TaxTMI 
TaxTMI 
Treatment of IPRs, Royalty and Technical Know-How Fees under FEMA, Customs, Income-tax and GST Laws.
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....reatment of IPRs, Royalty and Technical Know-How Fees under FEMA, Customs, Income-tax and GST Laws.<br>By: - YAGAY and SUN<br>Other Topics<br>Dated:- 14-8-2026<br>1. Introduction Intellectual Property Rights ("IPRs"), royalty payments and technical know-how arrangements are integral to modern cross-border business models. Indian companies routinely acquire patents, trademarks, copyrights, software rights, technical information, manufacturing processes and specialised know-how from overseas group companies or independent foreign licensors. Conversely, Indian enterprises may license their intellectual property and technology to overseas entities and earn royalty or technical know-how fees. Such arrangements cannot be examined under a single statute. The same payment may simultaneously have implications under FEMA, customs valuation law, income-tax law, transfer-pricing provisions and GST. The contractual characterisation of the payment; whether as royalty, licence fee, technical service fee, reimbursement, purchase consideration or know-how fee is therefore critical. A further complication arises because the Income-tax Act, 2025 replaced the Income-tax Act, 1961 with effect from 1....
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.... April 2026, although the 1961 Act continues to govern earlier tax years and proceedings relating to them. The central compliance principle is that legal characterisation must precede tax treatment. Merely describing a payment as "technical know-how fee" in an agreement or invoice does not determine its treatment. 2. What constitutes IPR, Royalty and Technical Know-How? IPR may include patents, trademarks, copyrights, designs, trade secrets, confidential information, proprietary technology, technical documentation, formulae, processes and software-related rights. Under the current income-tax framework, "royalty" broadly encompasses consideration for the transfer or grant of rights in patents, inventions, models, designs, secret formulae or processes, trademarks and similar property; imparting information concerning their working or use; use of such property; imparting technical, industrial, commercial or scientific knowledge, experience or skill; certain equipment-use rights; copyright rights; and services connected with such rights. "Fees for technical services" ("FTS") is separately defined and broadly covers consideration for managerial, technical or consultancy service....
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....s, including provision of technical or other personnel, subject to specified exclusions. The distinction matters because: • royalty generally relates to exploitation or licensing of an underlying IP/right or specified information; • technical service fees relate to the provision of technical, managerial or consultancy services; • technical know-how may contain both elements and must therefore be analysed based on the actual rights and obligations transferred. 3. FEMA Treatment 3.1 Payment by an Indian resident to a foreign licensor Under FEMA, payment for genuine royalty, technical know-how and other services to a non-resident is ordinarily a current account transaction, subject to the applicable FEMA rules, regulations, RBI directions and banking documentation. The Foreign Exchange Management (Current Account Transactions) Rules, 2000 regulate drawal of foreign exchange for current-account transactions, while authorised dealer ("AD") banks are responsible for ensuring compliance with the FEMA framework and applicable tax laws before permitting remittance. Accordingly, an Indian company making a remittance should ordinarily maintain: ....
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.... • executed technology/IP licence agreement; • invoice/debit note; • description of rights/services; • computation of royalty or technical fee; • tax deduction documentation; • Form 15CA/15CB, wherever applicable; • evidence of tax payment, where relevant; • supporting documents required by the AD bank; and • transfer-pricing documentation where the foreign licensor is an associated enterprise. The AD bank may require sufficient documentation to establish the bona fide nature and tax compliance of the remittance. 3.2 Capitalisation into equity Royalty or lump-sum technical know-how fees may, subject to applicable FEMA/FDI conditions, be capitalised against issue of equity instruments. RBI material has historically recognised general permission for issue of shares against lump-sum technical know-how fees and royalty, subject to pricing requirements and applicable tax laws. For contemporary transactions, however, the specific FDI sectoral cap, entry route, pricing, valuation, reporting and applicable foreign-investment regulations must be checked as on the tran....
