Presumptive Taxation Scheme for providing services or technology for setting up electronics manufacturing facilities in India

Introduction

Section 61(2) [Table S. No. 6] is a presumptive taxation scheme for non-residents providing services or technology for electronics manufacturing facilities in India. The scheme applies to non-residents engaged in providing services or technology for setting up electronics manufacturing facilities or manufacturing electronic goods in India. Presumptive income is calculated as 25% of the specified amounts.

1. About

Section 61(2) [Table S. No. 6] provides a presumptive taxation scheme for non-residents engaged in the business of providing services or technology for setting up electronics manufacturing facilities in India.

The presumptive tax scheme provides as follows:

(a) The provision applies to a non-resident engaged in the business of providing specified services or technology.

(b) Such services or technology are provided for the specified business.

(c) Such services or technology are provided to a resident company.

(d) The presumptive business income of the non-resident assessee shall be 25% of the specified amounts.

(e) The specified amount shall be calculated as per the method provided in the provision.

(f) The provision starts with a non-obstante clause overriding Sections 26 to 54 of the Act.

(g) Any loss, allowance or deduction shall not be allowed against income computed under Section 61(2) [Table S. No. 6].

2. Who can opt for the presumptive tax scheme of Section 61(2) [Table S. No. 6]?

The presumptive tax scheme of Section 61(2) [Table S. No. 6] applies to a non-resident engaged in the business of providing services or technology in India for the purposes of setting up an electronics manufacturing facility or in connection with manufacturing or producing electronic goods, articles or things in India.

The provision requires the fulfilment of the following conditions to become eligible for the presumptive tax regime of Section 61(2) [Table S. No. 6]:

(a) The assessee should be a non-resident.

(b) It is engaged in the business of providing services or technology in India.

(c) Such services or technology are provided for the purposes of setting up an electronics manufacturing facility or in connection with manufacturing or producing electronic goods, articles or things in India.

2.1. Business v. Profession

See also: Meaning of Business and Profession

For the purpose of Section 61(2) [Table S. No. 6], the business should include a profession, provided all other conditions are satisfied. The presumptive scheme should be available to all professions and may not be limited to the professions as specified in Section 62 because where the legislature intended to limit the benefit to the specified professions, it would have mentioned the same as it did in Section 58(2) [Table S. No. 3]. Section 58(2) [Table S. No. 3] scheme is available to the professions specified in Section 62 and not for all professions.

2.2. Providing

One of the conditions to avail of Section 61(2) [Table S. No. 6] presumptive scheme is that the non-resident is engaged in the business of providing services or technology in India.

To “provide” is not the same as “make available,” a litmus test for the taxability of fees for technical services (‘FTS’) under the DTAA.

The term ‘provide’ is wider in scope than ‘make available’. "Provide" generally implies the act of supplying or furnishing something. "Make available" carries a more specific meaning. It suggests providing a service and equipping the recipient with the ability to independently use the knowledge, technology, or skill in the future. Every service provided to the recipient may not alter the recipient"s capabilities to apply the same independently unless the know-how behind it is made available. For the presumptive tax scheme under Section 61(2) [Table S. No. 6], both the services, whether they make available the knowledge to the recipient or not, should be eligible.

2.3. Services

The word ‘services’ has not been defined in the Income-tax Act. This term has been defined in Article 366(26A) of the Constitution of India as "Services" means anything other than goods. As per Article 366(12), "goods" include all materials, commodities and articles.

The provision remains silent on how to deal with a situation that may arise in the case of a composite or mixed contract involving the supply of both goods and services, which could fall into two presumptive schemes. For example, an Indian company appoints a foreign company to design and construct a power plant for a manufacturing unit to manufacture semiconductor chips. The receipts of such a foreign company can be taxable under Section 61(2) [Table S. No. 4] (Presumptive Scheme for Civil Construction Companies) or Section 61(2) [Table S. No. 6] (if other conditions are fulfilled).

2.4. In India

The provision requires that the non-resident assessee is engaged in the business of providing services or technology “in India”. The term “In India” could mean three possible scenarios:

(a) The service provider is in India,

(b) The service recipient is in India,

(c) The service provider and recipient both are in India.

A similar situation existed in Section 80-O of ITA 1961 (now redundant), which allowed deductions in respect of royalties, commissions, fees, and similar income received from foreign governments or foreign enterprises. Explanation (iii) to this provision provided that “(iii) services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include services rendered in India.”

