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

Rohan Ltd, an Indian company, receives dividend of Rs 10,00,000 from its wholly owned subsidiary in Country M. Country M levies withholding tax at 15% under its domestic law, but the India-M DTAA caps it at 10% for dividends. Country M withheld Rs 1,50,000. Indian tax on this dividend is Rs 2,50,000 before relief, and the foreign tax credit is allowed only for tax payable under the treaty. What is the amount of foreign tax credit available in India, and what is the balance Indian tax payable on it, ignoring surcharge and cess?

Foreign tax credit is Rs 1,00,000 and balance Indian tax is Rs 1,50,000. Credit is limited to the treaty rate of 10% on Rs 10,00,000, not the 15% actually withheld. The excess Rs 50,000 is not creditable, and Indian tax of Rs 2,50,000 reduces by Rs 1,00,000.

  1. ACredit Rs 1,50,000; balance Indian tax Rs 1,00,000
  2. BCredit Rs 1,00,000; balance Indian tax Rs 1,50,000Correct
  3. CCredit Rs 2,50,000; balance Indian tax nil
  4. DCredit Rs 1,00,000; balance Indian tax Rs 2,50,000

Explanation

The treaty limits source tax to 10% of Rs 10,00,000 = Rs 1,00,000. Only this is creditable, since the extra Rs 50,000 withheld is not tax payable under the treaty and must be recovered from Country M. Credit is also limited to the Indian tax of Rs 2,50,000, which is not exceeded. Balance Indian tax = 2,50,000 - 1,00,000 = Rs 1,50,000. Option A wrongly credits the full amount withheld.

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