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Double Tax Avoidance Agreements
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8.1
Royalty has been defined to mean consideration for transfer of rights in
respect of or for use of intellectual property viz. patent, invention, model,
design, secret formula, process or trade mark and similar property. It includes
consideration for imparting of information concerning the working or use of
those properties and also for imparting of information concerning technical,
industrial, commercial or scientific knowledge or skill. It makes no difference
whether the consideration is by way of lump sum payment or in the form of
recurring payments based on production or any other factor. It, however, does
not include an income which arises from the transfer of the asset itself and is
liable to be taxed in the hands of the recipient as 'Capital Gain'.
8.1.1 Fees for
technical services' means any consideration for the rendering of any
managerial, technical or consultancy services, whether such consideration is
paid in lump sum or in any other manner. It also includes consideration for
providing services of technical or other personnel as part of their service
contract. It, however, does not include consideration for any construction,
assembly, mining or like projects undertaken by the recipient or consideration
which would be income of recipient chargeable under the head 'salary1
by virtue of the existence of employer-employee relationship between the
parties.
8.2
Royalty is taxable in the hands of non-residents if the same are received in or
accrued in India. Income of these nature are considered as always accruing in
India if the same is payable by the Government. If the income is payable by any
other person, it is the place of use of the intellectual property that governs
the place of accrual. If the right property or information for which royalty is
payable is used for the purposes of business or profession in India or for
earning income from any source in India, royalty is considered as accruing in
India and, accordingly chargeable to tax.
8.2.1
The above position, however, does not apply in relation to lumpsum royalty
payment made by a resident for transfer of right in respect of computer
software which is supplied by a nonresident manufacturer along with the
supply of 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. Such lumpsum payment is treated as business income
of the manufacturer.
8.2.2
Similarly ' Fees for technical services' is taxable in the
hand of non-residents if the same is received in India or it accrues in
India. It is considered as always accruing in India, if the income is payable
by the Government. In respect of payment made by others, it is the place where
the services are utilised that determine the accrual of income in India. If the
services are utilised in business or profession in India or for purpose of
earning income from any sources in India, the fees accrues in India regardless
of any other factor existing.
8.3
Rates of taxation : In respect of agreement made upto 31st March 1976, incomes
from royalty and fees for technical services was computed on actual basis after
deduction of expenses which could not have exceeded 20% of the gross receipt.
Such income of foreign companies received in pursuance of agreement after 31st
March, 1976 but before 1st April, 1997 became taxable on Gross receipt basis
without deduction of any expenses at the flat rate of 30%. Royalty and fees for
technical services received in pursuance of agreement made after 31st March,
1997 is taxable at 20% of gross receipts. The agreement with Indian concern is
required to be approved by the Central government but if it relates to a matter
included in the industrial policy of the Government of India and the agreement
is in accordance with that policy, such approval is not necessary. In the case
of non-resident non-corporate persons, this income is taxed at the normal rate
prescribed in the Finance Act on net income basis i.e. after deduction of
incidental expenses.
8.3.1
In case of royalty in consideration of the transfer of rights in respect of
Computer Software permitted to be imported under OGL a flat rate of 20% on
Gross receipts is applied without there being any requirement of approval or
without any requirement of the agreement being in accordance with the
industrial policy.
8.4 Exemptions
from tax : The following income from royalty/fee for technical services is
exempt from tax:-
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In case Royalty or Fees for technical services is received free
of tax under an agreement which relates to a matter included in the industrial
policy and is in accordance with such policy, or where the agreement is
approved by the Central government the tax paid by the payer viz. the
Government or the Indian concern will not be considered as income derived by
the recipient. In other words, the requirement of grossing up applicable to net
of tax payments will not apply to such income. [10(6A)]
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Fees for technical services received by notified foreign
companies in pursuance of an agreement for providing services in or outside
India in projects connected with the Security of India is exempt from tax.
[10(6C)]
8.5
Double Tax Avoidance Agreements: The bilateral agreements entered into by India
with many foreign countries provide concessional rate of tax on gross receipt
basis in respect of such income. A tax payer is entitled to be assessed at such
rate or at the rate applicable to him in terms of para 8.3 whichever is
beneficial to him. The rates as per bilateral agreements are given in the
annexure.
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