The India–US DTAA covers only US Federal income tax. So what happens to income taxes paid to an individual US State: can foreign tax credit be claimed for those too in India?
The Karnataka High Court addressed this in Wipro Ltd. v. DCIT, [2016] 382 ITR 179 (Karn.). Its answer: the fact that a State tax falls outside the DTAA does not necessarily mean that foreign tax credit is unavailable in India.
The dispute
Wipro had paid taxes in foreign jurisdictions, including State-level taxes in the United States, and claimed credit for them in India. The Revenue objected. Article 2 of the India–US DTAA, which lists the taxes the treaty covers, refers on the US side principally to Federal income taxes imposed under the Internal Revenue Code. A tax imposed by an individual US State, the Department argued, was therefore outside the treaty and could not qualify for credit.
Why section 91 changes the answer
That argument is attractive until section 91 is brought into the picture. Explanation (iv) to section 91 gives “income-tax”, in relation to a foreign country, a deliberately wide meaning:
It includes tax charged by the Government of “any part of that country” or by a local authority in that country.
Explanation (iv) to section 91
The High Court recognised that in a federal country such as the United States, taxation may exist at more than one level. India has entered into a DTAA with the United States as a country, not separate treaties with each State. The fact that State income tax is not covered by Article 2 cannot, by itself, end the enquiry. The Court effectively drew a distinction between two routes:
- US Federal income tax: relief is examined under section 90 read with the DTAA.
- US State income tax not covered by the treaty: relief can be examined independently under section 91, because Parliament expressly included taxes imposed by the Government of “any part” of a foreign country.
Importantly, the Court did not expand the DTAA to include State taxes, nor did it rewrite Article 2. It respected the treaty’s scope and gave effect to a separate provision already in domestic law.
For example, where an Indian resident pays both US Federal income tax and New Jersey State income tax on the same income, the Federal tax may fall within the treaty framework, while the New Jersey tax may be examined separately under section 91, subject, of course, to the normal conditions and limits for foreign tax credit.
A later development
The Revenue carried connected Wipro matters to the Supreme Court. On 13 January 2026, the Supreme Court recorded that the Revenue had instructions to withdraw the appeals/SLP and dismissed them as withdrawn.
A word of caution: a withdrawal is not the same as a Supreme Court decision affirming the High Court on merits, so Wipro cannot be described as a Supreme Court precedent on this issue. Equally, the Karnataka High Court ruling continues to stand, and the Revenue’s challenge in those proceedings is no longer pending.
Key takeaway
The DTAA may define which foreign taxes the treaty covers, but it does not erase a separate relief expressly granted by the Income-tax Act. For US State income taxes, the right question is not merely “Is this tax covered by the DTAA?” but “If it is not, does section 91 independently grant relief?” In Wipro, the Karnataka High Court said that it can.
The rulings discussed were rendered under the Income-tax Act, 1961, and section references are to that Act. This article is for general information only and does not constitute professional advice.