In India, royalty payment refers to the payment made by a licensee to a licensor for the use of intellectual property (IP) such as patents, trademarks, copyrights, and designs. Royalty payment in India is subject to tax under the Income Tax Act, 1961, and the relevant provisions are specified under Section 9(1)(vi) and Section 195 of the Act. Under Section 9(1)(vi), any income that arises in India through the transfer of any right, property or asset situated in India, or by the use or right to use any property or asset situated in India, is deemed to accrue or arise in India and is therefore taxable in India. Section 195 of the Income Tax Act requires that any person making a payment to a non-resident for the use of any intellectual property in India is required to withhold tax at the rate of 10% (or at the rate specified under the applicable Double Taxation Avoidance Agreement, if any). This withholding tax is required to be deducted at the time of making the payment or at the time of credit of such income to the account of the payee, whichever is earlier. However, if the non-resident has a Permanent Establishment (PE) in India, the royalty income would be taxable as business income and not as royalty income. In such cases, the tax would be calculated as per the applicable tax rates for business income in India. It is important to note that there are various exemptions and deductions available for royalty income under the Income Tax Act, and it is recommended to consult a tax expert for specific advice related to royalty payments in India.

DEAR CLIENT, In India, royalty payments arise primarily in the context of intellectual property rights, particularly concerning patents, copyrights, trademarks, and sometimes even in the context of natural resources like minerals or oil. The legal framework governing royalty payments involves multiple laws, such as the Copyright Act, 1957, the Patents Act, 1970, the Trade Marks Act, 1999, and specific statutes related to mining and resource extraction. Royalty payments are essentially fees paid by one party (the licensee or user) to another (the licensor or owner) for the right to use an intellectual property or resource. This can include monetary compensation based on the revenue generated from the use of the licensed property, a flat fee, or contributions based on production levels in resource extraction scenarios. The terms of royalty payments, including rates and conditions, are usually delineated in a licensing agreement or contract, which is legally binding upon the parties involved. The payment structure can vary significantly and is often a subject of negotiation; it may be calculated as a percentage of sales, a fixed amount per unit sold, or a combination of both. In India, the Collecting Societies, as per the Copyright Act, play a vital role in the management and collection of royalties for creators, particularly in music and literature. These societies, such as the Performing Rights Society of India (PRSI) and the Indian Performing Right Society (IPRS), ensure that artists and creators are compensated for the use of their works. The rates and distribution of royalties by these societies are governed by agreements and are ultimately subject to regulatory oversight by the Copyright Board. In the context of patents, the Patents Act allows patent holders to license their inventions to third parties in exchange for royalties. The agreement typically specifies the duration of the license, the scope of use, and the royalty rate. Patent royalties are crucial for stimulating innovation, as they provide inventors with a financial incentive to develop and commercialize new technologies. Disputes over royalty payments can arise when licensees do not fulfill their payment obligations under the contract, leading to potential legal battles. Furthermore, in the context of mining and natural resources, royalty payments are regulated under specific mining laws, such as the Mines and Minerals (Development and Regulation) Act, 1957. Here, the government imposes royalties on the extraction of minerals, and these payments are a significant source of revenue for the state. The rate of royalty is usually prescribed through notifications issued by the government and may vary depending on the type of mineral. Taxation is another critical aspect of royalty payments in India. Royalty payments are often subject to withholding tax as per the Income Tax Act, and the applicable tax rate can vary depending on whether the recipient is a resident or non-resident. The Indian legal framework provides mechanisms for tax treaties, which can influence the effective tax rate applied to royalty payments in cross-border transactions. We hope this clarifies your query. Please feel free to reach out for further assistance. Thank you

Dear client, Royalty payments in India refer to the consideration paid by one party (licensee) to another (licensor) for the use of intellectual property, patents, trademarks, copyrights, or natural resources. These payments are governed by various laws, including the Income Tax Act, 1961, the Foreign Exchange Management Act (FEMA), 1999, and industry-specific regulations. Understanding the legal and taxation aspects of royalty payments is essential for businesses, foreign investors, and individuals engaged in transactions involving intellectual property. Legal Framework Governing Royalty Payments 1. Income Tax Act, 1961 o Royalty payments made to residents are subject to Tax Deducted at Source (TDS) under Section 194J at the rate of 10%. o Payments made to non-residents are covered under Section 195, and the tax rate depends on the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the recipient’s country. 2. Foreign Exchange Management Act (FEMA), 1999 o Royalty payments to foreign entities require compliance with FEMA and RBI (Reserve Bank of India) guidelines. o The automatic route allows royalty payments for technology collaborations up to a certain limit, while higher payments require RBI approval. 3. Copyright Act, 1957 o Governs royalties for literary, artistic, and musical works. o Authors, composers, and creators are entitled to statutory royalties in certain cases. 4. Patents Act, 1970 and Trademarks Act, 1999 o Governs licensing and royalty arrangements for patents and trademarks. o Licensing agreements must comply with Indian IP laws to be enforceable. Taxation of Royalty Payments 1. Withholding Tax on Domestic Royalties o TDS at 10% under Section 194J for residents. o The recipient must include royalty income in their taxable income and pay applicable taxes. 2. Withholding Tax on Foreign Royalties o Payments to non-residents are subject to Section 195, with tax rates typically ranging from 10% to 20% unless reduced under a DTAA. o DTAA provisions can override domestic tax rates if beneficial to the taxpayer. 3. Goods and Services Tax (GST) on Royalties o Royalty payments attract GST at 18% under the category of supply of services. o GST is applicable on software licenses, franchise fees, and intellectual property transfers. Compliance and Regulatory Aspects 1. Filing of Forms o Form 15CA/15CB is required for remitting royalties abroad. o Taxpayers must maintain agreements and invoices for compliance. 2. RBI Approval o Certain transactions exceeding prescribed limits require RBI permission. 3. Penalties for Non-Compliance o Non-deduction of TDS can result in penalties under Section 201 of the Income Tax Act. o FEMA violations attract fines and restrictions on foreign remittances. We hope this clarifies your query. Please feel free to reach out for further assistance. Thank you