Foreign tax credit under a DTAA may survive nil Indian tax, but section 244A interest needs tax actually paid in India.

Foreign tax credit under section 90 read with the India-Japan DTAA may be available even when the corresponding income suffers no Indian tax because of section 10A exemption or brought-forward losses; the credit mechanism is aimed at relieving double taxation and is not denied merely because no tax remains payable in India. Interest under section 244A, however, is confined to refunds of tax actually paid in India, such as advance tax or TDS, so foreign tax withheld abroad does not by itself create an interest-bearing refund. The substantive credit claim is thus distinct from the separate claim for statutory interest on refund.

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Issues: (i) whether the assessee was entitled to full foreign tax credit for tax withheld in Japan despite no Indian tax liability on the corresponding income due to section 10A exemption and brought-forward losses; (ii) whether interest under section 244A was payable on the refund arising from such foreign tax credit.

Issue (i): whether the assessee was entitled to full foreign tax credit for tax withheld in Japan despite no Indian tax liability on the corresponding income due to section 10A exemption and brought-forward losses.

Analysis: The claim for foreign tax credit was examined under section 90 of the Income-tax Act, 1961 and Article 23 of the India-Japan DTAA. The Tribunal relied on its earlier decision in the assessee's own case for the later assessment year and on the Delhi High Court's approval of the Karnataka High Court view in Wipro Ltd., holding that the treaty relief is available even where the Indian tax on the relevant income is nil because the income is exempt under section 10A or absorbed by losses. The Tribunal treated the credit mechanism as relieving double taxation and not as being defeated merely because no tax remained payable in India on that income.

Conclusion: The issue was decided in favour of the assessee, and full foreign tax credit for the Japanese taxes was allowed.

Issue (ii): whether interest under section 244A was payable on the refund arising from such foreign tax credit.

Analysis: Interest under section 244A was considered in the context of refund of amounts actually paid into the Indian exchequer by way of advance tax, TDS, TCS, or other Indian tax. The Tribunal distinguished the case relied on by the assessee and found that, after giving effect to the foreign tax credit, there was no excess Indian tax payment that could generate a refund carrying statutory interest. The mere grant of foreign tax credit did not convert foreign tax withheld abroad into Indian prepaid tax for the purpose of section 244A.

Conclusion: The issue was decided against the assessee, and interest under section 244A was denied.

Final Conclusion: The foreign tax credit claim succeeded, but the consequential claim for interest on refund failed, so the assessee obtained substantive relief only on the credit issue.

Ratio Decidendi: Foreign tax credit under a DTAA may be allowed even where the corresponding income suffers no Indian tax because of exemption or losses, but interest under section 244A arises only on refund of tax actually paid in India.

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