TAXATION OF ROYALTY INCOME
CHAPTER
10.1 SCOPE OF THIS CHAPTER
This chapter deals with taxability of royalty in cross border situation, i.e. the taxability of an NR earning royalty income which is considered to have its source in India. This would be the case when an Indian person makes the payment to the NR as well as when the royalty is deemed to arise in India, even when the payer to the NR is another NR, if the intellectual property for which royalty is paid by the NR is used in India. The chapter also briefly discusses taxability of income received by a resident person falling within the meaning of royalty and arising to the recipient in foreign jurisdiction. In such a case, in general, the tax paid in the foreign jurisdiction would be available as a credit against the tax payable on that income in India.
The chapter will explain meaning of royalty under the IT Act, its taxability under the IT Act in the hands of all recipients generally and in the hands of an NR in particular. Since many NR recipients of royalty which is taxable in India would be eligible to or would claim the benefits of the applicable DTAA, we have dealt with the meaning of royalty under the relevant article in the UN MC, OECD MC and the DTAA with USA. Readers are advised to check the definition of ‘royalty’ under the relevant DTAA as applicable in the client’s case.
While payments in respect of lease of aircrafts (equipment), in respect of use of equipment for mineral and oil exploration would have been included under the generic definition of royalty, as they are lease payment for commercial equipment, these are treated differently for tax purposes both under the IT Act and the DTAA and hence are dealt with in this chapter under separate headings.
Upon a resident receiving royalty from a foreign company, the same would be subject to tax in that jurisdiction as per the domestic law of that jurisdiction read with the provisions of the DTAA between India and
that jurisdiction. This chapter will pick up the taxability in the hands of the Indian resident in the same manner as for an NR, referring to the Article on royalty in the same UN MC, OECD MC and India-USA DTAA. We will then discuss its taxability in the hands of the Indian resident. This chapter will explain the concept of foreign tax credit. However, the detailed discussion on claiming of foreign tax credit and the process for the same is dealt with in a separate Chapter 20 of this book.
This chapter will also discuss whether or not an NR will be able to claim expenses against the royalty received and set off any losses, for computing taxable royalty income on which the NR is taxed in India.
10.2 MEANING OF ROYALTY AND TAXABILITY UNDER IT ACT
10.2-1 Meaning of Royalty Under the various provisions of the IT Act
(A) Royalty is defined under section 9(6)(b) is as follows :
(
b) in this sub-section, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for the following—
(i) the transfer or grant of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
(v) the use or right to use any industrial, commercial or scientific equipment except the amounts referred in section 61(2) (Table: Sl. No. 5);
(vi) the transfer or grant of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including—
(A) films or video tapes for use in connection with television; or
(B) tapes for use in connection with radio broadcasting;
(vii) the rendering of services in connection with the activities referred to in sub-clauses (i) to (vi);
(
c)for the purposes of clause (b),—
(i) the transfer or grant of all or any rights in respect of any right, property or information includes transfer or grant of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which that right is transferred;
(ii) royalty includes consideration in respect of any right, property or information, whether or not—
(A) the possession or control of that right, property or information is with the payer;
(B) that right, property or information is used directly by the payer;
(C) the location of that right, property or information is in India;
(iii) the expression “process” includes transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not that process is secret;
(iv) the expression “computer software” means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customised electronic data.
The above definitions can primarily be divided in three parts :
(i) Transfer of rights, or permission to use, or imparting of information pertaining to intellectual property (like patent, invention, copyright, etc.)
(ii) Pertaining to lease or use of industrial, commercial or scientific equipment
(iii) Pertaining to imparting of information concerning technical, commercial or scientific knowledge, experience or skill
All emphasis is provided for the purposes of reference while interpreting whether the payment can be characterised as royalty. Royalty agreement needs to be drafted and examined for characterisation, referring to all these characteristics. If the income is meant to be business income, it is necessary that it does not satisfy any of these criteria. Please
also refer to the discussion of the SC in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT1 in this chapter.
(B) Income in respect of business of prospecting, exploration of mineral Oils - Section 61(2) Serial No. 5
61. (1) The provisions of sections 26 to 54, to the extent contrary to this section, shall not apply to the manner of computation of profits and gains of the specified business in sub-section (2).
(2) The profits and gains of any specified business as mentioned in column B of the Table below, carried on by a specified assessee as mentioned in column C of the said Table during a tax year, shall be computed in the manner specified in column D thereof, and shall be deemed to be the profits and gains of such business of such assessee chargeable to tax for the said tax year under the head “Profits and gains of business or profession”.
