I am an Indian citizen resident in India. Say I earn $1000 from a US source. They withhold 30% since I haven't provided an ITIN in my W8ben. So I get $700 in hand. I understand that I have to report $1000 as an income while filing returns in India. Will my Indian tax liability on this account (approx $309 at the highest bracket in India) stand reduced by the full amount withheld ($300) in the US?
This depends on how your agreement with the US Company is structured. Consult a professional CA who will guide you.
As you have stated, the entire amount of $1000 would be treated as income, for certain professions and type of activities, you can claim the tax paid in US and only pay additional in India, ie if you have paid 25% in US and are liable for 30% in India you just pay 5% more.