By Delhi Legal Company · Cross-Border Tax & FEMA Advisory · Updated July 2026

There is no cap on what an Indian company may pay a foreign licensor. There has not been one since December 2009. Yet more technology licensing arrangements fail on the amount than on any other point — not because a regulator refused the remittance, but because a transfer pricing officer disallowed the deduction three years later.

That gap between what FEMA permits and what the Income-tax Act will accept is the central fact of technology licensing into India, and it is where most planning goes wrong. Foreign licensors and their Indian counsel spend time on the exchange-control question, which is now largely settled, and comparatively little on the tax question, which is not.

Three separate regimes govern the same payment, and each answers a different question:

• FEMA asks whether the money may leave India. Since 2009, for royalty and technology fees, the answer is generally yes, on the automatic route, without limit.
• The Income-tax Act asks at what rate tax must be withheld before it leaves. Since April 2023, the domestic rate has been 20%, doubled from 10%.
• Transfer pricing asks whether the amount itself was arm’s length. This is the one with no fixed answer and the longest tail.

This guide covers what qualifies as royalty and what does not, including the software position after the Supreme Court’s ruling in Engineering Analysis; the withholding rate, treaty relief and the documentation that supports it; the return-filing consequence that came with the rate increase; the FEMA position and remittance mechanics; transfer pricing on intragroup licences; GST reverse charge; and how to structure the agreement so the tax position survives examination. A detailed FAQ follows at the end.

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1. What Counts as Royalty

Characterisation determines everything downstream — the rate, the treaty article, the documentation, and whether tax is due at all. It is also where most disputes begin.

The statutory definition

Under Section 9(1)(vi) of the Income-tax Act, royalty broadly covers consideration for:

• Transfer of all or any rights in a patent, invention, model, design, secret formula, process or trademark
• Imparting of information concerning technical, industrial, commercial or scientific knowledge, experience or skill — the classic know-how licence
• Use or right to use industrial, commercial or scientific equipment
• Transfer of rights in respect of copyright, including literary, artistic or scientific work
• Rendering of services in connection with any of the above

Sitting alongside it is fees for technical services under Section 9(1)(vii) — consideration for managerial, technical or consultancy services. Both are taxed at the same rate under Section 115A, which is why the distinction matters less for rate purposes than it does for treaty purposes.

Why the treaty definition often differs

Treaty definitions of royalty are frequently narrower than the domestic one, and the difference is where relief is found. Section 90(2) allows a non-resident the benefit of whichever is more favourable — the Act or the treaty — so a payment that is royalty under Indian law may not be royalty under the applicable treaty.

Two treaty features do most of the work:

The “make available” test. Several treaties — notably with the United States, the United Kingdom, Singapore and Canada — restrict fees for technical services to cases where the service makes available technical knowledge, experience or skill to the recipient. A service that solves a problem without transferring the underlying capability may fall outside the FTS article entirely, and therefore outside Indian tax where there is no permanent establishment.

Narrower royalty wording. Domestic explanations inserted into Section 9(1)(vi) over the years — particularly those addressing software and transmission — do not automatically read across into treaty definitions.

2. Software: The Position After Engineering Analysis

This is the single most consequential decision in Indian cross-border technology taxation, and it remains widely misapplied in both directions.

In Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, decided on 2 March 2021, the Supreme Court disposed of a batch of appeals concerning payments by Indian end-users and distributors to non-resident software suppliers. It held that amounts paid for the resale or use of computer software under end-user licence agreements or distribution agreements are not royalty for the use of copyright, do not give rise to income taxable in India, and accordingly attract no withholding obligation under Section 195.

The reasoning turned on a distinction that is easy to state and easy to lose:

A right in the copyright	A copyrighted article
The right to reproduce, adapt, sub-license or commercially exploit the underlying work	A copy licensed for use, with no right to reproduce, reverse engineer, modify or sub-license
Royalty — taxable, withholding applies	Not royalty — akin to a purchase of goods

The Court noted that distributors held a non-exclusive, non-transferable licence to resell, and end-users a limited right to use without any right to sub-license, transfer, reverse engineer, modify or reproduce. Applying the first-sale or exhaustion principle under the Copyright Act, 1957, the copyright owner’s control over a lawfully sold copy ends at that sale.

