Reasons for denial of Foreign Tax Credit (FTC) while processing Income Tax Return (ITR) by CPC – A study
Summary: The denial of Foreign Tax Credit (FTC) claims by the Central Processing Centre (CPC) during Income Tax Return (ITR) processing often stems from procedural issues and misunderstandings of tax regulations. FTC, which prevents double taxation on global income, allows taxpayers to claim credits for foreign taxes paid. Essential to this process is the timely filing of Form 67, as stipulated by Rule 128 of the Income Tax Rules, which must be submitted before the ITR due date under Section 139(1) of the Income Tax Act. However, delays in filing Form 67 can lead to FTC denial, since the CPC is instructed to process claims based on the timeliness and accuracy of this form. Despite CPC guidelines, several ITAT rulings have challenged this rigidity, emphasizing that the requirement to file Form 67 is directory rather than mandatory. This perspective is supported by various cases where tribunals have ruled that FTC should not be denied solely due to procedural delays, arguing that the Double Taxation Avoidance Agreement (DTAA) provisions should take precedence over rigid rule compliance. High Court decisions have reinforced this view, affirming that FTC claims should be evaluated on the substance rather than procedural formality, advocating for relief in cases where Form 67 is filed late but before the final assessment.
1. Introduction :-
1.1 Before delving into why the Foreign Tax Credit (FTC) claim was denied despite its claim in the Income Tax Return (ITR) while processing the ITR by Central Processing Centre(CPC), it’s important to first understand the basic concepts of the Foreign Tax Credit under the Income Tax Act 1961. A resident taxpayer who earns income from abroad is subject to taxation in India, meaning their global income is taxed in India. To prevent double taxation, since the taxpayer might have already paid taxes on this income in the source country, the Income Tax Act allows for a credit to be claimed for the taxes withheld by the foreign country when filing the return in India.To claim a credit for taxes paid abroad on a resident taxpayer’s global income, it is essential that the taxpayer files Form 67, as prescribed by the Income Tax Rules, before the due date for filing the Income Tax Return (ITR) under Section 139(1) of the Income Tax Act.
2. Relevant provisions of Income tax Act 1961 with reference to claiming of FTC credit:-
2.1 Under Indian tax law, Sections 90 and 91 of the Income Tax Act 1961 address the Foreign Tax Credit (FTC) concept. Section 90 pertains to claiming FTC when India has a Double Taxation Avoidance Agreement (DTAA) with another country, which allows for such a claim. Section 91 covers FTC claims when India does not have a DTAA with the country where the taxpayer’s income is sourced. In both scenarios, an Indian resident taxpayer who has paid taxes abroad can claim a credit for these foreign taxes against their Indian tax liability.
3. Rule 128 of Income tax Rules:-
3.1 The rules for claiming FTC have been specified under Rule 128, effective from April 1, 2017. As per Rule 128(1) of the Income Tax Rules stipulates that a resident taxpayer is entitled to a credit for any foreign tax paid in a country or specified territory outside India. This credit, which may be claimed as a deduction or otherwise, is granted for the year in which the corresponding income is declared or assessed for tax in India, according to the provisions of this rule. If the income on which foreign tax has been paid or deducted is taxed in more than one year, the credit for the foreign tax will be allocated proportionally across those years based on the manner in which the income is taxed in India. The relevant Rule 128 is given below for sake of clarity :-
Foreign Tax Credit.
128. (1) An assessee, being a resident shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India, by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the extent as specified in this rule :
Provided that in a case where income on which foreign tax has been paid or deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those years in the same proportion in which the income is offered to tax or assessed to tax in India.
(2) The foreign tax referred to in sub-rule (1) shall mean,—
| (a) | in respect of a country or specified territory outside India with which India has entered into an agreement for the relief or avoidance of double taxation of income in terms of section 90 or section 90A, the tax covered under the said agreement; |
| (b) | in respect of any other country or specified territory outside India, the tax payable under the law in force in that country or specified territory in the nature of income-tax referred to in clause (iv) of the Explanation to section 91. |
(3) The credit under sub-rule (1) shall be available against the amount of tax, surcharge and cess payable under the Act but not in respect of any sum payable by way of interest, fee or penalty.
(4) No credit under sub-rule (1) shall be available in respect of any amount of foreign tax or part thereof which is disputed in any manner by the assessee:
Provided that the credit of such disputed tax shall be allowed for the year in which such income is offered to tax or assessed to tax in India if the assessee within six months from the end of the month in which the dispute is finally settled, furnishes evidence of settlement of dispute and an evidence to the effect that the liability for payment of such foreign tax has been discharged by him and furnishes an undertaking that no refund in respect of such amount has directly or indirectly been claimed or shall be claimed.
