Chargeability of royalty and fee for technical services in hands of non-residents
[Section-59 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 59(1) of Income Tax Act 2025
59(1) Income in the nature of royalty or fees for technical services received by a specified assessee during a tax year, shall be charged to income-tax under the head “Profits and gains of business or profession” under this Act, if the following conditions are satisfied:––
- (a) income is received from the Government or an Indian concern;
- (b) income is in pursuance to an agreement made by the specified assessee with the Government or the Indian concern;
- (c) 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; and
- (d) the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed place of profession.
Section 59(2) of Income Tax Act 2025
59(2) No deduction shall be allowed against the income chargeable under sub-section (1) in respect of the following amounts:—
- (a) any expenditure or allowance which is not wholly and exclusively incurred for the business of such permanent establishment or fixed place of profession in India; or
- (b) amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to its head office or to any of its other offices.
Section 59(3) of Income Tax Act 2025
59(3) The provisions of section 61 in so far as it relates to business referred to in section 61(2) (Table: Sl. No. 5), shall not apply in respect of the income referred to in this section.
Section 59(4) of Income Tax Act 2025
59(4) The specified assessee shall keep and maintain books of account and other documents as per the provisions of section 62, get his accounts audited on or before the specified date referred to in section 63 by an accountant, and furnish report of audit in the prescribed form, duly signed and verified by the accountant.
Section 59(5) of Income Tax Act 2025
59(5) In this section, “specified assessee” means a non-resident (not being a company) or a foreign company.
FAQs on Section 59 of Income Tax Act 2025
1. Who is a “specified assessee” under Section 59 of the Income Tax Act, 2025?
A specified assessee refers to a non-resident (not being a company) or a foreign company.
2. From which date is Section 59 applicable?
Section 59 is applicable from 1st April, 2026.
3. What type of income is covered under Section 59(1)?
Section 59(1) covers income in the nature of royalty or fees for technical services received by a specified assessee.
4. Under which head of income is such royalty or technical fee taxed?
It is taxed under the head “Profits and gains of business or profession.”
5. What are the conditions that must be satisfied for Section 59(1) to apply?
The following four conditions must be satisfied:
(a) Income must be received from the Government or an Indian concern.
(b) It must arise from an agreement with the Government or the Indian concern.
(c) The assessee must carry on business in India through a permanent establishment (PE) or perform professional services from a fixed place of profession.
(d) The income must be effectively connected with such PE or fixed place.
6. What is meant by “effectively connected” in this context?
It means that the right, property, or contract giving rise to royalty or fees for technical services must be linked directly with the PE or fixed place of profession in India.
7. Can the specified assessee claim deductions against such income?
Only certain deductions are allowed. Expenditure must be wholly and exclusively incurred for the business of the Indian PE or fixed place.
8. Which deductions are not allowed under Section 59(2)?
(a) Any expenditure not wholly and exclusively incurred for the PE or fixed place.
(b) Any payments made (other than reimbursement of actual expenses) by the PE to the head office or other offices.
9. Is presumptive taxation under Section 61(2) applicable to this income?
No, as per Section 59(3), presumptive taxation under Section 61(2), Table: Sl. No. 5, does not apply to income covered under Section 59.
10. Are there any compliance requirements for specified assessees under Section 59?
Yes, under Section 59(4), the assessee must:
- Maintain books of account and documents as per Section 62.
- Get the accounts audited by an accountant on or before the specified date under Section 63.
- Furnish the audit report in the prescribed form, duly signed and verified.
11. What is the rationale for taxing such income under the head “business or profession”?
It ensures that income effectively connected with a business presence in India is taxed in line with business profits, aligning with international tax norms.
12. Does Section 59 apply if there is no permanent establishment in India?
No, one of the key conditions is the presence of a PE or fixed place of profession in India.
13. What if the royalty or FTS is not effectively connected with the PE?
In such a case, Section 59 would not apply. The income may instead be taxed under other relevant provisions of the Act.
14. Are branch offices treated as permanent establishments for the purpose of Section 59?
Yes, if the branch constitutes a PE or fixed place of profession, it would fall under the scope of Section 59.
15. Does the Act define “royalty” and “fees for technical services”?
While not defined in Section 59, these terms are generally interpreted as per the definitions provided elsewhere in the Act or relevant tax treaties.
16. Is tax deducted at source (TDS) applicable on such payments?
Yes, Indian payers are generally required to deduct tax at source on payments of royalty and FTS to non-residents, subject to applicable tax rates and DTAA provisions.
17. Can the assessee avail DTAA benefits while computing tax under Section 59?
Yes, if there is a Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of the assessee, its provisions may override domestic law to the extent more beneficial.
18. What is the consequence of not maintaining books of account or not getting the audit done?
Failure to comply with the requirements under Section 59(4) may attract penalties under Sections 77 and 78 of the Act.
19. Is advance tax applicable to income taxable under Section 59?
Yes, if the income is chargeable under “Profits and gains of business or profession,” advance tax provisions apply, unless exempted otherwise.
20. Can royalty or FTS be taxed under multiple provisions?
No, the income must be taxed under the most appropriate provision. If it is effectively connected with a PE, Section 59 applies; otherwise, taxation may occur under other heads or special provisions.
Section 59 of the Income Tax Act, 2025, introduces a specific framework for taxing royalty and fees for technical services received by non-residents, including foreign companies, with effect from 1st April 2026. When such income is effectively connected with a permanent establishment or fixed place of profession in India, it is chargeable under the head “Profits and gains of business or profession.”
This provision ensures that business-related income earned through a significant presence in India is taxed accordingly, with limited deductions allowed and mandatory compliance requirements such as maintaining books of account and audit. Importantly, the presumptive taxation regime does not apply to this income, maintaining its distinct treatment.
Overall, Section 59 aligns domestic tax laws with international standards and ensures clarity and consistency in taxing cross-border business activities involving royalties and technical services.
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