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CA Final · Direct Tax Laws & International Taxation · Application and Interpretation of Tax Treaties

An Indian resident company, Meru Ltd, earns Rs 20,00,000 from a PE in Country Q, on which Q taxes Rs 4,00,000. India-Q has a comprehensive treaty with the credit method. Indian tax on this income at the company's rate is Rs 5,00,000 (before any credit). Which is the credit available to Meru Ltd in India?

The credit is Rs 4,00,000. Under the credit method, relief is limited to the lower of the foreign tax actually paid, Rs 4,00,000, and the Indian tax attributable to that foreign income, Rs 5,00,000. Meru Ltd therefore pays the remaining Rs 1,00,000 in India.

  1. ARs 5,00,000
  2. BRs 9,00,000
  3. CRs 4,00,000Correct
  4. DRs 1,00,000

Explanation

Foreign tax credit is the lower of foreign tax paid (Rs 4,00,000) and Indian tax on that income (Rs 5,00,000), so credit is Rs 4,00,000. Rs 5,00,000 ignores the cap on actual foreign tax paid. Rs 1,00,000 is just the difference, and Rs 9,00,000 adds the two taxes.

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