Module 4

Taxation of Non-Residents: Royalty and Fees for Technical Services under

the Income Tax Act, 1961

The Income Tax Act, 1961, provides specific provisions for the taxation of non-residents,
particularly concerning income arising from royalties and fees for technical services (FTS).
These provisions are crucial for ensuring that income earned by non-residents from India is
appropriately taxed, while also preventing tax evasion through international arrangements.

1. Definition of Non-Resident (Section 6):

 Non-Resident: An individual or entity is classified as a non-resident for tax purposes if

they do not meet the conditions specified for "resident" status under Section 6 of the
Income Tax Act. The residency of an individual is determined based on the number of
days of physical presence in India during the financial year.

 Relevance: Non-residents are taxed only on income that is received, deemed to be

received, accrues, or arises in India. This includes income from royalties and fees for
technical services.

2. Royalty (Section 9(1)(vi)):

 Definition: Royalty is defined broadly under Section 9(1)(vi) to include payments

received for:

 The transfer of all or any rights in a patent, invention, model, design, secret
formula or process, trademark, or similar property.

 The imparting of any information concerning the working of, or the use of, such
intellectual property.

 The use of any industrial, commercial, or scientific equipment (excluding the

payments for the purchase of the equipment).

 The rendering of any services in connection with the activities mentioned above.

 Taxability: Royalty income is deemed to accrue or arise in India if it is payable by:


The Government.
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  A resident, except where the royalty is payable in respect of any right, property,
or information used, or services utilized, for the purposes of a business or
profession carried on by such resident outside India or for the purposes of
making or earning any income from any source outside India.

 A non-resident, where the royalty is payable in respect of any right, property, or

information used, or services utilized, for the purposes of a business or
profession carried on by such non-resident in India or for the purposes of making
or earning any income from any source in India.

Withholding Tax Rates:

 The rate of withholding tax on royalties paid to non-residents is typically 10% under
Section 115A, subject to applicable Double Taxation Avoidance Agreements (DTAAs),
which may provide for lower rates.

3. Fees for Technical Services (Section 9(1)(vii)):

 Definition: Fees for technical services (FTS) are defined under Section 9(1)(vii) to
include any consideration (including lump-sum payments) for the rendering of any
managerial, technical, or consultancy services, including the provision of services of
technical or other personnel.

 Taxability: FTS is deemed to accrue or arise in India if it is payable by:

 The Government.

 A resident, except where the fees are payable in respect of services utilized in a
business or profession carried on by such resident outside India or for the
purposes of making or earning any income from any source outside India.

 A non-resident, where the fees are payable in respect of services utilized in a

business or profession carried on by such non-resident in India or for the
purposes of making or earning any income from any source in India.

Withholding Tax Rates:

 The rate of withholding tax on FTS paid to non-residents is generally 10% under Section
115A, subject to applicable DTAAs, which may provide for lower rates.
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 4. Double Taxation Avoidance Agreements (DTAAs) – Section 90:

 Purpose: DTAAs help mitigate the risk of double taxation on the same income in both
India and the non-resident’s home country. Under Section 90, India has entered into
DTAAs with various countries.

 Impact on Royalty and FTS: DTAAs often provide for specific tax rates on royalties
and FTS, which may be lower than the domestic rates under the Income Tax Act. The
non-resident taxpayer can choose to be taxed either under the provisions of the Income
Tax Act or the DTAA, whichever is more beneficial.

 Permanent Establishment (PE): DTAAs may also define the conditions under which a
non-resident is considered to have a permanent establishment in India, impacting the
taxability of royalty and FTS income.

5. Section 115A: Taxation of Non-Residents on Royalty and FTS

 Flat Rate Taxation: Non-residents are subject to a flat rate of tax on royalty and FTS
income. The applicable rate under Section 115A is 10% (plus applicable surcharge and
cess) if the income is in accordance with the agreement made after March 31, 1976, but
before June 1, 2005. The same rate applies to agreements made on or after June 1, 2005,
provided the agreement is approved by the Central Government.

 No Deduction Allowed: No deductions are allowed under any other provisions of the
Act in computing the taxable income from royalties or FTS.

 Exemption from Filing Return: If the income is subject to TDS at the prescribed rate,
the non-resident may not be required to file a tax return in India, provided there is no
other income.

6. Section 44DA: Taxation of Royalties and FTS in Connection with PE in India

 Applicability: Section 44DA applies to non-residents earning royalty or FTS income

that is effectively connected with a PE or fixed place of business in India.

