Royalty and Fee for Technical Services

What is Royalty and Fee for Technical Services

• As Per Income Tax Act 1961.
Royalty means consideration paid for

  • • Transfer rights in respect of/ imparting of any information conserning use of / use of any patent, invention, model, design or trade mark or secret formula or similar property.
  • • Imparting of information concerning technical, industrial, commercial, or scientific knowledge or skill.
  • • Use or right to use any industrial, commercial or scientific equipment.

Fee for Technical Services (FTS)means any consideration for rendering of managerial, technical or consultancy services.

• As per INDO-US Treaty (Double Taxation Avoidance Agreement)
Royalty means consideration for

  • • use of or right to use any copyright of literary, artistic orscientific work including cinematograph or work on ten, tape orother means of reproduction for use in connection it radio ortelevision broadcasting, any patent, trade mark, design ormodel, plan secret formula or process
  • • Use, or right to use, any industrial, commercial or scientific equipment

Fee for Technical Services (FTS)means any consideration for

  • • Technical or consultancy services, including services like making available technical knowledge, experience, skill , know-how

Ruling by ITAT

Income Tax Appellate Tribunal has passed an order on 28-11-2019 ruling that the Income from cloud services (for a Non-resident) is not taxable, neither as royalty nor as Fee for included services under Indo-US DTAA.

Facts and circumstances of Case

  • • Rackspace Inc(Assessee) is an entity incorporated in US, provided cloud hosting services to customers in India.
  • • Assessee has Filed Tax return without payment of tax along with notes stating that income from cloud hosting services is not taxable.
  • • Commissioner of Income Tax (CIT) has selected the case for income escape assessment, stating the said income should be treated as income in form of royalty under Income Tax act.

Appeal by Assessee

  • • Assessee appealed the income should not treated as royalty as per India-US Treaty.
  • • Customers only avail hosting services and do not use, possess or control the equipment for providing the services
  • • Customers were neither provided the Technical or consultancy services, nor including services like making available technical knowledge, experience, skill, know-how.
  • • Hence the income should not be treated as Royalty or Fee for included services.

Final Judgement by ITAT

  • • The agreement between assessee and customer is for providing service and customer doesn’t have any control over the equipment, there is no impart of skills or technical know-how and hence income is out of scope of INDO-US Treaty.
  • • As per Section 90 of Income Tax an assessee can opt for DTAA or the ITA whichever is more feasible for him, hence in this case DTAA will overrule the ITA.
  • • And Assessee has no Permanent establishment in India hence cannot be considered as Business Income and should not be taxed.
  • • ITAT based on the above reasons passed an order on 28th November 2019, stating that income from Cloud services should be not be taxed as royalty or Fee for included services.

Disclaimer:“The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation.”

Prepared By

Partheep Thupakula

Date: 20/04/2020