Research & Articles

Royalty, Fees for Technical Services, or Business Profits: How a Payment to a Foreign Company Is Characterised in India

Authored by R & D Law Chambers LLP | Practice led by Ravish Bhatt, Dual-qualified lawyer (India and England & Wales) | Bar Council of Gujarat, Enrolment G/504/2008 | SRA (non-practising) Registration No. 492 477 | ADIT, Chartered Institute of Taxation, London

Published: 19 August 2026 | Last reviewed: 19 August 2026

Scope: this article is written against the Income-tax Act, 2025 as in force on 19 August 2026, and refers to the Income-tax Act, 1961 as it stood before its repeal with effect from 1 April 2026. Treaty provisions are described as they operate in Indian law. It addresses Indian law only, and nothing in it constitutes advice on foreign law or on the law of any treaty partner.

The domestic definitions of royalty and fees for technical services in section 9 of the Income-tax Act, 2025 are drawn wider than the corresponding treaty definitions, and section 9(11) applies them whether or not the non-resident has any presence in India. Characterisation is therefore decided twice, and the narrower treaty definition governs only where treaty entitlement is separately established under section 159(8).

Index of Topics

Characterisation decides the charge, before anyone reaches the rate
The domestic definition of royalty and its seven limbs
Computer software: what the statute says and what the Supreme Court held
Equipment hire and the extended meaning of “process”
Royalty whether or not the payer possesses, uses or locates the property
Fees for technical services under domestic law, and its two exclusions
What the treaties narrow: “make available” and managerial services
Intra-group management charges: characterisation before pricing
The charge that needs no presence
Treaty entitlement, documentation and the record that decides

1. Characterisation decides the charge, before anyone reaches the rate

In short: Whether a payment to a foreign company is royalty, fees for technical services or business profits determines whether India can tax it at all. Royalty and fees for technical services are charged by section 9(6) and section 9(7) of the Income-tax Act, 2025 on a payer-based source rule. Business profits are charged only through business connection, and under a treaty only through a permanent establishment.

This is why characterisation is not a rate question. A payment characterised as business profits, where the foreign company is treaty-entitled and has no permanent establishment in India, is not taxable in India at all. The same payment characterised as royalty is taxable in India on a gross basis regardless of any presence. The commercial documents that decide which it is are usually drafted by people who are not thinking about section 9.

The presence question and the business connection analysis are dealt with separately in our article on business connection and permanent establishment. This article deals with the characterisation of the payment itself.

2. The domestic definition of royalty and its seven limbs

In short: Section 9(6)(b) defines royalty as consideration, including lump sum consideration but excluding consideration chargeable under the head Capital gains, for the transfer or grant of rights in a patent, invention, model, design, secret formula or process or trade mark or similar property; the imparting of information about their working or use; their use; the imparting of information concerning technical, industrial, commercial or scientific knowledge, experience or skill; the use or right to use industrial, commercial or scientific equipment; the transfer or grant of rights in a copyright, literary, artistic or scientific work; and the rendering of services in connection with any of those activities.

Two features of this definition drive most disputes. The fourth limb, the imparting of information concerning technical, industrial, commercial or scientific knowledge, experience or skill, is wide enough to capture arrangements that the parties describe as services. The seventh limb sweeps in the rendering of services in connection with the first six, so a services agreement attached to a licence does not escape the royalty article merely by being separately priced.

The equipment limb carries an express carve-out by reference to section 61(2), Table Sl. No. 5, and the copyright limb expressly includes films or video tapes for use in connection with television and tapes for radio broadcasting. Neither carve-out nor inclusion should be assumed; both should be read against the current text before a position is taken.

3. Computer software: what the statute says and what the Supreme Court held

In short: Section 9(6)(c)(i) provides that the transfer or grant of rights in any right, property or information includes the transfer or grant of any right for use or right to use computer software, including the granting of a licence, irrespective of the medium through which that right is transferred. On the treaty side, the Supreme Court in Engineering Analysis Centre of Excellence Pvt Ltd v CIT (2021) 432 ITR 471 held that amounts paid by resident end-users and distributors to non-resident software suppliers under end-user licence and distribution agreements are not royalty for the use of copyright.

The two propositions sit side by side because they operate at different levels. The statutory inclusion is a domestic definition. The Supreme Court was construing the definition of royalties in Article 12 of the applicable treaties, and held that, on that definition, the distribution and end-user licence agreements did not create any interest in copyright, so no obligation to deduct arose under section 195 of the 1961 Act. The Court also held that a unilateral position taken on the OECD Commentary does not alter a treaty definition absent bilateral renegotiation. The decision was reaffirmed on review in CIT v GE India Technology Centre Pvt Ltd (2024) 469 ITR 389.

The operative consequence is that a software supplier without treaty entitlement is left with the domestic definition, which expressly includes the right to use computer software. The treaty is doing all the work, which makes the section 159(8) condition discussed below the whole of the protection rather than a formality.

