Royalty & Fees for Technical Services Under DTAA: Tax Rates & Rules

Why DTAA Treaty Rates Now Matter More Than Ever for Royalties and FTS

This article is part of our Complete Guide to DTAA for Foreign Companies. Here we dive deep into the specific provisions governing royalties and fees for technical services (FTS) — the two income categories that create the most cross-border tax disputes between India and treaty partner countries.

Until March 2023, the domestic withholding tax rate on royalties and FTS paid to non-residents was 10% (plus surcharge and cess, effective rate approximately 10.92%). The Finance Act 2023 doubled this to 20% (effective rate approximately 21.84% with surcharge and cess). This single change made India's domestic rate higher than the treaty rate in most of India's 90+ Double Taxation Avoidance Agreements.

The practical consequence: foreign companies receiving royalty or FTS income from India must now actively claim DTAA benefits to avoid overpaying tax. Without claiming treaty relief, a US parent company receiving INR 1 crore in royalties from its Indian subsidiary would face withholding of approximately INR 21.84 lakh under domestic law, compared to INR 15 lakh under the India-US DTAA — a difference of nearly INR 7 lakh on a single payment.

What Qualifies as Royalty Under Indian DTAAs

Article 12 of most Indian DTAAs defines royalties broadly. The definition typically covers payments for:

• Copyright use: The use of, or the right to use, any copyright of literary, artistic, or scientific work, including cinematograph films and software
• Patent and trademark use: Any patent, trade mark, design, model, plan, or secret formula
• Industrial equipment: The use of, or the right to use, industrial, commercial, or scientific equipment
• Know-how transfer: Information concerning industrial, commercial, or scientific experience

India's Expanded Domestic Definition

India's domestic definition of royalty under Section 9(1)(vi) of the Income Tax Act is broader than most treaty definitions. Through Explanation 2 (inserted by Finance Act 2012 with retrospective effect from 1976), India includes:

• Transfer of all or any rights (including granting of a licence) in respect of any copyright, literary, artistic, or scientific work
• Imparting of information concerning working of, or use of, a patent, invention, model, design, or process
• Use of any patent, invention, model, design, or process
• Imparting any information concerning technical, industrial, commercial, or scientific knowledge, experience, or skill
• Transfer or right to use any copyright, computer software, design, process, or other similar property
• Rendering of any services in connection with the above

The domestic definition explicitly includes computer software within the scope of royalty — a position that has generated extensive litigation and divergent court rulings. Under many DTAAs, software payments may not qualify as royalty if they involve a copyrighted article (a copy of the software) rather than copyright rights themselves.

What Qualifies as Fees for Technical Services (FTS)

Under Indian domestic law, Section 9(1)(vii) defines FTS as any consideration for the rendering of any managerial, technical, or consultancy services. This is an extremely broad definition — virtually any service with a technical element could be caught.

The Make Available Clause

This is the single most important concept in DTAA-based FTS taxation. Several of India's DTAAs — including the treaties with the USA, UK, Singapore, and Canada — contain a "make available" clause that narrows the definition of FTS.

Under the make available clause, fees are taxable as FTS in India only if the services:

1. Make available technical knowledge, experience, skill, know-how, or processes to the recipient, OR
2. Consist of the development and transfer of a technical plan or technical design

The critical distinction: a service provider who renders technical services but does not transfer the underlying technology or enable the recipient to perform the service independently in the future is not providing "included services" or FTS under these treaties.

Practical Examples

Treaties Without Make Available Clause

Not all Indian DTAAs contain the make available clause. Treaties with Germany, Japan, France, and several other countries follow the UN Model Convention approach, which taxes FTS more broadly — any payment for technical, managerial, or consultancy services can be taxed at source, regardless of whether technology is transferred.

Country-Wise DTAA Tax Rates for Royalties and FTS

The following table summarizes the withholding tax rates under India's most commonly invoked DTAAs, compared to the domestic rate.

Note: Rates shown are the maximum treaty rates. Some treaties have lower rates for specific types of royalty (e.g., equipment rentals may attract different rates than patent royalties). Always verify the specific treaty article for your transaction type.

For a comprehensive country-by-country breakdown, see our article on DTAA withholding tax rates by country.

How to Claim DTAA Benefits: Compliance Requirements

Claiming the lower treaty rate is not automatic. The Indian subsidiary (or the payer) must follow a specific compliance process.

Step 1: Obtain a Tax Residency Certificate (TRC)

The non-resident recipient must obtain a TRC from the tax authority of their country of residence. This certificate confirms that the recipient is a tax resident of the treaty partner country and is entitled to treaty benefits. The TRC must be valid for the relevant financial year.

