[Opinion] Interest on Foreign Tax Credit (FTC) Refunds | A Discriminatory Gap in Indian Tax Law

Gopal Nathani – [2025] 180 taxmann.com 473 (Article)

1. FTC in Canon Case

Cross-border income flows are a defining feature of the modern economy. To mitigate double taxation, India provides relief through section 90 (treaty-based FTC) and section 91 (unilateral relief). When FTC exceeds the domestic tax liability, the excess is refundable to the taxpayer. Before the Delhi Bench of the Income Tax Appellate Tribunal in Canon India (P) Ltd. v. Dy. CIT [2025] 180 taxmann.com 306 (Delhi-Trib.) the following ground was raised by the assessee by way of the cross objection (CO):

“That on the facts and in the circumstances of the case and in law, the Respondent should be allowed interest u/s 244A of the Act on refund and while computing such interest, the foreign tax credit should be kept at par with the prepaid taxes and the Respondent is eligible for interest from first day of assessment year till date of grant of refund.”

In this case the assessee claimed FTC amounting to Rs. 4,47,81,650/- for taxes withheld abroad, resulting in a refund under section 90. The Assessing Officer admitted the refund but declined to grant interest under section 244A. In dismissing the cross objection of the assessee, the Tribunal held that while refund of Foreign Tax Credit (FTC) under section 90 is admissible, no interest under section 244A is payable because such tax is not “paid into the Indian Treasury.” This adverse decision trigger a deeper debate on discrimination between domestic and foreign taxes and the role of India’s FTC regime in a globalised fiscal order.

2. Section 244A and the Purpose of Refund Interest

Section 244A mandates interest on refunds due to excess tax paid or collected and essentially speaking compensates for the time value of money lost, not the procedural origin of payment. The provision is compensatory and not penal in character. It was enacted following the Supreme Court’s jurisprudence that the Government should not unjustly enrich itself by retaining taxpayer money without compensation.

The Tribunal’s restrictive interpretation thus raises two fundamental questions:

1. Does the phrase “tax paid” in section necessarily require payment into the Indian treasury?
2. Is the legislative purpose frustrated when FTC refunds—even though not paid domestically—represent taxpayer funds withheld involuntarily?

A literal reading, as adopted by the Tribunal in this case, may not align with the wider statutory mandate of fairness and neutrality.

3. Discriminatory Effect – Domestic vs. Foreign Tax Refunds

This ruling creates two classes of taxpayers, violating neutrality. This differential treatment is arbitrary because taxpayers have no control over foreign withholding regimes. The Indian tax system thus discriminates based solely on geography of tax collection, not on the economic substance of the over-taxation.

4. Economic Reality in a Globalised Environment

Modern multinational operations involve multiple withholding points, differing tax cycles and varying administrative timelines. Taxpayers cannot control timing, quantum or procedures of foreign withholding. Denying interest effectively penalises them for circumstances beyond their control, a result incompatible with the policy vision of India’s cross-border tax regime.

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