4. Equipment hire and the extended meaning of “process”

In short: Section 9(6)(b)(v) treats consideration for the use or right to use industrial, commercial or scientific equipment as royalty, subject to the exclusion referable to section 61(2), Table Sl. No. 5. Section 9(6)(c)(iii) provides that “process” includes transmission by satellite, including up-linking, amplification and conversion for down-linking of any signal, and transmission by cable, optic fibre or any other similar technology, whether or not the process is secret.

The secrecy point matters. The first limb of the royalty definition speaks of a secret formula or process, and taxpayers have historically argued that a standard transmission service involves no secret process. Section 9(6)(c)(iii) closes that argument for the transmission cases by making secrecy irrelevant to the extended meaning.

For equipment, the enquiry is whether the payer has the use or right to use the equipment, as distinct from buying an outcome produced using the supplier’s equipment. Capacity contracts, hosting arrangements and bandwidth agreements sit on that line, and the line is drawn by what the contract confers rather than by what the parties call it.

5. Royalty whether or not the payer possesses, uses or locates the property

In short: Section 9(6)(c)(ii) provides that royalty includes consideration in respect of any right, property or information whether or not the possession or control of that right, property or information is with the payer, whether or not it is used directly by the payer, and whether or not its location is in India.

These three negatives remove the intuitive defences. A payer who never holds the software, never operates the equipment and deals with property situated wholly outside India is nonetheless within the domestic royalty definition if the consideration is in respect of a right, property or information within section 9(6)(b).

Read with section 9(11), the effect is that the domestic royalty charge is almost entirely detached from any physical or geographic connection with India. What is left as the connecting factor is the identity and situation of the payer, and the use to which the right or information is put.

6. Fees for technical services under domestic law, and its two exclusions

In short: Section 9(7)(b) defines fees for technical services as any consideration, including lump sum consideration, for the rendering of managerial, technical or consultancy services, including the provision of the services of technical or other personnel. It excludes consideration for any construction, assembly, mining or like project undertaken by the recipient, and consideration which would be income of the recipient chargeable under the head Salaries.

Three things follow. Managerial services are inside the domestic definition. There is no requirement that anything be transferred to, retained by or learned by the recipient. And the express inclusion of the provision of the services of technical or other personnel means that seconding or deputing staff can produce a fees for technical services characterisation on the payment, quite apart from any presence question that the same arrangement raises.

The construction exclusion is drafted by reference to a project undertaken by the recipient, not by reference to the character of the work. It is a carve-out for the contractor executing the project, and it does not extend to a supplier providing technical services into somebody else’s project.

7. What the treaties narrow: “make available” and managerial services

In short: Several of India’s treaties define fees for technical services more narrowly than section 9(7)(b). Under Article 13(4)(c) of the India-United Kingdom treaty, technical or consultancy services fall within the article only where they make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. Article 12(4)(b) of the India-United States treaty is worded to similar effect for fees for included services.

Two divergences from domestic law follow on the United Kingdom treaty wording. Managerial services are not within Article 13(4), although they are within section 9(7)(b). And technical or consultancy services are within it only if the make available condition is satisfied. Indian courts have construed that condition as requiring an enablement: the recipient must be equipped to perform the function independently afterwards, so that merely receiving a service which required technical expertise is not enough.

The practical consequence is that the same management or advisory fee can be fees for technical services under section 9(7)(b) and outside the treaty article altogether. Which of the two governs depends on treaty entitlement, and the treaty wording varies, so the article of the specific treaty must be read rather than assumed from another one.

The same payment under two definitions

	Section 9(7)(b), Income-tax Act, 2025	India-United Kingdom treaty, Article 13(4)
Managerial services	Within the definition	Not within the definition
Technical or consultancy services	Within the definition, without further condition	Within it only where the make available condition or an ancillary limb is satisfied
Transfer to the recipient	Not required	Enablement required: the recipient must be able to apply the knowledge independently
Provision of personnel	Expressly included	Included in the opening words, still subject to the make available condition
Availability of the narrower test	Not applicable	Only where treaty entitlement is established under section 159(8)

8. Intra-group management charges: characterisation before pricing

In short: An intra-group management or support charge raises characterisation before it raises pricing. Under section 9(7)(b) a management charge is capable of being fees for technical services on its face. Whether a treaty narrows that depends on the article, and whether the charge survives at all as a deduction is a separate transfer pricing enquiry.

The sequencing error is to answer the pricing question first. A benchmarking study establishes what an arm’s length charge would be for services actually rendered; it does not establish that the services were rendered, and it does not decide whether the consideration falls within section 9(6)(b) or section 9(7)(b). Where the underlying agreement bundles licences, know-how and support, the seventh limb of the royalty definition and the fees for technical services definition can both be engaged by different parts of a single invoice.

The pricing and functional characterisation side of intra-group charges, including the interaction between transfer pricing findings and taxable presence, is dealt with separately in our analysis of transfer pricing and permanent establishment disputes.

9. The charge that needs no presence

In short: Section 9(11) provides that for the interest, royalty and fees for technical services limbs in sections 9(5), 9(6) and 9(7), income of a non-resident is deemed to accrue or arise in India and included in total income whether or not the non-resident has a residence, place of business or business connection in India, and whether or not the non-resident has rendered services in India.

