Foreign tax credit rules: treaty-based credit allowed in full for some countries, while Korea and Taiwan required recomputation

Foreign tax credit for taxes paid in the United States, Japan and Germany was to be allowed in full under the relevant treaty provisions, because the ceiling was based on Indian tax attributable to the foreign-source income and not on a blanket apportionment by gross receipts. For Korea, the treaty applied a different limitation, so the credit had to be restricted to the Indian tax attributable to the Korean-source income. For Taiwan, where no treaty applied, relief fell under section 91 and had to be computed on the statutory comparison of Indian tax rate and foreign tax rate, whichever was lower. The alternative claim for deduction of foreign taxes was not adjudicated.

---

---

Issues: Whether foreign tax credit for taxes paid in the United States, Japan, Germany, Korea and Taiwan was to be allowed in full under the applicable treaty provisions and section 91 of the Income-tax Act, 1961, instead of being restricted by a blanket apportionment based on the ratio of foreign receipts to total income.

Analysis: For the United States, Japan and Germany, the treaty language required India to allow a deduction from tax on the resident's income equal to the foreign income-tax paid, subject only to the ceiling of Indian tax attributable to the income which may be taxed in the other State. The expression used in the treaties was income attributable to the foreign source income, and not the gross receipts themselves, so the restrictive formula adopted by the Assessing Officer was not accepted. For Korea, the treaty applied a different limitation, namely that the credit could not exceed the Indian tax attributable to the Korean-source income, so the ceiling was linked to the tax payable in India on the doubly taxed income. For Taiwan, in the absence of a treaty, section 91 governed the relief and the credit had to be computed on the statutory basis of Indian rate of tax or foreign rate, whichever was lower.

Conclusion: The assessee was entitled to full foreign tax credit for taxes paid in the United States, Japan and Germany, while the credit for Korea and Taiwan had to be recomputed in accordance with the applicable treaty or section 91. The alternative claim for deduction of foreign taxes was not adjudicated.

---