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| In other words, such income is taxed on the gross income basis, i.e. without allowing any expenses against the income. |
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| This provision is, however, in contradiction to the provisions contained in the tax treaties signed by India with a large number of countries. |
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| The tax treaties usually provide that where a foreign enterprise carries on business in India through a permanent establishment, or performs professional services from a fixed place of profession in India, the income received by the foreign enterprise by way of royalty or fees for technical services will be computed under the head "profits and gains of business or profession". |
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| The income shall be determined in accordance with the provisions of the Income Tax Act provided the royalty or technical services are effectively connected with the permanent establishment or the fixed place of profession in India. |
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| In such a situation the legitimate expenses incurred against the income shall be allowed as deduction from income. But the expenses, which can be allowed as deduction, should be incurred wholly and exclusively for earning the said income. Further, the reimbursement of actual expenses to the head office of the said permanent establishment is also permitted. |
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| It will be observed that whereas no expenses whatsoever are allowed under Section 115A, legitimate expenses may be allowed under the tax treaties. This can sometimes create a discrimination between a foreign company and an Indian taxpayer. Curiously, such kind of discrimination is not permitted under the tax treaties. |
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| In a recent case, reported in 224 ITR 203, the said issue of discrimination was raised before the Authority for Advance Rulings. It was argued that if an Indian company receives fees for technical services, it is entitled to claim the related expenses as deduction against the said income, and can be called upon to pay tax only on the net income. Such tax may be lower than 20 per cent of the gross amount. |
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| Therefore, it was contended that levy of a higher tax or the levy of a tax on gross payments instead of net payments would be discriminatory and would contravene the tax treaty. |
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| The Authority without giving a final verdict, nevertheless, observed that the issue of discrimination could be resolved only after completion of the assessment of the foreign enterprise by tax authorities in India. |
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| The government has taken note of the above discrimination. Therefore, to harmonise the aforesaid positions, Section 44DA has been inserted in the Income Tax Act with effect from the assessment year 2004-05 in respect of agreements made after March 31, 2003. |
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| Under the new section, where the royalty or fees for technical services received by a foreign company relates to a permanent establishment of such company in India, the income from royalty or fees from technical services shall be computed under the head "profits and gains of business or profession". |
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| The foreign company will also be entitled to claim expenses, which are wholly and exclusively incurred for earning the said income. But, the amounts paid by the permanent establishment to its head office or any of its other offices are not to be allowed unless the payment is towards reimbursement of actual expenses. |
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