Foreign tax credit under the India-USA DTAA is capped by Indian tax attributable to the same income.

Foreign tax credit under Article 25(2)(a) of the India-USA DTAA is limited to the amount of Indian income-tax attributable to the same income. Where the income returned in India results in a loss and no Indian tax is payable, the treaty does not permit refund or full credit of US taxes paid. The gross-basis taxation of income in the source state does not override the treaty cap, because double taxation relief operates only to the extent the same income is taxed in both countries. The document concludes that foreign tax credit cannot exceed the Indian tax liability on that income.

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Issues: Whether the assessee was entitled to refund of taxes paid in the USA by giving full credit under Article 25(2)(a) of the Double Taxation Avoidance Agreement between India and the USA, even though the income returned in India resulted in a loss and no Indian tax was payable on that income.

Analysis: Article 25(2)(a) permits India to allow credit for income-tax paid in the USA, but the deduction is expressly capped by the portion of Indian income-tax attributable to the same income. The restriction is clear from the treaty language and negatives any claim that the entire foreign tax paid must be refunded where the Indian tax liability is nil. The fact that certain incomes may be taxed in the source country on a gross basis, while the resident country computes tax on a net basis, does not create an absurdity or justify ignoring the treaty cap. Double taxation relief arises only where the same income is taxed in both countries, and the treaty does not support a refund of foreign tax in excess of Indian tax payable.

Conclusion: The assessee was not entitled to refund of the US taxes, and the direction to grant credit beyond the Indian tax liability was unsustainable.

Final Conclusion: The Revenue succeeded because foreign tax credit under the treaty could not exceed the Indian tax attributable to the same income.

Ratio Decidendi: Foreign tax credit under a double taxation avoidance treaty is limited to the Indian income-tax attributable to the relevant income, and no refund can be granted where the Indian tax liability on that income is nil.

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