Treaty tax credit limited to income actually taxed in India; no priority set-off against surtax under the statutory scheme.

Treaty-based double taxation relief under the India-Singapore agreement was analysed with reference to the income actually subjected to tax in India, not the full gross royalty. Because only the balance remaining after section 80-O deduction was taxed in India, Singapore tax credit was confined to that net royalty amount and not the entire royalty income. The text also states that foreign tax credit could not be given on a priority basis against surtax liability, as the Companies (Profits) Surtax Act, 1964 followed its own computation framework and did not require treaty relief to be first adjusted against surtax. The Revenue's computation was upheld on both issues.

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Issues: (i) Whether double taxation relief under Article 24 of the India-Singapore agreement was to be computed on the entire royalty income or only on the portion of royalty actually subjected to tax in India after deduction under section 80-O. (ii) Whether credit for Singapore tax under the agreement could be given on a priority basis against surtax liability.

Issue (i): Whether double taxation relief under Article 24 of the India-Singapore agreement was to be computed on the entire royalty income or only on the portion of royalty actually subjected to tax in India after deduction under section 80-O.

Analysis: The expression "subjected to tax" was held to refer to the quantum of income on which tax was actually levied in India, not merely to the nature of the income. Although the royalty income as such was taxed in Singapore, in India only the balance left after the section 80-O deduction was brought to tax. The agreement therefore required the Singapore tax credit to be worked out with reference to the portion of royalty that suffered tax in both countries, and the foreign-tax credit could not be based on the full gross royalty.

Conclusion: The relief was correctly restricted to the Singapore tax on the net royalty amount subjected to tax in India, and the issue was decided against the assessee.

Issue (ii): Whether credit for Singapore tax under the agreement could be given on a priority basis against surtax liability.

Analysis: Surtax computation under the Companies (Profits) Surtax Act, 1964 depends upon the income-tax payable under the Income-tax Act and the deductions mandated by the First Schedule. The statutory scheme did not provide any priority requiring foreign-tax credit to be adjusted first against surtax. On the contrary, the computation framework separately accounted for income-tax and foreign tax in determining chargeable profits, and the treaty relief could not be used to alter that scheme.

Conclusion: No priority set-off against surtax was available, and the issue was decided against the assessee.

Final Conclusion: The Tribunal upheld the computation adopted by the Revenue authorities on both issues, resulting in rejection of the assessee's challenge to the foreign tax credit and surtax adjustment.

Ratio Decidendi: For treaty-based double taxation relief, the expression "subjected to tax" denotes income actually taxed in the relevant jurisdiction, and the credit must be computed on that taxed amount in accordance with the statutory scheme governing the tax in question.

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