Nature of Royalty Income

• Royalty income refers to payments received for the use of intellectual property or technical know-how.
  
• It may include software licenses, patents, trademarks, copyrights, or mining rights.
  
• Such income is accounted as revenue in the Profit and Loss Account.
  
• Royalty can be recurring or lump-sum based on contractual terms.
  
• It is taxable under the head “Profits and Gains of Business or Profession” or “Income from Other Sources”.
  

Inclusion in Book Profit under MAT

• MAT is computed on book profit as per the Profit and Loss Account prepared under the Companies Act.
  
• Royalty income, once recognized in books, is part of book profit for MAT purposes.
  
• No specific exclusion is provided for royalty income under Section 115JB.
  
• Regardless of taxability under regular provisions, it is included in MAT unless exempt.
  
• Even if royalty is taxed at concessional rates under special provisions, MAT applies on book profit.
  

Special Provisions and Exemptions

• Section 115BBF provides concessional tax rate of 10% for royalty on patents developed and registered in India.
  
• This concessional rate is applicable under regular provisions, not under MAT.
  
• Foreign companies may be exempt from MAT if they lack a permanent establishment in India.
  
• Exemptions depend on the nature of the entity and applicable tax treaty benefits.
  
• Indian companies with royalty income are fully subject to MAT unless covered by new tax regimes.
  

Adjustments Related to Royalty Income

• If royalty income is received in advance and deferred in books, it may not affect current MAT.
  
• If it is subject to revaluation or provision adjustments, MAT must reflect those changes.
  
• Expenses related to royalty income, if disallowed under MAT, must be added back.
  
• Amortization of capitalized royalty payments must be considered as per accounting policies.
  
• Any unrealized royalty income shown in OCI (Other Comprehensive Income) is excluded unless routed through P&L.
  

Audit and Compliance Obligations

• Royalty income must be clearly disclosed in financial statements.
  
• Tax audit report and Form 29B should capture its inclusion in book profit.
  
• Auditors verify the recognition, timing, and classification of royalty.
  
• Proper documentation of contracts and accounting treatment is essential.
  

Companies must ensure that MAT liability includes royalty income where applicable.