Deduction in respect of Royalty income

What is the Deduction in respect of royalty income under the Income Tax Act, 1961

BRIEF INTRODUCTION

An author earns income by publishing their book. The publisher publishes the author’s book and also the author gets the profit against the overall number of books sold.

The said amount of profit earned by them is termed royalty income. An author is a person, who uses his skill, knowledge to write something for his readers. Nowadays the author writes books, articles and publishes their write au fait on many platforms.

An author basically enters into a contract with the publisher, in order to sell his books, however, a writer enters into a contract with the director, in order to cast and direct his story in a film or any visual presentation.

Once it is done, the writer gets their money from the publisher, and the same be termed as royalty income for the author.

Thus, where an author receives such form of royalty income, they can claim deductions under Section 80QQB of Income Tax Act 1961.

In order to avail, the benefit of deduction available under Section 80QQB of the Income Tax Act, the Gross Total Income of the author shall be computed as follows –

1. If an author derived his income from his profession;
2. If an author obtained an income from writing a book of his interest in respect of the copyright of his books being a piece of literary, scientific or artistic;
3. An author receives an advance payment of royalty but royalty shouldn’t be non- refundable. Read our articles:

DEDUCTION UNDER SECTION 80QQB

Where an assessee wishes to claim deductions under section 80QQB, the same shall be available up to Rs. 3,00,000 only. Or Gross total income earned by him. Or whichever is less.

CONDITION FOR CLAIMING DEDUCTION

In order to claim deduction under Section 80QQB, an assessee is required to fulfill the following conditions –

1. For claiming the tax benefit an assessee should be resident of India. Deduction under Section 80QQB isn’t available to the non-resident.
2. Claiming the deduction under Section 80QQB of income tax Act 1961, an assessee should be an author. Here the author also includes the joint author which suggests that a joint author can also take a deduction under Section 80QQB.
3. Content of the author’s book should be artistic, literary or scientific in nature.
4. The subject of the author’s books shouldn’t include brochures, commentaries, diaries, journals, magazines, textbooks, pamphlets, or other publications of comparable nature.
5. An assessee can claim the tax deductions only at the time of filing income tax returns.
6. The quantity should be received in payment consideration. If the number isn’t received in payment consideration, income as in more than 15% of the worth of books sold during the year should be ignored.

PROCEDURE FOR CLAIMING DEDUCTION

• If an individual is a resident of India and needs to take the deduction under Section 80QQB then he needs to fill the certificate Form 10CCD
• in case of individual has earned the income from foreign, in this case, he can claim the tax deduction, if the amount brought to in India within the period of six months from the end of the relevant previous year or any other time being allotted by a competent authority. Thus, in order to avail the deduction a person would be required to fill out Form 10H.

EXAMPLE

Suppose Mrs. Bharti has written a book named “My Country” and she is a Resident of India. In a financial year, she earns Rs. 1,00,000 as a royalty income from publishers. She is also having a business from which she earns Rs. 5,00,000. Now if she wants to take the deduction under section 80QQB,

She would be required to deduct the income of royalty from the gross total income. So Mrs. Bharti will be required to pay tax on Rs. 5,00,000 because she can take the deduction on Rs. 1,00,000 under 80QQB of income tax Act, 1961.

DEDUCTION UNDER SECTION 80RRB

• The patent is basically a right, is granted to an inventor by the govt, in order to allow the inventor to restrict others from making, selling, or using the same invention for a said period of time.
• A Patent is additionally termed because the property right ensures the innovator that innovator invention is secured. If a private gets the patent, then it excludes others from making, selling, or using the invention for a specific period of your time.
• The payment which the innovator gets from inventing something is going to be termed as royalty income for the innovator. Some of the items in respect of patent is issued are chemical formulas, computer software, and hardware, drugs, medical equipment, musical instruments, etc.
• For example, let’s take an example, Rohan invented a drug which cures the diseases of cancer and he applies for the patent and he gets the patent then he contains a right over these medicines.

DEDUCTION UNDER SECTION 80RRB OF INCOME TAX ACT, 1961

• An individual having income in the form of royalty paid on the work pertaining to art, patents, inventions, is eligible to claim deductions under Section 80RRB of the Income Tax Act, 1961.

