Royalty FTS Computation for Non-Residents

Section 59 — ROYALTY / FTS IN HANDS OF NON-RESIDENTS

Section 59 is the substantive equivalent of 1961 s. 44DA. Royalty and Fees for Technical Services received by a 'specified assessee' (non-resident with a PE / fixed place of profession in India) — and effectively connected with that PE / fixed place — are taxed under PGBP head as net income (gross less allowable expenses), not as Other Sources u/s 9(1)(vi) / (vii) read with s. 115A. Books-and-audit obligation (s. 62 / 63) attaches as a pre-condition to net-basis treatment.

STATUTORY ARCHITECTURE

The provision applies where a non-resident assessee carries on business / profession through a PE in India, and the royalty / FTS is effectively connected to that PE. In such case, the income is computed under PGBP — gross receipts less expenses wholly and exclusively incurred for earning such income (subject to s. 60 HO-expenditure cap). For royalty / FTS NOT effectively connected with a PE, gross-basis 10% / 20% tax under s. 207 / 527 read with rate-schedule applies (substantive equivalent of 1961 s. 115A).

PLANNING NOTES

(i) For NR consultancy / IT-services firms with India PE (project office / branch), evaluate s. 59 PGBP route vs. s. 207 gross-basis route — typically PGBP is beneficial when expenses are substantial. (ii) Maintain books u/s 62 and tax-audit u/s 63 — failure to comply forces fallback to gross-basis taxation. (iii) Effectively-connected test — fact-intensive; document PE-attribution working paper. (iv) Treaty interaction — Article 7 (Business Profits) v. Article 12 (Royalty / FTS) tussle; s. 59 aligns with Article 7 PE-attribution model.

CROSS-REFERENCES

• Section 60 — HO expenditure deduction limit for NRs.
• Section 62 — Maintenance of books.
• Section 63 — Tax audit.
• Section 207 / 527 — Gross-basis tax rates for NR royalty / FTS.
• Article 7 / 12 of applicable DTAA.