 Taxation Basis: Income is taxed on a net basis, meaning that the non-resident can
deduct expenses incurred wholly and exclusively for the purpose of the business of the

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 PE or fixed place of business. The profit from such business is computed as per the
normal provisions of the Act.

 Maintenance of Accounts: The non-resident is required to maintain proper books of

accounts and obtain a tax audit report.

7. Section 94A: Special Measures in Respect of Transactions with Notified Jurisdictions

 Purpose: Section 94A empowers the Indian government to notify certain jurisdictions
as Notified Jurisdictional Areas (NJAs) where there is inadequate information exchange.
This section is an anti-avoidance measure.

 Impact on Non-Residents:

 Increased TDS Rates: Payments to entities in NJAs may attract higher

withholding taxes.

 Disallowance of Deductions: Payments made to persons in NJAs may be

disallowed as deductions unless the payer can prove that the transaction is
legitimate and necessary.

 Additional Compliance: Transactions with NJAs require additional

documentation and reporting, making them less favorable from a tax planning
perspective.

8. Section 195: Withholding Tax on Payments to Non-Residents

 Applicability: Section 195 mandates that any person responsible for paying any sum
chargeable to tax in India to a non-resident (including foreign companies) must deduct
tax at the time of payment or credit, whichever is earlier.

 TDS Rate: The applicable TDS rate depends on the nature of payment, including
royalties and FTS, and is subject to the rates specified in the Income Tax Act or the
DTAA, whichever is beneficial to the non-resident.

 Certificate for Lower Deduction: Non-residents can apply for a certificate under
Section 195(2) or 197 for a lower or nil deduction of tax at source if they believe that the
tax liability is lower than the prescribed rate.

Dr. Rakesh Nadig H S [Link]., MBA., [Link]., SLET., Ph.D.

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 The Income Tax Act, 1961, in India, specifically addresses the taxation of non-residents
earning income from royalty and fees for technical services. These types of income are
generally subject to tax in India under the following provisions:

Royalty

 Section 9(1)(i): This section taxes any income derived by a non-resident from royalty or
license fees received in connection with the use of intellectual property rights, such as
patents, copyrights, trademarks, or know-how.

 Withholding Tax: The tax is generally withheld at source by the Indian payer at the
applicable rate. The rate varies depending on the nature of the royalty and the country of
residence of the non-resident.

 Double Taxation Avoidance Agreements (DTAs): India has DTAs with many
countries that can reduce or eliminate double taxation. These agreements may provide
for a lower withholding tax rate or a tax credit.

Fees for Technical Services

 Section 9(1)(vii): This section taxes any income derived by a non-resident from fees for
technical services received in connection with the provision of technical know-how,
services, or assistance.

 Withholding Tax: Similar to royalty, the tax is generally withheld at source by the
Indian payer at the applicable rate. The rate varies depending on the nature of the
services and the country of residence of the non-resident.

 Double Taxation Avoidance Agreements (DTAs): DTAs can also reduce or eliminate
double taxation for fees for technical services.

Important Considerations:

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  Permanent Establishment: If a non-resident has a permanent establishment in India,
the income derived through that permanent establishment may be taxed in India at a
higher rate.

 Tax Treaties: The specific tax treatment of royalty and fees for technical services can
vary depending on the provisions of India's DTAs with the non-resident's country.

 Documentation: Non-residents should ensure that they have adequate documentation to

support their income tax returns and to claim any benefits under DTAs.

 Tax Planning: Proper tax planning can help non-residents minimize their tax liabilities.
Consulting with a tax professional can be beneficial to understand the specific tax
implications and to explore available tax planning strategies.

Section 90: Double Taxation Avoidance Agreements (DTAAs)

Section 90 of the Income Tax Act, 1961, deals with the provisions related to Double Taxation
Avoidance Agreements (DTAAs). A DTAA is a tax treaty signed between India and another
country to avoid the scenario where an individual or a business entity is taxed twice on the
same income. The purpose of such treaties is to provide relief from double taxation and
promote the flow of trade, investments, and technology between the two countries.

Key Features of Section 90:

1. Relief from Double Taxation:

 Under Section 90, the Government of India has the authority to enter into
agreements with foreign countries to avoid the double taxation of income earned
in both jurisdictions.

 These agreements allow taxpayers to claim relief from double taxation either by
way of exemption or credit.

2. Exemption Method:

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  In some cases, the DTAA provides for the exemption method, where the
income earned in one country is exempt from tax in the other country. In other
words, only one country taxes the income.

3. Credit Method:

 Under the credit method, the income is taxed in both countries, but the taxpayer
can claim credit for the tax paid in the source country against the tax liability in
the residence country. This reduces the total tax burden on the taxpayer.