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....saction date rather than relying on older RBI circulars. 3.3 Royalty received by an Indian company from abroad Where an Indian enterprise licenses its IP or provides technical know-how to an overseas entity, the receipt represents foreign exchange earnings. FEMA compliance will involve, among other things, receipt through permitted banking channels, documentation and realisation/repatriation requirements. The commercial agreement should clearly identify whether the Indian entity is: • licensing IP; • transferring IP; • providing technical know-how; • providing technical services; or • supplying goods together with technology. The distinction becomes important for FEMA, tax, GST and transfer-pricing purposes. 4. Customs Treatment of Royalty and Licence Fees Customs valuation becomes relevant where IPR/royalty payments are connected with imported goods. Section 14 of the Customs Act, 1962 provides for transaction value and specifically contemplates inclusion of royalties and licence fees to the extent specified in the valuation rules. The critical provision is Rule 10(1)(c) of the Customs Valuation (Deter....
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....mination of Value of Imported Goods) Rules, 2007. Royalty and licence fees are added to the price actually paid or payable where they: • relate to the imported goods; • are required to be paid, directly or indirectly, by the buyer; and • constitute a condition of sale of the imported goods; to the extent they are not already included in the declared transaction value. Practical customs test - The customs authority will therefore examine three questions: A. Is the royalty/licence fee related to the imported goods? If the royalty is entirely for post-import manufacturing, marketing or independent services, the answer may be different. However, the contractual and economic relationship must be examined. B. Is payment a condition of sale? This is often the most contentious issue. A payment need not necessarily be made directly to the overseas seller. Rule 10 also contemplates payments made to a third party to satisfy an obligation of the seller. C. Is the amount already included in the import price? Only the amount not already included is ordinarily added. Importantly, the valuation rules also recognise that where royalty o....
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....r another payment for a process is includible, it may be added even though the process is performed after importation. Reproduction rights - The interpretative notes distinguish royalty relating to imported goods from charges for the right to reproduce the imported goods in India. The latter are not ordinarily added merely because they arise under the same broad IP arrangement. Customs and GST interaction - A particularly important compliance issue arises where royalty is included in customs value. Notification No. 6/2018-Integrated Tax (Rate) provides an exemption from IGST on royalty/licence fee to the extent the corresponding consideration has already been included in the transaction value under Rule 10(1)(c) of the Customs Valuation Rules. Thus, businesses should avoid double taxation of the same royalty component-first through customs valuation and again as an independent imported service without examining the specific exemption and its conditions. 5. Income-tax Treatment: Payment to Non-Residents 5.1 Royalty and FTS as Indian-source income Under section 9 of the Income-tax Act, 2025, income by way of royalty payable by the Government, a resident (subject to spe....
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....cified exceptions), or in specified cases by a non-resident, is deemed to accrue or arise in India. Similar source rules apply to FTS. Therefore, an Indian company paying royalty or technical services fees to an overseas entity cannot assume that the payment is outside the Indian tax net merely because the foreign supplier has no physical office in India. The place where the foreign supplier performs the service is not, by itself, determinative. 5.2 Treaty protection Where the recipient is resident in a country with which India has a Double Taxation Avoidance Agreement ("DTAA"), the treaty must be examined. The Indian tax position generally requires comparison between domestic law and the applicable treaty, with the more beneficial provision ordinarily available to the taxpayer, subject to fulfilment of treaty conditions. The Income Tax Department itself publishes comparative treaty/domestic rates for royalty and FTS. Typical treaty questions include: • Is the payment royalty under the relevant treaty? • Does the treaty require use of, or right to use, copyright/patent/trademark/process? • Does the treaty contain a "make available" condi....
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....tion for FTS? • Is there a permanent establishment? • Is the payment effectively connected with a PE? • Has the foreign recipient furnished a Tax Residency Certificate? • Are beneficial ownership and treaty entitlement established? Accordingly, domestic-law classification and treaty classification should be undertaken separately. 6. Withholding Tax For payments to a non-resident, withholding tax is a major compliance issue. Under the Income-tax Act, 2025, section 393(2) provides the TDS framework for specified payments to non-residents. It covers, among other items, interest and other sums chargeable to tax, with payments to non-resident persons generally subject to deduction at the applicable rate in force. Consequently, an Indian payer should determine: • whether the payment is taxable in India; • whether it constitutes royalty or FTS; • the applicable domestic rate; • the applicable treaty rate; • availability of treaty documentation; • surcharge and health and education cess implications, where applicable; • gross-up provisions ....
