Taxation of IP Royalties and Assignment Fees in India

This article is written by OLUWABUKOLA BENEDICTA ONI, University of Ibadan, Law, 500 level during her internship at LeDroit India

ABSTRACT

The concept of property has evolved beyond the confines of the tangible to embrace intangible interests, a transformation that may be traced as far back as the fifteenth century. A defining moment in this evolution occurred in 1474, when the Venetian Senate enacted the first codified patent system, formally recognising and enforcing exclusive rights in inventions. This development affirmed that property could subsist not only in physical objects but also in creations of the human intellect. The recognition of such exclusive rights inevitably gave rise to their commercial exploitation. Intellectual property assumed economic significance through mechanisms such as licensing, franchising, and other forms of authorised use, enabling right holders to derive value while retaining legal control.

In line with a fundamental principle of law, the existence of rights necessarily entails corresponding duties. Where intellectual property generates economic benefit, it properly attracts public obligations. Taxation thus emerges as a legitimate means of state revenue, and intellectual property, as a commercially exploitable form of property, falls squarely within its scope.

The aim of this paper is to examine the taxation of royalties and assignment fees in India, with the focus on how tax rules interact with IP law in the licensing ad transfer of IP rights. Note that the statutes stated are Indian authorities except where stated otherwise.

KEY WORDS: Taxation, Royalties, Assignment Fees, IP laws

INTRODUCTION 

Indian law treats intellectual property as property in a strict legal sense. Copyright, patents, trademarks and registered designs arise from statute and grant exclusive control recognised and enforced through courts. The Copyright Act 1957 protects original literary, artistic, musical and cinematographic works for a fixed statutory duration with the inclusion of sixty years after the author’s lifetime. The Patents Act 1970  gives the right to the inventors over the inventions for a period of twenty years from the date of filing. The Trade Marks Act 1999  provides protection for exclusive commercial identification, and hence, subject to renewal every ten years. The Designs Act 2000  provides protection to the visual appearance of industrial articles for limited periods. These rights have enforceable exclusivity, alienability, and economic value. Considering the above statements, it places them squarely within property law reasoning.

Absence of physical presence does not debilitate the legal position. Indian private law has traditionally seen in incorporeal property: debts, shares and goodwill. Intellectual property fits into that mold. Material form is less important than the ability to control its exploitation. Each right allows its owner commercial use, division and transfer. Assignment secures proprietorship. It can be in gross or for defined shares. Licensing retains ownership and allows partial use. That distinction is legally significant. Ownership is the determinant of who should control its exploitation. Permission determines how far the other could benefit without securing title.

In the case Engineering Analysis Centre of Excellence Pvt Ltd v Commissioner of Income Tax, the Supreme Court of India insisted that tax consequences must reflect copyright law principles governing ownership and licensed use. The court ruled that software firms that purchase computer software from foreign software suppliers/manufacturers have now been exempted from deducting the TDS. Similar reasoning appears across cases involving patents and technical know how, where courts focus on control, exclusion and transfer.

Tax exposure therefore arises as a legal incident of intellectual property exploitation. Revenue liability flows from how rights are held, shared or transferred. This approach preserves coherence across private law and revenue law. It has helped to ascertain clarity and protection for creators, assignees and licensees operating within Indian markets.

Statutes Governing Royalty Income in India

Indian income tax legislation sets out a precise treatment of royalty income that rests on intellectual property law concepts rather than loose commercial description. Section 9(1)(vi) of the Income Tax Act 1961 defines royalty as consideration for the transfer of rights, or for the use or right to use, copyright, patents, trademarks, designs, secret processes and similar intangible rights. It says:

The language ties tax liability to legally recognised interests under intellectual property statutes. Payment labels used in contracts carry little weight if the underlying transaction involves licensed exploitation of protected rights.

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The phrase “use or right to use” captures licensing arrangements that preserve ownership while permitting controlled exploitation. Copyright licences for reproduction, communication to the public or adaptation fall squarely within this wording. Patent licences granting manufacturing or sale rights attract the same result. Trademark licences permitting brand use without title transfer also fall within statutory reach. Assignment produces a different outcome. Once ownership passes, the transaction exits the statutory definition of royalty and enters capital or trading income analysis, depending on the transferor’s position. The statutory text therefore mirrors intellectual property doctrine with notable precision. Royalty income is subject to taxes on a source basis. Section 9 of the Act provides the accrual of royalty income to occur in India if the payer of the royalty is resident in India or if the royalty income is paid in respect of rights used or enjoyed in a business carried on or the income arising from anywhere within India. Cross-border royalty paid to non residents attracts withholding obligations under section 195. The current domestic rate for royalty paid to non residents stands at ten per cent, subject to surcharge and health and education cess. Royalty paid to resident licensors attracts tax deduction at source at ten per cent under section 194J. These rates matter commercially, as they influence pricing and contract structure in licensing negotiations.