4. Scope of Income Covered:

 DTAAs typically cover different types of income, such as salaries, dividends,

interest, royalties, capital gains, business profits, and income from
immovable property.

 They define the taxation rights of each country in relation to various types of
income and prescribe the maximum tax rates that may be applied by the source
country.

5. Non-Discrimination:

 Most DTAAs contain a non-discrimination clause, ensuring that nationals of

one contracting state are not treated less favorably in the other state in terms of
taxation than the nationals of the latter state.

6. Permanent Establishment (PE):

 The concept of Permanent Establishment (PE) is critical in DTAAs. It defines

when a business is deemed to have a sufficient presence in a foreign country to
be taxable there.

 Only if a business has a PE in the source country will it be taxed on its business
profits in that country.

7. TDS (Tax Deducted at Source) and DTAAs:

 In cases where income is subject to TDS, DTAAs allow the taxpayer to either
avail lower tax rates on certain types of income (like interest, dividends, and

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 royalties) or apply for refund of excess tax deducted by using the treaty
provisions.

Claiming Benefits under Section 90:

To claim the benefits of a DTAA under Section 90, taxpayers must provide specific
documentation, including:

 Tax Residency Certificate (TRC): Issued by the tax authority of the country of
residence, confirming that the taxpayer is a resident of that country.

 Form 10F: This form contains details of the taxpayer, including tax identification,
country of residence, and income details.

Key DTAAs Signed by India:

India has signed DTAAs with more than 90 countries, including major economies such as:

 United States

 United Kingdom

 Germany

 Singapore

 Mauritius

 Japan

 France

Transfer Pricing Analysis: Sections 90 to 94A of the Income Tax Act, 1961

Transfer pricing refers to the pricing of transactions between related parties. When related
entities engage in transactions, there's a risk that the prices may be manipulated to shift profits
from a high-tax jurisdiction to a low-tax jurisdiction. To prevent this, the Income Tax Act, 1961,
in India, has specific provisions from Section 90 to 94A to address transfer pricing.

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Key Sections and Their Implications:
1. Section 90:
 Arm's Length Principle: This section mandates that international transactions
between related parties should be priced at "arm's length," meaning at the price
that would have been charged between unrelated parties under comparable
circumstances.
 Presumptive Determination: If the taxpayer fails to provide adequate
documentation to prove that the transaction was at arm's length, the tax authorities
may presume that the transaction was not at arm's length and determine the
transfer price based on certain benchmarks or methods.
2. Section 92:
 Related Persons: This section defines who is considered a "related person" for
transfer pricing purposes. It includes entities that have a significant influence over
each other, such as subsidiaries, associates, and joint ventures.
3. Section 92A:
 Documentation Requirements: This section requires taxpayers to maintain
specific documentation to support their transfer pricing claims. The
documentation should include information about the nature of the transaction, the
method used to determine the arm's length price, and the comparables used.
4. Section 92B:
 Transfer Pricing Methods: This section outlines the various methods that can be
used to determine the arm's length price, such as the comparable uncontrolled
price (CUP) method, the resale price method, the cost plus method, the profit split
method, and the transactional net margin method.
5. Section 92C:
 Safe Harbor Provisions: This section provides certain safe harbor provisions
under which taxpayers may be exempt from transfer pricing adjustments if their
international transactions meet specific criteria, such as being below a certain
threshold or falling within a specified range of arm's length prices.
Implications for Businesses:

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  Compliance Burden: Businesses must maintain detailed documentation to support their
transfer pricing claims, which can be time-consuming and costly.
 Potential Tax Adjustments: If the tax authorities determine that the transfer price is not
at arm's length, the taxpayer may be subject to tax adjustments, including additional tax
liability and penalties.
 Impact on Business Decisions: Transfer pricing considerations can influence business
decisions, such as the structure of international transactions, the allocation of profits, and
the choice of jurisdictions.

Developments for FY 2024-25 (AY 2025-26)

Amendment Details
Tolerance Range Continued at 1% (wholesale trading) & 3% (others).
Safe Harbour Extended to FY 2024-25 & FY 2025-26; lithium-ion batteries added;
Rules threshold ↑ from ₹2,000 crore → ₹3,000 crore.
Block TP New scheme introduced: ALP for one year can be applied to next 2 years, if
Assessment opted & validated by TPO (Sec 92CA(3B)).
APA Programme Continues to gain traction, offering multi-year certainty.

Dr. Rakesh Nadig H S [Link]., MBA., [Link]., SLET., Ph.D.

SOC, SJCC