The Tribunal

Going by the objective of the provision and the later part of the provision that the services are provided “for the purposes of setting up an electronics manufacturing facility or in connection with manufacturing or producing electronic goods, article or thing in India”, a position may be taken that the presumptive tax scheme will apply only when the service provider and recipient both are in India. Where the non-resident is providing services from outside India or providing services from India for an overseas business, the presumptive tax scheme will not be available.

3. What does setting up an electronics manufacturing facility or producing electronic goods in India mean for Section 61(2) [Table S. No. 6]?

Section 61(2) [Table S. No. 6] extends the presumptive tax scheme to the non-resident if the service or technology is provided for any of the following two purposes or both:

(a) For the purpose of setting up an electronics manufacturing facility in India, or

(b) In connection with manufacturing or producing electronics goods, articles or things in India.

3.1. For the purpose of setting up an electronics manufacturing facility in India

The services or technology provided by non-residents should have a nexus with the specified purposes, which could be closest or farthest. As long as a nexus is established, it should be considered as eligible for the presumptive tax scheme of Section 61(2) [Table S. No. 6]. For example, the following services provided by a non-resident to a resident company for the setting up of a manufacturing facility in India should be eligible for the Section 61(2) [Table S. No. 6] scheme:

(a) Architectural services to make a drawing of the factory

(b) Shipping services to import the machinery

(c) Providing the design of final product

(d) Making available the know-how of manufacturing the final product

(e) Legal services to draft a contract with the parties providing the above services

3.2. In connection with manufacturing or producing electronic goods

Section 61(2) [Table S. No. 6] extends the presumptive tax scheme to the non-resident if the service or technology is provided in connection with manufacturing or producing electronics goods, articles or things in India. It can be said that the services or technology provided by non-residents should have a nexus with manufacturing or producing electronic goods, articles or things in India, which could be closest or remote. As long as the nexus is established, the presumptive tax scheme of Section 61(2) [Table S. No. 6] should apply.

3.2-1. Goods

The term "goods" is not defined in the Income-tax Act but is defined in other statutes. In the context of Section 61(2) [Table S. No. 6], it may be said that electronic "goods" could mean any movable property (tangible or intangible) that has the attributes like (i) capable of being used or consumed, (ii) capable of being bought and sold; (iii) capable of being transmitted, transferred, delivered, stored, possessed, etc. Thus, electronic goods may include all kinds of movable property, such as microchips, computers, and computer software.

3.2-2. Electric vs. Electronics goods

The terms "electric" and "electronics" are often used interchangeably, but they represent distinct, though related, concepts. Essentially, "electric" pertains to generating, distributing, and utilising electrical power. Conversely, "electronics" focuses on controlling and manipulating electrical flow, particularly in smaller, more precise applications. Electronic devices employ components like transistors and diodes to process and manage information. In essence, "electric" is concerned with the raw power of electricity, while "electronics" is centred on the intricate control of that power to perform specific tasks. Therefore, while all electronic devices require electricity to function, not all electric devices involve the complex control that defines electronics.

A toaster, kettle, fan, or electric oven are examples of “electric” appliances, as they directly convert electrical energy into a desired output. Mobile phones, laptops, smart watches, etc., are examples of “electronic” devices.

Many modern appliances operate with a blend of electric and electronic principles, blurring the traditional distinctions. While the core functionality, such as heating or motion, often relies on electric components like heating elements or motors, electronic circuitry enhances control and precision. For instance, a washing machine"s motor is electric, but its programmed wash cycles and digital timer are managed by electronic microprocessors. Similarly, a refrigerator"s compressor is electric, yet its digital temperature controls and smart features are electronic. Microwave ovens utilise an electric magnetron to generate microwaves, but their digital timers and pre-programmed settings rely on electronic circuits. In essence, digital displays, programmable functions, sensor technology, and network connectivity indicate the integration of electronic components.

Section 61(2) [Table S. No. 6] scheme should be available where the focus is entirely on manufacturing electronic goods, such as microchips or sensors, or goods that are both electric and electronic, such as TVs or refrigerators with circuits, processors, etc., even if they are not predominantly electronic.

4. Who should receive the services or technology from the non-resident?

Section 61(2) [Table S. No. 6] extends the presumptive tax scheme to a non-resident engaged in providing service or technology to a resident company for the specified business.

4.1. Resident company

Section 61(2) does not define the meaning of a ‘resident company’. A company should be considered a resident company if it fulfils the following conditions:

(a) It should be a company.

(b) It should be a resident in India.