Treaty protection moderates domestic law.” India has over ninety DTAAs. “Most DTAs have limited the tax rates on royalties between ten and fifteen percent.” In cases where DTAs are applicable, they prevail over domestic law with respect to inconsistency. There is an imperative to examine both provisions in detail and with caution in the context of transaction structuring. They have upheld the supremacy of DTAs in cases where the prerequisites are fulfilled.

International element becomes apparent while preparing treaties. The royalty clauses drafted by the Government of India are aligned with the OECD Model Tax Convention, sometimes extended to safeguard the source country’s taxing interests. The conflict of source versus residence taxation is apparent. The judicial systems of India are now dealing with this conflict through a restricted interpretation of the statute, especially introduced while handling cases regarding the software and technology sector. The legal structure of property.

Assignment Fees and Transfer of Intellectual Property Ownership

In India, there is a clear legal distinction between licensing and assignment. Assignment requires transfer of proprietary interest itself, not merely permission to use. Under the Copyright Act 1957, assignment requires written form and operates as a transfer of ownership in whole or in part. Also in the Patents Act 1970, permitting assignment of patent rights with corresponding entry on the register. Trademark law is not different, it treats assignment as conveyance of title rather than contractual permission. These statutory provisions portray intellectual property as property capable of absolute transfer with statutory limitations.

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After assignment, the assignor ceases to have legal control over exploitation. The assignee assumes the status of the owner, acquiring the exclusive right of usage, licensing, or further assignment. This new status creates taxing implications. Fees of assignment are regarded as consideration for the transfer of a capital asset rather than income from the exercise of ownership. This is mirrored under the Indian tax laws as well. The amount received as consideration upon the assignment of a right is not considered a royalty under section 9(1)(vi) of the Income Tax Act of 1961, as the emphasis is upon usage or the right to usage as opposed to the assignment of the right. The chargeable consideration falls under the domain of Capital Gains, except where the assignor regularly deals in intellectual property as stock in trade.

Capital gains treatment depends on the nature of the right and the manner of its creation. Intellectual property qualifies as a capital asset under section 2(14) of the Income Tax Act. Where the right is self generated, difficulty arises in determining cost of acquisition. Section 55  brings an end to this problem in respect of certain categories. Historically, the cost of acquiring copyright in literary, artistic, or musical or cinematographic works was nil, computed under the provisions of the Act. This is subject to certain conditions specified under the statute. This shall also be applicable to trademarks and other brand and rights developed within the firm, since the statute adopted the same principle to ensure that the capital gains tax is charged despite the nil historical cost treatment and base treatment thereof.

Judicial pronouncement supports the above treatment. Lump sum payment towards outright transfer of intellectual property rights has consistently been considered sale consideration and not royalty in several judicial decisions. For instance in the case of CIT vs. DCM Ltd, the Delhi High Court treated the transfer of technical know-how accompanied through permanent divestment as a capital receipt. This case now extends to trademark and patent rights in later decisions, depending on whether the transferor has any proprietary rights. Lack of control suggests a capital transaction.

This doctrinal separation between ownership transfer and licensed use performs an important disciplining function. It prevents revenue authorities from recharacterising assignment fees as royalty merely because intellectual property generates value. Tax liability follows legal substance. This clarifies what is ascertainable in commercial transactions and preserves alignment between intellectual property law and fiscal rules. Candidates who collapse assignment and licensing into a single category miss this structural clarity.

Judicial Interpretation of Royalties and Assignment Fees in Intellectual Property Transactions

The Indian judiciary has displayed restraint while classifying payments arising out of intellectual property transactions. The judiciary focuses solely on the forma pauperis character and control retained. Its rationalization has helped rein in challenges arising out of attempts by revenue authorities to excessively expand the meaning of royalty under intellectual property law.

The most authoritative case on the matter is the Supreme Court case of Engineering Analysis Centre of Excellence Pvt Ltd. Vs. Commissioner of Income Tax. The dispute concerned payments made for off the shelf software supplied through distribution arrangements. Revenue authorities treated the payments as royalty on the basis that software embodied copyright. The Court rejected that view. It held that copyright law distinguishes ownership of copyright from permission to use copyrighted articles. End users received no rights recognised under section 14 of the Copyright Act 1957. Absence of proprietary interest meant the payments could not fall within section 9(1)(vi) of the Income Tax Act 1961. The judgment insisted upon alignment between tax classification and intellectual property doctrine.

Earlier decisions had already gestured in this direction. Tata Consultancy Services v State of Andhra Pradesh,  was a landmark Indian Supreme Court ruling that held off-the-shelf (canned) software, when sold on a physical medium like a disk, constitutes “goods” and is therefore subject to sales tax under the Andhra Pradesh General Sales Tax Act (APGST). That distinction later shaped income tax reasoning. Courts consistently resist attempts to treat embedded intellectual property as sufficient to trigger royalty treatment without transfer of legally recognised rights.