What this means in practice

For a licensee, the ruling is genuinely useful but should not be applied by assumption. The workable discipline is to read the grant clause against the distinction above, document the conclusion at the time, and keep the agreement and the analysis together. A position taken on Engineering Analysis and evidenced contemporaneously is defensible. The same position asserted three years later, from memory, is considerably less so.

For SaaS and cloud arrangements the analysis is more nuanced still, because the payment may be neither a licence of copyright nor a sale of goods but consideration for a service — which raises its own questions about FTS characterisation and the “make available” test, and about GST treatment under the OIDAR rules where the recipient is a consumer.

3. The Withholding Rate and What Changed in 2023

Section 115A governs the taxation of royalty and FTS earned by a non-resident or foreign company without a permanent establishment in India.

The rate doubled

Until 31 March 2023, the Section 115A rate on royalty and FTS was 10%. The Finance Act 2023 increased it to 20%, effective from 1 April 2023, plus applicable surcharge and 4% health and education cess — taking the effective rate for a foreign company to roughly 21.8%.

Most Indian treaties cap royalty and FTS at 10% to 15%. The consequence is a reversal of the previous position:

	Before April 2023	From April 2023
Domestic rate (Section 115A)	10% plus surcharge and cess	20% plus surcharge and cess
Typical treaty rate	10% to 15%	10% to 15% (unchanged)
Which was better	Usually the domestic rate	Usually the treaty
Indian return filing	Generally exempt under 115A	Generally required if claiming treaty relief

The filing consequence nobody priced in

This is the part that is under-discussed and matters commercially.

Section 115A relieved a non-resident from filing an Indian income-tax return where its only Indian income was royalty or FTS and tax had been withheld at a rate not lower than the Section 115A rate. When that rate was 10% and the treaty rate was also 10%, many non-residents simply took the domestic route: same rate, no filing, no Indian tax registration.

With the domestic rate at 20%, a non-resident claiming a 10% treaty rate is by definition being withheld at less than the Section 115A rate — and the filing exemption falls away.

Documentation for treaty relief

Claiming a treaty rate is not a matter of asserting residence. The Indian payer, who bears the risk, will require:

• Tax Residency Certificate from the licensor’s home jurisdiction, valid for the relevant period
• Form 10F, now filed electronically on the Indian income-tax portal
• PAN — without it, Section 206AA can drive withholding to 20%, though Rule 37BC provides relief in defined circumstances where prescribed details are furnished
• No-PE declaration, confirming the licensor has no permanent establishment in India
• Where applicable, evidence addressing beneficial ownership and treaty anti-abuse provisions such as the principal purpose test

These documents expire. A TRC valid for one financial year does not cover the next, and a lapsed TRC means every subsequent remittance has been withheld at the wrong rate — a shortfall recoverable from the Indian payer with interest.

Where the risk actually sits

It sits with the Indian licensee, not the foreign licensor. Under Section 195 the payer must withhold. If the rate or the characterisation is wrong:

• The expense can be disallowed under Section 40(a)(i) — so the licensee loses the deduction for the entire royalty
• The shortfall is recoverable from the payer, with interest under Section 201(1A)
• Penalty under Section 271C may follow

A gross-up clause shifts the economics but not the obligation. The Indian company remains the person who must get it right.

The choice the 2023 rate rise createdPayment characterised as royaltyDomestic route20%plus surcharge and cessNo Indian return filingNo PAN or registration footprintTreaty route10–15%depending on the treatyIndian return generally requiredTRC · Form 10F · PAN · no-PEFor modest Indian royalty income, the compliance cost of the treaty route can exceed the tax it saves.

4. The FEMA Position: Liberal, but Not Unconditional

Exchange control is the part most licensors worry about and the part that is now largely settled.