4.1-1. Company

Section 2 defines company and other class(es) of companies:

(a) Section 2(28) defines "company"

(b) Section 2(53) defines "Indian company"

(c) Section 2(46) defines "foreign company"; and

(d) Section 2(42) defines "domestic company".

It would not include, to illustrate, cooperative societies, a firm or LLP (other than an LLP incorporated outside India), an association of persons or a body of individuals.

4.1-2. Resident

As per Section 6(10)(a) of the Act, a company would be a resident in India in any tax year if it is an Indian company or its place of effective management (POEM) in that year is in India. Thus, a company incorporated in India will always be a resident company, but a foreign company may be a resident in India if it has a POEM in India. Such a foreign company would continue to be classified as a foreign company and would not be treated as a domestic company. It would be a resident foreign company.

4.2. Specified business

The important conditions to consider a business as a specified business are as follows:

(a) The resident company is establishing or operating an electronics manufacturing facility or a connected facility for manufacturing or producing electronic goods, articles or things in India,

(b) It should be under a scheme notified by the Central Government in the Ministry of Electronics and Information Technology, and

(c) The resident company satisfies the conditions prescribed in this behalf.

4.2-1. Scheme of MEITY

One condition for extending the presumptive tax scheme of Section 61(2) [Table S. No. 6] to a non-resident is that the resident company establishes or operates an electronics manufacturing facility under a scheme notified by the central government in the Ministry of Electronics and Information Technology.

The government of India approved a comprehensive program for developing a semiconductor and display manufacturing ecosystem in India to position the country as a global hub for electronics system design and manufacturing. So far, the Ministry of Electronics and Information Technology has notified the following schemes for setting up such facilities in India:

(a) Production Linked Incentive Scheme (PLI) for IT Hardware

(b) Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS)

(c) Modified Electronics Manufacturing Clusters (EMC 2.0) Scheme:

(d) India Semiconductor Mission (ISM)

5. How much shall be the presumptive income under Section 61(2) [Table S. No. 6]?

5.1. Presumptive income

A sum equal to 25% of the aggregate of the specified amounts shall be deemed the profits and gains of such business of the non-resident assessee chargeable to tax under the head “Profits and gains of business or profession”. The effective tax rate (after surcharge and cess) of a foreign company, foreign firm and LLP as a percentage of the specified amount shall be as follows:

The effective tax liability of a non-resident individual, AOP, BOI and cooperative society shall be computed as per the applicable slab rate. The special income (i.e., capital gains, dividends, interest, royalty, FTS, etc.) shall be taxable at the applicable special rate.

5.1-1. Taxability if the non-resident has a PE in India

When the non-resident has a PE in India, and the specified amount is attributable to such PE in India, the income shall be computed on a presumptive basis, and the tax liability shall remain the same as computed above.

5.1-2. Taxability if the non-resident has no PE in India

If the non-resident does not have a PE in India, it may give rise to two situations:

(a) The services are rendered in India

(b) The services are rendered from overseas

When the services are rendered by the non-resident in India and other conditions are fulfilled, the income shall be computed on a presumptive basis provided it is deemed to accrue or arise in India on the yardstick of Section 9(2)/(6)(a)/(7)(a) or are received in India. The tax liability shall remain the same as computed above.

Where services are rendered from overseas, the presumptive tax scheme may not apply. In that situation, the taxable income should be computed according to other provisions of the Act read with the DTAA.

5.1-3. Taxability if the non-resident does not carry a business

If the non-resident does not carry a business, the presumptive tax scheme may not apply. In that situation, the taxable income should be computed as per other provisions of the Act read with the DTAA.

The income of a non-resident in the nature of royalty and fees for technical services shall be taxable if they are deemed to accrue or arise in India under Section 9(6)(a) and Section 9(7)(a). The tax shall be computed as per Section 207, which provides the rate of taxation in respect of income of a non-resident, including a foreign company, in the nature of royalty or fee for technical services not connected with the PE in India.

5.2. Specified Amount

The amounts specified for the computation of presumptive income shall be the aggregate of the following:

(a) The amount paid or payable to the non-resident assessee or to any person on his behalf on account of providing services or technology; and

(b) The amount received or deemed to be received by the non-resident assessee or on behalf of the non-resident assessee on account of providing services or technology.

5.2-1. GST will not be a part of the specified amount

A question would arise whether GST collected from the resident company would form part of the specified amount for computing the presumptive profit of 25% of the said amount. There are judicial decisions

Given the above judicial decisions rendered in the context of Section 61(2) [Table S. No. 1 and 5], it appears that GST collected from the resident company would not form part of the specified amount for computing the presumptive income.

