Section 10(6A) of the Income Tax Act, 1961, provides a tax exemption to foreign companies on income earned in India in the form of royalty or fees for technical services (FTS), provided certain conditions are met. This exemption applies when the Indian government or an Indian concern pays tax on behalf of the foreign company under a tax agreement.
Key Provisions of Section 10(6A)
- Eligible Assessee:
- Only foreign companiescan claim this exemption.
- Nature of Income:
- Royalty(e.g., payments for using patents, copyrights, trademarks, etc.)
- Fees for Technical Services(e.g., consultancy, technical assistance, etc.)
- Exemption Amount:
- Entire tax paid by the Indian payer(Government or Indian concern) on behalf of the foreign company is exempt.
- Conditions:
- The income must be received from the Government of Indiaor an Indian concern under an agreement.
- The agreement must be approved by the Central Government(if it relates to industrial policy matters).
- The agreement must have been entered into between 31 March 1976 and 1 June 2002.
Example of Section 10(6A)
Scenario
A US-based tech company (XYZ Inc.) enters into an agreement with an Indian software firm (ABC Ltd.) on 15 May 2000 to provide patented software technology.
- Royalty Payment: ₹50 lakhs per year
- Tax Rate on Royalty (as per IT Act): 20% (₹10 lakhs)
Tax Treatment Under Section 10(6A)
- ABC Ltd. (Indian concern)pays the royalty of ₹50 lakhs to XYZ Inc.
- ABC Ltd. also pays the tax (₹10 lakhs) on behalf of XYZ Inc.under the agreement.
- XYZ Inc. (foreign company)claims exemption under Section 10(6A) for the ₹10 lakhs tax paid by ABC Ltd.
- Result:
- XYZ Inc.’s taxable income in India = ₹50 lakhs (royalty received)
- Tax liability (₹10 lakhs) already paid by ABC Ltd. is exempt for XYZ Inc.
- Net tax burden on XYZ Inc. = ₹0
Key Considerations
✅ Agreement Period Limitation: Only agreements signed between 31 March 1976 and 1 June 2002 qualify.
✅ Approval Requirement: If the agreement relates to industrial policy, Central Government approval is mandatory.
✅ No Double Taxation: The foreign company does not pay tax again on the amount already taxed in India.
Comparison with Section 115A (Current Tax Treatment for Royalty/FTS)
| ASPECT | SECTION 10(6A) (OLD RULE) | SECTION 115A (CURRENT RULE) |
| Applicability | Only for agreements between 1976-2002 | Applies to current payments |
| Tax Rate | Tax paid by Indian payer is exempt | 10% flat tax on royalty/FTS (unless DTAA applies) |
| Deductions | No deductions allowed | No deductions under Chapter VI-A (except specific cases) |
| TDS Requirement | Tax paid by Indian entity | TDS @ 10% (or DTAA rate) by payer |
