The Income Tax Appellate Tribunal of Hyderabad issued a decision on 6 October 2021 in a case concerning whether a deduction may be claimed in respect of foreign tax paid exceeding a partial credit. The case involved a wholly owned subsidiary (the assessee) in India of a U.S. software company that had paid foreign tax totaling INR 5,561,306 through withholding in Indonesia, Malaysia, and Rwanda. In respect of the foreign tax paid, a credit for the full amount was claimed, but the assessing officer only granted a partial credit of INR 310,799. The assessee then claimed a deduction for the balance, INR 5,250,507, arguing that it should be allowed as a deduction as per the provisions of section 37(1) of the Income Tax Act 1961 (ITA), which generally provides that any expenditure, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". However, this was denied by the assessing officer considering the provisions of ITA section 40 regarding non-deductible amounts, including section 40(a)(ii), which disallows a deduction in respect of "tax" on the profits and gains of the business. This was appealed, with the company arguing that "tax" in this provision is limited to Indian tax and not foreign tax paid.

In its decision, the Tribunal upheld the position of the assessing officer, rejecting the assessee's argument. The Tribunal held that no deduction under section 37(1) can be allowed in respect of any income tax withheld abroad as the same will be subject to the provisions of section 40(a)(ii) of the ITA. Regarding the partial tax credit in particular, the Tribunal held that in the event of an assessee being allowed only a partial tax credit in respect of taxes withheld abroad, the assessee cannot be allowed any deduction, in respect of the balance of the taxes so withheld abroad, under section 37(1) of the ITA.