5.2-2. No disallowance under Section 59

Section 59 deals with the taxability of royalties and fees for technical services connected to the PE in India. Section 59(2) disallows the deduction in respect of the following:

(a) Any expenditure or allowance that 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 of reimbursement of expenses.

Section 61(9) excludes the applicability of Section 59, the above expenditure should not be disallowed if the royalty and FTS connected to the PE in India are taxable on a presumptive basis under Section 61(2) [Table S. No. 6].

5.2-3. Would other disallowance provisions apply?

The non-obstante clause of Section 61(1) overriding Sections 26 to 54 will mean that 25% presumptive income will be treated as having been arrived at after making disallowances referred to in Section 34, Section 35, Section 36, Section 37 etc.

6. Non-obstante clause overriding Sections 26 to 54

Section 61(2) [Table S. No. 6] is expressed to operate notwithstanding anything to the contrary contained in Sections 26 to 54. Thus, it does not override sections other than those under Sections 26 to 54, including Section 57/Section 276(2), under which ICDSs are notified.

6.1. Applicability of Section 57 and ICDSs

The CBDT

6.2. Applicability of tax audit

Assessee opting for presumptive tax schemes under Section 58 and Section 61 is exempt from tax audit under Section 63 when income is liable to be computed on a presumptive basis under those sections and requires tax audit only when the assessee claims profits lower than the profits computed on a presumptive basis.

Accordingly, the assessee is not required for tax audit under section 63 if the presumptive taxation scheme under Section 61(2) [Table S. No. 6] is opted. However, there is no specific requirement for tax audit when the assessee claims profits lower than the profits computed on a presumptive basis under Section 61(2) [Table S. No. 6].

6.3. Maintenance of books of accounts

Assessees opting for presumptive taxation schemes are exempt from maintaining books of account. However, they are required to maintain books of account if they claim profits from the business lower than the profits computed under the presumptive scheme and the income from such business or profession exceeds the maximum amount not chargeable to tax. In such cases, audit under section 63 is also required.

Accordingly, an assessee opting for the presumptive taxation scheme under Section 61(2) [Table S. No. 6] shall be required to maintain books of account where the profit from the business of providing specified services or technology is claimed to be lower than 25% of the specified amount.

6.4. Will DTAA override Section 61(2) [Table S. No. 6]?

Section 159(4) provides that where the central government has entered into a double taxation avoidance agreement with the government of any country outside India or specified territory outside India, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. This means a taxpayer may choose the provisions of the DTAA or ITA, whichever is more beneficial to him. Thus, it can be concluded that DTAA provisions override the provisions of the ITA to the extent they are in conflict with domestic law.

In case of a conflict between Section 61(2) [Table S. No. 6] and DTAA, the following situations may arise:

(a) If the non-resident has a PE in India, and the business income earned in India is connected to such PE, the tax liability in such a case shall be computed as per the ITA. If the conditions of Section 61(2) [Table S. No. 6] are fulfilled, the taxable business income shall be computed on a presumptive basis at the rate of 25% of the specified amount. If conditions are not fulfilled, the actual business income shall be computed as per general provisions.

(b) If the non-resident does not have a PE in India, the business income earned by him in India shall not be taxable in India. In such a situation, Section 61(2) [Table S. No. 6] will have no relevance. However, the royalty and FTS earned by him in India may be taxable in India if the DTAA gives the right to the source country to tax such income.

(c) If the non-resident does not carry a business, Section 61(2) [Table S. No. 6] will have no relevance. The royalty and FTS earned by him in India may be taxable in India if the DTAA gives the right to the source country to tax such income.

6.4-1. Computation of income under ITA vs. DTAA

The computation of income from providing services or technology, as mentioned in Section 61(2) [Table S. No. 6], depends on two factors – the nature of income and the existence of PE in India.

(a) Where the nature is business income, and the non-resident has a PE in India, the income shall be computed as per Section 61(2) [Table S. No. 6].

(b) Where the nature is business income but the non-resident does not have a PE in India, the income shall not be taxable in India in view of Article 7 (Business Profits) of the relevant DTAA.

(c) Where the nature is royalty or FTS, and the non-resident has a PE in India, the income shall be computed as per Section 61(2) [Table S. No. 6].

(d) Where the nature is royalty or FTS but the non-resident does not have a PE in India, the income shall be computed as per Section 61(2) [Table S. No. 6].

