Royalty vs FTS: Why Characterisation Matters in Cross-Border Technology Payments

Summary: Cross-border payments for software, technology, support, consultancy and other services require careful characterisation because the description used in an agreement or invoice does not by itself determine the Indian tax outcome. A payment may constitute royalty or fees for technical services under domestic law, yet receive different treatment under the applicable DTAA. This distinction becomes particularly important for software licences, technical support and consultancy arrangements. Under treaties such as the India–Singapore and India–US DTAAs, the “make available” requirement can restrict the taxation of technical services, while the Supreme Court’s ruling in Engineering Analysis is important in determining whether software payments involve a transfer of copyright rights amounting to royalty. Composite agreements should therefore be analysed component by component by examining the actual rights granted, services rendered, deliverables and conduct of the parties. The correct sequence is to determine the nature of the payment, apply domestic law, examine the relevant DTAA and treaty definition, determine India’s taxing right and only then decide the withholding consequence. Businesses should complete this analysis before remittance and maintain adequate treaty and supporting documentation.

Introduction

An Indian company pays ₹2 crore to its overseas group company. The agreement and invoice describe the payment as “technology and support services”. Tax is deducted on that understanding.

Three questions remain:

• Is the payment royalty?
• Is it fees for technical services (FTS)? Or
• Does the applicable double taxation avoidance agreement (DTAA) lead to a different result altogether?

The answer affects the non-resident’s taxability in India, the payer’s withholding obligation, cash outflow, treaty protection and the risk of double taxation. With the Income-tax Act, 2025, already in force from 1 April 2026, the relevant provisions have been renumbered and reorganised, but the characterisation issue is as live as ever.

Why does this matter?

Cross-border arrangements increasingly bundle:

• software licences with implementation and support;
• access to know-how with technicalassistance;
• management services with consultancy;
• equipment use with maintenance and training.

A single agreement can therefore carry payments of different tax character. For a CFO, Tax Head or in-house counsel, characterisation can decide whether domestic law applies, whether the treaty restricts India’s taxing right, and whether tax should have been withheld at all.

The legal framework under the Income-tax Act, 2025

Section 9 contains the source rule and the definitions relevant for royalty and FTS. Broadly:

• Royalty covers consideration for rights in patents, inventions, designs, secret formulae or processes, trademarks and copyright, for imparting specified information, and for the use of industrial, commercial or scientific equipment. The grant of a right to use computer software, including by licence, is expressly treated as royalty, irrespective of the medium of transfer.
• Fees for technical services cover consideration (including any lumpsum consideration) for the rendering of any managerial, technical or consultancy services, including the provision of services of technical or other personnel, but exclude consideration for certain construction, assembly, mining or like projects and income chargeable under the head salaries.
• Such income of a non-resident is deemed to accrue or arise in India whether or not the non-resident has a place of business in India or has rendered the services in India.

The core distinction is that royalty is linked to the use of, or right to use, specified intellectual property, information or equipment, whereas FTS is linked to the rendering of specified services.

Domestic characterisation is only the first step. Where a DTAA applies, the Act applies only to the extent it is more beneficial to the assessee. A tax residency certificate and prescribed documents are a precondition for treaty relief, while GAAR applies even where it is not beneficial to the assessee.

What has changed under the Income-tax Act, 2025?

The 2025 Act substantially carries forward the domestic-law framework for royalty and FTS, although the provisions have been renumbered and reorganised. The key practical changes are:

• Royalty or FTS received by a non-resident from the Government or an Indian concern, and effectively connected with an Indian permanent establishment (PE) or fixed place of profession, is computed as business income on a net basis, with restricted deductions and a requirement for an audit report in the prescribed form.
• Royalty and FTS of a non-resident or foreign company, other than PE-connected income, attract a 20% domestic rate, subject to the agreement conditions in the relevant rate provision and to the treaty.
• Withholding on payments to non-residents is now governed by a consolidated TDS framework, which must be read with the treaty and the applicable rules.

The precise section numbers should be verified against the final amended text before relying on them in any filing or opinion.

Royalty or FTS? The treaty can change the answer

A payment within the domestic FTS definition may still fall outside the treaty. Similarly, a payment treated as royalty under domestic law may not be taxable in India under the DTAA.