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....under the contract; and • timing of deduction. The Income Tax Department confirms that payments to non-residents are dealt with under the non-resident withholding provisions rather than the resident royalty/FTS provision. Gross-up If the agreement provides that the foreign licensor must receive a specified net amount, the Indian payer may bear the withholding tax economically. The tax gross-up should therefore be contractually and mathematically evaluated before determining the remittance amount. Deductibility consequence Failure to deduct or deposit tax can result not merely in interest and penalty exposure but also in disallowance of the corresponding expenditure. Section 35 of the Income-tax Act, 2025 specifically addresses non-deduction/non-payment of TDS on interest, royalty, FTS and other chargeable sums payable outside India or to non-residents. 7. Permanent Establishment and Business Income A foreign enterprise may have a more substantial Indian tax exposure where its royalty/FTS income is effectively connected with an Indian permanent establishment or fixed place of profession. Section 59 of the Income-tax Act, 2025 provides that royalty o....
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....r FTS income of a non-resident/foreign company connected with an Indian PE or fixed place of profession is computed under the head "Profits and gains of business or profession", subject to the conditions specified in that section. The distinction is commercially important: • Passive royalty/FTS income: generally dealt with under the special source-based provisions. • PE-connected royalty/FTS income: potentially taxable on a net basis as business income, with the statutory restrictions on deductions. The foreign enterprise may consequently have filing, books-of-account and audit obligations in India. 8. Transfer Pricing Where royalty or technical know-how payments occur between associated enterprises, transfer pricing becomes a separate layer of analysis. The fact that a payment is commercially justified does not establish that the amount is at arm's length. Under section 161 of the Income-tax Act, 2025, income arising from an international transaction and any allowance for expenditure arising from such transaction must be determined having regard to the arm's-length price ("ALP"). A robust royalty benchmarking exercise should examine: ....
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.... • ownership of the IP; • DEMPE functions-development, enhancement, maintenance, protection and exploitation; • territorial rights; • exclusivity/non-exclusivity; • duration; • technical support; • market access; • expected economic benefit; • comparable uncontrolled licence agreements; • royalty base; • royalty rate; • minimum guaranteed royalty; • upfront/lump-sum payments; and • contribution of the Indian entity to development or enhancement of the IP. The new compliance framework also provides for Form No. 48 for reporting international transactions, replacing the earlier Form 3CEB framework under the 1961 Act. For CFOs, the key message is simple: a royalty rate supported by the agreement is not automatically an arm's-length royalty rate. 9. GST Treatment - GST generally treats licensing or permitting the use or enjoyment of IPR as a supply of services. Schedule II to the CGST Act expressly treats temporary transfer or permitting the use or enjoyment of an intellectual property right as a suppl....
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....y of services. The notified rate for temporary or permanent transfer or permitting the use or enjoyment of IPR under Heading 9973 is generally 18%. Therefore, royalty paid for use of a foreign-owned patent, trademark, copyright, technology or similar IP will ordinarily require an import-of-services analysis. 9.1 Import of IPR services Where: • supplier is outside India; • recipient is in India; and • place of supply is in India, the transaction can constitute an import of services. Under the applicable reverse-charge mechanism, the Indian recipient may be required to discharge IGST. Notification No. 10/2017-Integrated Tax (Rate) provides the reverse-charge framework for specified imported services. Accordingly, a company paying royalty to a foreign licensor should examine: • supplier location; • recipient location; • place of supply; • whether the transaction is between associated enterprises; • time of supply; • applicable GST rate; • exchange-rate conversion; • self-invoice/documentation requirements; and • eligibi....
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....lity for input tax credit. 10. GST Input Tax Credit GST paid under reverse charge is generally capable of being claimed as input tax credit, subject to the statutory conditions and restrictions. The CBIC has clarified that tax paid under reverse charge can constitute input tax and may be credited subject to the normal ITC framework. For a business using imported technology/IP in taxable outward supplies, the economic impact may therefore be largely cash-flow oriented rather than a permanent tax cost. However, ITC should not be assumed. The CFO should separately test: • business-use requirement; • blocked-credit provisions; • registration status; • documentation; • accounting treatment; • time limits; and • proportionate reversal requirements, wherever applicable. 11. Associated Enterprise Issue under GST - GST contains a special rule for imported services involving associated enterprises. Where services are supplied by an overseas associated enterprise to an Indian entity, the timing of tax liability can arise upon accounting entry in the books, even before actual payment, subject....
