Tax sparing credit under the India-Thailand DTAA applies to dividend income exempted in Thailand but taxed in India.

Under the India-Thailand DTAA, tax sparing credit is available where Thai tax is deemed payable on dividend income even though the income was exempted in Thailand under an investment promotion regime. Article 23(3) treats the foregone Thai tax as payable for credit purposes, while Article 23(2) allows the credit against Indian tax subject to the treaty ceiling. Because the dividend was taxable in India and the treaty provided the more beneficial relief, section 90(2) permitted the assessee to claim the foreign tax credit, and the disallowance was unsustainable.

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Issues: Whether the assessee was entitled to credit in India for the tax spared in Thailand on dividend income under Article 23(3) of the India-Thailand DTAA read with section 90(2) of the Income-tax Act, 1961.

Analysis: The dividend received from the Thailand subsidiary was otherwise taxable under the Thailand Revenue Code, but was exempted in Thailand under the Investment Promotion Act. Article 23(3) deems Thai tax payable to include tax that would have been payable but for such exemption or reduction, and Article 23(2) allows credit of Thai tax payable against Indian tax, subject to the Indian tax ceiling. Since the dividend income was taxed in India and the exemption in Thailand represented tax spared under the treaty, the assessee satisfied the conditions for tax sparing credit. Section 90(2) also permitted the assessee to invoke the more beneficial treaty provision.

Conclusion: The assessee was entitled to the claimed foreign tax credit at 10% on the dividend income, and the disallowance was unsustainable.

Ratio Decidendi: Where a tax treaty expressly deems as payable the foreign tax that would have been payable but for a qualifying exemption, the resident assessee is entitled to credit for such tax spared, subject to the treaty ceiling and the more beneficial provision under section 90(2).

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