Dec. 28 – In part of its ongoing effort to liberalize cross border trade and promote technology transfers, the Indian government in November eliminated prescribed threshold limits for royalty payments.

Previously, Indian companies were permitted to pay royalties under the automatic route without specific prior approval of the regulatory body if they qualified under the following conditions:

• Lump sum payment of under US$2 million
• Recurring royalties of 5 percent on domestic sales and 8 percent on export sales for technology transfer agreements or collaborations
• Recurring royalties of 1 percent on domestic sales and 2 percent on export sales for use of trademarks or brand names to the foreign collaborator

Any payments beyond the threshold limits described above were subject to prior approval from the Project Approval Board – a board created under the auspices of the Ministry of Commerce and Industry.

With the release of Press Note No. 8 of 2009, the Department of Industrial Policy and Promotion announced that all royalty payments and lump sum fees for the transfer of technology and for the use of trademarks and brand names would be permitted under the automatic route without any limits.

The payments will be subject to Foreign Exchange Management Rules, 2000. Indian companies paying royalties to overseas affiliates will also need to consider transfer pricing regulations in India. The Indian government is stepping up enforcement and has been very aggressive in requiring taxpayers to demonstrate the benefits received apart from justifying the arm’s length nature of the royalty payments. If this cannot be justified, the tax authorities have been making transfer pricing adjustments, which can extend to the entire amount of royalties paid to the overseas affiliate.

For more information on royalty payments and transfer pricing in India, please contact Dezan Shira Associates at india@dezshira.com or visit www.dezshira.com.