E.—Special provisions relating to non-residents and foreign companies

Tax on dividends, royalty and technical service fees in case of foreign companies.

207(1)

The income-tax payable on the total income of a non-resident (not being a company) or a foreign company, which includes any income specified in the column B of the Table below, shall be the aggregate of income-tax specified in the column C thereof. --Table--

207(2)

Where the total income of a non-resident (not being a company) or of a foreign company, includes any income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made after the 31st March,1976, other than income referred to in section 59(1), and—

• (a) the agreement is approved by the Central Government where such agreement is with an Indian concern; or
• (b) where the agreement relates to a matter included in the industrial policy, for the time being in force, of the Government of India, it is as per that policy, then, subject to the provisions of sub-section (3), the income-tax payable shall be the aggregate of income-tax specified in column C of the Table below: --Table--

207(3)

Where the royalty referred to in sub-section (2) is in consideration for the transfer or grant of all or any rights (including the granting of a licence)––

• (a) in respect of copyright in any book to an Indian concern; or
• (b) in respect of any computer software to a person resident in India, then the provisions of sub-section (2) shall apply in relation to such royalty without application of provisions of clause (a) or (b) of that sub-section.

207(4)

In this section,––

• (a) “computer software” means any computer programme recorded on any disc, tape, perforated media or other information storage device; or any customised electronic data or any product or service of similar nature as notified by the Board, which is transmitted or exported from India to a place outside India by any means;
• (b) “fees for technical services” shall have the meaning assigned to it in section 9;
• (c) “royalty” shall have the meaning assigned to it in section 9.

207(5)

No deduction in respect of any expenditure or allowance shall be allowed under sections 28 to 61 and section 93 for computing income referred to in sub-sections (1) and (2).

207(6)

Where the gross total income of an assessee––

• (a) consists only of the income referred to in sub-section (1)(Table: Sl. No. 1 to 7), no deduction shall be allowed under Chapter VIII;
• (b) includes any income referred to in sub-section (1) (Table: Sl. No. 1 to 7), the gross total income shall be reduced by such income and the deduction under Chapter VIII shall be allowed as if such reduced amount were the gross total income of the assessee;

207(7)

the provisions of sub-section (6) shall not apply to a deduction allowed to Unit of an International Financial Services Centre under section 147.

207(8)

It shall not be necessary for an assessee to furnish a return of income under section 263(1), if—

• (a) the total income during the tax year consisted only of income referred to in sub-sections (1)(Table: Sl. No. 1 to 7) and sub-section (2) (Table: Sl. No. 1 and 2); and
• (b) the tax deductible at source under the provisions of Chapter XIX-B has been deducted from such income at a rate not less than the rate specified in sub-sections (1) and (2).

Explanation

Section Summary:

This section outlines the tax treatment for non-residents and foreign companies on specific types of income, such as dividends, royalties, and fees for technical services. It specifies the tax rates and conditions under which these incomes are taxed, particularly when such income arises from agreements with the Indian government or Indian concerns. The section also clarifies the applicability of deductions and exemptions for such income.

Key Changes:

1. Tax Rates and Conditions: The section introduces specific tax rates for non-residents and foreign companies on income from dividends, royalties, and technical service fees, as outlined in the accompanying table.
2. Approval Requirements: For royalties and technical service fees, the agreement must be approved by the Central Government or align with India's industrial policy, unless it involves specific cases like copyrights or computer software.
3. No Deductions: Expenditures or allowances under sections 28 to 61 and section 93 cannot be deducted when computing income under this section.
4. Exemption from Filing Returns: If the income consists solely of the specified types and tax has been deducted at source at the prescribed rate, the taxpayer is not required to file a return under section 263(1).

Practical Implications:

1. For Non-Residents and Foreign Companies: They must pay tax on dividends, royalties, and technical service fees at the rates specified in the table. The tax liability is calculated based on the aggregate of the specified rates.
2. For Indian Concerns: When entering into agreements with non-residents or foreign companies, they must ensure that the agreements are approved by the Central Government or comply with India's industrial policy to benefit from the specified tax rates.
3. Compliance Burden: Taxpayers must ensure that tax is deducted at source at the correct rates to avoid the need for filing a return under section 263(1).

Critical Concepts:

1. Royalty: Defined as payments for the use of, or the right to use, any copyright, patent, invention, design, or similar property.
2. Fees for Technical Services: Payments for managerial, technical, or consultancy services, including the provision of services of technical or other personnel.
3. Computer Software: Includes any computer program, customised electronic data, or similar products/services transmitted or exported from India.

Compliance Steps:

1. Determine Applicable Tax Rates: Refer to the table provided in the section to determine the tax rates applicable to the specific type of income.
2. Ensure Agreement Compliance: For royalties and technical service fees, ensure that the agreement is approved by the Central Government or aligns with India's industrial policy.
3. Tax Deduction at Source (TDS): Ensure that TDS is deducted at the prescribed rates to avoid the need for filing a return under section 263(1).
4. Maintain Documentation: Keep records of agreements, approvals, and TDS deductions for compliance and audit purposes.

Examples:

1. Royalty Income: A foreign company licenses its patented technology to an Indian company. The royalty income is taxed at the rate specified in the table, provided the agreement is approved by the Central Government.
2. Technical Service Fees: An Indian company hires a foreign consultant for technical services. The fees paid to the consultant are taxed at the specified rate, and TDS is deducted at source. If the income consists solely of these fees and TDS is correctly deducted, the consultant is not required to file a return under section 263(1).

This section ensures clarity and consistency in the taxation of non-residents and foreign companies, while also simplifying compliance for certain taxpayers.