India: Application of foreign tax credit under U.S. tax treaty

India: Foreign tax credit under U.S. tax treaty

The Ahmedabad Bench of the Income-tax Appellate Tribunal held that the taxpayer can claim and apply a foreign tax credit (FTC) in respect of taxes withheld in the United States against dividend income on the satisfaction of the conditions specified in the FTC Article of the India-United States income tax treaty. Furthermore, when a tax withholding (deduction) is at a rate higher than the rate prescribed in the tax treaty, the taxpayer will be eligible to claim a FTC restricted to the amount computed based on the rates prescribed in the tax treaty.

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The case is: Bhavin A Shah v. ACIT

Summary

The taxpayer, an individual, earned dividend income from foreign securities in the United States and had taxes withheld from such dividend income. The taxpayer claimed a tax credit under Section 90 of the Income-tax Act, 1961 in respect of the dividend income earned outside India. 

The Assessing Officer declined the taxpayer’s claim for the tax credit because relief would be available on the actual payment made in the return of income filed in the United States and tax paid thereon, and tax credit cannot be given on simply tax withheld (deducted) at source from foreign dividend income. The Commissioner of Income-tax (Appeals) upheld the order of the Assessing Officer.

Tribunal decision

The tribunal decided that as long as the taxpayer has reported all income in the amout of income offered to tax, the tax credits are also to be allowed in respect of the taxes withheld in the United States. The matter was remitted to the Assessing Officer with directions to compute the admissible tax credit in accordance with the tribunal’s findings.

 

Read an April 2017 report [PDF 369 KB] prepared by the KPMG member firm in India: Tax credit can be claimed in respect of taxes deducted in the U.S.; restricted to rates prescribed in the India-USA tax treaty

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