(5) The credit of foreign tax shall be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country or specified territory outside India and shall be given effect to in the following manner:—
| (i) | the credit shall be the lower of the tax payable under the Act on such income and the foreign tax paid on such income : |
| Provided that where the foreign tax paid exceeds the amount of tax payable in accordance with the provisions of the agreement for relief or avoidance of double taxation, such excess shall be ignored for the purposes of this clause; | |
| (ii) | the credit shall be determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which such tax has been paid or deducted. |
(6) In a case where any tax is payable under the provisions of section 115JB or section 115JC, the credit of foreign tax shall be allowed against such tax in the same manner as is allowable against any tax payable under the provisions of the Act other than the provisions of the said sections (hereafter referred to as the “normal provisions”).
(7) Where the amount of foreign tax credit available against the tax payable under the provisions of section 115JB or section 115JC exceeds the amount of tax credit available against the normal provisions, then while computing the amount of credit under section 115JAA or section 115JD in respect of the taxes paid under section 115JB or section 115JC, as the case may be, such excess shall be ignored.
(8) Credit of any foreign tax shall be allowed on furnishing the following documents by the assessee, namely:—
| (i) | a statement of income from the country or specified territory outside India offered for tax for the previous year and of foreign tax deducted or paid on such income in Form No.67 and verified in the manner specified therein; |
| (ii) | certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee,— |
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| (a) | from the tax authority of the country or the specified territory outside India; or | |
| (b) | from the person responsible for deduction of such tax; or | |
| (c) | signed by the assessee: |
Provided that the statement furnished by the assessee in clause (c) shall be valid if it is accompanied by,—
| (A) | an acknowledgement of online payment or bank counter foil or challan for payment of tax where the payment has been made by the assessee; | |
| (B) | proof of deduction where the tax has been deducted. |
2[(9) The statement in Form No. 67 referred to in clause (i) of sub-rule (8) and the certificate or the statement referred to in clause (ii) of sub-rule (8) shall be furnished on or before the end of the assessment year relevant to the previous year in which the income referred to in sub-rule (1) has been offered to tax or assessed to tax in India and the return for such assessment year has been furnished within the time specified under sub-section (1) or sub-section (4) of section 139:
Provided that where the return has been furnished under sub-section (8A) of section 139, the statement in Form No. 67 referred to in clause (i) of sub-rule (8) and the certificate or the statement referred to in clause (ii) of sub-rule (8) to the extent it relates to the income included in the updated return, shall be furnished on or before the date on which such return is furnished.]
(10) Form No.67 shall also be furnished in a case where the carry backward of loss of the current year results in refund of foreign tax for which credit has been claimed in any earlier previous year or years.
Explanation.—For the purposes of this rule ‘telegraphic transfer buying rate’ shall have the same meaning as assigned to it in Explanation to rule 26.]
Here are some key points to consider:-
| FTC is allowed in the year when the income related to the foreign tax has been declared or assessed for tax in India.
It can be used to offset the tax, surcharge, and cess payable under Indian tax laws, but not against interest, fees, or penalties. FTC is not applicable if the foreign tax is under dispute. It is also available for tax payable under Section 115JB (Minimum Alternate Tax). The credit is calculated as the total of amounts computed separately for each income source from a specific country. The FTC amount will be the lesser of the Indian tax payable on that income or the foreign tax paid. Additionally, the FTC is determined by converting the foreign tax amount at the Telegraphic Transfer Buying Rate on the last day of the month immediately preceding the month in which the tax was paid or deducted. |
3.2 As previously mentioned, to claim the Foreign Tax Credit (FTC), the resident taxpayer must file Form 67 before the deadline for submitting the income tax return under Section 139(1) of the Income Tax Act. However, an amendment to Rule 128 through the Income-tax (Twenty-seventh Amendment) Rules, 2022, effective from April 1, 2022 (for Assessment Year 2023-24 and onwards), allows taxpayers to submit Form 67 on or before the end of the assessment year relevant to the previous year in which the income was offered to or assessed for tax in India, provided the return for that assessment year is filed within the time specified under Section 139(1) or Section 139(4). Consequently, taxpayers can now file Form 67 by the end of the assessment year, for example, for Assessment Year 2024-25, the deadline is March 31, 2025, instead of the previous deadline of July 31, 2024.