High Courts are following the same rationale while dealing with patents, technical know-how, and trademarks. In the cases of CIT vs. DCM Ltd, the amount received as part payment for the permanent transfer of technical know-how was held to be a capital receipt as opposed to a royalty payment because of the absence of ongoing obligations of control. The retention of control would reverse this position. This applies in the same way to the decisions of trademark assignments, where the ongoing control of the brand or quality supervision is considered.

The judicial approach to cross-border transactions is marked by the same level of discipline. The courts emphasize that the interpretation of the treaty must follow the principle of ownership analysis. In the absence of the use/right to use intellectual property under the Double Taxation Avoidance Agreement (DTAA), the courts do not advocate the expansion of the term under domestic laws. The override rule works after the determination of beneficial ownership.

The cumulative effect of these decisions lies in methodological restraint. Courts refuse to treat revenue considerations as independent drivers of classification. Payment structure alone does not determine tax outcome. Ownership, control and statutory recognition govern the result. This judicial posture reinforces coherence across intellectual property law and income tax law. It also signals to revenue authorities that recharacterisation without doctrinal footing will fail.

Such reasoning performs a stabilising function within intellectual property markets. Parties structure licences and assignments with confidence that courts will respect legal form. That confidence encourages licensing, technology transfer and creative investment within India. Judicial interpretation therefore operates not merely as dispute resolution, but as an institutional guarantor of doctrinal integrity.

Policy Tensions: Revenue Protection, Innovation Incentives and the Future of Intellectual Property Taxation in India

Indian tax policy toward intellectual property sits on a narrow ridge. One side carries the pressure to protect revenue in a digital economy where value moves faster than factories. The other side carries the need to reward invention, authorship and commercial risk. Royalty taxation sits exactly at that meeting point.

India remains a net importer of technology. In 2022, for the first time, payments for use of intellectual property overtook receipts from Indian-owned rights holders and created a deficit in the current account arising from technology transfers. This explains the no-nonsense attitude towards the taxation of royalties. Withholding taxes guarantee collection at source, contain erosion of the tax base and avert dependence on post-payment enforcement. The approach serves fiscal prudence, yet raises the cost for Indian licensees and may deny access to really state-of-the-art technology.

Innovation policy complicates this stance. India aspires to become a technology exporting jurisdiction. Government data shows research and development expenditure remains under one per cent of GDP, well below levels recorded in Germany and South Korea. Tax treatment of royalties influences that figure. Where licensing income faces heavy friction at entry and exit, private investment hesitates. Universities, start ups and research driven firms feel this pressure first.

Judicial interpretation has attempted restraint. In Engineering Analysis Centre of Excellence Pvt Ltd v Commissioner of Income Tax, the Supreme Court refused to treat routine software licensing as royalty where ownership remained unchanged. The judgment did not relax taxation in general. It restored alignment between intellectual property law and tax characterisation. Ownership, control and transfer mattered again. This correction preserved space for innovation without dismantling the revenue system.

Administrative practice reveals the same tension. The Equalisation Levy and digital service taxation proposals emerged from concern that traditional royalty rules no longer capture value creation in data driven markets. Yet India withdrew proposals to expand royalty definitions through domestic amendment after resistance from industry and treaty partners. Policy adjustment followed commercial reality rather than fiscal ambition alone.

A forward looking approach demands balance rather than escalation. Stable definitions, predictable withholding rates and respect for intellectual property ownership encourage inbound and outbound licensing. Revenue still flows where genuine use occurs. Innovation gains breathing room. Tax law becomes a support system rather than an obstacle.

This balance determines whether India remains a consumer of intellectual property or moves toward sustained ownership. Royalty taxation shapes that trajectory more than slogans or funding announcements. Law decides incentives. Incentives decide behaviour.

Conclusion 

Indian royalty taxation would benefit from narrower statutory drafting tied more closely to ownership and economic control. Current withholding rates, reaching 10 per cent for residents and 20 per cent for non residents under domestic law, often exceed treaty expectations and raise transaction costs for inbound technology transfers. A legislative clarification aligning section 9(1)(vi) with treaty language would reduce disputes without weakening revenue collection. The Supreme Court decision in Engineering Analysis shows that judicial correction arrives late and after commercial damage. Statute should do that work earlier.

Comparative practice offers guidance. The United Kingdom limits royalty taxation to payments linked to use within its territory, while Germany relies on strict source attribution tied to permanent establishment risk. Both systems preserve revenue while avoiding expansive definitions. India could adopt similar restraint, paired with stronger audit capacity. Predictability attracts licensing activity. Licensing activity expands the tax base. The gain lies in volume rather than aggressive characterisation.