Chargeability of royalty and fee for technical services in hands of nonresidents.
59(1)
Income in the nature of royalty or fees for technical services received by a specified assessee during a tax year, shall be charged to income-tax under the head “Profits and gains of business or profession” under this Act, if the following conditions are satisfied:––
- (a) income is received from the Government or an Indian concern;
- (b) income is in pursuance to an agreement made by the specified assessee with the Government or the Indian concern;
- (c) the specified assessee carries on business in India through a permanent establishment, or performs professional services from a fixed place of profession, situated in India; and
- (d) the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed place of profession.
59(2)
No deduction shall be allowed against the income chargeable under sub-section (1) in respect of the following amounts:—
- (a) any expenditure or allowance which is not wholly and exclusively incurred for the business of such permanent establishment or fixed place of profession in India; or
- (b) amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to its head office or to any of its other offices.
59(3)
The provisions of section 61 in so far as it relates to business referred to in section 61(2) (Table: Sl. No. 5),shall not apply in respect of the income referred to in this section.
59(4)
The specified assessee shall keep and maintain books of account and other documents as per the provisions of section 62, get his accounts audited on or before the specified date referred to in section 63 by an accountant, and furnish report of audit in the prescribed form, duly signed and verified by the accountant.
59(5)
In this section, “specified assessee” means a non-resident (not being a company) or a foreign company.
The new Income Tax Bill introduces specific provisions under Section 59 that alter the taxation of royalty and fees for technical services received by non-resident individuals and foreign companies (collectively termed as "specified assessees"). Here's a comparison with the current income tax law:
1. Taxation Basis:
Current Law: Under Section 115A of the Income-tax Act, income by way of royalty and fees for technical services received by a non-resident is taxed at a flat rate on a gross basis, without the requirement to establish a business connection or permanent establishment (PE) in India.
New Bill (Section 59(1)): Income in the nature of royalty or fees for technical services received by a specified assessee will be charged under the head “Profits and gains of business or profession” if the following conditions are met:
Income is received from the Government or an Indian concern.
The income arises from an agreement with the Government or the Indian concern.
The specified assessee conducts business in India through a permanent establishment or provides professional services from a fixed place of profession in India.
The right, property, or contract related to the royalties or fees is effectively connected with such permanent establishment or fixed place of profession.
2. Deduction of Expenses:
Current Law: No deductions are allowed against such income, as it is taxed on a gross basis.
New Bill (Section 59(2)): Deductions are permitted against the income chargeable under sub-section (1), except for:
Expenditures or allowances not wholly and exclusively incurred for the business of the permanent establishment or fixed place of profession in India.
Amounts paid (other than reimbursement of actual expenses) by the permanent establishment to its head office or any of its other offices.
3. Compliance Requirements:
Current Law: There is no specific requirement for maintaining books of account or getting accounts audited for such income.
New Bill (Section 59(4)): Specified assessees are required to:
Maintain books of account and other documents as per the provisions of section 62.
Get their accounts audited by an accountant on or before the specified date referred to in section 63.
Furnish the audit report in the prescribed form, duly signed and verified by the accountant.
4. Definition of Specified Assessee:
Current Law: Applies broadly to non-residents receiving royalty or fees for technical services.
New Bill (Section 59(5)): Specifically defines "specified assessee" as a non-resident (not being a company) or a foreign company.
Key Differences:
Taxation Approach: The new bill shifts from taxing such income on a gross basis at a flat rate to taxing it as business profits, allowing for certain deductions.
Establishment Requirement: The new provisions apply only if the non-resident has a permanent establishment or fixed place of profession in India, whereas the current law does not require this.
Compliance Obligations: The new bill imposes additional compliance requirements, including maintaining books of account and mandatory audits, which are not specified under the current law.
These changes signify a move towards aligning the taxation of royalty and fees for technical services with the general principles applicable to business income, emphasizing the significance of a permanent establishment in India and allowing for related business deductions.