3.3 Please note that Form 67 can only be submitted online. This feature allows registered users to file Form 67 through the e-Filing portal. Taxpayers can refer to the “Form 67 user manual”[1] available on the Income Tax Department’s e-Filing portal, which includes a detailed flow chart to assist with the easy upload of Form 67. It may be noted that the taxpayer can add an Authorized Representative to file Form 67 on taxpayer’s behalf. Further, it is not mandatory to obtain a CA certificate[2] to verify and confirm the details of the foreign tax credit claimed by the tax payer. The form 67 consists of four sections namely Part A, Part B, Verification, and Attachments, as outlined below below:
| Part A | Part A of the form entails basic information such as Taxpayer’s Name, PAN or Aadhaar, Address and Assessment Year. |
| Part B | Part B of the form is where taxpayer will be required to provide details of refund of foreign tax as result of carry backward of losses and disputed foreign disputed tax. |
| Verification | The Verification section contains a self-declaration form of taxpayer containing fields as per Rule 128 of the Income Tax Rules, 1962. |
| Attachments | The last section of Form 67 is Attachments where taxpayer need to attach a copy of the certificate or statement and proof of payment / deduction of foreign tax |
4. Let’s explore why the CPC is not granting FTC to some taxpayers. According to the CPC’s guidelines[3], Form 67 should be filed along with the return, and the claim for relief must be accurately filled out in the ITR. Returns with relief claims under section 90 are forwarded to the Assessing Officer (AO) for verification. The AO, using the records from Form 67 or other documentation, has the authority to approve the foreign tax credit in the ITR through the ITBA system. CPC then processes the ITR, considering the appropriate relief under section 143(1). If the AO has approved the relief claimed in the ITR, it will be granted based on the correctness of Form 67 and the amount claimed therein.
4.1 If a taxpayer misses the deadline for filing Form 67 as specified by sections 139(1) or 139(4) of the Income Tax Act, the CPC will deny the FTC to the taxpayer while processing the ITR under section 143(1). Since section 119(2)(b) of the I.T Act does not explicitly allow for condonation of delays in filing Form 67, the taxpayer must seek relief from the appellate authorities. This has led to litigation, with tribunals generally ruling that filing Form 67 is not mandatory and that DTAA provisions take precedence over the Income Tax Act/Rules. The decisions of various ITATs on this issue are given below for clarity:
a. Ms. Brinda Ramakirshna Vs The ITO[4],:-The ITAT,Bangalore held that (i) Rule 128(9) of the Rules does not provide for disallowance of FTC in case of delay in filing Form No.67; (ii) filing of Form No.67 is not mandatory but a directory requirement and (iii) DTAA overrides the provisions of the Act and the Rules cannot be contrary to the Act.
b. M/s 42 Hetz Software India Pvt Ltd Vs ADIT[5], , the ITAT, Bangalore held that “we have perused he submissions advanced by both sides in light of records placed before us. 6. There is no dispute that the Assessee is entitled to claim FTC. On perusal of provisions of Rule 128 (8) & (9), it is clear that, one of the requirements of Rule 128 for claiming FTC is that Form 67 is to be submitted by assessee before filing of the returns. In our view, this requirement cannot be treated as mandatory, rather it is directory in nature. This is because, Rule 128(9) does not provide for disallowance of FTC in case of delay in filing Form No.67. This view is fortified by the decision of coordinate bench of this Tribunal in case of Ms.Brinda Kumar Krishna vs.ITO in ITA no.454/Bang/2021 by order dated 17/11/2021. 7. It’s a trite law that DTAA overrides the provisions of the Act and the Rules, as held by various High Courts, which has also been approved by Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence (P.) Ltd. reported in (2021) 432 ITR 471. 8. We accordingly, hold that FTC cannot be denied to the assessee. Assessee is directed to file the relevant details/evidences in support of its claim. We thus remand this issue back to the Ld.AO to consider the claim of assessee in accordance with law, based on the verification carried out in respect of the supporting documents filed by assessee. Accordingly the grounds raised by assessee stands allowed for statistical purposes”
c. Sanjay Patil Vs Assessing Officer,[6]:- The ITAT, Surat had followed the decion of coordinated bench of ITAT Bangalore, in the case of Ms. Brinda Ramakrihna Vs the ITO and held that it is vivid from the above judgment of the Coordinate Bench that Assessee has vested right to claim the FTC under the tax treaty, the same cannot be disallowed for mere delay in compliance of a procedural provision, that is ‘delay in filing Form No.67’. Therefore, respectfully following the judgment of the Coordinate Bench of ITAT, Bangalore in the case of Ms. Brinda Rama Krishna (supra), we direct the Assessing Officer to examine the quantum of Foreign Tax Credit claimed by the assessee and allow the Foreign Tax Credit in accordance with law. Statistical purposes, the appeal of the assessee is treated to be allowed.
