Taxation of Royalty and Fees for Technical Services (FTS) for Non-Residents
The taxability of royalty or FTS income for a non-resident depends on factors such as the place of accrual, existence of a Permanent Establishment (PE) in India, the date of the agreement, and Double Taxation Avoidance Agreements (DTAAs). For agreements entered into on or after 01-04-2003, taxation is governed by Section 44DA, Section 56 or Section 115A.
Taxability of Royalty and FTS Income
- Royalty/FTS from the Government: Always deemed to accrue in India and taxable in India.
- Royalty/FTS from other persons: Taxable if used for a business/profession in India or for earning any income from any source in India.
- DTAA Applicability: Provisions of DTAA apply if they are more beneficial.
Recognition of Income
- Income by way of royalty or rendering of services is recognised in accordance with ICDS-IV.
- ICDS shall also apply for computation of incomes in the nature of royalty or fees for technical services which are taxable on a gross basis in the hands of a non-resident non-corporate assessee or a foreign company underSection 115A.[Circular No. 10/2017, dated 23-3-2017]
- Royalty Recognition:Recognised on an accrual basis unless another systematic method is more appropriate.
- Service Revenue Recognition:Follows the percentage of completion method (POCM), but for short-term contracts (≤90 days), it may be recognised upon completion.
Taxable Head of Income and Tax Rates
- When received from the Government or an Indian concern
o If income is linked to PE in India, it is taxed as business income under Section 44DA at normal tax rates. Expenses are allowed except expenses not wholly/exclusively incurred for PE and payments to head office/other offices (except reimbursement).
o If income is not linked to PE, it is taxed under the head ‘other sources’ at a rate of 20% under Section 115A. Expenses are not allowed to be deducted.
- When received from others
o Tax at normal rates under standard provisions.
o If from the oil/mineral business (e.g., services, hire of plant/machinery for extraction), the presumptive tax scheme under Section 44BB applies, and 10% of receipts are deemed as income.
(Note: 44BB not applicable if 44D / 44DA / 115A applies.)
Deductions and Exemptions
- Business Expenses: Allowed if income is connected to a PE.
- Chapter VI-A Deductions: Allowed.
- Exemptions:
o Tax on royalty or FTS paid by the Government or an Indian concern on behalf of a foreign company (Section 10(6A)).
o Royalty/FTS received under agreements with the Indian government for security-related projects (Section 10(6C)).
o Royalty/FTS from National Technical Research Organisation (Section 10(6D))
o Royalty/FTS from leasing aircraft/ships to IFSC units (Section 10(4F)).
Minimum Alternate Tax (MAT) on Royalty/FTS Income
- Applicable to foreign companies with a PE in India.
- Adjustments to book profit apply if income is taxed at a lower rate than MAT.
TDS on Royalty/FTS Payments to Non-Residents
- Tax shall be deducted underSection 195from royalty/FTS payments to non-residents.
- If tax is not deducted and deposited, the payer cannot claim the expense as a deduction.
Return Filing Requirements
A non-resident must file an income tax return if his income is taxable in India. However, return filing is not required if:
- The non-resident individual, AOP, or BOI has total income (before specified exemptions/deductions) below the basic exemption limit.
- TDS on royalty/FTS is deducted at a rate not lower than the tax rate provided underSection 115A.