"Substance must prevail over form in cross-border taxation, especially where treaty benefits exist."
A recent ruling by the Delhi High Court in the case of Munchener Ruckversicherungs Gesellschaft AG v. CIT [2025] 174 taxmann.com 19 has clarified a crucial aspect of cross-border tax administration in India:
Non-residents cannot be denied credit of tax deducted at source (TDS) on income that is exempt under a Double Taxation Avoidance Agreement (DTAA), even if such income is not offered to tax in the return.
This judgment is a critical safeguard for foreign taxpayers doing business with India, especially where tax is deducted by Indian entities on payments that are, in fact, not taxable under a treaty.
Case Brief
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A German reinsurance company, classified as a non-resident, received payments from an Indian entity. TDS was deducted on this income.
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The company claimed that the income was not taxable in India under the India-Germany DTAA, and accordingly did not offer it to tax.
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It still claimed the TDS credit, since tax had already been withheld at source.
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The Assessing Officer (AO) and subsequently the Commissioner (CIT) under Section 264 rejected the claim, citing:
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The income was not shown in the return,
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Form 26AS (TDS statement) wasn’t presented at the initial stage.
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Aggrieved, the assessee approached the Delhi High Court, which ruled in its favour.
Key Takeaways from the Judgment
✅ 1. DTAA Relief Cannot Be Denied Just Because Income Is Not Offered in the Return
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If income is not taxable under a DTAA, there's no obligation to report it as taxable income.
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Claiming TDS credit does not require income to be offered to tax, if exemption under treaty is valid.
✅ 2. Section 155(14) Offers a Legal Remedy
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If TDS credit is not allowed due to delayed furnishing of Form 26AS or certificate, Section 155(14) permits rectification.
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The law does not require revision of the return—you can present the documentation later and still claim the credit.
✅ 3. Substance Over Form: Practical Delays Should Not Deny Legal Rights
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Administrative or procedural gaps—like delayed Form 26AS availability—shouldn’t result in loss of tax credit.
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Courts are inclined to favor genuine claims backed by proper records, even if furnished at a later stage.
Practical Guidance for Taxpayers
| Do's | Don'ts |
|---|---|
| ✅ Assert treaty exemptions clearly in the return and supporting documents | ❌ Don’t assume TDS credit is lost just because the income wasn’t offered |
| ✅ Preserve all TDS certificates and keep track of Form 26AS | ❌ Don’t delay follow-up with deductors for proper reporting in Form 26AS |
| ✅ Use Section 155(14) to request rectification when credit is denied for documentation reasons | ❌ Don’t skip filing an application just because the return is already processed |
| ✅ Seek Section 264 remedy where due, but back it with treaty position and documentation | ❌ Don’t let technical rejection discourage legal recourse—High Courts can still intervene |
Strategic Insight
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Cross-border tax compliance is increasingly procedural. This judgment ensures genuine tax relief is not denied due to administrative formalities.
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The Court reaffirmed that DTAA protection overrides domestic law, and TDS is still tax "paid", even if income isn’t taxed.
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This is especially useful for foreign companies, NRIs, and global service providers where:
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DTAA exempts income,
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Indian payers deduct tax out of caution,
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Delays or technical lapses occur in tax credit matching.
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Conclusion: Law Backs the Taxpayer When Treaty Protection Applies
This judgment sets a strong precedent:
When a DTAA exempts income from Indian tax, and tax has already been deducted, the taxpayer’s right to claim that tax back or adjust it must not be defeated by procedural excuses.
For non-resident taxpayers and tax professionals, this ruling is a reminder to document treaty positions clearly and to not give up on legitimate TDS credit, even when challenged at the assessment or rectification level.