The caps are gone

Historically, royalty remittances under foreign technology collaboration agreements were capped on the automatic route — a lump sum of USD 2 million, royalty at 5% of domestic sales and 8% of exports, with lower limits of 1% and 2% where only a trademark or brand name was licensed without technology transfer. Anything above required government approval.

Press Note 8 of 2009, effective 16 December 2009, removed those caps. The corresponding entry was omitted from Schedule II of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, giving the change retrospective effect from that date.

The position today: payment of royalty, lump sum fees for transfer of technology, and payments for use of a trademark or brand name are permitted on the automatic route, without percentage limits, as current account transactions. No prior approval from the RBI or the government is required for the payment as such.

What “automatic route” does not mean

Three qualifications matter, and skipping them is where problems arise.

The payment must still comply with the Current Account Transaction Rules. Automatic route means no prior approval; it does not mean unregulated. The authorised dealer bank processing the remittance is a gatekeeper and will apply its own documentation requirements.

Documentation must substantiate the payment. An executed licence agreement setting out the basis of the royalty, invoices consistent with that basis, board approval, and — where the quantum is significant or the counterparty related — supporting valuation or benchmarking material. Regulatory scrutiny of large intragroup royalty outflows has been real, and enforcement action in this space has turned on whether payments were supported by genuine, documented technology transfer.

Tax clearance is part of the remittance. Forms 15CA and 15CB accompany the outward payment. A bank will not process the remittance without them, which means the withholding analysis has to be complete before the money moves — not reconciled afterwards.

Where the payer is a foreign-owned subsidiary

Royalty paid by an Indian subsidiary to its own parent sits at the intersection of every regime in this guide. FEMA permits it; the withholding rules price it; transfer pricing tests it; and the FDI reporting trail must be complete for the remittance to clear the bank.

That last point catches people. An authorised dealer bank processing an outward royalty payment may examine the entity’s broader FEMA position — the FIRC trail, FC-GPR acknowledgements, FLA filings. A missing filing from years earlier can stall a routine royalty remittance today, for reasons that have nothing to do with the royalty itself. Keeping FEMA reporting current is, among other things, what keeps ordinary payments ordinary.

5. Transfer Pricing: Where Intragroup Licences Actually Fail

For a licence between related parties, this is the regime with teeth. FEMA will let the money out and withholding will be deducted correctly — and the deduction can still be disallowed years later because the amount could not be justified.

A royalty paid by an Indian subsidiary to its foreign parent is an international transaction between associated enterprises. It must be at arm’s length, documented, and reported in Form 3CEB along with every other cross-border related-party transaction.

One payment. Three regimes. Three different moments.FEMAAsksMay it leave India?Yes — no capAutomatic route since 2009Withholding taxAsksAt what rate?20% or treatyDeducted before paymentTransfer pricingAsksWas the amount defensible?Years laterDeduction can be disallowedThe remittance clearing the bank proves nothing about the third column.Most licences fail on the amount, long after the money moved.

What the tax authorities test

Transfer pricing scrutiny of royalty typically runs along four lines:

• Was anything actually received? The benefit test. A royalty paid for technology the Indian entity cannot demonstrate it used, or for a brand that generates no identifiable value in India, is vulnerable. Documentation of what was transferred, when, and to whom matters more than the elegance of the agreement.
• Is the rate comparable? Benchmarking against comparable uncontrolled licences, ideally in the same industry and territory.
• Is the base appropriate? Net sales, gross sales, sales excluding imported components — the base can move the number as much as the percentage, and it should be defined precisely.
• Is there duplication? Where the parent also charges management fees or technical service fees, the authorities will ask whether the same value is being paid for twice under different labels.

