Section 115BBF of the Finance Bill, 20161 introduced the Patent Box Regime in India. Patent Box Regime is an effort which enables an inventor to benefit through tax concessions on the royalty income. The first country to enforce it was Ireland and hence, the name is derived from its tax form.

Need for the Patent Box Regime in India

  1. The existing regime which  provided front end incentive was not sufficient to encourage patenting and innovations in India.
  2. Investment linked deductions were to be phased out by the government
  3. To encourage the ‘Make in India’ project.
  4. To comply with the Base Erosion & Profit Shifting Project (BEPS)- Action 5 (Countering Harmful Tax Practices)by the Organisation for Economic Co-Operation & Development.

Thus, to boost activities involving indigenous research & development as well as to mark India as a global Research & Development hub, the patent box regime is brought into force by the Indian government. It is aimed to provide additional benefits through a concessional taxation regime for income derived through existing patents and encourages the development of new patents. This would further lead to the creation of jobs of high value involving the patent.

Section 115BBF of the Income Tax Act

  • Section 115BBF of the Income Tax Act provides that where royalty income is a part of assessee’s income, the income tax on the royalty income shall be calculated at a concessional rate of 10%, provided that the patent is developed as well as registered in India.
  • Further, the royalty income is deducted from the total income, on which the income tax is applicable.
  • The assesse would not be eligible to any other benefit in respect of any other expenditure or allowance if he chooses to benefit under Section 115BBF.

Section 115BBF is

  • Only applicable to a patentee who is a resident of India
  • Only Patents who are granted under the Patents Act, 1970 come within its purview.
  • Royalty income shall be only in respect of a patent that is developed as well as registered in India. Thus, at least 75% of the expenditure on the invention shall be incurred in India by the eligible taxpayer to avail this benefit.
  • By Royalty income is meant the consideration received for:
    • Transfer of any or all rights, also including the grant, of licence in respect of the patent.
    • Imparting of information which is necessary or concerned with the use of or the working of a patent.
    • the use of the patent.
    • Rendering services for any of the aforementioned activities.
    • Lump sum considerations, including advances on royalty are also a part of the royalty income but it does not include income which is in the nature of capital gains or payments received for sale of products which are manufactured through the patented process or article for commercial use.

How is it availed2?

Form No. 3CFA is to be furnished by the eligible taxpayer who wishes to avail the benefit of Section 115BBF. It is to be duly verified electronically by either a digital signature or electronic verification by any person who is authorised to sign income returns. The form should be complete and is to be filed before the due date for filing income tax returns under Section 139(1) of the Income Tax Act.

The form seeks general details of the taxpayer, the details of the patent, the details of the royalty income eligible from patent and also the expenditure incurred on the eligible patent in and outside India. Particulars of each eligible patent are to be reported separately.

The Director General Income Tax (Systems) is responsible for implementing security, retrieval as well as archival policies concerning Form No. 3CFA. He also specifies the formats, procedures andstandards to ensure capture and transmission of such data.

Is Section 115BBF Mandatory?

No, it is not obligatory for the eligible taxpayer to seek the benefit of Section 115BBF. But, once the taxpayer has availed the benefit, the taxpayer is under an obligation to avail the same benefit for the next 5 years. For e.g. if a taxpayer avails the benefit under Sec115BBF in 2019, he would have to avail the benefit every year for the next 5 years till 2024. If he does not, he would not be eligible to avail the benefit under Section 115BBF for the 5 years following such year in which the option is not exercised.