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.... to the statutory conditions. This makes inter-company royalty arrangements particularly important from a GST closing perspective. A multinational group should not wait for the foreign invoice/payment cycle before evaluating GST liability. 12. Royalty embedded in imported goods: Integrated Compliance Model - Consider an Indian manufacturer importing machinery from its foreign group company. The Indian company pays: • USD 1 million for machinery; and • 5% of Indian sales as royalty for use of technology embedded in the machinery. Four separate questions arise: • Customs: Is the royalty related to imported goods and a condition of sale? If yes, it may be added under Rule 10(1)(c). • Income-tax: Is the royalty taxable in India in the hands of the foreign recipient? If yes, TDS applies subject to treaty relief. • GST: Is the royalty a supply of imported IP service? If yes, IGST under reverse charge may apply, subject to the specific customs-related exemption where the royalty has already been included in customs transaction value. • Transfer pricing: Is 5% of sales an arm's-length consideration betw....
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....een associated enterprises? The same payment therefore potentially produces four distinct tax analyses. 13. Key Contractual Clauses - Technology/IP agreements should be drafted with tax consequences in mind. The agreement should clearly state: • exact IP being licensed; • ownership of pre-existing IP; • ownership of improvements; • territory; • exclusivity; • duration; • right to sublicense; • right to reproduce; • technical support obligations; • training obligations; • royalty base; • minimum royalty; • lump-sum consideration; • withholding-tax allocation; • GST allocation; • customs responsibility; • gross-up mechanism; • transfer-pricing adjustment mechanism; • audit/documentation rights; and • termination consequences. A poorly drafted "technology fee" clause can create avoidable disputes under all four regimes. 14. CFO/CEO Compliance Checklist - Before approving an IPR/royalty/technical-fee arrangement, manag....
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....ement should ask: Legal • What exact right or service is being acquired? • Is there an actual transfer of ownership or merely a licence? • Is the agreement enforceable and appropriately documented? FEMA • Is the remittance permissible? • What documentation will the AD bank require? • Are FDI or other FEMA provisions triggered? Customs • Does royalty relate to imported goods? • Is it a condition of sale? • Has it been included in customs valuation? • Is any subsequent royalty payment liable to supplementary valuation? Income Tax • Is the recipient taxable in India? • Is it royalty or FTS? • What does the applicable DTAA provide? • What TDS rate applies? • Is gross-up required? • Is PE exposure present? Transfer Pricing • Is the royalty commercially beneficial? • Is the rate arm's length? • Are comparable licences available? • Are DEMPE functions documented? GST • Is there an import of services....
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....? • Is RCM applicable? • What is the place of supply? • Is IGST credit available? • Has customs valuation already captured the royalty? 15. Conclusion The taxation of IPRs, royalty and technical know-how fees is inherently multi-dimensional. FEMA determines whether and how the cross-border payment may be made; customs law determines whether royalty must be loaded into the value of imported goods; income-tax law determines source taxation and withholding; transfer pricing tests the commercial quantum between associated enterprises; and GST examines the licensing/technology transaction as a supply of services. The most important practical principle is therefore: • Do not tax the label-analyse the rights, obligations, economic substance, contractual flows and actual use of the IP or technology. For Indian businesses, the optimal compliance framework is a single integrated transaction memo prepared before execution of the agreement, covering FEMA, customs, income tax, treaty position, transfer pricing and GST. This approach is particularly important for multinational groups because a royalty payment that appears ....
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....routine from an accounting perspective can simultaneously generate customs valuation, withholding-tax, transfer-pricing and GST exposure. Finally, because the Income-tax Act, 2025 is now operative from 1 April 2026, professionals should distinguish carefully between transactions governed by the new Act and earlier tax years governed by the repealed 1961 Act. The transition provisions mean that historical assessments and earlier tax years continue under the old legislation, while tax-year 2026-27 onwards is governed by the new framework. *** Professional caveat: This article is intended as a technical overview and not as transaction-specific legal or tax advice. Royalty and technical know-how arrangements are highly fact-sensitive; the agreement, flow of funds, IP rights, import structure, associated-enterprise relationship and applicable DTAA should be reviewed before adopting a final position. *** =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....