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Royalty Under Income Tax Act

Royalty – Under ITA

Abbreviations used:

ITA         : Indian Income Tax Act

WHT     : Withholding Tax

 Royalty is generally a consideration received by a person – a creator or an innovator for allowing his work of art or scientific invention to be used commercially. The developed country levy tax on royalty based upon residence of the inventor, the place where it is developed, the place of the royalty agreement, or where trademarks, copyrights and other intangible rights are registered or transferable. While the developing countries levy tax on royalty where it is used or in the source country.

 Taxability of Royalty as per Income Tax Act

Section-9(1)(vi) of ITA provide that Non-residents are taxable for his Royalty income if payable to him by Indian government, Indian resident or even from Non-residents with few exceptions; whether or not, such non-resident has a residence or place of business or business connection in India or has rendered services in India.

Exceptions:

  • For royalty is payable by Indian resident in respect of any right, property or information used or services utilised by him for the purpose of his overseas business or profession; or for the purpose of making or earning any income from source outside India. Or
  • For royalty is payable by non-resident in respect of any right, property or information used or services utilised by him for the purpose of his Indian business or profession or for the purpose of making or earning any income from Indian source.

DSRV Comments:

  1. Residential status of the recipient of Royalty is not relevant.
  2. Royalty is taxable in the hands of non-resident in all cases irrespective the fact that he has a residence or place of business or business connection in India or has rendered services in India Except a very few exceptions as stated above. {This has been added to nullify the decision of the Honourable Supreme Court in the Ishikawajima-Harima Heavy Industries’ case (288 ITR 408) which says both rendering & utilisation of Royalty services in India in mandatory}
  3. The word used is ‘payable’ not paid, it may indicate the taxability on accrual basis instead of cash basis and WHT compliance to be made on accrual basis.
  4. Similarly, the word ‘for the purpose of’ instead of ‘utilised in’ in exception one is very wider in scope thereby allowing all ancillary and support services into its scope.
  5. There is lot of litigation on exception ‘Royalty is payable for the purpose making or earning any income from source outside India’, e.g. Royalty payable by resident to Non-resident for export sale is not taxable. Aktiengesellschaft Kuhnle Kopp and Kausch (262 ITR 513) (Madras HC)

Definition of Royalty as per ITA

Explanation 2 of Section-9(1)(vi) of ITA provides that Royalty means consideration including any 87 lump sum consideration for:

  • the transfer of all or any rights (including the granting of a licence) in respect of; or
  • the imparting of any information concerning the working of, or the use of; or
  • the use of any….

patent, invention, model, design, secret formula or process or trade mark or similar property.

  • Imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill.
  • The use or right to use any industrial, commercial or scientific equipment excluding any equipment used in oil exploration business.
  • The transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting (Words “, but not including consideration for the sale, distribution or exhibition of cinematographic films” omitted by the Finance Act, 2020, w.e.f. 1-4-2021)
  • The rendering of any services in connection with the activities referred as above. 

Exclusion:

  • Any consideration which would be the income of the recipient chargeable under the head “Capital gains” or
  • Any lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.

Note: These 3 explanations has been added by Finance Act, 2012 in S-9(1)(vi) of ITA

Explanation 4: Clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

Explanation 5:  Clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not a) the possession or control of such right, property or information is with the payer; b) such right, property or information is used directly by the payer; c) the location of such right, property or information is in India.

Explanation 6: Clarified that the expression “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, and optic fibre or by any other similar technology, whether or not such process is secret.

DSRV Comments:

  1. The various terms used in the definition of royalty in not defined in the ITA. Therefore, terms of the contract read with general meaning or specific meaning as defined in relevant Acts of these terms will decide the applicability on a case to case basis.
  2. Explanation 4 to 6 to Section-9(1)(vi) of ITA has been inserted by Finance Act, 2012 w.r.e.f . 1.6.1976 thereby enhancing the scope of Royalty. Retrospective effect of this amendment has been recently nullified by the Apex Court.  Engineering Analysis Centre of Excellence (P.) Ltd.  CIT 432 ITR 471.
  3. In our next paper, we shall discuss in details about this landmark judgement of the Apex Court.
  4. Determination of classification of consideration payable to the Non-resident is of immense importance as if considered as his business income, it will fall out of tax net in Indian in the absence of business connection or fixed based of non-resident in India.

Tax Rate for Royalty under Income Tax Act

Income of non-residents from Royalty (taxable as Royalty) is taxable @10% tax rate on Gross basis as per Section-115A of ITA. The surcharge or cess shall be in addition to the tax rate.

  1. Income of non-residents having Permanent Establishments in India from Royalty (taxable as Business Profit) is taxable at normal tax rate on net basis as per Section-44DA of ITA. The surcharge or cess shall be in addition to the tax rate.

DSRV Comments:

  1. The Royalty income of non-residents shall be taxable either under Secion-44DA or under Section-115A of ITA irrespective of the business to which it relates.
  2. If the non-residents do not have PAN or specified informations, then tax rate as per Section-206AA of the ITA shall be 20%.
  3. The Royalty Income of the non-residents if taxable on gross basis under Section-115A and this being only income of the during that year, he is not required to file Tax Return in Indian, while in other case, he need to file his tax return in India.

To conclude, Royalty as defined under the ITA is quite wide in scope and judicial decision will clearly support in this direction. As India do have a comprehensive treaty arrangement with most of the Countries in Action and negotiated the matters in many ways keeping in view of its economic developments and tax consideration. In the next paper, we shall discuss in details what we understand about Royalty under tax treaties with different Countries.

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)

Please feel free to write on sanjay@dsrvindia.com or contact at: +91 9810116321

 

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