Tax Treaty Case Law around the Globe 2015

S. 347India: Credit for Taxes “Paid” as opposed to “payable” – the Case of Vijay Electricals Ltd

D.P. Sengupta

I. S. 348Introduction

When both the residence country and the source country levy tax on the same person, the principal responsibility for relieving double taxation lies with the country of residence. Such double taxation is relieved either through the exemption method or through the credit method. As a residence country, India in its tax treaties generally undertakes to relieve double taxation by the ordinary credit and per country method. However, even while implementing such simplistic measures, peculiar problems may arise. The present case highlights one such issue where tax was withheld by the source state in different years but the taxpayer claimed credit in one year by including the income in its return of income on an accrual basis.

II. Facts of the case

The taxpayer, Vijay Electricals Ltd, is an Indian company engaged in the business of manufacturing and exporting power and distribution transformers. It had a Brazilian subsidiary, Vijay Electrical do Brasil Ltd. It had advanced a loan of INR 1.2 billion to its subsidiary and charged interest at 13 % per annum. In its return of inc...