Every invention, tune, or bit of software has value. Royalty is the price for using that value. In tax language, it’s income earned by allowing someone else to use intellectual property — a patent, a formula, or even an app interface.
When global companies started licensing technology to India, money began flowing outward. That’s when lawmakers introduced Section 9(1)(vi) — to ensure India taxes royalty that truly belongs here, even when the recipient sits abroad.
What Section 9(1)(vi) Really Says
This provision isn’t just about definitions; it decides where income arises. The section says royalty is deemed to accrue or arise in India if it’s:
- Paid by the Government of India to a non-resident;
- Paid by a resident, unless the payment is for business or rights used outside India; or
- Paid by a non-resident, when the royalty relates to business or property used in India.
So, a Japanese tech firm earning licence fees from Indian clients cannot escape Indian tax simply because the server sits in Tokyo. If the use happens here, tax follows.
What Counts as “Royalty” Under the Act
The word covers more ground than most people expect. According to Explanation 2 of the section, royalty includes payments for:
- Using or transferring patents, designs, inventions, or formulas;
- Licensing copyrights of books, music, or films;
- Using trademarks or brand names;"
- Hiring or operating industrial or scientific equipment;
- Or sharing technical or industrial know-how.
Think of a streaming platform in India paying licence fees to a US studio, or a pharmaceutical company paying for chemical formulas. Both are royalty payments in the eyes of Indian tax law.
Also Read: Earning Abroad from Royalties or Technical Services? Here’s the Tax Rule You Can’t Ignore
Why Deemed Accrual Matters
This phrase — deemed accrual — is the backbone of cross-border taxation. It ensures that if intellectual property is used in India, the tax base doesn’t vanish overseas.
Even if the contract is signed in London & payment wired in dollars, once the rights are exploited in India, the income “arises” here under Section 9(1)(vi).
Royalty Payable by the Indian Government
There’s a specific line in the law: royalty payable by the Indian Government to any non-resident is taxable in India.
Imagine India buying satellite imagery from a European space company — that fee counts as royalty. The foreign supplier might live abroad, but the income is taxed in India because it’s paid by the Government itself.
The final tax rate, however, depends on the relevant Double Taxation Avoidance Agreement (DTAA). Most treaties cap it between 10 % and 15 %.
Residents vs Non-Residents — Who Pays What
Let’s separate the two cases clearly:
- When the payer is a resident:
If an Indian business pays royalty for rights used inside India — say, a Delhi-based firm licensing design software — it’s taxable in India.
If those rights are used abroad, it’s not. - When the payer is a non-resident:
If the royalty relates to something used within India — maybe a foreign airline paying Indian airports for navigation data — the income again becomes taxable here.
It’s about where the benefit is consumed, not where the cheque is written.
Royalty vs Fees for Technical Services
These two often travel together but mean different things.
- Royalty = payment for use of a right.
- FTS (Fees for Technical Services) = payment for performance of expertise."
Buying a software licence? Royalty.
Paying an engineer to customise it? FTS.
Both are taxable, just under different sub-sections of Section 9.
Also Read: Income Deemed to Accrue or Arise in India
TDS Obligations Under Section 195
Whenever an Indian company makes a royalty payment to a non-resident, TDS must be deducted. The payer acts as the withholding agent under Section 195.
The default domestic rate is roughly 10 % (plus surcharge & cess), though DTAAs may lower it. If no deduction is made, the expense can be disallowed under Section 40(a)(i), and the payer may face interest and penalties.
In short — miss the TDS, & the taxman treats you as the defaulter.
Practical Scenarios
Example 1:
A Mumbai animation studio licenses characters from a US company. The payment for usage rights = royalty taxable in India.
Example 2:
An Indian IT firm uses cloud software hosted in Singapore for its overseas clients. Since the use is outside India, royalty doesn’t accrue here.
Example 3:
An Indian defence agency pays a French firm for access to radar technology. The payment is royalty; tax applies in India, but treaty rates will decide how much.
Real-life cases like these are routine now — especially with tech, films, & SaaS models growing across borders.
DTAAs and Treaty Protection
India has tax treaties with more than 90 countries. Under most of them:
- “Royalty” is defined narrowly — sometimes excluding equipment hire.
- Tax rates are capped (often 10 % flat).
- The recipient can claim credit for Indian taxes in their home country.
For example, the India-US DTAA allows India to tax royalty at 10 % if the beneficial owner is a US resident. Always check the treaty before withholding — many businesses forget this & overpay.
Landmark Judicial Views
Courts have drawn the lines over time.
- Raja Benoy Kumar Sahas Roy (1957) helped define agricultural income; decades later, Tata Consultancy Services v. State of AP (2004) did the same for software — calling it “goods.”
- The Supreme Court in Engineering Analysis Centre v. CIT (2021) settled a long-pending debate: payments for standard off-the-shelf software aren’t royalty.
- Nokia Networks (2012) clarified that equipment leases tied to technical know-how could be treated as royalty in certain contexts.
Each ruling adjusted how Section 9(1)(vi) interacts with technology & trade.
Also Read: Taxation Rules for Non-Residents on Dividends, Interest, Royalties & Fees
The Business Angle
Why does all this matter? Because one wrong classification can derail your tax audit.
Startups pay for cloud tools every day — Google Workspace, Adobe, AWS credits. Most of these have an IP element. If the payment qualifies as royalty, TDS is mandatory. If it doesn’t, it falls under business expense.
Many disputes arise not from intent, but from confusion. Section 9(1)(vi) exists to keep the line visible.
Mistakes That Trigger Notices
- Paying a non-resident without checking the DTAA rate.
- Classifying technical support as royalty.
- Missing Form 15CA/CB filing while remitting.
- Not keeping documentation of the licence agreement.
Each one looks small — until the department raises a query years later.
Royalty in the Digital Era
Today, royalty isn’t limited to patents and movies. It includes software subscriptions, streaming rights, & even digital infrastructure used in India.
For instance, when Indian advertisers pay global platforms like Netflix or Spotify for brand placements, the revenue might qualify as royalty because intellectual property (the content library) is used here.
That’s why the Finance Act 2020 introduced new clauses & the Equalisation Levy to cover these e-commerce royalties.
Summary
- Section 9(1)(vi) covers the deemed accrual of royalty in India.
- Royalty income under the Income Tax Act is taxable, including payments to non-residents.
- Royalty payable by the Indian Government to a foreign entity is taxable in India.
- DTAAs usually limit the rate to 10–15 %.
- Missing TDS can make the payer an “assessee in default.”
Also Read: Deduction on Royalty Income Earned by Authors
Conclusion
At its core, Section 9(1)(vi) says something simple: if India uses your idea, India gets to tax your income from it. The provision isn’t about punishment — it’s about fairness. It ensures that when intellectual property fuels Indian business, the tax system gets its share. If your firm makes or receives royalty payments — whether for software, trademarks, or content licences — it’s worth having a CA review the structure once.
Our experts at CallMyCA.com help businesses interpret treaty rates, calculate TDS, & avoid avoidable litigation.
