INTERNATIONAL TAXATION ASPECT OF ROYALTY AND FEES FOR TECHNICAL

SERVICES.

ROYALTY IN TERMS OF TAXATION

Royalties arise from selling of the intellectual property rights. Though Royalties and Fees for
Technical Services (FTS) are often seen together in tax books as proverbial twins, there are some
vital differences between the two. The Royalty is associated with Intellectual Property Rights,
whereas Fees for technical services are mostly associated with rendering of managerial, technical
or consultancy services. The differences are more apparent if we consider what constitutes
Royalties or FTS as per Tax Laws. The tax law in India (the Income Tax Act, 1961) contains
extensive provisions in respect of taxation of both - Royalty and Fees for Technical Services.
These are provided in Section 9 of the Income Tax Act.1
Royalty under the Indian Income Tax act, 1961 is defined under Section 9 of the Act. 2 This
section provides that consideration flowing in from the following items fall under the category of
royalty:

a) 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;

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

1 Kushal Kumar, student of National University of study and Research in Law, Ranchi submits an assignment of
Direct Tax on the topic of International Aspects of Royalty and Fees for Technical Services. The assignment is a
compilation of various documents available across the web, in order to present the best knowledge of the subject.
http://www.incometaxindia.gov.in/booklets%20%20pamphlets/royalty-and-fees-for-technical-services.pdf

2 "royalty" means 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 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, a patent, invention, model,
design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar
property ;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge,
experience or skill ;

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c) The use of any patent, invention, model, design, secret formula or process or trade mark or
similar property;

d) The imparting of any information concerning technical, industrial, commercial or scientific

knowledge, experience or skill;

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

f) The transfer of all or any rights (including the granting of a license) 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

g) The rendering of any services in connection with the activities referred to in sub-clauses (i) to
(iv), (iva) and (v).

Such payments can be in the form of a regular payment (such as monthly or quarterly) or can be
one time lump-sum payment or a combination of the two but such payment even if any lump
sum consideration should not be such that it qualifies to be the income chargeable under the head
Capital gains. This would mean that it should not be a sale or transfer through which the
person transferring it revokes its right to use it again. The I-T Act also excludes the following
from the purview of being considered as payment for royalty:

Consideration for sale, distribution or exhibition of cinematographic film; and

Consideration from the transfer of an IPR, which can qualify to be an income under the head
income from capital gains.

The definition of royalty is very vast and includes inter alia any consideration, including any
lump sum consideration received for allowing another person the use of any patent, model,
design, industrial equipment etc. or; consideration received for transfer of all or any rights in the
model, design, patent, copyright, literary work etc. It however, does not include any
consideration which is chargeable as income under the head capital gains in the hands of the
recipient. The Finance Act 2012, made a series of retrospective amendments to the definition of
royalty and thereby substantially expanded the scope of the term royalty.

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FEES FOR TECHNICAL SERVICES IN TERMS OF TAXATION

Fees for Technical Services (FTS) have been defined in Section 9 3 itself under clause (vii) as any
consideration (including lump sum) for rendering of any managerial, technical or professional
services including the services of technical or other personnel. However, considerations for
assembly, mining or similar project undertaken by the recipient have been taken out of the ambit
of the definition of FTS. Similarly if any sum is received by a non-resident technician is
chargeable to tax as salaries, the receipt cannot be taxable as FTS. Following are not in the nature
of FTS:

Consideration for any construction, assembly, and mining or like project.

Salary received by a person in connection with providing technical service.

As regards the Double Tax Avoidance Agreements (DTAA), each DTAA will have its own
definition of royalty and FTS. The provisions in respect of Royalties and Fees for Technical
Services (FTS) are generally contained in Article 12 of the DTAAs. In some tax treaties the
concept of FTS is not present at all and in some treaties, FTS is referred to as FIS (Fees for
included Services). The definition of royalty under the DTAAs is a truncated one as compared to
the provisions of the Act. In some DTAAs the scope of FTS is restricted through the make
available concept.4

TAXABILITY UNDER THE DOUBLE TAX AVOIDANCE AGREEMENT

The applicable article of the DTAA would generally prescribe a rate for taxability of royalty /
FTS / FIS covered within its fold. Similar to the treatment provided in section 115A of the Act,
royalty or FTS /FIS not attributable to a PE in India of the non-resident recipient would be
3 "Fees for technical services" means any consideration (including any lump sum consideration) for the
rendering of any managerial, technical or consultancy services (including the provision of services of
technical or other personnel) but does not include consideration for any construction, assembly, mining or
like project undertaken by the recipient or consideration which would be income of the recipient
chargeable under the head "Salaries".

4 http://resource.cdn.icai.org/43809citax33497.pdf

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taxable on gross basis (as per relevant provisions of the DTAA). Most DTAAs India has entered
into provide for a tax rate in the range of 10-15%. 5 In such a scenario, the assesse has an option
to apply the tax rate prescribed in the applicable DTAA or section 115A of the Act, whichever is
more beneficial to it. Further, in a situation where the royalty/FTS is attributable to a PE in India
of the non-resident, the income liable to tax would be computed on net basis as per relevant
Articles of the DTAA (i.e., Article 5 {dealing with PE} read with Article 7 {dealing with
Business Profits} in most cases). The tax rate applicable in such a scenario would be 40% (plus
applicable surcharge and education cess). For determining the characterization of a payment into
Royalty / FTS, as well taxability of the same, provisions of the Act, or the respective DTAA,
whichever is more beneficial shall apply. Further, it should be noted that the main complication
arises not in the determination of the situs of taxation, but on the interpretation of the definition.
The tax authorities would always endeavor to classify the payment as towards royalty or FTS
whereas the taxpayer would try to negate that by contending that it is business income and not
taxable in the absence of a PE. The debate is typically more conflagrated in case of determination
of Royalty.

5 Surcharge and education cess would not be leviable on such a rate

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