What Is Actually Being Licensed

The drafting consequence: the schedule must list each component individually. “The Licensor’s technology” is not a definition. It is an invitation to argue about what was included.

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Types of Technology Agreement

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Foreground, Background and Improvements

Every technology agreement should define three categories and allocate each:

• Background IP — what each party brings to the arrangement, owned before it began. Ordinarily stays with its owner, licensed only to the extent needed
• Foreground IP — what is created during and as a result of the arrangement. The central negotiation in joint development and sponsored research
• Improvements — modifications and enhancements to the licensed technology, whether made by the licensor or the licensee

Improvements clauses require care in India. Section 140 of the Patents Act, 1970 renders void a condition providing for exclusive grant-back of improvements, along with clauses preventing challenges to the validity of the patent and coercive package licensing. A workable structure is therefore:

• Licensee-created improvements are owned by the licensee
• The licensee grants the licensor a non-exclusive, royalty-free or royalty-bearing licence to those improvements
• Licensor improvements are made available to the licensee during the term, with the commercial terms stated — whether included in the existing royalty or charged separately
• Severable improvements — those usable independently of the licensed technology — are treated differently from non-severable improvements that cannot be used without the underlying technology

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Know-How: Protected Only by What You Draft

India has no dedicated trade secrets statute. Protection of know-how rests on:

• Contractual confidentiality obligations, properly drafted and properly scoped
• The equitable duty of confidence
• Practical measures — marking, access control, segregation, audit trails
• Section 27 of the Indian Contract Act, 1872, which makes agreements in restraint of trade void, and under which post-employment non-compete clauses are generally unenforceable in India. Confidentiality obligations and, in appropriate cases, non-solicitation, are what actually hold

The confidentiality architecture a technology licence needs

• Definition of Confidential Information that captures oral disclosures and observations made during plant visits, not merely documents marked confidential
• A marking and confirmation protocol for oral disclosures
• Need-to-know limitation, with a named list of the licensee’s personnel who receive access
• Flow-down obligations to the licensee’s employees, contractors and sub-licensees, backed by individual undertakings
• Physical and IT security obligations — segregated storage, access logs, restrictions on copying and removal
• Residual knowledge — whether the licensee’s personnel may use unaided memory retained after the term. This is a heavily negotiated clause and a very wide residuals carve-out can hollow out the entire confidentiality regime
• Survival period — confidentiality in genuine trade secrets should survive indefinitely, not for the customary three or five years
• Return or destruction on termination, with certification
• Exclusions — information already public, independently developed, or lawfully received from a third party, each of which the licensee must be able to evidence

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Making the Transfer Actually Happen

This is the part that distinguishes a technology agreement from every other licence, and the part most often drafted as an afterthought.

1. The documentation package

A schedule listing every document to be delivered, with format, language, units of measurement and delivery date:

• Process description and process flow diagrams
• Piping and instrumentation diagrams, equipment lists and specifications
• Plant layout and civil, structural and utility requirements
• Raw material, intermediate and product specifications
• Operating manuals, standard operating procedures and control parameters
• Quality control and testing protocols
• Safety, environmental and effluent treatment requirements
• Software, control system configuration and licences
• Maintenance schedules and spare parts lists
• Regulatory dossiers, where applicable

Delivery is not transfer. Provide for a review period in which the licensee may identify gaps, and an obligation on the licensor to remedy them within a stated time.

2. Training and deputation

• Training at the licensor’s facility — number of personnel, duration, scope, who bears travel and living costs
• Deputation of the licensor’s engineers to the licensee’s site — number, seniority, duration, day rates, and cost of travel and accommodation
• Commissioning and start-up support, and support during trial runs
• Continuing technical assistance during the term, with an agreed response mechanism and a cap on free days beyond which charges apply
• Visa and immigration responsibility for foreign personnel
• Permanent establishment risk — extended presence of the licensor’s personnel in India can create a service permanent establishment under most treaties, materially changing the licensor’s Indian tax exposure. Day limits should be tracked contractually and monitored in practice

