📘 Understanding Royalty Payments From India to Non-Treaty Countries

With the growing globalization of business operations, Indian companies and professionals frequently engage with foreign entities for intellectual property (IP), technical services, and other royalty-bearing arrangements. While India's tax treaties (DTAA) offer relief in many such cross-border payments, transactions involving non-treaty countries pose distinct tax and regulatory challenges.

This article aims to provide a comprehensive understanding of how royalty payments made from India to entities in non-treaty countries are treated under Indian tax law.

🔍 What Are Royalty Payments?                                 

Royalty is a payment made for the use of or right to use:

• 
  Patents, trademarks, copyrights
• Technical know-how
• Software licenses
• Industrial/commercial/scientific equipment
• Literary or artistic works

🎯 Section 9(1)(vi) of the Indian Income Tax Act, 1961, defines what constitutes "royalty" and considers such income as arising in India if paid by an Indian resident.

🌐 What Are Non-Treaty Countries?

Non-treaty countries are those with whom India does not have a Double Taxation Avoidance Agreement (DTAA). In such cases, Indian tax laws—without treaty-based reliefs—apply in full.

Examples of non-treaty jurisdictions may include smaller island nations or countries without diplomatic tax relationships with India.

⚖️ Tax Treatment of Royalty Payments to Non-Treaty Countries

 1. Applicable Law

• Governed by the Income Tax Act, 1961
• No DTAA benefits like reduced withholding tax or exemption

💸 2. Withholding Tax (TDS)

• Royalty paid to a non-resident (even without a PE in India) is taxable in India.
• Section 195 mandates withholding of tax at source.
• In the absence of DTAA, standard rate of 10% + surcharge + cess applies, which may go up to 10%–15% or more.

⚠️ TDS must be deducted before remitting the payment abroad.

📑 Important Compliance Requirements                             

 A. Form 15CA & 15CB

• 
  Form 15CA: Declaration of remitter on tax deducted
• Form 15CB: Certificate by Chartered Accountant confirming nature of payment and taxability
• Required before making any remittance outside India (as per Rule 37BB of Income Tax Rules)

🏦 B. RBI Regulations (FEMA)

• Under FEMA rules, foreign remittance of royalty is permissible through automatic or approval routes depending on the sector.
• Companies must check limits and sector-specific caps issued by RBI.

📚 C. Documentation

• Agreement or invoice clearly stating the purpose of payment
• Proof of ownership of IP/technical services
• Chartered Accountant’s report under Section 195

💼 Example Scenario

🔧 An Indian software company pays $10,000 as a license fee to a tech firm in a non-treaty country (e.g., Belize):

• TDS at ~10.4% must be deducted before payment
• File Form 15CA/CB
• Ensure compliance with FEMA limits
• Report under Form 3CEB if covered under transfer pricing

🔎 Challenges in the Absence of DTAA               

✅ Best Practices

✔ Evaluate if the foreign party is from a treaty country through subsidiaries
✔ Explore possibility of sourcing services via a third-party intermediary
✔ Properly classify the nature of payment (royalty vs. FTS vs. business income)
✔ Obtain expert tax and legal opinion before remittance
✔ Maintain proper audit trail for future assessments

📌 Conclusion

In the case of royalty payments to non-treaty countries, the absence of DTAA benefits significantly increases the tax and compliance burden on Indian payers. Companies must carefully examine the withholding tax obligations, ensure regulatory compliance, and adopt best practices to avoid future litigation or penal consequences.

While India remains a global hub for cross-border business, such transactions must be backed by sound legal interpretation, proper documentation, and timely reporting to stay on the right side of the law.

Operations Head at TAXAJ

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