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CMA Final · Direct Tax Laws and International Taxation · Interest and Fees

A foreign company receives Rs 15,00,000 as fees for technical services under an approved agreement with an Indian concern that satisfies section 207(2). It incurred Rs 3,00,000 of expenditure to earn it and also has other income of Rs 10,00,000 taxable at rates in force. Ignoring surcharge and cess, which statement is correct about the tax on the fees?

Tax on the fees is Rs 3,00,000. Section 207(2) applies 20% to the gross Rs 15,00,000, and section 207(5) bars deduction of the Rs 3,00,000 expenditure in computing this income. The other income is taxed separately at rates in force.

  1. ATax is Rs 2,40,000 as expenditure is allowed against the fees at 20%
  2. BTax is Rs 3,00,000 on Rs 15,00,000 at 20% with no deduction for the expenditureCorrect
  3. CTax is Rs 3,00,000 on Rs 15,00,000 at rates in force
  4. DTax is Rs 5,00,000 on Rs 25,00,000 at 20%

Explanation

Section 207(2) taxes fees for technical services at 20%. Under section 207(5), no deduction for expenditure or allowance under sections 28 to 58, 60, 61 and 93 is allowed in computing this income. So tax is 15,00,000 x 20% = 3,00,000. The other income of Rs 10,00,000 is taxed at rates in force separately. Allowing the Rs 3,00,000 expense would wrongly give Rs 2,40,000.

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