3. Performance guarantees and acceptance testing

For process and plant technology, this is the commercial heart of the agreement:

• Quantified guarantees — output capacity, yield, product quality specifications, consumption norms for raw materials, utilities and energy
• Conditions precedent to the guarantees — the licensee’s raw material specifications, utilities, equipment supplied to specification, and adherence to operating procedures
• The acceptance test protocol — when it is run, over what period, under what conditions, measured how, by whom, using which sampling and analytical methods
• Repeat testing rights, and the number of attempts permitted
• Consequences of failure — a remedy period for the licensor, technical modifications at whose cost, liquidated damages on a defined scale, reduction of royalty, and ultimately termination with refund
• Consequences of success — formal acceptance certificate, which triggers milestone payments and starts the royalty clock

Without an acceptance protocol, a dispute about whether the technology works becomes a dispute about who bears the burden of proof — and that is a very expensive question to litigate.

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The Commercial Clauses

Grant. Exclusive, sole or non-exclusive. Field of use. Territory. Whether the licence is limited to a named plant and installed capacity — extremely common in process technology, and the reason capacity expansion clauses matter. Whether the licensee may manufacture for export, and to which territories. Whether sub-licensing and contract manufacturing are permitted.

Financial structure. Typically a lump sum payable in tranches against documentation delivery, training completion and successful performance testing, plus a running royalty on net sales. The royalty base, deductions, minimum guarantees, accrual trigger, reporting and audit rights should be drafted as set out on our Royalty Agreements page.

Supply obligations. Where the licensor also supplies catalysts, raw materials, components or equipment, the arrangement must be structured with Section 140 in view, since conditions requiring the licensee to acquire unpatented articles from the licensor, or prohibiting sourcing from third parties, are void.

Maintenance of the licensed rights. Who pays patent renewal fees, who controls prosecution, and a step-in right for the licensee if the licensor allows a patent to lapse.

Enforcement. Notification obligations, who controls infringement proceedings, cost and recovery sharing, and cooperation. Where the licence is exclusive, note Section 109 of the Patents Act, 1970, which allows an exclusive licensee to institute infringement proceedings.

Third-party infringement claims. Who defends, who pays, and what happens if the licensee is forced to stop — modification of the technology, procurement of a licence, or termination with a defined refund.

Warranties. Ownership and authority to license; that the documentation is complete and accurate; that the technology has been successfully operated at commercial scale (state where and at what capacity). Validity of patents is ordinarily not warranted. Non-infringement warranties are heavily negotiated and often limited to actual knowledge.

Liability. Caps, exclusion of indirect and consequential loss, and carve-outs for confidentiality breach, IP infringement and wilful misconduct.

Insurance, particularly where the technology involves process safety, hazardous materials or product liability exposure.

Term. Distinguish the term of the patent licence from the term of the know-how licence, because they do not naturally expire together.

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Termination and the Hardest Question in Technology Licensing

What happens to technology the licensee has already received and absorbed?

You cannot un-teach a plant. Once engineers have run a process for four years, the knowledge is in the organisation. The realistic negotiating positions are:

• Full cessation — the licensee stops using the technology entirely and returns or destroys all documentation. Attractive to the licensor, frequently unrealistic and commercially brutal for a licensee that has built a plant
• Perpetual paid-up licence on termination for the licensor’s breach, or on expiry after the full term — the licensee keeps using what it has, with no further royalty
• Continued use on continuing royalty at a reduced rate
• Cessation with a wind-down period and a defined sell-off of existing inventory

The position should differ according to why the agreement ended — termination for the licensee’s breach ordinarily produces cessation, while expiry by effluxion of time or termination for the licensor’s breach ordinarily produces continued use.

Other post-termination provisions: return or destruction of documentation with certification, cessation of trademark use, survival of confidentiality indefinitely for trade secrets, survival of accrued payment and audit obligations, and the treatment of sub-licences.