What defensible documentation looks like

The file that survives examination is assembled contemporaneously, not reconstructed. It should contain:

• The executed licence agreement, with a precise definition of what is licensed
• Evidence of actual technology transfer — training records, documentation delivered, engineering support provided, personnel deployed
• A benchmarking study supporting the rate
• Evidence of benefit to the Indian entity: what it can now do that it could not before
• Clear separation between royalty and any management or service fees, with distinct scopes
• Board approval and related-party transaction disclosure under the Companies Act

The distinction between assembling this at the time and assembling it at assessment is the distinction between a routine adjustment and a substantial one.

6. GST on Imported Technology

The indirect tax layer is separate, and neutral if handled — expensive if not.

A licence of intellectual property by a foreign licensor to an Indian recipient is an import of service. Where the recipient is registered in India, GST applies under reverse charge: the Indian company pays the tax itself and, where eligible, claims it back as input tax credit.

Where full credit is available, the mechanism is economically neutral — pay it, claim it, net zero. That neutrality is precisely why it gets overlooked, because nothing about it changes the profit and loss account.

Ignoring the obligation does not save the tax. It converts a neutral entry into unpaid tax, plus interest, plus penalty exposure, with the credit unavailable for the period concerned. The practical control is a standing rule that every payment to a non-resident is reviewed for reverse charge before release, and that the self-invoice and challan are generated in the same month as the accrual rather than at the annual audit.

7. Structuring the Agreement

Most of the tax and FEMA outcomes described above are determined by the agreement. Drafting it as a commercial document and treating tax as a subsequent question is the common sequencing error.

Unbundle the streams

A single agreement often covers several distinct things: a patent or know-how licence, a trademark licence, technical training, ongoing engineering support, and sometimes software. These can attract different treaty treatment — and services that do not “make available” technical knowledge may fall outside Indian tax altogether under several treaties.

An agreement that states one undifferentiated fee forfeits that analysis. Separate the streams, price them separately, and define the scope of each, so that each can be characterised on its own terms.

Define the royalty base precisely

“5% of sales” is not a definition. Specify whether the base is net or gross, whether it excludes taxes, freight, discounts and returns, whether imported components purchased from the licensor are excluded, and whether exports are treated differently. Ambiguity here produces disputes with the tax authorities and, occasionally, with the counterparty.

Handle the gross-up deliberately

Licensors frequently ask for royalty net of Indian taxes. The economics of a gross-up are material: at a 10% treaty rate the cost uplift is modest; at 20% it is substantial. Two points to settle explicitly in the agreement: who bears the tax if treaty relief is denied or documentation lapses, and what happens if the rate changes. Silence on the second means renegotiating under pressure the next time a Finance Act moves the number.

Make the documentation a contractual obligation

The Indian payer carries the withholding risk but depends on the licensor for the documents that reduce it. The agreement should require the licensor to furnish a current TRC, Form 10F details, PAN where applicable, and a no-PE declaration — annually, and as a condition of payment. Without that obligation, the licensee is left applying the higher rate or taking risk it cannot control.

Cover the surrounding terms

• Territory and exclusivity — whether the licence extends to exports
• Improvements — who owns developments made by the Indian licensee, and whether grant-back is required
• Sub-licensing — permitted or not, and on what terms
• Term, renewal and termination, including what survives
• Confidentiality and treatment of know-how after termination
• Governing law and dispute resolution — arbitration seat, and enforceability in India
• Competition law — restrictive conditions in licence agreements can raise issues under the Competition Act
• Registration of the licence with the relevant IP registry — see trademark recordal where a mark is licensed

8. Common Structures and Their Trade-offs

Structure	How it works	Main considerations
Running royalty	Percentage of defined sales, paid periodically	Aligns with performance; base definition and benchmarking are critical
Lump sum	Fixed fee for the technology transfer	Simpler to withhold on; harder to justify if benefit is not demonstrable
Lump sum plus running royalty	Upfront transfer fee with ongoing royalty	Common in manufacturing; must avoid paying twice for the same value
Trademark or brand licence	Royalty for use of the mark, no technology transfer	Benefit test is harder; historically the most scrutinised category
Technical services	Fees for engineering, training or support	Treaty “make available” test may exclude from Indian tax entirely
Software licence	End-user or distribution licence	Engineering Analysis may take it outside royalty — depends on the grant clause
Equity instead of royalty	Technology contributed for shares — see entity setup	Different regime entirely — FDI rules, valuation and FC-GPR reporting apply

The last row is worth a note. Where a foreign technology owner takes equity in an Indian company rather than a royalty stream, the transaction leaves the current account regime and enters the capital account one — sectoral caps, pricing guidelines, valuation certificates and FC-GPR reporting all apply. It is a different structure with a different rulebook, not a variation on licensing.

