Summary: Royalty payments made by Indian companies to foreign group entities for the use of brands, technology, intellectual property and know-how require careful examination of domestic income-tax provisions, the applicable Double Taxation Avoidance Agreement (DTAA), withholding obligations and cross-border compliance. Under Section 115A of the Income-tax Act, 1961, qualifying royalty and fees for technical services received by non-residents are generally taxable at 20% on a gross basis, together with applicable surcharge and cess. However, a tax treaty may prescribe a lower rate or a narrower definition of royalty, subject to treaty eligibility and proper documentation. Indian payers must examine the actual rights transferred under software licences, intellectual-property arrangements and technical service contracts instead of relying solely on invoice descriptions. For transactions governed by the Income-tax Act, 2025, Section 393(2) provides the relevant non-resident withholding framework, while Form 144 replaces Form 27Q for quarterly TDS reporting and Forms 145 and 146 replace Forms 15CA and 15CB for prescribed foreign-remittance compliance. The article compares domestic and treaty taxation, including the treatment of surcharge, cess, permanent establishment connections and beneficial ownership. It also highlights the importance of tax residency certificates, Form 10F, PAN-related documentation, transfer pricing benchmarking for associated-enterprise royalties and GST reverse charge on imported services. Finally, the article examines gross-up clauses under Section 195A and explains why the classification of the payment, treaty entitlement, documentation and arm’s length pricing must be established before remittance.
Royalty Payments to Foreign Companies in India: Domestic Tax, DTAA and Withholding Compliance
1. The domestic rate
Royalty received by a non-resident from an Indian payer is taxed on a gross basis under section 115A of the 1961 Act at 20% plus surcharge and cess. The same provision applies to fees for technical services. Under the Income-tax Act 2025, the withholding obligation for payments to non-residents sits in section 393(2) (Sl. No. 17, the successor to section 195), and the quarterly statement is Form 144, replacing Form 27Q. The Income Tax Department’s published foreign-company rate page still shows the 35% general rate; royalty is outside that general rate only because the special gross-basis rate applies. The reduced 50% rate for approved pre-1976 agreements has little practical relevance today.
2. The treaty rate
Most of India’s treaties cap royalty withholding in a band that commonly runs from 10% to 15% (some older treaties are higher and some are lower). Where the treaty rate is lower than the domestic rate, the assessee may apply the treaty under section 90(2) of the 1961 Act. Two points are routinely missed.
First, the treaty rate is not automatic. The non-resident must hold a tax residency certificate (TRC) and furnish Form 10F, and the payer should collect a declaration on beneficial ownership and absence of a PE in India to which the royalty is attributable.
Second, the treaty has its own definition of royalty. The scope can be narrower or wider than the domestic definition in Explanation 2 to section 9(1)(vi). A payment can be taxable as royalty domestically yet fall under business profits in the treaty, in which case it is taxable only if there is a PE.
3. Domestic vs treaty at a glance
| Item | Domestic law | Treaty |
|---|---|---|
| Rate on gross royalty | 20% plus surcharge and cess | Rate in the Royalty article, applied to gross |
| Who can claim | Any non-resident | Resident of treaty country, with TRC and Form 10F |
| Definition | Section 9(1)(vi) and Explanation 2 | Treaty Article, including any “make available” wording |
| Surcharge and cess | Applicable | Generally not added on the treaty rate; confirm current practice |
| PE override | Not relevant | If royalty is effectively connected with an Indian PE, taxed as business profits |
4. Characterisation is where disputes arise
Software licences, SaaS subscriptions, brand fees, data access and “technical support” bundled with IP use do not all fall in the same bucket. The question is what the Indian payer actually receives: the right to use a copyrighted work, a right in a process, or access to a service. The label in the invoice does not decide the outcome. Contracts should describe the grant of rights precisely, and the file should show the functional facts.
5. Compliance before remittance
- Obtain TRC, Form 10F, PAN or the alternative information, and the beneficial-ownership declaration.
- Decide whether to remit under the treaty rate or apply for a lower or nil deduction certificate. Under the 2025 Act, the payer furnishes Form 145 and, where applicable, a chartered accountant certificate in Form 146 (successors of 15CA and 15CB).
- Deposit tax by the due date and file Form 144 quarterly. Deduct at 20% plus surcharge and cess if the documents are missing, since the treaty rate cannot be applied without them.
- Issue the withholding certificate to the payee, who will need it for the foreign tax credit.
6. Transfer pricing and GST
Where the licensor is an associated enterprise, the royalty rate must also be at arm’s length. Benchmarking a brand or technology royalty is difficult, and the Indian entity should hold the agreement and a contemporaneous benchmarking file. Separately, GST on import of services applies on a reverse-charge basis, and where the Indian company has full input tax credit the effect is usually a cash-flow matter; in a related-party case the declared value should still be defensible.
7. Gross-up clauses
Many group agreements say the Indian entity bears the tax. Under section 195A of the 1961 Act, tax is then computed on a grossed-up basis. The payer should model the grossed-up cost before agreeing to a net royalty.
Practical takeaway: the withholding rate is a function of four facts: the character of the payment, the payee’s treaty eligibility, the paperwork on file, and the arm’s length price. Missing any one of them will change the answer.
Sudheer Nagavarapu is a Partner at A2 Consultants, Hyderabad.
