Tax sparing credit under India-Thailand DTAA applies to exempt Thai dividends, even without actual tax payment.

Article 23 of the India-Thailand DTAA applies a tax sparing credit where Thai dividend income is exempt under the Thai Investment Promotion Act or Revenue Code, because paragraph 3 deems the amount that would have been payable absent the exemption as "Thai tax payable." Actual payment of Thai tax is therefore not required when the exemption falls within those specified incentive laws. The treaty text itself controls the meaning of the foreign tax credit mechanism, and the exemption was treated as incorporated into the DTAA, so proof of separate foreign-law payment was unnecessary. The assessee was entitled to credit for the notional Thai tax on dividends.

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Issues: Whether the assessee was entitled to tax credit in India under Article 23 of the India-Thailand DTAA in respect of dividend income from its Thai subsidiary, even though no tax was actually paid in Thailand because of a statutory exemption, and whether such tax sparing credit covered the amount that would have been payable but for the exemption.

Analysis: Article 23 of the DTAA governs elimination of double taxation and expressly uses a deeming fiction in paragraph 3 to include in "Thai tax payable" the amount that would have been payable but for an exemption or reduction granted under the Thai Investment Promotion Act or Revenue Code. The treaty therefore does not require actual payment of Thai tax where the exemption falls within the specified Thai incentive laws. The Court held that the relevant treaty expression must be construed according to the DTAA itself, and that the tax sparing mechanism is intended to incentivize investment and promote economic development. The foreign-law exemption was specifically incorporated into the treaty language, so no remand for proof of foreign law was necessary. The dividend exemption under the Thai incentive regime brought the case within Article 23(3), and the assessee was entitled to credit for the notional Thai tax at 10%.

Conclusion: The assessee was entitled to tax sparing credit under Article 23 of the India-Thailand DTAA, and the Revenue's challenge to the Tribunal's order failed.

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