Table
Sl. No.
Specified business
Specified assessee Profits and gains of business or profession
A B C D
5 Business of providing services or facilities (including supply of plant and machinery on hire) for prospecting, extraction or production of mineral oils.
Non-resident. 10% of (A+B), where,—
A = sum on account of business of providing services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of mineral oils in India, paid or payable (in or outside India), to the assessee or any other person on his behalf;
B = sum on account of business of providing services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of mineral oils outside India, received or deemed to be received in India, by the assessee or any other person on his behalf.
For applying the provisions of this section, the following conditions need to be satisfied :
(i) The person receiving the payment must be an NR
(ii) Such NR must be engaged in the business of :
a. providing services or facilities connected with, or
b. supplying plant and machinery on hire used, or to be used in, the prospecting for, or extraction or production of, mineral oils
(iii) The amounts payable must be
a. for providing services and facilities connected with, or
b. supply of plant and machinery on hire which is used in the prospecting or extraction or production of mineral oils in India
In this context, plant includes the following : Ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business, i.e. for the purposes of prospecting for, or extraction or production of mineral oils. It is important to note that the definitions are ‘inclusive’ and not ‘exhaustive’. Therefore the intention is to include similar items as are mentioned.
The NRs engaged in this business have the option to elect to be taxed on lower profit instead of profits under this presumptive basis, provided that the NR keeps and maintains such books of account and other documents as prescribed under section 58 and section 62 and gets them audited and furnishes a report of such audit as prescribed under section 58 and section 63.
As mentioned above, this section 61 would only apply if income is taxable under the head ‘income from business and profession’.
10.2-2 Taxation of royalty under the IT Act
This section of the Chapter deals with taxation of royalty within its meaning under the IT Act and also how the tax is levied and payable. Taxation of each type of royalty of an NR who is eligible to the provisions of a DTAA, may be taxed under the relevant DTAA if the scope and rate of tax under the DTAA is more beneficial as compared to the IT Act and the NR is eligible to the DTAA benefits. Taxation under DTAA is discussed in paragraph 10.3 of this chapter.
(1)Section 9(6)
A payment which falls within the meaning of royalty as defined under section 9(6) is taxable in India under the IT Act as per the rate prescribed in section 207 (plus applicable surcharge and cess).
(2)Foreign companies with PE, receiving royalty - Section 59
Where the royalty income is connected with the business carried out by the NR through a permanent establishment (“PE”) or a fixed base in India, then such royalty is taxable under section 59 of the IT Act. This section provides that the royalty income in such a situation (where it is connected with the business of the PE or fixed place of business in India) is to be computed as per the rules applicable under the IT Act to compute the profits and gains of business or profession.
Additionally, section 59 specifically denies the following deductions: (i) in respect of any expenditure or allowance which is not wholly and exclusively incurred for the business of such PE or fixed place of profession in India; or (ii) in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the PE to its head office or to any of its other offices.
It further provides that special provisions for taxation of royalty applicable in case of exploration etc. of mineral oils contained in section 61 would not apply for the purposes of taxation of royalty covered by this section. PE for the purpose of this section is specifically defined to include a fixed place of business through which the business of the enterprise is wholly or partly carried on.
It can be seen that there could be different interpretations in relation to what constitutes expenditure which is “wholly & exclusively incurred for the business of the PE or fixed place of business”.
Care needs to be taken while claiming deductions under these sections to determine taxable income to avoid dispute and disagreement and proper documentation and records should help in avoiding litigation.
(3)Royalty falling under section 9(6), taxed under section 207 – on Gross basis
Where the income of an NR includes income by way of royalty which is not covered under section 59, i.e. it is not connected with the PE of the NR in India, it will be taxed at 20% on the gross receipt of royalty, as per section 207.
Section 207(5) provides that no deduction would be allowed for any expense or allowance incurred for earning such royalty income.
(4) Taxation of royalty in respect of business of exploration of mineral oils - Section 61
This relates to income that falls within the purview of section 61 and pertains to royalty received in connection with the business of exploration of mineral oils by the NR. This income is taxed as business income on presumptive basis. 10% of the gross receipts of the NR engaged in this business is considered taxable as business income and taxed at the rate of 35% plus surcharge and cess.
The conditions which need to be satisfied for claiming taxability under this section under the IT Act are listed and discussed under section B of para 10.2-1 above.
