Interest Royalty & Fees for Technical Services JB Nagar CPE Study Circle-ICAI 2 July 2012

8/12/2019 Interest Royalty & Fees for Technical Services JB Nagar CPE Study Circle-ICAI 2 July 2012

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. .Circle - ICAI

Intensive Course on Income Tax

Deemed accrual - Interest, Royaltyand Fees for Technical Services

2nd July, 2012

Naresh Ajwani

PartnerRashmin Sanghvi & Associates

Chartered Accountants


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Interest, Royalties, FTS 9(1), clausesv , vi an

(vii)

axation of above income 44D 44DA115A

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Some basic concepts briefly.

Common features of taxation of interest,

royalty and FTS. Meaning of interest, royalty and FTS.

,issues with respect to these incomes.

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Accrual of income is relevant for:

- A resident to determine the year in.

- A non-resident (and NOR) to determine,taxablein India or not.

- person re urn ng o or eav ng n ato determine whether income is taxablean eyear.

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Debt should become due to the person.

Place of accrual should be in India.

year concerned.

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section 9.

Deeming Fiction ection :

- Expands the scope of total income.- Income actually does not accrue, but is

fictionall deemed to accrue in India.

- Interpret it strictly. However the scope is

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Income deemed to accrue inIndia

Deemed to accrue in India section 9:

Income is deemed to accrue in India due to:

- Business connection in India.

- Property, asset, source of income in

.- Transfer of Capital asset situated in India.

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Income deemed to accrue inInd a

World income

Indian income

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Income is deemed to accrue in India ifpayment is by:

- Government.

- Indian resident unless loan, services,property is used for business outside Indiaor for earning income from source outside

.

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- Non-resident if property, service is usedor usiness in In ia; or oan, property,

service is used for earning income fromsource n n a.

[Section 9(1) clauses (v), (vi), (vii)]

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E. . Source in India

. .

Resident

Non-Resident

Sub-

LicenseTaxable

Indian

Resident

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Section 115A.

.

If Section 115A is not applicable, normalprovisions apply.

For royalty and FTS, if there is a PE, then

under section 44DA, net profit is taxable.

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Income is deemed to accrue in Indiaw et er t e non-resi ent:

- has residence or place of business orbusiness connection in India, or

- has rendered services in India.

[Explanation to S. 9]

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-

Interest is defined in S. 2(28A). It means:

- interest on debt of any kind.

- service fee or other char e in res ect ofdebt, or unutilised credit facility.

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Loan given in rupeesby non-resident

No tax relief. Regular tax is payable.

Loan iven in forei n currenc lowerrate of tax u/s. 115A on GROSS interest.

.

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.

Loan should be borrowed in Foreignurrency.

Foreign Currency Foreign Exchange. Interest is received from Government or

Indian concern.

Tax is payable @ 20% [plus SC & EC] on.

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II. Loan by infrastructure debt fund:

ax is a able 5% lus SC & EC onGROSS interest.

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III. Specific Loans:

Loan is borrowed between 1.7.2012 and30.6.2015 in forei n currenc .

There is a loan agreement or Long term.

Government approval is obtained.

ax = on nterest paya e uptorate approved.

ax on the excess interest?19


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-

- Income comprises only of interest.

- Full tax has been deducted at source.

Indian concern not defined.CBDT circular 740 dated 17.4.1996 - interest

bank is taxable @ 20% - Indian branch is a.

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ABN Amro Kolkata Tribunal.

Interest payable by branch to HO is not

deductible. Dresdner Bank Mumbai Tribunal.

taxable.

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- Consideration including lumpsum

consideration for various kinds of uses ofproperties as under:

i) Patent, etc. (generally IPR is

atented.- Transfer of all or any rights (including

- Imparting of information concerning the, .

- Use of the properties. 22


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-

, ,

scientific knowledge, experience or skill:

- Imparting o in ormation concerning t e

above. iii) Industrial, equipment (excluding

S.44BB payments oil exploration related):

- Use or right to use the above.

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- iv) Copyright, literary, artistic or scientific

work including films, . (generally there isa copyright):

- Transfer of all or any rights (including

rant of a licence .However sale, distribution or exhibition of

.

v) Rendering of any servicesin connection.

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-

What is not royalty?

Ca ital Gain.Outright purchase of design, etc.

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-

Finance Act 2012 Explanations 4,5 and 6

inserted with effect from 1.6.1976. Right to use software irrespective of the

medium.

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-

It is not relevant whether right, property orin ormation:

- is in possession or control of payer.- is used directly by the payer.

- .

Process shall mean transmission by satellite .

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- Consideration includin lum sum

consideration for:- ,consultancy services.

-personnel.

owever oes no nc u e cons era on:- for any construction, etc.

- which amount to salaries.28


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Indian concern.

It s ou not e connecte to t e PE u s.

44DA. here should be an agreement with Indian

concern which should be:

- approved by Central Government, or

-

Policy. 29


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- 30% - if agreement is entered into upto1.5.1 7.

- 20% - if agreement is entered intobetween 1.6.97 to 31.5.2005.

- 10% - if a reement is entered into on or

after 1.6.2005.

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software to an Indian resident condition of

not applicable.

be imported under import policy.

S.80HHE. It includes customised data orroduct or service as notified.

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.

Deduction is available under Chapter VI-A

(unlike interest provisions). There is however no exemption from filing a

return even if full tax is deducted at source

(unlike interest provisions).

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-

agreement is entered into on or after. .

Royalty & FTS is effectively connected withe ;

then the net profits are taxable @ normal

rates.

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-

allowed as deduction.

Expenses pai y PE to H are not

deductible (unless it is reimbursement ofactua expenses .

Audit & Accounts are mandatory as per

S.44AA and 44AB.

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-

PE includes a fixed place of business through

which business is wholly or partly carried on. Fixed place of business not defined.

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Interest Royalty & Fees for Technical Services JB Nagar CPE Study Circle-ICAI 2 July 2012

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