Step 2: File Form 10F

The non-resident must also provide Form 10F, which contains additional details such as the taxpayer's status, nationality, tax identification number, and the period of residential status. If these details are already covered in the TRC, a separate Form 10F may not be required — but in practice, most Indian payers and tax authorities expect it.

Step 3: Apply Lower Withholding Rate Under Section 195

When the Indian entity makes the payment, it must deduct TDS under Section 195 at the applicable rate. If the payer wishes to apply the DTAA rate (which is lower than the domestic rate), it must either:

• Apply the lower rate directly based on the TRC and Form 10F (self-assessment), OR
• Obtain an order from the Assessing Officer under Section 195(2) or a certificate under Section 197 authorizing the lower rate

Step 4: File Form 15CA and Form 15CB

Before making the remittance, the Indian entity must file Form 15CA electronically. If the aggregate remittance exceeds INR 5 lakh in the financial year, a certificate from a Chartered Accountant in Form 15CB is also required. The CA's certificate confirms the applicable rate, the treaty invoked, and the TRC details.

Step 5: Quarterly TDS Returns

The Indian payer must report all Section 195 deductions in its quarterly TDS return (Form 27Q). The return must correctly reflect the DTAA rate applied, the treaty country, and the TRC details.

Common Disputes and Litigation Risks

Software Payments: Royalty or Business Income?

The taxation of software payments remains one of the most litigated issues in Indian tax law. The Supreme Court's landmark ruling in Engineering Analysis Centre of Excellence v. CIT (2021) held that payments for shrink-wrapped or off-the-shelf software are payments for a copyrighted article (not copyright itself) and therefore do not constitute royalty under most DTAAs. However, the Income Tax Department continues to litigate this issue for customized software, SaaS subscriptions, and cloud computing services.

Reimbursement of Expenses vs. FTS

When a parent company incurs expenses on behalf of its Indian subsidiary and recharges them at cost, the question arises: is the recharge a payment for FTS? Indian tax authorities often characterize cost recharges — particularly for IT support, HR services, or marketing — as FTS payments subject to withholding tax. The defence requires demonstrating that the recharge is a reimbursement of actual costs with no element of income or service provision.

Most Favoured Nation (MFN) Clause

Several of India's DTAAs (including with France, Netherlands, and Sweden) contain an MFN clause, allowing the treaty partner to claim the benefit of a lower rate that India may have agreed with a third country. The Supreme Court's 2023 ruling in Nestle SA v. ACIT restricted the automatic application of MFN clauses, holding that a separate notification is required to give effect to MFN provisions. This remains an evolving area of law.

Structuring Royalty and FTS Payments: Practical Guidance

Separate Royalty from Service Components

When a single agreement covers both the licence of IP (royalty) and the provision of services (FTS), ensure the contract clearly separates and prices each component. Mixed contracts often attract the higher of the two applicable rates on the entire payment.

Document the Commercial Rationale

Indian tax authorities scrutinize intercompany royalty and FTS payments through the lens of transfer pricing. The Indian subsidiary must demonstrate that:

• The payment is for genuine services or IP actually used in the Indian business
• The rate is at arm's length (benchmarked against comparable uncontrolled transactions)
• The payment generates a commensurate benefit for the Indian entity

For royalty payments, the RBI's historical guideline of 5% of net sales for manufacturing and 8% for know-how is still referenced by tax authorities, even though it is no longer a formal cap under current FEMA regulations.

Use the Correct Treaty

The treaty that applies is determined by the tax residency of the recipient, not the country of the parent company's incorporation. If a UK-incorporated company routes its IP licensing through a Singapore subsidiary, the India-Singapore DTAA (10% royalty rate) would apply — not the India-UK DTAA — provided the Singapore entity has genuine economic substance and is the beneficial owner of the royalty income.

For more on how to properly claim treaty benefits and reduce withholding, read our article on claiming DTAA benefits for lower withholding tax.

Key Takeaways

• India's domestic withholding rate on royalties and FTS is now 20% (plus surcharge and cess), making DTAA claims essential for foreign companies to reduce tax costs.
• The "make available" clause in DTAAs with the USA, UK, Singapore, Canada, and Australia significantly narrows what qualifies as taxable FTS — routine services without technology transfer are excluded.
• Country-wise DTAA rates typically range from 10-15%, offering savings of 5-10 percentage points over the domestic rate.
• Compliance requires a valid TRC, Form 10F, Form 15CA/15CB, and correct reporting in Form 27Q TDS returns.
• Software payments, cost recharges, and MFN clause applicability remain actively litigated — seek professional advice for these transaction types.