Assessment of income from royalties, fees for technical services. know-how fees. - Income Tax - 909/CBDT

INSTRUCTION NO. 909/CBDT Dated : January , 1976 Section(s) Referred: 143 Statute: Income - Tax Act, 1961 Recently a study of the foreign collaboration cases was undertaken with the object of finding out broadly the extent to which the expenses claimed by the foreign companies in the matter of assessment of income from royalties, fees for technical services. know-how fees, etc., were being admitted by the Income-tax Officers. From the sample taken, it has been observed that in some cases the expenses have been allowed as deduction more on an ad hoc basis rather than on a proper scrutiny of account books or statements of account. In most of the cases, no worthwhile scrutiny had been made even though the expenses claimed were prima facie unduly high. For example, it was noticed that in a cases where royalities running into several lakhs of rupees had been paid each year, the assessments had been completed on losses year after year. In another cases, the assessee's claim for expenses was accepted by the Income-tax Officer on the basis of a certificate which related to expenses incurred over several years preceding the year in which the services had been rendered. In some of the cases where current research results were ostensibly to be made available to the Indian party under the terms of a composite agreement, expenditure incurred abroad on research and development had been allowed as an admissible deduction without verification of the fact whether any such current research results were actually being made available. 2. The Board consider this state of affairs to be highly unsatisfactory and desire that the claims for expenses should be scrutinised in depth in all foreign collaboration cases. For the purpose of arriving at the correct profits assessable in India, the Income-tax Officers should consider in appropriate cases the applicability of the alternative methods available under rule 10 of the Income-tax Rules, 1962. In any case where the claim for expenses exceeds 1/3rd of the gross receipts on account of royalties or technical service fees, it should be looked into by the Commissioner of Income-tax himself and he should give necessary advice/guidance in the matter to the assessing officers. 3. Incidentally, it was also noticed that the maintenance of assessment records of foreign companies left much to be desired. Now that separate IAC Ranges have been created in important Charges for handling foreign tax cases, this aspect should receive adequate attention and immediate remedial measures should be taken to improve the up keep of assessment records.