Taxation on royalty and fee for technical services on foreign companies in India

“With increased globalization and the growth of information technology, the import of technical know-how, acquisition of software and technical services is not very uncommon in developing economies like ours” writes Karan Gupta, Partner at S. P. Chopra & Co in New Delhi. He says in his recent article published this month the increased focus on service oriented economy has paved the way for augmented prominence of Intellectual Property Rights transfers across borders.

Characterization of cross-border software payments or payments in relation to import of technical services, as either royalty or business profits or some other head has always been a contentious issue in India. The underlying point of question involved here in is that whether such a transaction would amount to a “transfer of a copyright” or “transfer of a copyrighted article”.

To start with, there is no direct rule or basis for categorizing a transaction involving transfer of software or technical know-how under a particular head for the purpose of taxation. Taxation in India of such payments to foreign companies would depend on the nature of the transaction. The payments made by a resident to a non-resident/foreign company towards such transactions could be characterized as royalty, fees for technical services, capital gains or business profits depending on the nature of the transaction.

Indian courts have recognized in an array of judgments that the category of income would depend upon the “predominant purpose for which the consideration is paid in a transaction”.

Another contentious transaction from categorization perspective is full rights on the product are not transferred to the purchaser. Without prejudice to the specific nature of the transfer, in general, such payments are likely to be categorized as business income or capital gains rather than royalties.

The categorization of a payment as “Fee for technical services (FTS)” is comparatively less debatable and it is generally recognized that any payment for the technical services, which involves the application of inter-alia technical knowledge, experience, skill, know-how, or processes, availed by a resident form a foreign company would be regarded as FTS.

SP Chopra & Co
Chartered Accountants based in New Delhi providing Assurance, Tax, Advisory and Outsourcing services.

2018-06-07T14:20:16+00:00 March 10th, 2018|