9. Your Technology Licensing Checklist

• ✓ Characterise each payment stream before drafting — royalty, FTS, software, or none of these.
• ✓ Check the applicable treaty definition, not only the domestic one.
• ✓ For services, test whether the treaty “make available” condition is met.
• ✓ For software, read the grant clause against the copyright-versus-copyrighted-article distinction and document the conclusion.
• ✓ Model both routes: 20% domestic with no Indian filing, versus treaty rate with Indian return filing.
• ✓ Make TRC, Form 10F, PAN and no-PE declaration contractual obligations, renewed annually.
• ✓ Diarise TRC expiry — a lapsed certificate means every later remittance was under-withheld.
• ✓ Define the royalty base precisely: net or gross, inclusions and exclusions, export treatment.
• ✓ Unbundle royalty from management and service fees to avoid duplication findings.
• ✓ Prepare benchmarking support before the first payment, not at assessment.
• ✓ Keep evidence of actual technology transfer and benefit to the Indian entity.
• ✓ Book GST reverse charge monthly with the self-invoice, not annually.
• ✓ Ensure Forms 15CA and 15CB precede each remittance.
• ✓ Confirm the entity’s wider FEMA filings are current, since the bank may look at them.
• ✓ Report the transaction in Form 3CEB and disclose it as a related-party transaction.

10. Seven Mistakes That Cost the Most

1. Pricing the agreement on the old 10% rate. The domestic rate has been 20% since April 2023. Agreements drafted before that, and never revisited, are frequently mispriced — particularly where a gross-up applies.

2. Claiming treaty relief without pricing the filing consequence. Halving the rate generally brings the licensor into the Indian return-filing system. For modest royalty income, the compliance cost can exceed the saving.

3. Letting the TRC lapse. Treaty relief depends on a current certificate. An expired TRC means every subsequent remittance was under-withheld, recoverable from the Indian payer with interest.

4. Assuming Engineering Analysis exempts all software payments. It turns on whether a right in the copyright was transferred. That is a question about the grant clause, and it must be documented at the time.

5. Bundling everything into one fee. A single undifferentiated royalty forfeits treaty analysis on the components and invites the least favourable characterisation of the whole.

6. Treating FEMA clearance as the end of the analysis. There is no cap on royalty, but transfer pricing still tests the amount. The remittance clearing the bank says nothing about whether the deduction survives.

7. Forgetting GST reverse charge because it nets to zero. Neutral only if paid. Unpaid, it becomes tax plus interest plus penalty, with the credit unavailable for that period.

Conclusion

Technology licensing into India is not difficult, but it is governed by three regimes that answer different questions and are administered by different people at different times. FEMA asks whether the money may leave, and since 2009 the answer for royalty and technology fees is generally yes, without limit. The Income-tax Act asks at what rate — 20% domestically since April 2023, or a lower treaty rate at the cost of Indian return filing. Transfer pricing asks whether the amount was ever defensible, and asks it years afterwards.

The two things most worth getting right at the outset are characterisation and documentation. Characterisation because it determines the rate, the treaty article, and sometimes whether Indian tax arises at all — and because it is settled by the words of the agreement rather than by the commercial intent behind it. Documentation because every position in this area is defensible when evidenced contemporaneously and fragile when reconstructed later.

Draft the agreement with the tax analysis in it, not alongside it. That single sequencing decision resolves most of what otherwise becomes expensive.

Frequently Asked Questions (FAQ)

The questions licensors and Indian licensees ask us most often: