Foreign tax credit on US interest income depends on proof that withholding was made in accordance with US law.

A resident assessee claiming credit in India for US tax withheld on interest from its US subsidiary was entitled to relief under the relevant treaty if the foreign withholding was in accordance with US law. The decisive question was not the absence of a US return, but whether the TDS certificate or other supporting documents could verify lawful withholding abroad. The ITAT noted that India must grant credit where income of a resident may be taxed in the United States under the convention, whether the tax is collected directly or by deduction. The matter was therefore sent back for verification of the foreign tax documents, and credit was to be allowed if the withholding was duly established.

---

---

Issues: Whether the assessee was entitled to credit in India for tax withheld in the United States on interest income received from its US subsidiary, and whether the matter required verification of the foreign tax withholding documents.

Analysis: The interest income was taxable in India in the hands of the resident assessee. The treaty provisions governing interest and relief from double taxation were examined, and it was noted that where income derived by a resident of India may be taxed in the United States in accordance with the convention, India is to grant credit for the US tax, whether collected directly or by deduction. The authorities below denied credit mainly on the ground that the assessee had not shown the exact US law under which tax was withheld and had not filed a US return. The tribunal held that the decisive question was whether the withholding by the US payer was in accordance with US law, which could be verified from the TDS certificate or other supporting documents.

Conclusion: The assessee was not finally denied foreign tax credit; the matter was restored to the Assessing Officer for examination of the TDS certificates and other supporting material, and credit was to be allowed if the withholding was shown to be in accordance with US law.

---