The Bench, consisting of members Beena Pillai (Judicial Member) and Chandra Poojari (Accountant Member) has ruled that Rule 128 of the Income Tax Rules which requires the assessee to submit Form 67 before filing the income tax return for claiming Foreign Tax Credit (FTC) is directory in nature and not mandatory, thus FTC cannot be denied for delay in filing Form 67.

The Assessee 42 Hertz Software India Pvt Ltd filed its income tax return and claimed FTC under Section 90 of Income Tax Act with respect to tax withheld by Japan. The Assessing Officer noted that the Assessee had not filed Form 67 before filing its income tax return which was mandatory for claiming FTC. Subsequently, during assessment proceedings the Assessee filed Form 67 which was not accepted by the AO. The AO disallowed the claim of FTC on the ground that the Assessee had failed to furnish Form 67 on or before the due date of furnishing the income tax return under the Act which was mandatory as per Rule 128 (9) of the Income Tax Rules, 1962. The Assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)) against the order of the AO.

The CIT(A) confirmed the order of the AO and held that since the Assessee had not filed Form 67 before the time prescribed under the Income Tax Act, therefore Form 67 was non-est in law. The CIT(A) held that the provisions of Rule 128 (8) and 128 (9) are mandatory in nature and rejected the contention of the Assessee that filing of Form 67 was a procedural requirement the non-compliance of which did not disentitle the Assessee of FTC. The Assessee filed an appeal before the ITAT against the order of the CIT (A).

The Counsel for the Assessee 42 Hertz Software submitted before the ITAT that the provisions of Rule 128 are procedural in nature and no condition is prescribed in the India-Japan DTAA that the FTC can be disallowed for non-compliance with any procedural provision. The Counsel averred that as the provisions of DTAA override the provisions of the Income Tax Act, the Assessee has a vested right to claim the FTC under the tax treaty which could not be disallowed for mere delay in compliance with a procedural provision. The departmental representative submitted that fulfilling the requirement under Rule 128 (9) is mandatory and hence the revenue authorities were justified in refusing to give credit for the foreign tax paid by the Assessee.

Rule 128(8)(i) of the Income Tax Rules, 1962 provides that Foreign Tax Credit (FTC) shall be allowed on furnishing a statement of income from the country or specified territory outside India offered for tax for the previous year and a statement of foreign tax deducted or paid on such income in Form No. 67. Also, Rule 128 (9) provides that statement in Form No. 67 shall be furnished on or before the due date specified for furnishing the income tax return under Section 139 (1) of Income Tax Act.

The ITAT noted that Rule 128 requires the Assessee to submit Form 67 before filing the income tax return for claiming FTC. The ITAT held that the requirement of Rule 128 is directory in nature and not mandatory since it does not provide for disallowance of FTC in case of delay in filing Form 67.

Also, the ITAT ruled that it is a trite law that DTAA overrides the provisions of the Income Tax Act and the Income Tax Rules, which has been approved by the Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd versus Commissioner of Income Tax (2021).

The ITAT therefore ruled that FTC could not be denied to the Assessee for delay in filing Form 67.

The ITAT thus allowed the appeal of the Assessee and remanded the issue back to the AO to consider the claim of the Assessee in accordance with law.

Case Title: M/S. 42 Hertz Software India Pvt. Ltd., Bangalore Versus The Assistant Commissioner Of Income Tax, Bangalore

Order: 07.03.2022 (Itat Bangalore)

Counsel For The Appellant/Assessee: Shri Pvss Prasad, Ca

Counsel For The Respondent/ Revenue Department: Shri Priyadarshini Mishra, Addl. CIT (DR)

  Click Here To Read/Download Order