ELIGIBILITY -DEDUCTION UNDER SECTION 80RRB 

Where an individual wished to claim deduction under Section 80RRB of Income Tax Act 1961, the same would be required to satisfy the subsequent criteria:

1. The person must be a Resident of India;
2. Person must be the owner of a patent, in order to claim deduction under Section 80RRB. Where the person doesn’t have an original patent, the same shall not be eligible for claiming tax deduction;
3. An income earned by the royalties in respect of patents must have been registered under the Patent Act, 1970 on or after the 1st April 2003.

AMOUNT OF DEDUCTION AVAILABLE –UNDER SECTION 80RRB

The amount of deduction shall be available, based on the following criteria –

1. An individual can claim a deduction of up to Rs 3 lakh. If their income is above Rs. 3 lakhs then the deduction under royalty can’t exceed the limit. However, where the royalty income is less than Rs. 3 lakhs, the said individual would be eligible to claim full deduction on its income under Section 80RRB.
2. Individual can’t club the income of other sources with royalty income. It implies that they’ll claim a deduction just for the amount he’s receiving from royalty.
3. An Individuals who don’t hold the original patent don’t seem to be eligible for tax deduction under section 80RRB of income tax Act 1961.
4. If an individual earns royalty income from outside India, then the deduction under section 80RRB can only be claimed within six months from the end of last year. However, the said deduction would be available, only upon the submission of documentary evidence to the Income-tax department. If you don’t produce the document then you’re not eligible to get the deduction.
5. Only those assesses can claim the advantage of deduction who fulfill the criteria of the Indian resident. A non-resident individual is ineligible to claim deduction under Section 80RRB of Income Tax Act 1961.
6. In respect of granting the patent, it’s an agreement between the 2 parties but in some circumstances, the govt grants the license to use patent for the general public at large. In such a situation, the govt. will settle the number of royalties with the controller who grants the legal right.

ROYALTY RECEIVED BY NON-RESIDENTS (SECTION 44DA)

Section 44DA of income tax Act, 1961 deals with the Special provision of Income by way of royalties within the case of a non-resident.

According to Section 6 of the income tax Act 1961, an assessee is qualified as a non-resident if they satisfy anyone of the subsequent conditions:

1. In a financial year, individuals stay in India for less than 181 days; and
2. Financial Year, individuals stay in India for not more than 60 days;
3. If an individual stays in India which exceeds 60 days in a year but doesn’t exceed 365 days or more during the 4 previous financial years.

SECTION 44DA OF INCOME TAX ACT 1961

• Section 44DA of the income tax Act, 1961 talks about the availability for computing income by way of royalties within the case of the non-resident. If a non-resident receives an amount in pursuance of an agreement made before the 1st April 2003 it’ll be governed by Section 44DA of the income tax Act 1961.
• If a far-off company or a non-resident is earning the fee for technical service or royalty income from India through a permanent establishment in India then such fee for technical service or royalty shall be computed under the top “profits and gains of business or profession”.
• The income tax charges tax on all the five heads and it also provides a deduction on the identical that may be claimed by the assessee to save lots of the tax. There are many provisions under the tax Act which talks about the deduction of tax when an individual is earning the income from royalty.
• An author has been vested with the right to claim deduction under section 80QQB. The patentee can take the advantage of tax deduction under section 80RRB of tax Act, 1961. However, If an individual is sharing the information and taking the royalty then that may not come under the royalty income.

The payment made in respect of transfer of all or any rights, including granting of license in respect of intellectual property like patent, design, trademark copyright, will be taxable as royalty under Section 9(1)(vi) of the Income Tax Act, 1961. Royalty is taxable as income deemed to arise in India and an individual making payment to a non-resident is obliged to deduct tax on the payment.

However, explanation 4 was inserted in 2012, in order to provide a retrospective effect, that the transfer of right in respect of any right, property or information, includes the transfer of all or any right to be used or right to use computer software (including granting of a license) no matter the medium through which such right is transferred. The definition of royalty within the Double Taxation Avoidance Agreements (DTAA) isn’t quite as wide.

The tax department’s view regarding taxation of payments to be used of software/purchase of software is that payment for grant of license- whether exclusive or non-exclusive, distribution and sale of CD carrying the software, sale of equipment with software would be taxable as royalty since a part of such payment, if not in entirety, is for copyright within the software.

However, assesses in various categories – end-users, resellers, distributors took a stand that the payment isn’t for any copyright since no right is conveyed to the payer/buyer of software and it’s not taxable as royalty.

the distinction between the utilization of/right to use copyright and a copyrighted article or object containing copyrighted software was emphasized to contend that no tax is deductible on such payments.

