Why these payment categories get specific treatment
Royalty and Fees for Technical Services (FTS) payments to non-residents are treated as income deemed to accrue in India under domestic law, and are subject to withholding tax at source — with the applicable rate often reduced under the relevant DTAA, if the conditions for treaty relief are met.
What typically counts as royalty
Payments for the use of (or right to use) intellectual property — patents, trademarks, copyrights, know-how, and increasingly, software licensing arrangements, which have generated considerable interpretive debate over the years as to whether they constitute royalty or a business income sale.
What typically counts as FTS
Payments for managerial, technical, or consultancy services — though many DTAAs include a "make available" test, requiring that the services actually transfer technical knowledge or skill to the recipient in a way they can apply independently in future, not just deliver a one-off service outcome. This distinction genuinely changes the tax outcome and is worth analysing carefully rather than assuming.
Where DTAA relief comes in
Many treaties provide a reduced withholding rate for royalty and FTS payments compared to the domestic rate, and some treaties (depending on the specific "make available" language) can exclude certain service payments from FTS treatment entirely — making the specific treaty article and its precise wording genuinely consequential to the tax outcome.
Practical steps for Indian payers
- Correctly classify the payment (royalty, FTS, or ordinary business income) based on its actual substance, not just contractual labelling
- Confirm DTAA eligibility and rate applicability with proper documentation (TRC, Form 10F)
- Obtain a 15CB certification confirming the correct withholding treatment before remitting
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