Section 59: computation of royalty and fees for technical services in the hands of non-residents

Introduction

Royalty or technical-service fees received by a specified non-resident move into the business-income computation when the Indian establishment or fixed-place connection test is met. Section 59 restricts deductions and requires records and audit.

Key takeaways

When this section applies

Section 59(1) applies where income in the nature of royalty or fees for technical services is received by a "specified assessee" during a tax year, and all of the following conditions are met:

• The income is received from the Government or an Indian concern.
• It is received under an agreement made by the specified assessee with the Government or the Indian concern.
• The specified assessee carries on business in India through a permanent establishment, or performs professional services from a fixed place of profession, situated in India.
• The right, property or contract in respect of which the royalty or fees for technical services are paid is effectively connected with that permanent establishment or fixed place of profession.

How the income is computed and what cannot be deducted

Where these conditions are satisfied, the income is computed under the head "Profits and gains of business or profession." However, Section 59(2) blocks two categories of deduction against this income:

• Any expenditure or allowance that is not wholly and exclusively incurred for the business of the permanent establishment or fixed place of profession in India.
• Amounts paid by the permanent establishment to its head office or to any of its other offices, other than towards reimbursement of actual expenses.

Books of account and audit requirement

Section 59(4) requires the specified assessee to keep and maintain books of account and other documents as required under Section 62, get the accounts audited on or before the specified date under Section 63 by an accountant, and furnish the audit report in the prescribed form, duly signed and verified by the accountant.

Section 59(3) clarifies that the presumptive computation for the shipping business of non-residents under Section 61(2) (Table Sl. No. 5) does not apply to income covered by this section.

Step-by-step flow for applying Section 59

1. 1

   Is the recipient a non-resident (not a company) or a foreign company?

   • No: Section 59 does not apply.
   • Yes: Go to the next step.
2. 2

   Is the income royalty or fees for technical services received from the Government or an Indian concern, under an agreement with it?

   • No: Section 59 does not apply.
   • Yes: Go to the next step.
3. 3

   Does the recipient carry on business through a permanent establishment, or professional services from a fixed place of profession, in India?

   • No: Section 59 does not apply.
   • Yes: Go to the next step.
4. 4

   Is the right, property or contract effectively connected with that PE or fixed place?

   • No: Section 59 does not apply.
   • Yes: Go to the next step.
5. 5

   Compute as business income with the Section 59(2) restrictions

   Disallow expenditure not wholly and exclusively for the Indian PE or fixed place. Disallow payments to the head office or other offices, other than reimbursement of actual expenses. Section 61(2) (Table Sl. No. 5) does not apply.

6. 6

   Comply with books and audit

   Maintain books under Section 62, and get an accountant's audit by the Section 63 specified date, with the report in the prescribed form (Section 59(4)).

Practical checklist

Glossary

Permanent establishment

An Indian business presence used in Section 59's effective-connection test.

Fees for technical services

A defined payment category subject to this special non-resident rule when its conditions are met.

Frequently asked questions