Where patents are involved, Section 141 of the Patents Act, 1970 gives either party the right to determine the contract on three months’ notice once the patent, or all the patents by which the article or process was protected, ceases to be in force.

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Section 140 and the Competition Act

Section 140 of the Patents Act, 1970 renders void conditions in contracts relating to patented articles or processes that:

• Require the licensee to acquire from the licensor, or its nominee, any article other than the patented article
• Prohibit the licensee from acquiring or using articles other than the patented article supplied by anyone other than the licensor
• Prohibit the licensee from using any article or class of articles not protected by the patent
• Provide for exclusive grant-back, prevent challenges to the validity of the patent, or impose coercive package licensing

Inclusion of such a condition is also available as a defence in an infringement suit under Section 140(3).

Separately, the Competition Act, 2002 applies. Section 3(5) preserves reasonable conditions necessary to protect intellectual property rights, so field of use, territorial and quality restrictions are ordinarily acceptable. Tie-in arrangements, exclusive supply and distribution obligations and refusal to deal are assessed under Section 3(4) on their effects, and abuse of a dominant position under Section 4 is not exempt at all.

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Cross-Border Technology Transfer

Foreign exchange

Payment of royalty and lump-sum fees for technology transfer to a foreign licensor is permitted under the automatic route as a current account transaction, subject to the conditions in force. The earlier regime of caps and government approval for technical collaboration has been liberalised, but the position applicable to the specific arrangement should be confirmed rather than assumed.

Tax

• Withholding on royalty and fees for technical services paid to a non-resident under Section 195, at the rate prescribed by Section 115A, subject to the beneficial rate under an applicable treaty — available only with a Tax Residency Certificate, Form 10F and a no-permanent-establishment declaration, with Form 15CA and 15CB compliance
• Grossing up under Section 195A where the agreement provides for payment net of tax — state expressly who bears the withholding
• Service permanent establishment risk where the licensor’s personnel are present in India beyond the treaty threshold. This converts the licensor’s Indian position from simple withholding on royalty to taxation of business profits attributable to the PE, and it is the single most commonly overlooked tax consequence in technical collaboration agreements. Track deputation days contractually
• Transfer pricing where the parties are associated enterprises — the royalty and technical service fees must be at arm’s length and supported by benchmarking and evidence of benefit
• Software payments — the Supreme Court’s decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT held that payments for shrink-wrapped and off-the-shelf software to non-resident suppliers are not royalty under the applicable treaties. Characterisation of any particular arrangement depends on its terms
• GST, including reverse charge on import of services

Export control

Outbound transfer of certain technologies is controlled. The SCOMET list — Special Chemicals, Organisms, Materials, Equipment and Technologies — forms part of the export control regime under the Foreign Trade Policy, administered by the DGFT, and it covers intangible technology transfers including transmission of technical data and provision of technical assistance, not merely physical shipments. Indian licensors licensing out, and Indian entities re-transferring foreign technology, must confirm whether authorisation is required.

Corporate disclosure

Indian companies importing technology should note the Board’s Report disclosure obligations on technology absorption under Section 134(3)(m) of the Companies Act, 2013 read with the Companies (Accounts) Rules, 2014, which require details of technology imported during the preceding financial years, whether it has been fully absorbed, and the reasons where it has not.

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Escrow

Where the licensee’s operations depend on the licensor’s continued existence and support — particularly for software, control systems and continuously updated technical documentation — an escrow arrangement provides continuity assurance without transferring ownership.

• Deposit — source code, build instructions, documentation, keys and configuration, with a verification obligation so that what is deposited is actually usable
• Update obligation — deposits refreshed at defined intervals or on each release
• Release events — insolvency, cessation of business, failure to provide contracted support after notice and a cure period
• Scope of the released licence — internal use and maintenance only, with confidentiality preserved
• A tripartite agreement with a reputable escrow agent, and verification testing at agreed intervals

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Due Diligence

If you are licensing in:

• Does the licensor actually own the technology, and is the chain of title complete from the inventors and developers?
• Are the patents granted, in force, renewed, and in the territories you need?
• Is the technology proven at commercial scale, and where? Ask for reference plants and, where possible, visit
• Are there third-party rights you would need — blocking patents, in-licensed components, open source obligations in the software?
• Is a freedom to operate analysis required for your territory and your product?
• What regulatory approvals does the process or product require, and does the licensor’s dossier support them?
• What are the environmental, safety and effluent implications, and are they within your consent conditions?

