and that the substantive right to FTC should not be denied due to this procedural delay.
• Judicial Outcome: The Tribunal ruled that the late filing of Form 67 should not lead to the denial of FTC, as it is a procedural formality and not a mandatory pre-condition for claiming the credit.

Tribunal's Decision

• Procedural vs. Substantive Rights: The Tribunal emphasized that filing Form 67 is a procedural requirement and should not extinguish the substantive right to FTC.
• Legislative Intent: The denial of FTC based on procedural delays contradicts the legislative intent of avoiding double taxation.
• Directive to Allow FTC: The Tribunal directed the authorities to allow Srivastava's FTC claim, reinforcing the principle that procedural lapses should not lead to substantive tax disadvantages.

Conclusion

The case of Manoj Kumar Srivastava v. ACIT underscores the importance of distinguishing between procedural compliance and substantive rights in tax law. The Tribunal's decision clarifies that procedural delays, such as the late filing of Form 67, should not extinguish a taxpayer's right to claim FTC. This ruling serves as a precedent for future cases, ensuring that taxpayers' rights are protected despite procedural lapses.

Other Case Laws Referred

1. M/s. Wipro Ltd. v. Dy. CIT (Karnataka High Court) [2016] 382 ITR 179:
   • The Karnataka High Court held that the delay in filing Form 67 should not result in the denial of FTC, emphasizing that FTC is a substantive right.
2. M/s. Vodafone Idea Ltd. v. ACIT (Mumbai ITAT) ITA No. 7247/Mum/2018:
   • The Mumbai ITAT ruled that procedural lapses, like the delayed filing of Form 67, should not lead to the denial of FTC, as the purpose of FTC is to avoid double taxation.
3. Pr. CIT v. M/s. Bharat Oman Refineries Ltd. (Bombay High Court) [2023] 152 taxmann.com 288:
   • The case at hand, which further solidifies the judicial stance that procedural lapses should not override substantive rights, provided there is no revenue loss or malafide intent.

Final Interpretation

The rulings in cases like M/s. Bharat Oman Refineries Ltd. v. Pr. CIT and Manoj kumar srivastava vs cit 2024 TaxPub(DT) 2777 (Del-Trib). clearly demonstrate that procedural delays, such as the late filing of Form 67, should not lead to the denial of a taxpayer's right to claim Foreign Tax Credit (FTC). The courts have consistently upheld that the intent of tax laws is to prevent double taxation and ensure fairness. Therefore, as long as the taxpayer has met the substantial requirements, their right to FTC remains intact, despite any procedural lapses. This reinforces the importance of focusing on the substance of tax compliance over strict procedural adherence.