ITAT Allows Canon India Full Foreign Tax Credit for Taxes Paid in Japan Despite Nil Indian Tax Liability
Tribunal Clarifies That FTC Can Be Claimed Even When No Tax Is Payable in India
Ruling Strengthens Certainty for Multinational Companies Operating Across Borders
By Our Legal Correspondent
New Delhi: November 17, 2025:
In a landmark decision, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, has allowed Canon India Pvt. Ltd. to claim full foreign tax credit (FTC) for taxes paid in Japan, despite having nil tax liability in India. The ruling is expected to have far-reaching implications for multinational corporations operating in India, as it clarifies the scope of FTC under the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA).
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This judgment provides much-needed clarity on how Indian subsidiaries of global companies can claim relief from double taxation, ensuring fairness and consistency in cross-border taxation.
Background of the Case
Canon India, a subsidiary of Canon Inc., Japan, had paid taxes in Japan on certain income. When filing its Indian tax return, the company had nil tax liability due to available deductions and exemptions. However, it sought to claim foreign tax credit for taxes already paid in Japan.
The Assessing Officer (AO) denied the claim, arguing that FTC could only be granted if there was corresponding tax liability in India. The matter was escalated to the ITAT after the Commissioner of Income Tax (Appeals) upheld the AO’s view.
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ITAT’s Observations
The ITAT rejected the AO’s reasoning and ruled in favour of Canon India. Key observations included:
- FTC is a right under DTAA: The tribunal emphasized that FTC is not dependent on whether tax is payable in India.
- Double taxation relief: The purpose of FTC is to avoid double taxation and denying credit when Indian liability is nil defeats this purpose.
- Nil liability does not cancel FTC: Even if Indian tax liability is zero, FTC can still be claimed for taxes paid abroad.
- Consistency with global practice: The ruling aligns India’s approach with international norms on tax credit.
This interpretation strengthens India’s commitment to honouring its DTAA obligations.
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Why This Ruling Matters
The judgment is significant for several reasons:
- Certainty for multinationals: Companies operating in multiple jurisdictions can now claim FTC without fear of denial due to nil liability in India.
- Encourages investment: Greater clarity in tax law boosts investor confidence.
- Aligns with global standards: India’s FTC regime now mirrors practices in other countries, ensuring consistency.
- Reduces litigation: The ruling sets a precedent that may reduce disputes between taxpayers and authorities.
Impact on Multinational Companies
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For multinational corporations, the ruling means:
- Better tax planning: Companies can structure operations knowing FTC will be available.
- Reduced tax burden: Relief from double taxation ensures fairness.
- Compliance clarity: Firms can confidently claim FTC even in years with nil liability in India.
This is particularly relevant for subsidiaries of global firms in sectors like technology, pharmaceuticals, and manufacturing.
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Legal Framework: FTC in India
Under the Income Tax Act, 1961, and the Income Tax Rules, 1962, FTC is available to Indian residents for taxes paid abroad, subject to conditions. The CBDT (Central Board of Direct Taxes) issued detailed rules in 2016, requiring taxpayers to furnish proof of foreign taxes paid.
The DTAA between India and Japan further strengthens the right to claim FTC, ensuring that income is not taxed twice. The ITAT ruling confirms that FTC is a substantive right, not contingent on Indian liability.
Expert Opinions
Tax experts have welcomed the ruling, noting that it provides clarity and reduces uncertainty. According to professionals:
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- The decision will boost confidence among foreign investors.
- It ensures fair treatment of taxpayers under international tax law.
- It may lead to fewer disputes and smoother compliance.
Some experts caution that the ruling may still be challenged by the tax department, but they believe the ITAT’s reasoning is strong.
Wider Context
India has been working to improve its tax regime to attract foreign investment. Recent reforms, including the introduction of faceless assessments and simplified compliance rules, aim to reduce litigation and improve transparency.
The ITAT ruling fits into this broader trend, signalling India’s commitment to fair and predictable tax policies.
Challenges Ahead
Despite the positive ruling, challenges remain:
- Implementation: Tax authorities must ensure consistent application of the ruling.
- Documentation: Companies must maintain detailed records of foreign taxes paid.
- Possible appeals: The department may challenge the ruling in higher courts.
Taxpayers must remain vigilant and ensure compliance with procedural requirements.
Future Outlook
Looking ahead, the ruling could reshape India’s approach to cross-border taxation:
- More FTC claims: Companies will be encouraged to claim FTC even in nil liability years.
- Reduced disputes: Clear precedent may reduce litigation.
- Global alignment: India’s tax regime will be seen as more investor friendly.
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By 2030, experts predict that India’s FTC framework will be fully harmonized with global standards, making the country a more attractive destination for multinational corporations.
Conclusion
The ITAT’s ruling allowing Canon India full foreign tax credit for taxes paid in Japan despite nil Indian tax liability is a landmark decision in India’s tax jurisprudence. It clarifies that FTC is a substantive right under DTAA and cannot be denied merely because Indian liability is zero.
For multinational companies, the ruling provides certainty, fairness, and relief from double taxation. For India, it strengthens its reputation as a country committed to global tax norms and investor-friendly policies.
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