Section 115A of Income Tax Act

Section 115A of Income Tax Act deals with taxation of Income from royalty or fees for technical services (other than those covered u/s 44DA) received by non-resident/foreign company from the following shall be chargeable to tax @ 10% : –

• Government under an agreement ;
• Indian concern, in pursuance of agreement  , which is either approved by Government , or If the matter in relation to which such income is received, relates to   a matter of industrial policy and is as per industrial policy, no separate approval of the Government is required.

Notes

1. Where is the non-resident assessee earning income under Section 115A of Income Tax Act, also has other income, such income  will be chargeable to tax at normal rates applicable to the assessee.
2. The rate of tax discuss above under Section 115A is subject to any beneficial rate / no taxability provisions, prescribed under DTAA ;
3. No deduction for expenditure or allowance shall be allowed to the assessee under Sections 28 to 44C and Section 57 in computing the above income. Any current /brought forward unabsorbed depreciation of any business, cannot be set off against the income referred to in section 115A, since the set off and carry forward of depreciation is governed by section 32 .
4. Deduction under Chapter VI-A is not available on the income chargeable to tax under Section 115A of Income Tax Act
5. Rate of tax under Section 115A of Income Tax Act is not applicable on royalty or Fee for technical services paid to non-resident, which is connected with its Permanent Establishment in India. Such payment would be treated as business profits and taxable at 40% under the provisions of Section 44DA.
6. Definitions of Royalty and Fee for technical services , for the purpose of Section 115A of Income Tax Act are given under Section 9(1)(vi) and Section 9(1)(vii), respectively.
7. Amendment 2023- The income tax rate on income by way of royalty or fee for technical services included in total income, which is currently taxed at 10%, shall be increased and be taxed at 20% with effect from 01.04.2024.

Section 115A of Income Tax Act, 1961 – Example 1 : –

ICO makes payment of Rs. 5 lakhs for consultancy services taken from UK firm. Payment is made in accordance with industrial policy of the Government. Compute the tax liability (Excluding applicable surcharge and education cess) on such payment as per Section 115A ?

Solution –

Consulting income of UK firm would be taxable at 10% under Section 115A. Thus, tax liability would be Rs 50,000.

Section 115A of Income Tax Act, 1961 – Example 2 : –

In Example 1, assume that such payment is exempt from tax under India-UK DTAA, what would be the rate of tax ?

Solution –

Non-residents can compute their tax liability as per –

1. The tax rates prescribed under the Income-tax Act ; or
2. at the rates prescribed under the DTAAs,

whichever are more beneficial.

In this case, such payment is exempt from tax under India-UK DTAA. Thus, UK firm will avail benefit of DTAA and claim exemption on such income. Hence, the rate of tax on such income could be Nil.

Section 115A of Income Tax Act, 1961 – Example 3 : –

UK firm has Permanent Establishment (PE) in India. Such PE is engaged in the business of manufacturing of software, and has ownership rights to such software. ICO makes payment of royalty of Rs. 5 lakhs to UK firm for usage of such software. Payment is made in accordance with industrial policy of the Government. Compute the tax liability on such payment as per Section 115A ?

Solution –

Rate of tax under Section 115A is not applicable on royalty paid to non-resident, which is effectively connected with its Permanent Establishment in India. Such payment would be treated as business profits and be taxable at the rate of 40% under Section 44DA.

Related Content

• Special Provisions Prescribed Under Chapter XII A of Income tax act
• Section 115AB of Income tax act
• Section 115AC of Income tax act
• Section 115AD of Income tax act – Tax on Income of Foreign Institutional Investors
• Tax on Non Resident Sportsmen or Sports association

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This article was supported and created through efforts of Ms. Rashi Khandelwal, as a part of her legal internship at Sorting Tax.