Moreover, since the non-residents would value more highly to be governed by the DTAA which doesn’t classify such payment as royalty, in any event, the benefit under Section 90 (2) can be availed and also the sum wouldn’t be chargeable to tax in India.

key points of Taxation of Royalty Income

The key points within the above-mentioned judgment which approves the choice of varied High Courts and AAR in favor of the taxpayer are:

• The transfer of rights should be understood with reference to the Copyright Act, 1957, and grant of license without proprietary interest isn’t covered.
• There must be a parting with the right enabling the recipient to exercise the right enumerated within the Copyright Act like the right to breed the work, issue copies, etc.
• Transfer of the ownership of the physical substance, within which copyright subsists isn’t a grant of right.
• A non-exclusive, non-transferable license, merely enabling the utilization of a copyrighted product, is within the nature of restrictive conditions which are ancillary to such use, and thus, can’t be construed as a license, allowing complete right over the product.
• Where the core of a transaction is to authorize the end-user to possess access to and make use of the “licensed” computer software product over which the licensee has no exclusive rights, the same would mean that no copyright shall be parted with.
• Right to breed and also the right to use computer software is distinct and separate rights and within the case of non-exclusive EULAs no right is parted with.

The Supreme Court further held that changes to the domestic Act which couldn’t are contemplated at the time of getting in the DTAA cannot be imported into the understanding of the term ‘royalty’ under the DTAA. Further, it also held that where the sum isn’t chargeable to tax as royalty, there was no have to deduct tax. In the matter of Pilcom v. CIT [2020] 116 taxmann.com 394/271 Taxman 200/425 ITR 312 (SC),

it was held that the provisions will not apply since the deduction claimed, in the case of Pilcom wasn’t provided under Section 195 in respect of “sum chargeable to tax” and therefore the payer failed to have any option but to deduct tax whether the sum was ultimately taxable or not.

DEDUCTION UNDER SECTION 194J

The CBDT had issued Notification No.21/2012 dated 13-6-2012 in terms of which tax has already been paid on the primary transfer of software either under Section 194J or Section 195, the tax wasn’t required to be deducted in subsequent transfers where the transferor could be a resident.

Interestingly, under explanation 4, nothing was mentioned in respect of Section 194J, requiring a person making payment of any royalty to a resident to deduct tax.

The definition of royalty is as per Section 9(1)(vi), Explanation 2. Explanation 4 which was inserted in 2012 wasn’t included within the definition for purposes of Section 194J.

It’s going to now be possible to require an argument that even for resident payees, the definition of royalty isn’t satisfied just in case of payment for software with limited rights to use the identical both on account of absence of regard to Explanation 4, in Section 194J and also the elucidation by the Supreme Court that unless there’s a transfer of the correct, payment for the limited right to work the software won’t fall within the ambit of royalty.

DIRECT TAX & DTAA TAXATION ASPECT ROYALTY RECEIVED:

under Section 5(2) of the Income Tax Act, 1961 provides that a Non-Resident is taxable in India on incomes received or deemed to be received in India and on income which accrue or arise to him in India or is deemed to accrue or arise to him in India as provided in under Section 9(1) (vi) of the Income Tax Act or Article dealing with Royalty income in the treaties (i.e. Article 12).

If the IPR is located in India, then the consideration for its use or disposal accrues/arises in India & thus is taxable under section 5(2) regardless of requirement in under section 9(1)(vi).

Implications of taxation aspects for other Intellectual Property Rights (IPR)

The provisions of taxability remained mainly upon the transfer of right in respect of copyright or “use of or right to use” because of DTAA(s) and the amendment made to Explanation 4 to Section 9(1)(vi).

It was held by the Supreme Court, that in order to satisfy the term use of or right to use, the copyright, interest or right must have been created in such distributor/end-users.

It was also held that in event of a non-exclusive license, a non-transferable license doesn’t provide or give the right to someone to enjoy the rights as a right-holder, and hence no transfer of rights or right to use can be executed.

The IT Act covers payment for the transfer of rights yet as use just in case of other IPRs like patent, trademark, etc., under separate clauses. the excellence between copyright and other IPRs is that just in the case of copyright the making of one copy isn’t treated as infringement as per Section 52 (1) (aa) of Copyright Act, 1957.

Similar provisions haven’t been drafted for other IPRs. Therefore, non-exclusive and restrictive permission for the use of patent and payment for such patent, shall be covered under the ambit of royalty, and under this, where the person uses the same to provide the products using the patent, uses the trademark on goods or service, in the absence of such permission, the same would be termed as infringement.