The last clause is the one that surprises foreign suppliers. Services performed wholly outside India, by people who have never travelled to India, for a client in India, can still generate fees for technical services within section 9(7) because the rendering of services in India is expressly made irrelevant.

The combination of section 9(11) with the width of the section 9(6) and 9(7) definitions is what makes characterisation the whole of the enquiry. There is no presence-based filter that a foreign supplier can pass in order to keep these payments outside the Indian charge. The only filter is the definition itself, and then the treaty.

10. Treaty entitlement, documentation and the record that decides

In short: Under section 159(8) of the Income-tax Act, 2025, a non-resident may claim relief under an agreement with a foreign country or specified territory only where a certificate of residence is obtained from the Government of that country or territory. Prescribed information must also be furnished in Form No. 41, which replaced Form 10F, under Rule 75 of the Income-tax Rules, 2026.

Because the treaty definition is the only thing standing between a wide domestic definition and a gross-basis charge, the documentary condition is not administrative. Until it is satisfied, the narrower definition discussed in section 7 above is simply unavailable, and the payment is assessed on the domestic definition.

What then decides a contested characterisation is the contract, the invoices, the scope of work and the correspondence, all of which exist before any question is asked. A description of a deliverable as a licence, or of a fee as a management charge, is evidence against the party that wrote it. For the payer-side consequences of characterising a payment wrongly, and the remittance and rate mechanics that follow, see our work on withholding tax on payments to non-residents.

Frequently Asked Questions

Is payment for software licensed from a foreign company treated as royalty in India?

Under domestic law, section 9(6)(c)(i) of the Income-tax Act, 2025 includes the transfer or grant of any right for use or right to use computer software, including by licence, irrespective of the medium. Under treaty law, the Supreme Court held in Engineering Analysis Centre of Excellence Pvt Ltd v CIT (2021) 432 ITR 471 that amounts paid by resident end-users and distributors to non-resident suppliers under end-user licence and distribution agreements are not royalty for the use of copyright. Which applies depends on treaty entitlement.

What is the difference between royalty and fees for technical services in India?

Royalty under section 9(6)(b) is consideration for rights in, use of, or information about property such as patents, processes, trade marks, copyright and industrial, commercial or scientific equipment, and for services rendered in connection with those activities. Fees for technical services under section 9(7)(b) is consideration for rendering managerial, technical or consultancy services, including the provision of technical or other personnel. A single agreement can generate both, and each has its own treaty article.

Does the “make available” condition apply to all Indian tax treaties?

No. It is a feature of particular treaties rather than a general rule. Article 13(4)(c) of the India-United Kingdom treaty requires that technical or consultancy services make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or design, and Article 12(4)(b) of the India-United States treaty is worded to similar effect. Other treaties are drafted differently, so the article of the specific treaty must be read.

Can India tax fees for services performed entirely outside India?

Yes, under domestic law. Section 9(11) of the Income-tax Act, 2025 provides that income within the interest, royalty and fees for technical services limbs is deemed to accrue or arise in India whether or not the non-resident has a residence, place of business or business connection in India, and whether or not it has rendered services in India. Whether a treaty narrows the result depends on the applicable article and on establishing treaty entitlement.

Are managerial services taxable as fees for technical services in India?

Under section 9(7)(b) of the Income-tax Act, 2025, managerial services fall within the definition of fees for technical services. Several treaties are narrower. Article 13(4) of the India-United Kingdom treaty covers technical and consultancy services, not managerial services, and subjects the former to the make available condition. A management charge can therefore be within the domestic definition and outside the treaty article at the same time.

Does a payment for bandwidth or satellite transmission count as royalty?

Section 9(6)(c)(iii) of the Income-tax Act, 2025 provides that “process” includes transmission by satellite, including up-linking, amplification and conversion for down-linking of any signal, and transmission by cable, optic fibre or any other similar technology, whether or not the process is secret. That removes the argument that a standard transmission service involves no secret process. Whether the treaty royalty article reaches the same result is a separate question turning on its wording.

How R & D Law Chambers Works on These Matters

Characterisation is treated here as a drafting problem before it is an assessment problem. The words that decide whether a payment is royalty, fees for technical services or business profits are usually written into a services schedule or a licence recital months before anyone considers section 9, and by the time the question is asked the record is fixed. The practice reviews cross-border agreements for that exposure and argues the resulting characterisation where it is contested.

Work in this area runs across the direct tax and contract practices, which is why the same agreement is read for its treaty consequences and its commercial ones at the same time. For assessment and appellate representation on characterisation disputes, see our page for income tax lawyers in Ahmedabad.

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Disclaimer: this article is provided for general information only. It does not constitute legal advice and does not create a lawyer-client relationship. Outcomes under the Income-tax Act, 2025, the Income-tax Rules, 2026 and any applicable tax treaty depend on the facts of each case and on the state of the law at the relevant time. References to statutory provisions, rules, forms, treaty articles and judicial decisions should be verified against the current primary sources before they are acted on. R & D Law Chambers does not guarantee any particular outcome in any matter.