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

Anand Textiles Ltd, an Indian resident company, earned Rs 50,00,000 of business income through a permanent establishment in Country Y, on which Country Y levied tax of Rs 12,00,000. Its total Indian income including this is Rs 2,00,00,000 and Indian tax before relief is Rs 50,00,000 (average Indian rate 25%). The treaty provides credit method under section 90. What relief is available in India for this income?

The relief is Rs 12,00,000. Foreign tax credit is limited to the lower of the foreign tax paid and the Indian tax attributable to the foreign income at the average Indian rate. Indian tax on Rs 50,00,000 at 25% is Rs 12,50,000, which is higher than the foreign tax of Rs 12,00,000.

  1. ARs 12,00,000Correct
  2. BRs 12,50,000
  3. CRs 50,00,000
  4. DRs 24,00,000

Explanation

Credit is allowed at the lower of foreign tax paid and Indian tax on the doubly taxed income. Indian tax on that income at the average rate is 25% x Rs 50,00,000 = Rs 12,50,000. Foreign tax paid is Rs 12,00,000. Lower is Rs 12,00,000. Rs 12,50,000 wrongly takes the Indian tax figure.

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