Understanding the Taxability of Royalty Payments Under the India-UK DTAA

In an increasingly globalized world, businesses often leverage intellectual property (IP) such as trademarks, logos, or designs from foreign entities. When such intellectual property is used, the Indian entity typically pays a royalty fee to the foreign IP owner. These payments trigger tax obligations, both domestically and internationally. In this article, we will explore the taxability of royalty payments made by an Indian entity to a UK-based company, with a focus on the provisions under the India-UK Double Taxation Avoidance Agreement (DTAA).

Introduction to Royalty Payments

Royalties are payments made for the use of or the right to use intellectual property such as trademarks, patents, logos, and more. In the context of cross-border transactions, such payments are treated as income in the country of the IP owner and may also be taxed in the country from which the royalty is paid.

In this article, we will focus on a scenario where an Indian company (XYZ Exports) pays royalties to a UK company (PQR Company) for the use of a trademark/logo (ASC Logo) and examine the tax implications under Indian tax laws and the India-UK DTAA.

Taxability of Royalty Payments Under Indian Law

Under the Indian Income Tax Act, 1961, royalty payments made by an Indian resident to a non-resident are considered as income arising in India. Section 9(1)(vi) of the Act specifically defines royalty as income accruing or arising in India if it is for the use of or the right to use any intellectual property, including trademarks and logos

Withholding Tax Rate (Finance Act 2024): Royalties paid to non-residents are subject to a flat 20% withholding tax (plus applicable surcharges and cess).
Without applying the DTAA, PQR Company might face double taxation in India at 20% and in the UK.

Example Without Applying DTAA

If XYZ Exports pays ₹1,00,00,000 as royalty to PQR Company, the withholding tax under Indian domestic law would be ₹20,00,000, leaving PQR Company with ₹80,00,000.

Taxability Under the India-UK DTAA (Article 13)

The India-UK DTAA reduces the withholding tax rate on royalties to 15%. To claim this reduced rate, PQR Company must provide a Tax Residency Certificate (TRC) confirming it is a tax resident of the UK.

Under Article 13 of the DTAA, royalties include payments for the use of intellectual property like trademarks, logos, and designs.
The 15% tax rate applies to royalty payments, reducing the withholding tax from 20% to 15%.

Scenario	Tax Rate on Royalties	Tax Deducted by XYZ Exports	Net Payment to PQR	Relief for PQR (UK Entity)
Without DTAA (Indian Law)	20%	₹20,00,000	₹80,00,000	No automatic relief; risk of double taxation
With DTAA (India-UK DTAA)	15%	₹15,00,000	₹85,00,000	Relief or tax credit in the UK

Compliance: Filing Forms 15CA and 15CB

XYZ Exports must comply with Section 195 of the Indian Income Tax Act when making royalty payments to PQR Company. This involves filing Forms 15CA and 15CB.

Form 15CA: Declaration of the payments made to a non-resident by XYZ Exports.
Form 15CB: Certified by a Chartered Accountant (CA), ensuring the correct tax deduction.

Key Considerations for Businesses

Ensure proper documentation (TRC) to claim reduced tax rates under the DTAA.
File Forms 15CA and 15CB accurately to avoid compliance issues.

Consult a Chartered Accountant

Frequently Asked Questions (FAQ)

Q1: What is the withholding tax rate for royalty payments under the India-UK DTAA?

A1: The DTAA caps the withholding tax rate at 15% of the gross royalty amount, which is lower than the 20% rate under Indian domestic law.

Q2: Why are Forms 15CA and 15CB required for cross-border royalty payments?

A2: These forms ensure compliance with tax deductions for cross-border payments. Form 15CA is a declaration by the remitter, and Form 15CB is certified by a Chartered Accountant.

Q3: How can businesses claim relief from double taxation on royalty payments?

A3: By applying the India-UK DTAA, businesses can reduce their withholding tax and avoid double taxation through tax credits or relief in the residence country (UK).