XYZ Inc., a company incorporated in U.S. is engaged in management consultancy. It has set up a branch office in India which qualifies to be a permanent establishment in terms of India-U.S Tax treaty. During the previous

Computation of Tax Payable under the normal provisions of the Income-tax Act, 1961 Particulars Amount (₹) Fee for Technical Services 75,00,000 Dividend Income from Indian Company 17,00,000 Total Income 92,00,000 Income Tax @ 10% on fee for technical services (as per India-US tax treaty) 7,50,000 Income Tax @ 20% on Dividend Income 3,40,000 Total Tax 10,90,000 Add: Health and Education Cess @ 4% (only in respect of dividend income) (4% of ₹ 3,40,000) 13,600 Tax Payable 11,03,600 Computation of Tax Payable u/s 115JB Particulars Amount (₹) Amount (₹) Fee for technical services Nil Dividend Income from Indian Company 17,00,000 Less: Expenses incurred 75,000 16,25,000 Book Profit 16,25,000 Tax payable u/s 115JB @ 15.60% (15%+4%) (cess) 2,53,500 Tax payable by assessee (Higher of (i) tax payable under the normal provisions; and (ii) tax payable under MAT) 11,03,600 Notes: Under section 115A, fee for technical services and dividend income are taxable on gross basis without allowing deduction for any expenses. Hence, ₹ 3,00,000 and ₹ 75,000 incurred for earning the above income are not allowed as deduction. Income tax is payable at the rate provided under the Act or treaty, whichever is beneficial to assessee. Fees for technical services is taxable @ 10% + cess (4%) under the Act. However, treaty provides tax rate of 10% on such income. Cess rate is not added to rates prescribed under the treaty. Hence, in this case, fees for technical service shall be taxable @ 10% without including cess of 4%. Similarly, dividend income is taxable @ 20% + Cess (4%) under the Act. The treaty provides tax rate of 25% on such income. Hence, dividend income shall be taxable @ 20.80%. MAT provisions u/s 115JB are applicable to foreign company having a permanent establishment in India in terms of provisions of relevant double taxation avoidance agreement. In this case, provisions of section 115JB shall be applicable to XYZ Inc. since it has a permanent establishment in India. Under section 115JB, fee for technical services which is taxable at a rate lower than 15% is to be reduced while calculating book profits. In this case, fees for technical services is taxable @ 10%, hence, the same is to be reduced in computing book profits. XYZ Inc. is liable to pay tax as per normal provisions of the Act, the same being higher than the MAT.