Royalty under Taxability of different kinds of income – Income Tax

Royalty under Taxability of different kinds of income :

Royalty has been defined in Explanation 2 to section 9(1)(vi) to mean the consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “capital gains‟) for –

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;

(ii) the imparting of any information concerning the working of or the use of patent, invention, model, design, secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention, model, secret formula or process or trade mark or similar property;

(iv) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;

(v) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

(vi) the transfer of all or any rights including the granting of a licence in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting but not including consideration for the sale, distribution or exhibition of cinematographic films; or

(vii) the rendering of any service in connection with the activities referred to in (I) to (v) above.

Further, CBDT Circular No. 202 dated 5.7.1976 has clarified that “royalty‟ would include both industrial royalties and copyright royalties.

Section 9(1)(vi) deems income by way of royalty as accruing or arising in India in the following three cases:

(i) Royalty payable by the Central Government or any State Government must be deemed to accrue in India regardless of who is the payee and what is the amount of royalty and also irrespective of the purpose of the payment;

(ii) Royalty payable by any resident taxpayer to any person, whether resident or non – resident, would be deemed to accrue in India in every case except where the payment is relatable to a business or profession carried on by the resident outside India or for the purpose of making or earning any income from any other source outside India; and

(iii) Royalty payable even by a non-resident would be deemed to accrue in India in cases where the payment is relatable to any business or profession carried on by the non-resident in India or to any other sources of the non-resident’s income in India.

However, the definition excludes any income which might otherwise be chargeable as capital gains. Thus, a receipt of a capital nature for the total change in ownership of the patents, invention, model, design, drawings, specifications, trade mark, secret formula or process, data, documentation, etc. representing technical know-how provided by foreign collaborators to Indian taxpayers would not give rise to income by way of royalty while the authority given under the collaboration agreement to the Indian taxpayer to use for the purpose of his business the drawings, designs, patents, etc., representing technical know-how which would continue to belong to the foreign collaborator would come within the purview of royalty for purposes of deeming the same accruing in India, thus, making the non-resident liable to tax under this provision. For this purpose, it is immaterial whether the royalty is paid as a lump sum or as a recurring payment; it is also immaterial whether the royalty is described as such under the collaboration agreement or is known as licence fees, copyright charges or by any other name.

Consideration for use or right to use of computer software is royalty within the meaning of section 9(1)(vi)

As per section 9(1)(vi), any income payable by way of royalty in respect of any right, property or information is deemed to accrue or arise in India. The term “royalty” means consideration for transfer of all or any right in respect of certain rights, property or information. There have been conflicting court rulings on the interpretation of the definition of royalty, on account of which there was a need to resolve the following issues –

Does consideration for use of computer software constitute royalty?

(i) Is it necessary that the right, property or information has to be used directly by the payer?

(ii) Is it necessary that the right, property or information has to be located in India or control or possession of it has to be with the payer?

(iii) What is the meaning of the term “process”?

In order to resolve the above issues arising on account of conflicting judicial decisions and to clarify the true legislative intent, Explanations 4, 5 & 6 have been inserted with re trospective effect from 1st June, 1976.

Explanation 4 clarifies that the consideration for use or right to use of computer software is royalty by clarifying that, transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

Consequently, the provisions of tax deduction at source under section 194J and section 195 would be attracted in respect of consideration for use or right to use computer software since the same falls within the definition of royalty.

Note – The Central Government has, vide Notification No.21/2012 dated 13.6.2012 to be effective from 1st July, 2012, exempted certain software payments from the applicability of tax deduction under section 194J. Accordingly, where payment is made by the transferee for acquisition of software from a resident-transferor, the provisions of section 194J would not be attracted if –

(1) the software is acquired in a subsequent transfer without any modification by the transferor;

(2) tax has been deducted either under section 194J or under section 195 on payment for any previous transfer of such software; and

(3) the transferee obtains a declaration from the transferor that tax has been so deducted along with the PAN of the transferor.

Explanation 5 clarifies that royalty includes and has always included consideration in respect of any right, property or information, whether or not,

(a) the possession or control of such right, property or information is with the payer;

(b) such right, property or information is used directly by the payer;

Explanation 6 clarifies that the term “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for downlinking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret.

Under section 115A, royalty income is taxable at the rate of 10% if it is received in pursuance of an agreement made after 31st March, 1976. The conditions attached to this provision are as follows:

(i) The recipient of the royalty should be a foreign company or a non-corporate non-resident.

(ii) The royalty may be received from the Government or an Indian concern.

(iii) The royalty should be received in pursuance of an agreement made by the foreign company with the Government or the Indian concern after 31st March, 1976.

(iv) Where the agreement is with an Indian concern, it should be approved by the Central Government.

(v) Where the agreement relates to a matter included in the industrial policy (prevailing at that time) of the Central Government, the agreement should be in accordance with that policy.

(vi) The conditions (iv) and (v) shall not apply where the royalty is received in consideration for the transfer to an Indian concern, all or any rights in respect of copyright in any book, or for the transfer to a person resident in India, any computer software.

(vii) In computing the royalty income, no deduction shall be allowed under sections 28 to 44C and section 57.

It is to be noted that section 115A is not applicable in respect of royalty income covered under section 44DA (1).

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