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CA Final · Direct Tax Laws & International Taxation · Overview of Model Tax Conventions

Vikram Software Services Pvt Ltd, an Indian company, earned Rs 50,00,000 as royalty from a Country P licensee. Country P taxed it at 10% under the treaty, while Indian tax computed on this income is 30% before any relief. Assuming the Model-based credit method under Article 23B (ordinary credit) applies, what is the tax credit allowed in India against Indian tax on this royalty?

The credit allowed is Rs 5,00,000. Under the ordinary credit method of Article 23B, relief is limited to the lower of foreign tax paid and domestic tax on the same income. Country P tax is Rs 5,00,000 (10%), while Indian tax would be Rs 15,00,000 (30%), so the foreign tax is fully credited.

  1. ARs 5,00,000Correct
  2. BRs 15,00,000
  3. CRs 10,00,000
  4. DRs 20,00,000

Explanation

Under the credit method, credit equals the lower of foreign tax paid and Indian tax on that income. Foreign tax = 10% x Rs 50,00,000 = Rs 5,00,000. Indian tax = 30% x Rs 50,00,000 = Rs 15,00,000. The lower figure, Rs 5,00,000, is allowed; Rs 15,00,000 ignores the limit.

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