If you are licensing out:

• Is your know-how documented well enough to be transferred, and segregated well enough to be protected?
• Have you cleared your own chain of title, including employee and contractor assignments?
• Is the licensee financially and technically capable of performing, and of paying royalties for the full term?
• What is your exposure if the licensee’s plant fails, or causes injury or environmental damage?
• Does the transfer require SCOMET authorisation?
• Are you creating a future competitor, and does the post-termination position reflect that?

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Where Technology Licences Fail

1. “The Licensor’s technology” used as a definition, with no itemised schedule
2. No documentation schedule, so completeness of the package cannot be measured
3. No acceptance testing protocol, so a dispute about whether the technology works has no agreed answer
4. Unquantified performance guarantees, or guarantees with no stated conditions precedent
5. No liquidated damages or remedy mechanism for performance shortfall
6. Confidentiality expiring after three years on information that is a permanent trade secret
7. Residual knowledge clause drafted so widely that it defeats the confidentiality regime
8. Exclusive grant-back of improvements, void under Section 140
9. Tie-in supply obligations for unpatented materials, void under Section 140
10. Post-termination position unaddressed, leaving the parties to argue about a plant that is already running
11. Deputation days uncapped and unmonitored, creating a service permanent establishment
12. Withholding and gross-up ambiguous, producing a dispute at the first remittance
13. Patent term and know-how term treated as one, so royalty obligations become uncertain on patent expiry
14. Capacity and plant location not defined, so the licence silently covers expansions the pricing never contemplated
15. No escrow where the licensee’s continuity depends on the licensor’s support
16. SCOMET position never checked on an outbound transfer
17. Foreground and background IP undefined in a joint development, producing an ownership dispute over the only valuable output

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How Delhi Legal Company Handles Technology Licensing

• Structuring — licence, technical collaboration, joint development, sponsored research, option or assignment, chosen against the commercial objective and the tax and regulatory consequences
• Technology schedules — itemised definition of patents, know-how, documentation, software, materials and services, so that scope is measurable rather than arguable
• Transfer mechanics — documentation schedules with formats and dates, training and deputation terms, commissioning support, and a defined acceptance testing protocol
• Performance regime — quantified guarantees, conditions precedent, testing methodology, remedy periods, liquidated damages and termination consequences
• Confidentiality architecture — definitions capturing oral and observed disclosure, need-to-know controls, employee flow-down undertakings, residuals negotiated realistically, and indefinite survival for genuine trade secrets
• Improvements and IP allocation — background, foreground and improvements defined and allocated, with grant-back structured to comply with Section 140
• Statutory screening — Section 140 and Competition Act, 2002 review of every restrictive term before it goes into the draft
• Cross-border structuring — FEMA position, withholding and treaty documentation, permanent establishment risk from deputation, transfer pricing support for related-party arrangements, and GST treatment
• Export control — SCOMET assessment for outbound and re-transferred technology
• Escrow — tripartite escrow agreements with verification and defined release events
• Exit — post-termination continuity, wind-down, survival and dispute resolution, including expert determination for technical disputes

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Frequently Asked Questions (FAQs)

1. What is a technology licensing agreement?

A. It is a contract under which one party permits another to use a package of technology — typically patents together with know-how, technical documentation, software, training and technical assistance — to manufacture a product or operate a process, usually in return for a lump sum and running royalty.

2. How is it different from a patent licence?

A. A patent licence grants rights under a specific registered right. A technology licence transfers a working capability, of which the patent is often the smallest part. The know-how, drawings, operating parameters, training and technical support are usually what the licensee actually needs, and they are protected by contract rather than by statute.

