Delhi ITAT upholds Foreign Tax Credit on overseas legal and consultancy receipts of Shardul Amarchand Mangaldas & Co.

Background and context

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has dismissed a batch of departmental appeals in the case of ACIT Vs Shardul Amarchand Mangaldas & Co. (ITAT Delhi), thereby affirming the assessee’s entitlement to Foreign Tax Credit (FTC) in respect of taxes withheld abroad on professional fees received from multiple foreign jurisdictions.

The dispute primarily revolved around:

  • The proper characterization of legal and consultancy fees under various Double Taxation Avoidance Agreements (DTAAs), particularly the India–Japan DTAA, and
  • Whether, upon offering the gross foreign receipts to tax in India, the assessee could claim FTC under section 90/90A of the Income Tax Act 1961 read with Rule 128 of the Income Tax Rules 1962.

The Tribunal’s order is common for a group of assessment years, with Assessment Year (AY) 2018-19 treated as the lead year. The decision has implications for professional firms rendering cross-border legal or consultancy services and facing foreign tax withholding on such income.

Appeals and lead year approach

Appeals covered

The Revenue had filed multiple appeals against a common order of the Commissioner of Income Tax (Appeals) [CIT(A)] passed under section 250. The appeals covered various years, including:

  • AY 2017-18
  • AY 2018-19
  • AY 2019-20
  • AY 2020-21
  • AY 2021-22
  • AY 2022-23

The assessments were framed under:

  • section 143(3) (regular assessment), sometimes read with sections 143(3A) and 143(3B), and
  • Reassessment under section 147 read with section 144B in one of the years.

Lead year concept adopted by CIT(A)

The CIT(A) identified the appeal for AY 2018-19 (Appeal No. NFAC/2017-18/10022110) as the lead year, considering that:

  • The factual matrix was common,
  • The nature of services and incomes was identical across years, and
  • The assessee’s grievance before the appellate authority was substantially the same.

Accordingly, the reasoning and conclusions drawn for the lead year were applied mutatis mutandis to all other years.

The Revenue challenged this consolidated approach, arguing, among other things, that each jurisdiction and each year required independent treaty-based and factual verification, especially for FTC computation.

Factual matrix of the assessee’s case

Nature of business and accounting method

The assessee is a partnership firm engaged in a wide spectrum of legal and consultancy services, including:

  • Mergers and acquisitions
  • Taxation
  • Dispute resolution
  • Competition law
  • Regulatory litigation
  • Capital markets
  • Private equity and related advisory

The firm renders services to both domestic and foreign clients in the ordinary course of its legal practice and follows the cash system of accounting, offering both income and expenditure to tax on the basis of actual receipt/payment.

Foreign professional receipts and tax withholding

During the relevant years, the assessee received professional/legal fees from clients based in various countries, including:

  • Japan
  • China
  • Malaysia
  • Uganda
  • Sri Lanka
  • Poland
  • Oman

Key features:

  • The assessee brought the gross foreign receipts to tax in India as part of its total income.
  • Foreign clients deducted tax at source in their respective countries under the applicable DTAA with India.
  • The assessee claimed FTC in India under section 90/90A, read with Rule 128, in respect of such foreign tax withheld.

Compliance with procedural requirements

To support its FTC claim, the assessee:

  1. Filed Form 67 for each relevant assessment year.
  2. Attached foreign tax deduction/withholding certificates issued by overseas clients, duly evidencing the foreign tax paid.
  3. Disclosed the foreign income in the return and in the course of assessment proceedings.

There was no dispute that these forms and certificates were filed, nor was there any allegation of mismatch between foreign income and foreign tax claimed for credit.

Core controversy: FTS vs independent personal services

Assessee’s characterization

The assessee treated its professional receipts from foreign jurisdictions as “Fees for Technical Services” (FTS) under the relevant DTAA articles, for example:

  • For Japan: Article 12(4) read with Article 23 of the India–Japan DTAA.

Based on this characterization, the assessee contended that:

  • The foreign tax withheld in those jurisdictions was in accordance with the DTAA; and
  • Such tax qualifies for credit in India under section 90/90A read with the applicable DTAA and Rule 128.

Assessing Officer’s view

The Assessing Officer (AO) disputed this characterization and held:

  • The services were essentially legal/professional services, not FTS.
  • Under the respective DTAAs, professional services are taxable under the article dealing with Independent Personal Services (IPS), e.g., Article 14 in the India–Japan DTAA, and not Article 12 (FTS).

In support, the AO’s reasoning (particularly in the context of the Japan DTAA) was: