Article 10 of India US DTAA – Foreign Tax credit (FTC) allowable upto lower of tax withheld or the limit prescribed in DTAA; FTC should be computed separately in respect of each item of income.

7.  TS-130-ITAT-2017
(Ahd)

Bhavin A. Shah vs. ACIT

A.Y. 2009-10, Date of Order: 29^th March, 2017

Facts

The Taxpayer was an individual resident in India. He had
invested in shares of US companies and earned dividend therefrom during the relevant
year. Tax was withheld in US from the dividend received by the Taxpayer. The
Taxpayer offered such dividend for tax in India and claimed foreign tax credit
(FTC) aggregating to roughly 30% of the gross dividend in respect of tax
withheld in USA.

The AO rejected the claim of the Taxpayer on the ground that
FTC is available only in respect of actual payment made while filing return of
income (i.e., tax paid directly by the Taxpayer) and not on tax withheld in
USA.

While upholding the order of the AO, the CIT(A) observed that
the documents/ evidence furnished by the Taxpayer in support of the FTC claim
did not mention the name of the Taxpayer and/ or were not signed by the
relevant authorities and further that the taxes withheld were almost 30% of the
gross receipt.

Held

–  In accordance with Article 25 of India-USA
DTAA, if tax is withheld from dividend earned by the Taxpayer from USA, and if
he has offered such dividend to tax in India, FTC may be granted in respect of
tax withheld in the US.

–  Article 10(2) of India-USA DTAA stipulates the
maximum rate of tax chargeable in USA on dividend earned by the Taxpayer from
USA.

–  Thus, the following conditions should be
satisfied for claiming FTC in India in respect of dividend:

–  The Taxpayer should be a resident in India, in
terms of Article 4 of India-USA DTAA and not merely a resident under the Act.

–  Income received by the Taxpayer should be
“dividend” as defined in Article 10(3) of India-USA DTAA.

–  Dividend should have been taxed in USA in accordance
with Article 10(2) of India-USA DTAA.

–  Tax may be either by way of direct payment or
withholding.

–  FTC allowable should be restricted to lower of
tax withheld in USA or tax liability in India respect of such dividend.

– The particulars furnished by the Taxpayer
showed that while aggregate withholding tax rate in USA was higher than 25%, in
some cases tax was withheld at rates higher than 25% and in some cases at rates
lower than 25%. Hence, the contention of the Taxpayer for grant of FTC at blanket
rate of 25% was incorrect.

– Computation of FTC cannot be by way of
generalization. AO should ascertain the withholding tax rate in respect of each
dividend income. In cases where tax was withheld at rate lower than that
stipulated in India-USA DTAA, FTC should be granted at actual. In cases where
tax was paid/withheld at rate higher than that stipulated in India-USA DTAA,
FTC should be restricted to the amount corresponding to that rate.