In the case of Larsen & Toubro Ltd. v. Girish Dave, DIT (IT)2 the Bombay HC had the occasion to deal with payments by Larsen & Toubro (“L&T” or “Taxpayer”) to NRs which the Taxpayer claimed to qualify for section 44BB but the tax department treated it as royalty under section 115A.
The Taxpayer had entered into a contract with ONGC, for a project at an offshore location and hired barges and tugs from six NR companies to execute contractual obligations with ONGC. The tugs were hired to transport compressor module from yard to offshore location of the Project. The compressor module was an integral part of equipment to enhance exploration/production capacity.
The HC observed that from the text of section 44BB, it becomes evident that the emphasis is not on the service, facility or plant and machinery. What is the linchpin of the provision is the connection of the service or facility with, or the use of the plant and machinery on hire for, exploration, extraction or production of mineral oils. The Explanation 2 to section 44BB provides that for the purpose of the said section, “plant” includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business. The definition of “plant” is thus inclusive and subsumes within its fold means of transport, equipment and machinery, which can be utilised for the purpose of exploration, extraction and production of mineral oils. Based on the above, the HC accepted the Taxpayer’s claim that the pith and substance of each of the contract and agreement in this case was inextricably connected with prospecting, extraction and production of mineral oil and hence,
payments made by the Taxpayer to non-resident companies in execution of the said contract qualified to be taxed under section 44BB.
Also, under section 44BB, the NR taxpayer has an option to offer 10% of its income on presumptive basis or lower income, if it complies with the requirements as mentioned above in section B of para 10.2-1.
An NR can elect to be taxed under the DTAA unless the provisions of the IT Act are more beneficial to the NR. In this context, unless the income of equipment leasing which falls under section 44BB is arising out of a PE, the NR can opt to be taxed on gross basis under the Royalty article of the applicable DTAA, if that is more beneficial. In general, that would not be the case, but the facts of each case need to be examined.
(5)Taxation of income of NR from business of operation of aircrafts - Section 61
In case of an NR taxpayer engaged in the business of operation of aircraft, such income would not be taxed as royalty falling within the meaning of royalty under section 9(6) which deals with payment for the use or right to use any industrial, commercial or scientific equipment. Such income would be regarded as business income from operation of aircraft under the IT Act and will be taxed on presumptive basis as income under the head ‘profits and gains of business or profession’ under section 61 as follows :
5% of the amounts paid or payable to the NR in or outside India, in respect of :
(a) the carriage of passengers, livestock, mail or goods from any place in India; and
(b) the carriage of passengers, livestock, mail or goods from any place outside India.
(6)Taxation of income of a Resident in India from royalty, including special regime for income from Patents under section 194
Income received by a resident from an NR (from a person outside India), which is characterised as ‘royalty’ and therefore taxed as such in that jurisdiction, would be taxed in India in the hands of the resident, as part of his income from business or profession.
However, if the resident has paid tax on such royalty outside India, then he can claim credit for the taxes paid in the foreign jurisdiction, either under section 159. For this purpose he has to file Form 44 (online) by providing all the information required in the form. Submission of this form will enable the tax officer to give credit for the taxes paid in the
jurisdiction outside India. The Resident should also possess all the documentation to prove the payment of taxes outside India. This mechanism ensures that the royalty income is not doubly taxed.
Patent Box Regime
If the royalty income arises to a resident, who is the holder of patent which is registered in India in his name, and if he elects to be taxed on such royalty income under section 194, then the resident will be taxed in India on such royalty income at the rate of 10% (plus applicable surcharge and cess). In order to claim taxability under the regime of section 194, the following will need to be taken care of:
u Patentee should be the first & true inventor of the invention. It also includes first & true joint-inventor.
u Such ‘Patent’ is registered under the Indian Patents Act, 1970.
u Total income of the applicant includes royalty income from such registered Patent, registered & developed in India.
u Concessional taxation @ 10% on royalty income generated from ‘Patent’, including from outside India.
u Taxation u/s 194 is optional and not mandatory.
u Eligible taxpayer opting for taxation u/s 194 needs to file Form 65 on or before the due date of submission of income tax return.
u Form 65 seeks general details such as name, address, PAN of the applicant along with Patent specific details such as description of Patent, Patent number, Date of registration under Patents Act, Royalty Income generated from such Patent and expenditure incurred within and outside India w.r.t. such Patent.
u No expense is allowable as deduction against the royalty income sought to be taxed under section 194 or against any other income if concessional taxation u/s 194 is opted for.