3. Is know-how protected by law in India?

A. There is no dedicated trade secrets statute in India. Know-how is protected by contractual confidentiality obligations, by the equitable duty of confidence, and by the practical security measures the parties maintain. This makes the drafting of the confidentiality provisions the most important protection the licensor has.

4. Are non-compete clauses enforceable against a former licensee or employee?

A. Post-term and post-employment non-compete restrictions are generally unenforceable in India, because Section 27 of the Indian Contract Act, 1872 makes agreements in restraint of trade void. What is enforceable is a properly drafted confidentiality obligation protecting trade secrets, and in appropriate cases non-solicitation.

5. How long should confidentiality obligations last?

A. For genuine trade secrets, indefinitely. A standard three or five year confidentiality period, imported from commercial NDAs, is inappropriate for process know-how that will still be valuable in twenty years. The survival period should be drafted deliberately rather than inherited from a template.

6. What is a residual knowledge clause?

A. A provision permitting the recipient’s personnel to use information retained in unaided memory after the term. Licensees ask for it because engineers cannot unlearn what they have learned. Drafted too widely, it hollows out the entire confidentiality regime, so it should be narrow, personnel-specific and expressly exclude documented information and specific technical data.

7. Who owns improvements made by the licensee?

A. Whatever the agreement provides, subject to Section 140 of the Patents Act, 1970, which renders void a condition providing for exclusive grant-back. A workable structure is that the licensee owns its improvements and grants the licensor a non-exclusive licence to them, with severable and non-severable improvements treated differently.

8. What is the difference between background and foreground IP?

A. Background IP is what each party brings to the arrangement, owned before it began. Foreground IP is what is created during and as a result of the arrangement. In joint development and sponsored research, ownership of foreground IP is usually the most heavily negotiated term, and leaving it undefined produces a dispute over the only valuable output.

9. What should a documentation schedule contain?

A. Every document to be delivered, individually listed, with format, language, units of measurement and delivery date — process descriptions and flow diagrams, engineering drawings, equipment specifications, material and product specifications, operating manuals and control parameters, quality and testing protocols, safety and environmental requirements, software and configuration, and maintenance schedules.

10. What is an acceptance testing protocol and why does it matter?

A. It is the agreed procedure for demonstrating that the technology performs as guaranteed — when the test is run, over what period, under what conditions, measured by whom and using which methods. Without it, a dispute about whether the technology works becomes an unresolvable argument about the burden of proof, which is extremely expensive to litigate.

11. What performance guarantees should a licensee ask for?

A. Quantified guarantees on output capacity, yield, product quality specification, and consumption norms for raw materials, utilities and energy — coupled with clearly stated conditions precedent covering the licensee’s inputs, equipment and adherence to operating procedures, a remedy period for the licensor, liquidated damages on a defined scale, and a right to terminate with refund if the shortfall persists.

12. Can the licensor require us to buy raw materials from it?

A. Not as a condition of the licence. Section 140 of the Patents Act, 1970 renders void conditions requiring the licensee to acquire from the licensor any article other than the patented article, or prohibiting the licensee from sourcing such articles from third parties. A genuine, separately negotiated supply arrangement is different from a tie-in imposed as a licence condition.

13. Can we be prevented from challenging the validity of the licensed patent?

A. A clause preventing a challenge to validity falls within the conditions rendered void by Section 140. Where the licensor’s commercial concern is genuine, the route to consider is a carefully drafted termination right triggered by a validity challenge, rather than an outright prohibition.

14. What happens to the technology when the agreement ends?

A. This is the hardest question in technology licensing, because a plant cannot be un-taught. The realistic outcomes are full cessation, a perpetual paid-up licence, continued use on a reduced royalty, or cessation with a wind-down period — and the position should differ according to why the agreement ended, with termination for the licensee’s breach ordinarily producing cessation.

