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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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