Foreign tax credit, not exemption, applied to USA branch profits of an Indian resident under the treaty

An Indian resident is taxable on global income under section 5(1)(c), so profits of the assessee's USA branch were not excluded from Indian taxation. The treaty provisions did not create an exemption: Article 7 dealt with attribution of profits to a permanent establishment, while Article 25.2(a) provided relief only by way of foreign tax credit for tax paid in the United States. The operative effect was application of the credit method rather than complete exemption, and the issue was decided in favour of the Revenue.

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Issues: Whether the profits derived by the assessee's USA branch were exigible to tax in India or only the tax paid in the USA was to be given credit under the applicable treaty.

Analysis: The assessee, being a resident in India, was taxable on global income under section 5(1)(c) of the Income-tax Act, 1961. The treaty provisions relied upon did not create an exemption for USA branch profits; Article 7 dealt with attribution of profits to a permanent establishment, while Article 25.2(a) provided only for relief by way of tax credit for tax paid in the United States. The treaty thus contemplated taxation in India on the resident's income with credit for foreign tax paid, rather than complete exclusion of such profits from Indian taxation.

Conclusion: The USA branch profits were not exempt from tax in India, and the tax credit method was correctly applied. The issue was decided in favour of the Revenue.

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