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Get in the study of royalty and FTS tax regulatory overview. Gain insights on financial planning, safeguarding from compliance, and taxation in this blog.

An Analysis Of Royalty And FTS Tax On Gross Basis Or Net Basis

Setting Context For Royalty And FTS Taxability

 Income from Royalty and Fee for technical Services are generally taxable in the hands Non-resident on a gross basis both under Income Tax Act (ITA) as provided in section-115A read with section-9(1)(vi) and (vii) and under DTAAs in the source state. As best tax advisory services India and renowned tax consultant in Gurgaon we say when these two income i.e. royalty and FTS is considered as business income of the Non-residents being connected to the permanent establishment of the Non-resident, it should be taxed on the net basis. In this blog, we shall briefly touch upon this issue and try to share a prospective of Taxability of Royalty and FTS both under ITA and DTAAs.


Legal Framework Under ITA And DTAA

  • As per Section-5 of the ITA, Non-resident is taxable in India in the following situations:(i)      If the income is accrue or arise OR deemed to accrue or arise in India to the NR;(ii)     If the income is received or deemed to be received in India by the NR.
  • If the NR do not have any PE in India, then any income in the nature of royalty and FTS shall be taxable under section-9(1) (vi) or (vii) of the ITA as per the rate of tax prescribed under section-115A of the ITA or rate prescribed in relevant DTAA, if available, on the gross basis.
  • If the NR do have PE in India, then then any income in the nature of royalty and FTS shall be taxable under any of the three sections of the ITA i.e. section-44BB, or section-44D, or section-44DA of the ITA read with section-9(1) (vi) or (vii) of the ITA depending upon the conditions mentioned in these sections.
  • Section-44BB is applicable in special cases where the NR is engaged in the business for providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India. The taxable income shall be 10% of the gross receipts i.e. effective rate of tax 4% plus surcharge and education cess or lower taxable income subject to maintain books of accounts, audit and scrutiny of tax returns, at the option of the non-resident. Further, this section shall not apply in a case where the provision of section- 44D or section-44DA or section-115A of the ITA apply.
  • Section-44D is applicable till 31st March, 2003 which restrict deduction in respect of any expenditure or allowance for computing income by way of royalty and FTS of a foreign company
  • Section-44DA is applicable on or after 1.4.2003 and provides special provision for computation of income by way of royalty and FTS in case of non-residents whether foreign company or other than foreign company carries on business through in India through a PE and such income is effectively connected with such PE shall be computed under the ‘Profit and gains of Business or Profession’ in accordance with the provisions of ITA with very few restrictions in respect of any expenditure or allowance i.e. virtually on net basis. Further, this section shall not apply in cases where provisions of section 44BB apply.
  • Now, whether the non-resident has a choice to select these sections of the ITA for computing income in respect of royalty and FTs? The simple answer may be, there is no choice to the non-resident as such but things can be planned in the limited manner to minimise overall tax on the Non-resident.
  • Interplay between Section-115A and Section-44BB may be possible as in both the cases, the non-resident shall not be having PE in India but the rate of tax is much higher under section- 115A as compared to section-44BB. There may be opportunities based on the specific requirements and agreement between the parties.
  • Most of the Indian DTAAs provides taxability of royalty and FTS as such and provides for gross basis rate of tax in the source state in the absence of PE of the non-resident in India. If the non-resident do have PE or fixed place of business in India and the income is attributable to such PE or fixed place of business, then such income shall be taxable as business profit in the hands of the non-resident and shall be taxation under the head ‘Profit or gains of business or profession’ as per the provision of the ITA as explained above.


Concluding Remark

Indian economy is one of the fastest developing economies of the World and lot of exploration activities are currently taking place with an exponential growth in the sector. The importance of these provisions may not under estimated in view of lot of foreign companies are setting up their business in India. Accordingly, royalty and fee for technical services shall be taxation on gross basis or net basis as the case may be.

(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)

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