d. Sonakshi Sinha Vs CIT[7],:- The ITAT, Mumbai had followed the ITAT Bangalore decision in the case of Ms. Brinda Ramakrihna Vs the ITO and M/s 42 Hetz Software India Pvt Ltd Vs ADIT held that “we have carefully considered the rival contention and perused the orders of the lower authorities. Short question in this appeal is whether assessee is entitled to foreign tax credit even when form number 67 required to be filed according to the provisions of rule 128 (9) of the Income Tax Rules on or before the due date of filing of the return of income, not complied by the assessee, but same was filed before the completion of the assessment proceedings. Precisely, the fact shows that assessee filed return of income u/s 139 (1) of the income tax act. In such a return of income, she claimed the foreign tax credit. However, form number 67 was filed during the course of assessment proceedings and not before the due date of filing return. Rule 128 (9) of the Income Tax Rules 1962 provides that the statement in Form No. 67 referred to in clause (i) of sub-rule (8) and the certificate or the statement referred to in clause (ii) of sub-rule (8) shall be furnished on or before the due date specified for furnishing the return of income under sub-section (1) of section 139, in the manner specified for furnishing such return of income. We find that coordinate bench in 42 Hertz Software India (P.) Ltd v. ACIT [2022] 139 taxmann.com 448 (Bangalore – Trib.) wherein following its earlier order in the case of Ms. Brinda Rama Krishna v.ITO [2022] 135 taxmann.com 358 (Bang – Trib) it was held that “one of the requirements of Rule128 for claiming FTC is that Form 67 is to be submitted by assessee before filing of the returns and that this requirement cannot be treated as mandatory, rather it is directory in nature. This is because, Rule 128(9) does not provide for disallowance of FTC in case of delay in filing Form No. 67. Same view is also taken by a coordinate division bench in Vinodkumar Lakshmipathi V CIT(A) NFAC ITA No.680/Bang/2022 06.09.2022. It is AY 18-19 well settled that while laying down a particular procedure, if no negative or adverse consequences are contemplated for non-adherence to such procedure, the relevant provision is normally not taken to be mandatory and is considered to be purely directory. Admittedly, Rule 128 does not prescribe denial of credit of FTC. Further the Act i.e. section 90 or 91 also do not prescribe timeline for filing of such declaration on or before due date of filing of ROI. Further rule 128 (4) clearly provides the condition where the foreign tax credit would not be allowed. Rule 128 (9) does not say that if prescribed form would not be filed on or before the due date of filing of the return no such credit would be allowed. Further by the amendment to the rule with effect from 1 April 2022, the assessee can file such form number 67 on or before the end of the assessment year. Therefore, legislature in its own wisdom has extended such date which is beyond the due date of filing of the return of income. Further , the fact in the present case is quite distinct then the issue involved in the decision of the honourable Supreme Court in case of Wipro Ltd (supra). Here it is not the case of violation of any of the provisions of the act but of the rule, which does not provide for any consequence, if not complied with. Therefore, respectfully following the decisions of the coordinate bench on this issue, we hold the assessee is eligible for foreign tax credit, as she has filed form number 67 before completion of the assessment, though not in accordance with rule 128 (9) of The Income Tax Rules, which provided that such form shall be filed on or before the due date of filing of the return of income. Accordingly, ground number 2 of the appeal of the assessee is allowed. 013. Other grounds of appeal are also revolving around the issue of claim of foreign tax credit and therefore those are allowed.
e. Ashish Sood vs DCIT (ITAT, Chandīgarh) in ITA No. 747/Chd/2023 dated 23.04.2024:- The ITAT, Chandigarh held that “13.4.We are also of the considered view that Ld. CIT(A) erred in holding as under:
“Further Rule 129(8) incorporates the word “ Shall” which imply that filing of Form No. 67 before the time limit under section 139(1) [now extended to 139(4)] is directory / mandatory.”
