Taxability of Royalty paid to non resident on receipt basis

FACTS:

A LLC (USA) no PE in India enters into an agreement with B LTD (India) the effect of which, royalty income will be generated in the hands of A INC in consideration of services provided to B LTD.

A INC follows cash basis whereas B Ltd follows accrual basis of accounting. During FY 2014-15 A raised invoices for USD 10 million out of which USD 7.86 million were paid by B Ltd during the same FY however as per mercantile system of accounting and out of abundant caution TDS is deducted by B Ltd on entire USD 10 million.

QUERY:

1.      The fact that since A LLC follows cash basis of accounting can it offer for taxation in India only USD 7.86 million ?

 

2.      How much of tax credit can be claimed?

OPINION

Issue 1

As per Sec 90(2) “Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assesse”.

The beneficial provisions are not only to be understood from the point view of lesser rate of tax but also to determine the taxability of income as well.

In INDIA-USA DTAA, Article 12 deals with taxability of royalty & fees for technical services

1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed :

(a)    in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-paragraph (b) of this paragraph] :

(i)    during the first five taxable years for which this Convention has effect,

(a)    15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company ; and 

(b)    20 per cent of the gross amount of the royalties or fees for included services in all other cases ; and

 

(ii)    during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services ; and

(b)    in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services.

3. The term "royalties" as used in this Article means :

(a)    payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and

(b)    payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8.

In Article 12(1) phrase used was “paid to a resident of other contracting state” further definition of royalties also means “payment of any kind received”. Since the phrases used in the DTAA is ‘paid’ or ‘received’, therefore one can say that as per INDIA-USA DTAA royalty income is taxable on receipt basis and hence non-resident recipient with no PE in India can offer royalty for taxation in INDIA on receipt basis.

 

Issue 2

As per rule 37BA of Income tax rules, “Credit for tax deducted at source and paid to the Central Government, shall be given for the assessment year for which such income is assessable”. Hence TDS credit corresponding to the income offer for taxation can be claimed, however balance tds credit can be carried forward to future years.

 

 

  

Disclaimer: The view expressed above is those of the contributors and posted here for knowledge sharing purpose without any commercial aspect. Professional opinion must be sought before entering into any similar transactions. The contributor shall not be held liable for loss of any kind arising from the exercise of information contained in it.