Concessional Taxation Regime for royalty income in respect of patent developed and registered in India [Section 115BBF]

Related amendment in section: 115JB

Effective from: A.Y.2017-18

(i) The Finance Act, 2016 has introduced a concessional taxation regime for royalty income from patents for the purpose of promoting indigenous research and development and making India a global hub for research and development.

(ii) The purpose of the concessional taxation regime is for encouraging entities to retain and commercialise existing patents and for developing new innovative patented products.

(iii) Further, this beneficial taxation regime will incentivise entities to locate the high-value jobs associated with the development, manufacture and exploitation of patents in India.

(iv) The nexus approach has been recommended by the OECD under Action Plan 5 in Base Erosion and Profit Shifting (BEPS) project. This approach requires attribution and taxation of income arising from exploitation of Intellectual property (IP) in the
jurisdiction where substantial research and development (R & D) activities are undertaken instead of the jurisdiction of legal ownership.

(v) Accordingly, new section 115BBF has been inserted to provide that where the total income of the eligible assessee includes any income by way of royalty in respect of a patent developed and registered in India, then such royalty shall be taxable at the rate of
10% (plus applicable surcharge and cess). For this purpose, developed means atleast 75% of the expenditure should be incurred in India by the eligible assessee for any invention in respect of which patent is granted under the Patents Act, 1970.

(vi) No deduction for any expenditure or allowance in respect of such royalty income shall be allowed under the Act.

(vii) The eligible assessee has to exercise the option for taxation of income by way of royalty in respect of a patent developed and registered in India in accordance with the provisions of section 115BBF in the prescribed manner, on or before the due date specified under section 139(1) for furnishing the return of income for the relevant previous year.

(viii) Where an eligible assessee opts for taxation of income by way of royalty in respect of a patent developed and registered in India for any previous year in accordance with section 115BBF, and the assessee offers the income for taxation for any of the
five assessment years relevant to the previous year succeeding the previous year not in accordance with section 115BBF(1), then the assessee shall not be eligible to claim the benefit of section 115BBF for five assessment years subsequent to the assessment year relevant to the previous year in which such income has not been offered to tax in accordance with section 115BBF(1).

(ix) Further, the amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF would not be subject to MAT under section 115JB. The same would be reduced while arriving at the book profit. Consequently, the related expenditure would be added back for arriving at the book profit.

(x) Meaning of eligible assessee:

Eligible assessee means:

• A person resident in India,

• who is the true and first inventor of the invention and

• whose name is entered on the patent register as the patentee in accordance with Patents Act, 1970.

Eligible assessee includes:

• every such person, being the true and the first inventor of the invention, where more than one person is registered as patentee under Patents Act, 1970 in respect of that patent.

(xi) Meaning of royalty:

“Royalty”, in respect of a patent, means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains” or consideration for sale of product manufactured with the use of patented process or the patented article for commercial use) for the—

(1) transfer of all or any rights (including the granting of a licence) in respect of a patent; or

(2) imparting of any information concerning the working of, or the use of, a patent; or

(3) use of any patent; or

(4) rendering of any services in connection with the activities referred to in (1) to (3) above.

(xii) Meaning of lumpsum:

“Lump sum” includes an advance payment on account of such royalties which is not returnable.