Technology transfers are essential in growing markets corresponding to India, which depend on manufacturing. Transfers are often paid by royalties or licensing charges. However, transfers are typically handled as contributions in the direction of capital in technology-based joint ventures.

Permission to make use of or the sale of expertise are topic to strict tax frameworks, each domestically and below worldwide tax treaties. The unsuitable categorisation can fall foul of the Indian tax authorities in addition to the tax workplaces within the house nations of international companions. Determining the distinction and performing accordingly is significant.

Consideration for the fitting to make use of expertise is usually known as a royalty and falls below the broad definition in section 9 of the Income Tax Act, 1961 (act), of revenue deemed to accrue or come up in India. This consists of the switch of all or any rights to expertise. International tax treaties outline such consideration extra restrictively as a fee for utilizing or the fitting to make use of expertise.

Permission to make use of expertise is a non-exclusive proper. The transferor retains absolutely the proper and discretion to discontinue manufacturing and might file a patent. The transferee should return proprietary elements on the finish of the settlement and has an obligation of confidentiality to limit disclosure. Complete possession isn’t transferred to the transferee.

In home transactions, the licensee should deduct a withholding tax of two%-10% because the case perhaps earlier than paying royalty charges to the licensor. The licensor has to pay a 22% tax on the web royalty price. For worldwide royalty funds each one-time and periodic funds are permitted and may be within the type of common funds corresponding to month-to-month or quarterly. The particular revenue tax price of 20% plus surcharges and subject-specific levies below section 115A of the act, or the revenue tax price of 10% to 25%, relying on the phrases of the actual tax treaty, can be levied. The price extra useful to the taxpayer applies.

Giving consideration for the sale of expertise, it’s categorised as a capital transaction and is taxable as a capital achieve or enterprise revenue. In a sale, the transferee has unique rights to the desired utilization.

The transferee has the fitting to sub-license, is below no obligation to return the expertise, and should file patents and designs in their very own title. A expertise switch settlement with out unique rights throughout a restricted interval, inside a restricted geographical space, with extra funds to be used and giving consideration within the type of a considerable lump sum fee, can even represent a sale of the expertise. A international transferor may be taxed solely of their house nation on both a capital achieve or enterprise revenue following an outright sale except they’ve a everlasting institution (PE) in India.

In India, taxation on a sale is just like that for permission to make use of expertise. If a international transferor has a PE in India, tax can be levied on capital beneficial properties. This is 20% for a long-term capital achieve, the place the asset is held for greater than 24 months. A brief-term capital achieve, with the asset held for lower than 24 months, will entice tax of 30%.

The distinction between a permission and a sale is essential. Transferees should withhold tax on the quantity paid in agreements granting permission to make use of. Mistakes or non-compliance entice curiosity and penalties below the act. On the opposite hand, transferees withholding taxes unnecessarily trigger losses to themselves and abroad transferors.

Parties should perceive the distinction between permission to make use of and the sale of expertise, and make sure the appropriate place is clearly set out in expertise switch agreements. The transferor could search an advance ruling from the Income Tax Department (division) as to which class an settlement falls into. Where an error has been made and an incorrect withholding carried out, the transferor could apply to the division for a refund.

The transferor can even invoke the mutual settlement process and transfer the appliance to the competent authority below the double taxation avoidance settlement between India and their house nation. Correctly classifying expertise transfers is important and have to be unambiguous within the settlement. Fortunately, errors of judgment may be rectified as much as six years after wrongful deductions have been made.

Gautam Khurana is the managing associate and Abhishek Hans is a associate at India Law Offices.