In the Double Taxation Avoidance Agreement (DTAA) between India and Israel, the provisions

related to tax credits aim to prevent double taxation of income earned by residents of both
countries. Let's explore the differences in tax adjustment under the DTAA between India and
Israel through a mini case example, expressed in Indian Rupees (INR), and then pose two tricky
questions:

Mini Case Example:

Suppose Mr. A, a resident of India, earns interest income of INR 100,000 from investments in
Israel. The tax rate in Israel on such interest income is 20%, resulting in a tax liability of INR
20,000. Now, let's consider two scenarios:

1. Tax Credit Method in India: Under the India-Israel DTAA, India allows Mr. A to claim a tax
credit for the INR 20,000 tax paid in Israel against his Indian tax liability on the same income
Suppose Mr. A's Indian tax liability on the INR 100,000 interest income is INR 30,000. In this
case, Mr. A can claim a tax credit of INR 20,000 paid in Israel against his Indian tax liability,
reducing his Indian tax liability to INR 10,000.

2. Tax Adjustment Method in Israel: Conversely, under the Israel-India DTAA, Israel may allow
a tax adjustment rather than a tax credit for taxes paid in India. This means that Israel will adjust
the Israeli tax liability of Mr. A to account for the tax paid in India.If the tax rate in Israel is higher
than in India, Israel may allow a deduction from the Israeli tax liability for the tax paid in India,
resulting in a reduced overall tax burden for Mr. A.

Questions:

1. Suppose Mr. A's Indian tax liability on the INR 100,000 interest income is only INR 15,000.
Under the tax credit method in India, what happens to the excess tax credit of INR 5,000 paid in
Israel?

2. In the scenario where Mr. A's Indian tax liability is higher than the tax paid in Israel, what
factors would influence whether Israel allows a tax adjustment and the extent of that
adjustment?