6.4-2. Rate of tax under ITA vs. DTAA

The tax rate to be applied to the income computed under Section 61(2) [Table S. No. 6] shall depend upon two factors - nature of income, such as royalty, FTS or other business income, and whether connected to PE in India.

(a) Where the nature is business income, and the non-resident has a PE in India, the income computed as per Section 61(2) [Table S. No. 6] shall be taxable at the applicable rate.

(b) Where the nature is business income but the non-resident does not have a PE in India, the income shall not be taxable in India in view of Article 7 (Business Profits) of the relevant DTAA.

(c) Where the nature of income is royalty or FTS, and the non-resident has a PE in India, the income computed as per Section 61(2) [Table S. No. 6] shall be taxable at the applicable rate.

(d) Where the nature of the income is royalty or FTS but the non-resident does not have a PE in India, the income computed as per Section 61(2) [Table S. No. 6] shall be taxable at the applicable rate.

In view Section 61(9) which excludes the applicability of Section 207, the concessional tax rate for the royalty and FTS specified under Section 207 shall not be available if the presumptive income from the royalty or FTS is computed under Section 61(2) [Table S. No. 6].

7. No loss, allowance or deduction shall be allowed against income computed under Section 61(2) [Table S. No. 6]

Section 61(4) imposes a clear restriction on the computation of income under this provision. It states that no loss, allowance, or deduction of any kind shall be permitted against the income computed under Section 61(2).

The effect is that income determined under Section 61(2) stands on its own footing and must be taxed as computed. The taxpayer cannot reduce it by current or brought-forward losses, statutory allowances, or deductions otherwise available under the Act. Any such losses or deductions must be absorbed against other heads of income.

8. Conditions for resident company to avail benefit under Section 61(2) [Table Sl No. 6]

For the purpose of Section 61(2) [Table: Sl. No. 6], a resident company shall satisfy the following conditions:

(a) It should establish or operate an electronics manufacturing facility, or a connected facility for manufacturing or producing electronic goods, articles or things in India under a scheme notified by the Central Government under the Ministry of Electronics and Information Technology; and

(b) It should not become ineligible under such a scheme at any time during the tax year for which tax is being computed for the income of the non-resident.

Further, “electronic goods” shall include goods covered under the notified scheme, including their supply chain ecosystem.

9. Other Provisions

9.1. Obligation of the resident company to deduct tax at source

Section 195(1) provides that any person responsible for making a payment to a non-resident in respect of any sum chargeable under the provisions of the Act shall deduct tax at source at the rates in force. Therefore, the resident company will have an obligation to deduct tax under Section 195 from the gross sum paid or payable to the non-resident. As the effective tax rate shall be lower than the rate of tax deduction specified in Part II of the first schedule to the Finance Act or the rate specified in the DTAA, the payer can approach the AO under Section 195(2) for tax deduction at a lower or nil rate. The payees may also obtain these certificates from the Assessing Officer under Section 195(3) or Section 197(1).

9.2. No exemption from payment of advance tax and return filing

Section 61(2) [Table S. No. 6] does not confer exemption from other provisions of the Act, i.e., the obligation to pay advance tax, file the return of income, etc.

10. Comprehensive illustration

An Indian company uses various foreign entities" services to establish a semiconductor manufacturing plant in India. It takes the following services during the tax year and pays the service fees.

The taxability of such sum under the DTAA and Income-tax Act shall be as under:

References

CIT vs. Peters & Prasad Association [2015] 58 taxmann.com 360 (Andhra Pradesh and Telangana)

CIT v. Vantage International Management Co. [2023] 156 taxmann.com 23 (SC), CIT v. Transocean Offshore International Ventures Ltd. [2023] 157 taxmann.com 203 (SC) and CIT (International Taxation) v. Schlumberger Asia Services Ltd. [2024] 158 taxmann.com 267 (SC)

Circular No. 10/2017, dated 23-3-2017

Royalties and Fees for Technical Services

Article 15 (Independent Personal Services) of India-USA DTAA provides the taxation rights to the resident country in respect of the income earned by an individual or firm from providing the personal services, i.e., engineering, architecture services, etc.

Business Profits

Business Profits

Business Profits or Fees for Technical Services

Business Profits

Fees for Technical Services

For: Maruti Udyog Ltd. vs. Assistant DIT [2009] 34 SOT 480 (Delhi). Against: John Deere India (P.) Ltd. vs. Deputy DIT [2019] 102 taxmann.com 267 (Pune - Trib.)

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