The India–Singapore DTAA is a useful illustration. Article 12 deals with royalties and fees for technical services together. It provides:

• Royalties and fees for technical services arising in India and paid to a Singapore resident may be taxed in Singapore.
• They may also be taxed in India, but if the recipient is the beneficial owner, the tax is capped at 10% of the gross amount.
• “Royalties” covers payments for the use of, or right to use, copyright, patent, trademark, design, model, plan, secret formula or process, or information concerning industrial, commercial or scientific experience, and for the use of industrial, commercial or scientific equipment.
• “Fees for technical services” means payments for managerial, technical or consultancy services (including through technical or other personnel) if such services:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information; or

(b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or

(c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.

The “make available” test is not satisfied merely because the service provider uses technical expertise or employs technical personnel. The Indian recipient should enable to apply the relevant knowledge, skill or process independently after the service is completed.

The India–US DTAA takes a similar approach but uses the expression “fees for included services”. Under Article 12, such fees are taxable in India only where the services are ancillary and subsidiary to a royalty-bearing right, or make available technical knowledge, experience, skill, know-how or processes, or involve the development and transfer of a technical plan or design. The Memorandum of Understanding clarifies that technology is made available only when the recipient is enable to apply it independently, and that non-technical consultancy cannot qualify.

The correct sequence is therefore not “Invoice description → TDS rate”, but:

Practical illustration

Consider a hypothetical example. Indian Co. pays ₹2 crore to its Singapore associated enterprise under a single agreement described as “technology and support services”. Broken into its components, the analysis looks quite different from the invoice:

On the software component, the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd.

1. CIT held that payments under end-user licences and distribution agreements that do not transfer the copyright owner’s rights are not royalty under the DTAAs, and no withholding obligation arises. Review petitions in one batch were dismissed on 23 April 2024, and the remaining review petitions were dismissed on 11 May 2026 by following that earlier order. Relief therefore rests on the treaty and on the rights actually granted, not on section 9 alone.

On support, the line between routine helpdesk assistance and training that enables Indian Co.’s team to apply the technology independently is a question of evidence: deliverables, training records and correspondence.

The lesson is that one contract does not necessarily mean one tax character.

Practitioner’s checklist

In practice, what to examine:

• Contractual rights: Is there a licence, a transfer of copyright rights, access to know-how, or simply services?
• Actual conduct: Invoices and agreements matter, but what did the recipient actually receive and do?
• Technology involved: For software and digital products, the precise rights granted can be decisive.
• The treaty: Review the article, protocol and any explanatory material independently, together with treaty entitlement and limitation-of-benefits conditions.
• Withholding and documentation: Determine the withholding obligation before remittance, including TRC and other prescribed documents. Where PE-connected income is involved, ensure that the non-resident complies with the audit-report requirement in the prescribed form.

Common mistakes

• Treating the agreement label as conclusive. “Technical support” is not automatically FTS; a “licence fee” is not automatically royalty.
• Applying domestic law and stopping there. A payment taxable under section 9 may be protected by the DTAA.
• Treating a composite agreement as a single payment. Components may represent different rights and services.
• Ignoring the rights actually transferred. For software and IP, the distinction between a mere right to use and a transfer of copyright rights can decide the outcome.
• Reviewing withholding only after payment. The analysis should precede the remittance.

Areas requiring attention

The difficult cases are hybrids: cloud and SaaS arrangements, technical support, database access, know-how, implementation, maintenance, management support and bundled technology contracts. The position depends on the facts, treaty language, rights granted and evidence available.

What should businesses do?

1. Break the payment into its underlying rights and services, rather than relying on the invoice description.

2. Review the agreement together with actual conduct, deliverables and correspondence.

3. Test each component under section 9 of the Income-tax Act, 2025.

4. Apply the relevant DTAA, protocol and any explanatory material before concluding.

5. Determine withholding before remittance, including treaty documentation.

6. Maintain contemporaneous evidence supporting the characterisation adopted.

Final takeaway

The real question is rarely “What did we call the payment?” It is “What did the Indian entity actually receive, what rights were granted, how does domestic law characterise it, and what does the treaty permit India to tax?”

Royalty vs FTS is a characterisation exercise first and a withholding exercise second, and never more so than when technology, IP and services are bundled into one intercompany arrangement..