Computation of business income from royalties or FTS

Introduction

If royalty or fee for technical services received by a non-resident or a foreign company is connected to a permanent establishment or a fixed place of profession in India, it shall be taxable under the head ‘Profit and gains from business and profession’ in accordance with this provision.

1. About

The taxability of Royalty income and Fees for technical services depends upon the existence of permanent establishment of a non-resident in India. If the permanent establishment exist in India and the royalty or FTS is connected to it, the income shall be taxable under the head "Business or Profession" as per Section 44DA. If the permanent establishment does not exist, the income shall be taxable under the head other sources at the rate specified under Section 207, subject to provisions of DTAA.

2. Taxability under the head PGBP

Income by way of royalty or fees for technical service will be taxable under the head ‘Profit and Gains from business and profession’ if the following conditions are satisfied:

(a) The taxpayer is a foreign company or non-resident non-corporate-assessee;

(b) Business is carried on by the taxpayer through a permanent establishment in India, or professional services are performed from a fixed place of profession situated in India;

(c) The taxpayer earns income by way of royalty or fees for technical services;

(d) Such royalty or fees for technical service is received from government or Indian concern in pursuance of an agreement with the government or an Indian concern;

(e) Such rights, property or contract with respect to which such royalties or fees for technical service are received, is effectively connected with such permanent establishment or fixed place of profession.

If the above conditions are not satisfied, the royalty or fees for technical services will be taxable under Section 207.

2.1.  Restriction on claiming deduction

When this provision applies, no deduction shall be allowed in respect of the following:

(a) Any expenditure or allowance which is not wholly or exclusively incurred for the business of such permanent establishment or fixed place of profession in India; or

(b) Amount paid by the permanent establishment to its head office or to any of its other offices. However deduction shall be allowed where such payment is made by way reimbursement of expenses.

Barring the aforesaid two incomes (i.e., royalty or technical fees), other income of the taxpayer shall be computed according to the normal provisions of the Act.

Further, the provisions of Section 61 shall not apply to the income covered under this provision.

2.2. Books of accounts and Audit

Every non-resident and foreign company shall keep and maintain books of Accounts. Such books of accounts shall be audited by a Chartered Accountant who holds a valid certificate of practice. Such non-resident or foreign company are required to furnish such audit report in Form 24, duly signed and verified, before one month prior to the due date of furnishing return of income under section 263(1) .

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.