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📘 Cross-Border Taxation Simplified: Royalty, FTS & Head Office Expenses Explained – Income Tax Act 2025

Royalty & Fees for Technical Services

🎯 Core Idea

When a non-resident or foreign company earns:
👉 Royalty or
👉 Fees for Technical Services (FTS)

and has a Permanent Establishment (PE) or fixed place in India,
then such income is taxed as:

👉 “Profits & Gains of Business or Profession (PGBP)” 

 

⚖️ Conditions to Apply Section 59

All of the following must be satisfied:

• Income received from Government or Indian entity
• Agreement exists with such payer
• Non-resident has PE / fixed place in India
• Income is effectively connected with that PE

 

🚫 Important Restrictions

• Only business-related expenses of Indian Establishment is allowed

• No excessive payments to Head Office allowed (except reimbursement)

• Mandatory:
👉 Books of accounts
👉 Audit report filing

 

📌 Example

A UK-based company provides technical consultancy to an Indian company.

• Receives FTS = ₹5 Crore
• Has a branch office (PE) in India
• Expenses related to Indian operations = ₹2 Crore

👉 Taxable Income under PGBP = ₹3 Crore

✔ Normal business taxation applies
❌ Cannot treat it as simple FTS taxed at flat rate

 

💡 Key Insight

👉 If no PE in India → taxed separately (typically lower withholding basis)
👉 If PE exists → taxed like regular business income

 

📘 Head Office Expenses

🎯 Core Idea

Non-residents can claim head office expenses incurred outside India,
but subject to strict limits.

🧠 What is Head Office Expense?

Includes expenses incurred outside India, such as:

• Salary of foreign management
• Office rent abroad
• Travel expenses of overseas staff
• General admin expenses

📊 Deduction Rule

👉 Deduction allowed = Lower of:

• Actual head office expenses, OR

• 5% of Adjusted Total Income (ATI)

 

📌 Example 1 – Normal Case

Adjusted Total Income = ₹10 Crore

Head Office Expenses = ₹80 Lakhs

👉 5% of ₹10 Cr = ₹50 Lakhs

✔ Allowed Deduction = ₹50 Lakhs
❌ Excess ₹30 Lakhs disallowed

 

📌 Example 2 – Loss Case

Adjusted Total Income = Loss
Average ATI (last 3 years) = ₹6 Crore

👉 5% of ₹6 Cr = ₹30 Lakhs

✔ Max deduction allowed = ₹30 Lakhs

 

⚠️ Key Restriction

Even if actual expenses are high:

👉 Deduction is capped at 5%
👉 Prevents profit shifting outside India

 

✅ Final Insight

These sections ensure:

👉 Fair taxation of non-residents operating in India
👉 No excessive profit shifting via head office charges
👉 Alignment with global tax principles (PE-based taxation)

 

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