Section 59 of the Income-tax Act, 2025 — Royalty and Fees for Technical Services of Non-Residents with a PE in India

In plain language

What Section 59 is about

Section 59 of the Income-tax Act, 2025 (effective 1 April 2026, i.e. tax year 2026-27) lays down how income by way of royalty or fees for technical services (FTS) earned by a non-resident is taxed when that non-resident actually operates in India through a permanent establishment (PE) or a fixed place of profession. In such cases, the income is not taxed on a flat gross basis; instead it is computed on a net basis under the head "Profits and gains of business or profession" — like an ordinary business. This section is the successor to Section 44DA of the old Income-tax Act, 1961 and carries the same core logic into the new Act.

Who it applies to

• Specified assessee only. Section 59(5) defines a "specified assessee" as a non-resident (not being a company) or a foreign company. Resident taxpayers and Indian companies are outside its scope.
• The non-resident must be carrying on business in India through a PE, or performing professional services from a fixed place of profession located in India.
• The royalty/FTS must be effectively connected with that PE or fixed place — a genuine business link, not merely a paper connection.

The four conditions in Section 59(1)

All four must be satisfied for the income to be taxed under this section:

• (a) Source: the income is received from the Government or an Indian concern.
• (b) Agreement: it arises under an agreement made by the non-resident with the Government or the Indian concern.
• (c) Presence: the non-resident has a PE or fixed place of profession in India.
• (d) Effective connection: the right, property or contract for which the royalty/FTS is paid is effectively connected with that PE/fixed place.

Restrictions on deductions — Section 59(2)

Because the income is taxed net, the section polices what can be deducted so profits are not artificially deflated:

• No deduction for any expenditure or allowance that is not wholly and exclusively incurred for the business of the PE / fixed place in India.
• No deduction for amounts (other than a genuine reimbursement of actual expenses) paid by the PE to the head office or to any other office of the non-resident — for example, notional head-office royalty, management fees or interest.

No presumptive scheme — Section 59(3)

The presumptive taxation route for certain non-resident businesses does not apply to income covered by Section 59. So a non-resident with a PE cannot switch to a fixed-percentage deemed-profit basis for this royalty/FTS income; it must be computed on actual net profit.

Books and audit — Section 59(4)

• The specified assessee must maintain books of account and other documents.
• The accounts must be audited by an accountant, and the audit report furnished in the prescribed form by the due date. In practice, the audit report is filed in the form notified under the 2025 Act / Income-tax Rules, 2026 (commonly referred to as Form 24 for this purpose).

How it interacts with related sections

• Definitions of "royalty" and "fees for technical services" flow from the definitions in the Act (mirroring Explanation 2 to section 9(1)(vi)/(vii) of the 1961 Act) — the character of the payment decides whether Section 59 even applies.
• Where the non-resident does not have a PE, royalty/FTS is generally taxed on a gross basis at the special rate under the non-resident taxation provisions (the successor to section 115A), not under Section 59.
• DTAA relief: a tax treaty can override and give a lower or gross rate — the taxpayer can choose whichever is more beneficial.

Practical implications

• Having a PE turns a simple withholding situation into a full return-filing, audited, net-profit compliance exercise.
• Head-office charge-backs are the main audit battleground — keep clean documentation proving they are actual reimbursements.
• Net taxation can be better or worse than gross — if real Indian expenses are high, net basis lowers tax; if margins are fat, the gross special rate might have been lower, but Section 59 leaves no choice once a PE exists.