Deduction in respect of royalty on patents.

152(1)

An assessee, being an individual, who is––

• (a) a resident in India;

• (b) a patentee;

• (c) in receipt of income by way of royalty in respect of a patent registered on or after the 1st April, 2003 under the Patents Act, 1970; and.

• (d) having gross total income for the tax year which includes royalty, shall be allowed a deduction from such income computed in the manner specified in sub-sections (2) to (6).

152(2)

The deduction under this section shall be equal to the whole of such income referred to in sub-section (1) or three lakh rupees, whichever is less.

152(3)

Where a compulsory licence is granted in respect of any patent under the Patents Act, 1970, the income by way of royalty for the purpose of allowing deduction under this section shall not exceed the amount of royalty under the terms and conditions of a licence settled by the Controller under that Act.

152(4)

In respect of any income earned from any source outside India, so much of the income, shall be taken into account for the purpose of this section as is brought into India by, or on behalf of, the assessee in convertible foreign exchange within six months from the end of the tax year in which such income is earned or within such further period as the competent authority referred to in section 151(8)(c) may allow in this behalf.

152(5)

No deduction under this section shall be allowed unless the assessee furnishes a certificate in the prescribed form, duly signed by the authority as prescribed, along with the return of income setting forth such particulars, as prescribed.

152(6)

No deduction under this section shall be allowed in respect of any income earned from any source outside India, unless the assessee furnishes a certificate in such form, from the authority or authorities, as prescribed, along with the return of income.

152(7)

In this section,––

• (a) “Controller” means the authority as defined in section 2(1)(b) of the Patents Act, 1970;

• (b) “lump sum” includes a non-refundable advance payment for royalties;

• (c) “patent” means any patent granted, including a patent of addition, under the Patents Act, 1970;

• (d) “patentee” means the true and first inventor recorded as the patentee under the Patents Act, 1970, including joint patentees recorded as such true and first inventors;

• (e) “patent of addition” shall have the same meaning as assigned to it in section 2(1)(q) of the Patents Act, 1970;

• (f) “patented article” and “patented process” shall have the same meanings as assigned to them in section 2(1)(o) of the Patents Act, 1970;

• (g) “royalty” in respect of a patent, means consideration for—

  • (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent; or
  • (ii) the imparting of any information concerning the working of, or the use of, a patent; or
  • (iii) the use of any patent; or
  • (iv) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iii), but does not include any consideration,––
    • (A) which would be the income of the recipient chargeable under the head “Capital gains”; or
    • (B) for sale of product manufactured with the use of patented process or of the patented article for commercial use; and

• (h) “true and first inventor” shall have the same meaning as assigned to it in section 2(1)(y) of the Patents Act, 1970.

Explanation

Section Summary:

This section provides a tax deduction for individuals who are residents of India and earn income through royalties from patents registered on or after April 1, 2003, under the Patents Act, 1970. The deduction is aimed at encouraging innovation by reducing the tax burden on patentees who earn royalty income. The deduction is limited to the lesser of the total royalty income or ₹3 lakh.

Key Changes:

1. Eligibility Criteria: The deduction is now explicitly available to resident individuals who are patentees and earn royalty income from patents registered after April 1, 2003.
2. Deduction Limit: The deduction is capped at ₹3 lakh or the total royalty income, whichever is lower.
3. Compulsory License Royalty: If a compulsory license is granted under the Patents Act, the royalty income eligible for deduction cannot exceed the amount settled by the Controller.
4. Foreign Income: Royalty income earned outside India is only eligible for deduction if it is brought into India in convertible foreign exchange within six months (or an extended period allowed by the competent authority).
5. Documentation Requirements: Taxpayers must furnish a certificate in the prescribed form, signed by the prescribed authority, along with their income tax return to claim the deduction.

Practical Implications:

• For Individual Patentees: Resident individuals earning royalty income from patents can reduce their taxable income by up to ₹3 lakh, provided they meet the eligibility criteria and comply with documentation requirements.
• For Foreign Income: Patentees earning royalty income from foreign sources must ensure the income is remitted to India within the specified timeframe to qualify for the deduction.
• Compliance Burden: Taxpayers must maintain proper documentation and obtain the necessary certificates to claim the deduction, adding to their compliance responsibilities.

Critical Concepts:

• Royalty: Defined as consideration for transferring patent rights, imparting information about the patent, using the patent, or rendering services related to the patent. It excludes income chargeable as capital gains or consideration from the sale of products manufactured using patented processes.
• Patentee: Refers to the true and first inventor recorded as the patentee under the Patents Act, 1970, including joint patentees.
• Compulsory License: A license granted by the Controller under the Patents Act, which limits the royalty income eligible for deduction to the amount settled by the Controller.

Compliance Steps:

1. Determine Eligibility: Ensure you are a resident individual, a patentee, and earn royalty income from a patent registered after April 1, 2003.
2. Calculate Deduction: Compute the deduction as the lesser of your royalty income or ₹3 lakh.
3. Documentation: Obtain the prescribed certificate from the relevant authority and submit it along with your income tax return.
4. Foreign Income Remittance: If earning royalty income from abroad, ensure it is remitted to India in convertible foreign exchange within six months (or the extended period allowed).

Examples:

• Scenario 1: Mr. A, a resident individual, earns ₹2.5 lakh as royalty from a patent registered in 2005. He can claim a deduction of ₹2.5 lakh under this section.
• Scenario 2: Ms. B earns ₹4 lakh as royalty from a patent registered in 2010. She can claim a deduction of ₹3 lakh (the maximum limit).
• Scenario 3: Mr. C earns ₹1 lakh as royalty from a foreign patent and remits the amount to India within six months. He can claim a deduction of ₹1 lakh, provided he submits the required certificate with his tax return.

This section incentivizes innovation by reducing the tax burden on patentees while ensuring compliance through documentation and remittance requirements.