January, 2011

In the present era of globalization, the Government of India has been trying to liberalize its policy on FDI and Foreign Trade by relaxing the rules for import of foreign technologies and payment for royalty. Until 16/12/2009, there were certain restrictions on the upper limit for the payment of royalty for technology transfer under automatic route as per the limits prescribed in Annexure-V, under item 8 of Schedule-II of the Current Account Transaction Rules-2000. Accordingly prior permission was required from Project Approval Board, Department of Industrial Policy & promotion, Ministry of Commerce, Government of India for cases involving payment for exceeding lump sum of fees of US$ 2 million and payment of royalty of 5% on domestic sales and 8% on exports. There were also restrictions for payment of royalty for payment on use of trademarks & brand names of the foreign collaborations up to 2% for exports and 1% for domestic sales. This was the position up to 16/12/2009.

However, the above restrictions have been done away with on and from 16/12/2009 by way of notifications in Press Note-8 (2009 Series) issued by the department of Industrial Policy & Promotion (FC Section) Government Of India, and suitable amendment has been made in the Current Account Transaction Rules 2000 vide notification dated 5th May, 2010 issued by Department of Economic Affairs, Ministry of Finance, Government of India with retrospective effect from 16/12/2009 and amended rules are contained in Foreign Exchange Management (Current Account Transaction) (Amendment) Rules, 2010. Henceforth the Indian Company making payment for technology transfer or for use of Trademarks or Brand names is required to submit post payment reports to Government of India for statistical purpose only.

The above amendment has given a further boost to the Foreign Technology Transfer as the amount of royalty fees can be fixed on market determined rates and without involving any permission from any government authority being either Reserve Bank of India or the Department of Industrial Policy & Promotions, Ministry of Commerce.

According to the provisions of Section-9 (1) (vi) of Indian Income Tax Act, 1961 any income by the way of royalty is taxable in India as the same is treated as income deemed to accrue or arise in India. The term royalty has been defined under Explanation-2 of the aforsaid section and include the value of consideration for or in exchange of mainly of the followings:-

1. The transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property.

2. The transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films.

However, one must remember to make the distinction between the income by way of royalty and income by way of fees for deemed income under the provisions of section 9 (1)(vii) and has been mainly defined in Explanation 2 to the said section as below:

Explanation 2: "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

The provisions of withholding tax on payment of royalty and fees for technical services to a non resident are applicable as per the provisions of section 195 and the Income Tax Act 1961 as per the rates prescribed either under the Income Tax Rules 1962 or the applicable rates as per the Double Taxation Treaties between Government of India and the other countries.

The above position of law as applicable for technology transfer as prescribed under Foreign Exchange Management Act, 2000 and under the Income Tax Act, 1961 must be borne in mind while advising any overseas clients for joint ventures or for foreign collaboration. ITAG as a IP Boutique firm is a one stop solutions for all types of registration and approvals for the Technology Transfer in this present globalised economic environment.

- Dr. D. R. Agarwal