ITAT Mumbai Ruling: Retrospective Application of Rule 128 Invalid for Denying Foreign Tax Credit and Transfer Pricing Principles Reaffirmed

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, recently delivered a comprehensive judgment addressing multiple complex tax disputes, including the retrospective application of procedural rules for Foreign Tax Credit (FTC), transfer pricing (TP) adjustments on corporate guarantees, the treatment of interest-free business advances to foreign joint ventures, and the interplay between exempt income disallowances and book profit computations.

The consolidated order, pronounced on 03.05.2024, disposed of four cross-appeals filed by the assessee and the Revenue department for Assessment Years (AY) 2015-16 and 2016-17 in the case of KEC International Limited Vs DCIT. This detailed analysis breaks down the key judicial pronouncements and their implications for corporate assessees engaged in cross-border transactions and joint ventures.

1. Denial of Foreign Tax Credit (FTC) Under Rule 128

One of the primary grievances raised by the assessee pertained to the denial of relief for taxes paid in a foreign jurisdiction. The assessee, a company executing various infrastructure and power transmission projects globally, earned profits from operations in Kenya. These profits were subjected to taxation both in Kenya and in India.

To mitigate double taxation, the assessee claimed relief under Section 90 and Section 91 of the Income-tax Act, 1961. While the assessing authorities allowed corresponding relief for taxes paid in other foreign countries based on the submitted proof, the credit for taxes paid in Kenya was explicitly denied. The assessing officer invoked Rule 128 of the Income-tax Rules, 1962, contending that the assessee had failed to furnish Form No. 67, which is a procedural prerequisite for availing FTC under the said rule.

The Tribunal's Verdict on Retrospective Applicability

The ITAT critically examined the legislative timeline of the invoked rule. The Tribunal observed that Rule 128 was introduced via the Income-tax (18th Amendment) Rules, 2016, and was explicitly made effective from 01.04.2017. However, the assessee had filed the return of income for the relevant assessment year on 27.11.2015.