Foreign tax credit must track the income element in receipts, with credit capped by Indian tax attributable to that income.

Foreign tax credit under the relevant tax treaties was analysed on the basis of the income element embedded in foreign receipts, not gross receipts. Where the assessee furnished a reasonable item-wise computation and it was not shown to be defective, a mechanical turnover-based allocation was unwarranted; the doubly taxed income was accepted on that basis. The credit itself remained capped at the Indian tax attributable to the relevant foreign income, and where Indian tax was paid under MAT, attributable tax was worked out by apportioning MAT in the ratio of double-taxed profit to overall profit for the Singapore and Indonesia receipts. On that computation, the admissible credit was enhanced to the amount determined by the Tribunal.

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Issues: (i) whether, for purposes of foreign tax credit under the relevant tax treaties, the income said to be taxed in both countries had to be determined on the basis of gross receipts or on the basis of the income element embedded in those receipts; (ii) whether the foreign tax credit was to be restricted by apportioning the Indian tax liability on a turnover-based ratio or on a reasonable computation of the tax attributable to the relevant double-taxed income.

Issue (i): whether, for purposes of foreign tax credit under the relevant tax treaties, the income said to be taxed in both countries had to be determined on the basis of gross receipts or on the basis of the income element embedded in those receipts.

Analysis: The treaty language referred to income that may be taxed in the other State and to the tax attributable to such income. That expression points to the income component in the foreign receipts, not the gross receipts themselves. Where the assessee furnished a reasonable and item-wise computation of the income embedded in the foreign transactions, and the computation was not shown to be defective, there was no warrant to apply a blanket turnover ratio to all receipts. The computation accepted by the assessee was supported by the nature of the transactions, including retention money released without fresh cost, additional user charges requiring no incremental cost, and maintenance receipts with allocated expenses.

Conclusion: The income eligible to be treated as doubly taxed had to be determined on the basis of the income element embedded in the receipts, and the assessee's reasonable computation was accepted.

Issue (ii): whether the foreign tax credit was to be restricted by apportioning the Indian tax liability on a turnover-based ratio or on a reasonable computation of the tax attributable to the relevant double-taxed income.

Analysis: The treaties capped the credit at the Indian tax attributable to the relevant foreign income. Since the tax in India was paid under the MAT provisions, the attributable tax had to be worked out by apportioning the MAT liability in the ratio of the double-taxed profit to the overall profit, separately for the Singapore and Indonesia receipts. On that basis, the credit admissible for the Indonesian income and the Singaporean income was computed, and the aggregate admissible credit was less than the amount claimed but higher than the amount allowed by the lower authorities. The assessee did not press the claim beyond the amount computed on that basis.

Conclusion: The foreign tax credit was admissible only to the extent of the tax attributable to the doubly taxed income, and the assessee was entitled to credit of Rs. 9,47,344.

Final Conclusion: The assessee succeeded in part: the restrictive turnover-based approach was rejected, the income element in the foreign receipts was accepted on a reasonable basis, and the foreign tax credit was enhanced to the extent computed by the Tribunal.

Ratio Decidendi: Under the relevant tax treaty credit clauses, foreign tax credit is limited to the Indian tax attributable to the income actually taxed in both jurisdictions, and where the assessee furnishes a reasonable computation of the income embedded in the foreign receipts, a mechanical turnover-based apportionment is unwarranted.

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