The correct Rule is 128(9) and not Rule 129(8). The word “Shall” is interpreted as directory in view of the several pronouncements as above (supra). By using the both expression directory / mandatory an impression is created that the Ld. CIT(A) is attempting to blow hot and cold by using both the terminology directory / mandatory in the impugned order, which shows that order is passed in mechanical manner.13.5 The Ld. CIT(A) by having held that “ that it is brought on record that filing of Form No. 67 is mandatory to claim the benefit of Foreign Tax Credit” but in fact there is no material whatsoever on record to substantiate the said finding of Ld. CIT(A). The order of Ld. CIT(A) therefore is bad in law. 13.6 We also hold that it was incumbent upon both the authorities below to have at least Peruse the Form 67 and its accompaniments which were on record of both the authorities AO/ CIT (A) despite well settled law that condition of time limit for filling/submission are directory in nature in view of the authorities above (Supra). Therefore their non-consideration has rendered the Provision of Section 90/91, the DTAA between India and USA totally nugatory and Otiose.
f. Madras High Court Decision: The Madras High Court in the case of DuraiswamyKumaraswamy Vs. PCIT Duraisamy Kumarasamy Vs PCIT in W.P No. 5824 of 2022 dated 6.10.2023 wherein in para 11, 12 & 13 it is held as follows:
“11.The law laid down by the Hon’ble Apex Court in Commissioner of Income-Tax, Maharashtra v. G.M.Knitting Industries (P) Limited in Civil Appeal Nos.10782 of 2013 and 4048 of 2014 dated 24.06.2015, which was referred above, would be squarely applicable to the present case. In the present case, the returns were filed without FTC, however the same was filed before passing of the final assessment order. The filing of FTC in terms of the Rule 128 is only directory in nature. The rule is only for the implementation of the provisions of the Act and it will always be directory in nature. This is what the Hon’ble Supreme Court had held in the above cases when the returns were filed without furnishing Form 3AA and the same can be filed the subsequent to the passing of assessment order. 12. Further, in the present case, the intimation under Section 143(1) was issued on 26.03.2021, but the FTC was filed on 02.02.2021. Thus, the respondent is supposed to have provided the due credit to the FTC of the petitioner. However, the FTC was rejected by the respondent, which is not proper and the same is not in accordance with law. Therefore the impugned order is liable to be set aside. 13. Accordingly the impugned order dated 25.01.2022 is set aside. While setting aside the impugned order, this Court remits the matter back to the respondent to make reassessment by taking into consideration of the FTC filed by the petitioner on 02.02.2021. The respondent is directed to give due credit to the Kenya income of the petitioner and pass the final assessment order. Further, it is made clear that the impugned order is set aside only to the extent of disallowing of FTC claim made by the petitioner and hence, the first respondent is directed to consider only on the aspect of rejection of FTC claim within a period of 8 weeks from the date of receipt of copy of this order.”
5. Conclusions:-
5.1 Upon analysing the tribunal decisions, it is observed that the tribunals view the filing of Form 67 as directory rather than mandatory. They examined Rules 128(8) and 128(9) and concluded that although Rule 128(9) requires Form 67 to be filed by the due dates specified under sections 139(1) or 139(4), it does not explicitly stipulate that failure to file Form 67 within the prescribed time limits will result in denial of FTC. The tribunals also noted that since the provisions of the DTAA take precedence over the Act and Rules, timely filing of Form 67 is not a prerequisite for claiming FTC. Additionally, the Hon’ble Madras High Court in Duraiswamy Kumaraswamy Vs. PCIT pointed out that it is sufficient for taxpayers to file Form 67 before the final assessment order is passed by the revenue authorities.
5.2 Nevertheless, to ensure compliance and avoid litigation, taxpayers should adhere to the deadlines specified in sections 139(1) and 139(4) of the Income Tax Act while filing Form 67 to avail themselves of the FTC. It is also important to note that if a taxpayer has filed an updated income tax return under Section 139(8A) of the Income Tax Act, Form 67 (related to income included in the updated return) must be submitted on or before the date of filing the updated return. However, to claim relief under Section 90, Form 67 must be filed before the end of the relevant assessment year.
[i] [This article is intended to raise tax awareness and is meant for academic purposes]
[1] https://www.incometax.gov.in/iec/foportal/help/statutory-forms/popular-form/form67-um
[2] https://www.incometax.gov.in/iec/foportal/help/statutory-forms/popular-form/form67-faq
[3] Hand Book for Tax Consultants/Tax Payers, November 2020 – CPC, Income Tax Department.
[4] ITAT, Bangalore in ITA No. 454/Bang/2021 dated 17.11.2021
[5] ITAT, Bangalore in ITA No. 29/Bang/2021 dated 07.03.2022
[6] ITAT,Surat, in ITA No. 189/SRT/2021 dated 18.05.2022
[7] ITAT, Mumbai in ITA No. 1704/Mum/2022 dated 29.09.2022
[i] Author’s note.
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