15. Does the licence end when the patent expires?

A. Not necessarily, and this should be addressed expressly. The patent licence and the know-how licence have different natural lives. Section 141 of the Patents Act, 1970 gives either party the right to determine the contract on three months’ notice once the patent, or all the patents protecting the article or process, ceases to be in force, so continuing know-how royalties must be structured deliberately.

16. Can royalty and lump-sum fees be remitted to a foreign licensor?

A. Yes. Payment of royalty and lump-sum technology transfer fees is permitted under the automatic route as a current account transaction, subject to the conditions in force. The withholding, treaty and documentation position should be settled at the drafting stage rather than at the point of remittance.

17. What withholding tax applies to a foreign technology licensor?

A. Royalty and fees for technical services paid to a non-resident attract withholding under Section 195 at the rate prescribed by Section 115A, plus surcharge and cess, subject to the beneficial rate under an applicable treaty. Treaty benefit requires a Tax Residency Certificate, Form 10F and ordinarily a no-permanent-establishment declaration, with Form 15CA and 15CB compliance.

18. What is service permanent establishment risk?

A. Under most Indian tax treaties, the presence of a foreign enterprise’s personnel in India furnishing services beyond a specified number of days can create a service permanent establishment. That changes the licensor’s Indian position from withholding on royalty to taxation of business profits attributable to the PE. It is the most commonly overlooked consequence of technical collaboration agreements, and deputation days should be capped contractually and monitored in practice.

19. Does our technology export require government authorisation?

A. It may. The SCOMET list under the Foreign Trade Policy, administered by the DGFT, controls the export of specified chemicals, organisms, materials, equipment and technologies — and it covers intangible technology transfers, including transmission of technical data and the provision of technical assistance, not merely physical shipments. The position should be checked before any outbound transfer.

20. Do we have to disclose imported technology in our Board’s Report?

A. Indian companies are required, under Section 134(3)(m) of the Companies Act, 2013 read with the Companies (Accounts) Rules, 2014, to include particulars relating to technology absorption in the Board’s Report, including details of technology imported in the preceding financial years, whether it has been fully absorbed, and the reasons where it has not.

21. What is source code escrow and do we need it?

A. Escrow deposits source code, build instructions, documentation and keys with a neutral third party, for release to the licensee on defined trigger events such as the licensor’s insolvency or failure to provide contracted support. It is appropriate wherever the licensee’s operations depend on the licensor’s continued existence, and the deposit should be verified rather than assumed to be usable.

22. Should we do a freedom to operate search before licensing in?

A. Yes, in most cases. A licence from the licensor tells you nothing about third-party patents that your product or process may infringe in your territory. A freedom to operate analysis is a separate exercise from any patentability or validity work the licensor has done, and it is the licensee that bears the commercial risk.

23. What warranties should we expect from a technology licensor?

A. Ownership and authority to license, completeness and accuracy of the documentation, and confirmation that the technology has been successfully operated at commercial scale, with reference installations identified. Validity of patents is ordinarily not warranted, and non-infringement warranties are usually limited to the licensor’s actual knowledge.

24. What happens if a third party claims our licensed technology infringes its patent?

A. That depends entirely on what the agreement says, which is why it must say something. The clause should allocate the conduct and cost of the defence, and set out the consequences if the licensee is restrained — modification of the technology at whose cost, procurement of a third-party licence at whose cost, or termination with a defined refund.

25. We are entering a joint development. What should we settle first?

A. Ownership of foreground IP, background IP licences necessary to exploit it, the field and territory in which each party may use the result, publication rights where an institution is involved, treatment of improvements, decision-making on filing and prosecution of patents, cost sharing, and what happens on termination or on one party wishing to exit.

26. What does Delhi Legal Company charge for technology licensing work?

A. It depends on whether the engagement is drafting, negotiating a document you have been offered, or a full technical collaboration with performance guarantees and cross-border tax structuring. We quote in writing, and we review the restrictive terms against Section 140 and the Competition Act, and the cross-border position for withholding and permanent establishment risk, as part of the drafting rather than afterwards.