Royalty and Fees for Technical Services — Taxation for Non-Residents

Royalty and Fees explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Royalty and fees for technical services earned by non-residents are taxed in India on a gross basis at 20% under section 115A (plus surcharge and cess). Treaties often reduce the rate to 10–15% and, for FTS, may apply a "make-available" test that narrows the charge.

Overview

Royalty and fees for technical services (FTS) are among the most common cross-border payments India taxes. They are deemed to accrue in India when paid by a resident (or, in some cases, by a non-resident for business in India) and are taxed on a special gross basis. The definitions and charge sit in the Income-tax Act, 2025 (originating in section 9(1)(vi)/(vii) and section 115A of the 1961 Act).

What Is Royalty

Royalty is consideration for the use of, or right to use, intellectual and industrial property — patents, inventions, models, designs, trademarks, copyrights, secret formulae or processes, and industrial, commercial or scientific equipment or know-how. Statutory Explanations extend it to certain software licences, satellite/cable transmission and use of data-transmission capacity.

What Is Fees for Technical Services

FTS is consideration for managerial, technical or consultancy services, including the provision of technical or other personnel. It excludes consideration taxable as salary, and consideration for a construction, assembly, mining or like project undertaken by the recipient.

Rate — Section 115A

"Gross basis" means no deduction for expenses — tax is on the whole receipt. Because there is no expense allowance, the treaty rate usually matters a great deal.

Treaty Rates and the Make-Available Test

Under section 90(2), the taxpayer applies the DTAA if it is more beneficial. Many treaties cap royalty/FTS at 10% to 15%. Crucially, several treaties (for example, India–USA, India–UK) apply a make-available test to FTS: the service is taxable as FTS only if it makes technical knowledge, experience, skill or know-how available to the recipient, enabling them to apply it independently later. Routine services that do not transfer skill escape the FTS article — though they may still be business profits taxable only through a PE.

Effect of a Permanent Establishment

If the royalty or FTS is effectively connected with a PE the non-resident has in India, section 115A gross taxation does not apply. Instead the income is computed as business profits on a net basis — receipts less attributable expenses — and taxed at the applicable rate.

Worked Example

A US software company licenses software to an Indian customer for ₹40,00,000 and provides related consultancy that does not make any technical skill available. The licence fee, if characterised as royalty, is taxed at the India–US treaty rate (say 15%) on a gross basis. The consultancy, failing the make-available test and absent a PE, may not be taxable as FTS at all. Proper characterisation drives the withholding under section 195.

Compliance

The Indian payer withholds tax under section 195 at the applicable rate, supported by the payee’s TRC and Form 10F for treaty benefits, and files Form 15CA/15CB. Where only section 115A income arises and tax is correctly deducted, the non-resident may be relieved from filing a return, though a return is usually advisable to substantiate treaty positions.

Common Pitfalls

• Treating all software payments as royalty without checking the treaty and current jurisprudence.
• Ignoring the make-available test, leading to over-withholding on genuine non-FTS services.
• Applying gross-basis tax where the income is in fact connected to an Indian PE.

Related Guides

• Section 195 — TDS on Payments to Non-Residents
• Permanent Establishment (PE) — When It Triggers
• More Guides