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CA Final · Direct Tax Laws & International Taxation · Application and Interpretation of Tax Treaties

Kavya Tech Inc., a US company, earns Rs 40,00,000 as fees for included services from an Indian company. Assume the applicable treaty allows India to tax such fees at 15% on gross basis, and the domestic rate on such fees is 20% (ignore surcharge and cess for the question). Kavya incurred direct expenses of Rs 10,00,000 relating to the services. Kavya has a valid tax residency certificate. What is the Indian tax liability on this income?

The tax is Rs 6,00,000. The beneficial treaty rate of 15% applies on the gross fees of Rs 40,00,000 because the treaty provides for gross-basis taxation, so direct expenses are not deducted. The higher domestic rate of 20% would give Rs 8,00,000 and is not chosen.

  1. ARs 4,50,000
  2. BRs 6,00,000Correct
  3. CRs 8,00,000
  4. DRs 3,00,000

Explanation

The treaty rate of 15% is more beneficial than 20% and applies on the gross fees: 15% of Rs 40,00,000 = Rs 6,00,000. Deducting expenses first (Rs 30,00,000 x 15% = Rs 4,50,000) is wrong because the treaty rate applies on gross basis. Rs 8,00,000 is the domestic rate on gross.

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