Computing income by way of royalties, etc., in case of non-residents - Clause 59 of the Income Tax Bill, 2025 vs. Section 44DA of the Income Tax Act, 1961

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Contents

Clause 59 Chargeability of royalty and fee for technical services in hands of nonresidents.

Income Tax Bill, 2025

Introduction

Clause 59 of the Income Tax Bill, 2025, introduces provisions concerning the chargeability of income in the form of royalties and fees for technical services received by non-residents. This clause is significant as it outlines how such income is to be treated under the head "Profits and gains of business or profession." The provision is particularly relevant in the context of increasing globalization and cross-border transactions involving intellectual property and technical services. This article will provide a comprehensive analysis of Clause 59 and compare it with the existing Section 44DA of the Income Tax Act, 1961, which deals with similar issues.

Objective and Purpose

The primary objective of Clause 59 is to ensure that income in the form of royalties and fees for technical services, received by non-residents from Indian sources, is taxed appropriately under the head of business profits. The provision aims to prevent tax avoidance by ensuring that such income is connected with a permanent establishment or a fixed place of profession in India. The legislative intent is to align the taxation of such income with international tax principles and ensure that India receives its fair share of tax revenue from cross-border transactions.

Detailed Analysis

1. Key Provisions of Clause 59

Clause 59 specifies that 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" if certain conditions are satisfied:

The income must be received from the Government or an Indian concern.
The income must be pursuant to an agreement with the Government or the Indian concern.
The specified assessee must carry on business in India through a permanent establishment or perform professional services from a fixed place of profession in India.
The right, property, or contract in respect of which the royalties or fees are paid must be effectively connected with such permanent establishment or fixed place of profession.

2. Comparison with Section 44DA

Section 44DA of the Income Tax Act, 1961, also deals with the taxation of income by way of royalties and fees for technical services received by non-residents. The key similarities and differences between Clause 59 and Section 44DA are as follows:

Scope and Applicability:

Both provisions apply to non-residents receiving income from royalties and fees for technical services. However, Clause 59 explicitly defines "specified assessee" as a non-resident (not being a company) or a foreign company, whereas Section 44DA applies to non-residents and foreign companies without this explicit definition.

Conditions for Taxation:

Both provisions require that the income be received from the Government or an Indian concern and that it be effectively connected with a permanent establishment or fixed place of profession in India. The conditions outlined in Clause 59 are similar to those in Section 44DA, indicating a continuity in the legislative approach.

Deductions and Allowances:

Both Clause 59 and Section 44DA disallow deductions for expenses not wholly and exclusively incurred for the business of the permanent establishment or fixed place of profession in India. They also disallow deductions for amounts paid by the permanent establishment to its head office or other offices, except for reimbursement of actual expenses.

Maintenance of Accounts and Audit:

Clause 59 requires the specified assessee to maintain books of account and have them audited, similar to the requirements u/s 44DA. However, Clause 59 references specific sections (61, 62, and 63) of the Income Tax Bill, 2025, which may have updated requirements compared to the existing provisions u/s 44DA.

Practical Implications

The introduction of Clause 59 is likely to have several practical implications for non-resident taxpayers and Indian entities engaging in cross-border transactions involving royalties and technical services:

Compliance Requirements:

Non-residents will need to ensure compliance with the new provisions, including maintaining proper documentation and undergoing audits as required.

Tax Planning:

The alignment of Clause 59 with international tax principles may require non-residents to revisit their tax planning strategies to optimize their tax liabilities in India.

Dispute Resolution:

The effective connection requirement may lead to disputes regarding the characterization of income and the existence of a permanent establishment, necessitating careful legal and tax advisory.

Comparative Analysis

Clause 59 and Section 44DA are aligned in their approach to taxing royalties and fees for technical services, reflecting a consistent policy stance. However, Clause 59 may introduce updated compliance requirements and definitions that reflect changes in international tax norms and practices. The comparison highlights the need for stakeholders to stay informed about legislative changes and their implications for cross-border transactions.

Conclusion

Clause 59 of the Income Tax Bill, 2025, represents a continuation of the legislative framework established by Section 44DA of the Income Tax Act, 1961, with potential updates to reflect current international tax practices. The provision underscores the importance of ensuring that income from royalties and technical services is taxed appropriately in India, aligning with global standards. As the Bill progresses, stakeholders should closely monitor developments to ensure compliance and optimize their tax positions.

Full Text:

Clause 59 Chargeability of royalty and fee for technical services in hands of nonresidents.

Dated: 11-3-2025