(7) Exemption from tax on royalty received by NR in certain situations
u Section 11 provides that income received by an NR by way of royalty or interest for lease of an aircraft which is paid by a unit of an International Financial Services Centre (“IFSC”), if the unit in the IFSC commences its operations on or before 31 March 2024 is exempt from tax in India.
‘Aircraft’ in this context means an aircraft or a helicopter, or an engine of an aircraft or a helicopter or any part thereof.
INTERNATIONAL TAXATION READY RECKONER
AUTHOR : Daksha Baxi, Surajkumar Shetty
PUBLISHER : Taxmann
DATE OF PUBLICATION : June 2026
EDITION : 4th Edition | 2026
ISBN NO : 9789371265843
NO. OF PAGES : 632
BINDING TYPE : Paperback
2,395
DESCRIPTION
International Taxation Ready Reckoner is a practice-oriented guide to the taxation of cross-border transactions under the new Income-tax Act 2025, as amended by the Finance Act 2026 and read with the Income-tax Rules 2026. With the Income-tax Act 1961 now replaced, this Edition restates the field in the language and section-scheme of the new statute, so that advisers can locate every provision by its new number.
Built as a reckoner rather than a commentary, it answers the questions a professional actually faces: Is this income or payment taxable in India? How do the IT Act and the relevant Double Taxation Avoidance Agreement (DTAA) interact, and does the treaty benefit survive PE, GAAR and the Principal Purpose Test? The authors set out a repeatable method—read the residence position, read the treaty, then work each stream of income under both the Act and the DTAA—supported by worked examples, current case law and an end-to-end case study. This book is intended for the following audience:
• Chartered Accountants, Tax Advisers and Consultants
• Tax Lawyers and the Direct-Tax Teams
• In-House Tax and Finance Teams
• Professionals
• Trusted Advisers to SMEs and Family Businesses
• Anyone Responsible for Withholding Tax
• Faculty and Students
The Present Publication is the 4th Edition, amended by the Finance Act 2026. This book has been authored by CA. Daksha Baxi & Adv. Surajkumar Shetty, with the following noteworthy features:
• [Fully Recast Under the New Law] The subject is re-presented in the framework, terminology and section numbering of the Income-tax Act 2025 (read with the Income-tax Rules 2026), bridging the transition for readers trained on the Income-tax Act 1961
• [A Teachable Method, Not Just Black-Letter Law] A step-by-step approach to non-resident taxability—how to read a DTAA and whether it applies, the IT-Act-versus-treaty interplay, surcharge and cess on treaty rates, the Most-Favoured-Nation clause, and the consequences of PE, GAAR and the PPT under the MLI
• [Stream-By-Stream Treatment Under Both Regimes] Each major head of income is analysed first under the IT Act and then under the relevant DTAA article, side by side
• [Treaty and Model-Convention Text] Built on the UN and OECD Model Conventions (Articles 6, 7, 12 and 12A) and the actual language of India's treaties with the US, UK, Australia, Singapore, Germany, France, the Netherlands, Mauritius, the UAE, Japan, Belgium and the Philippines—with China, Cyprus and Poland in the case-law—and MLI-synthesised texts where relevant
• [BEPS-Aware] Integrates BEPS Action 6 (treaty abuse) and Action 7 (avoidance of PE status), alongside the MFN debate and CBDT Circular No. 3/2022
• [Grounded in Current Case Law] Up-to-date precedents woven through, including Tiger Global (SC), Vodafone-Essar, Sanofi Pasteur, Vanenberg Facilities, Indostar Capital, GE India Technology Centre, Toshoku, Infosys BPO, Cadila Healthcare, and the Giesecke & Devrient/Total Oil India split on the DTAA rate for DDT
• [A Genuine Capstone] A fact-based case study built around an Indian JV company and a foreign 'know-how' LLP, worked through eleven sequential questions that apply the whole book to one scenario
• [Built-In Ready References] A front-of-book non-resident withholding (TDS) rate table under Part II of the First Schedule to the Finance Act 2026; a Glossary of Terms; decision charts and flowcharts; summary tables (DTAA article map, valuation rules, transfer pricing); FAQs on GAAR; and an Appendix of forms referred to
• [Current and Emerging Issues] The digital economy and e-commerce, Equalisation Levy-2, Significant Economic Presence, indirect transfer of Indian assets, and the IFSC/GIFT City regime
