How India and the OECD Arrive at Different Royalty Outcomes

19 Dec 2025 • By Asksolique.ai Team • Tax & Regulatory

When one international payment must satisfy both economic reality and legal precision.

Royalty taxation was once straightforward. Payments were typically made for clearly identifiable rights such aspatents, copyrights, trademarks, or licensed technology. If intellectual property was transferred or licensed, royalty arose. If not, it did not.

That clarity has faded. Modern businesses no longer own technology in the traditional sense. Instead, they access it through cloud platforms, automated processes, remote infrastructure, equipments, and specialised know-how. Payments today are made not just for intellectual property, but for the ability to use technology to create value.

This expansion would not have caused friction if every country viewed royalty in the same way.

But India and the OECD follow two different philosophies:

India focuses on where value is created and consumed, even without legal rights.
OECD focuses on whether legal rights over IP are transferred, not merely used.

To understand why the same payment can be treated as royalty under Indian domestic law but not under an applicable tax treaty, we must examine how India’s expanded statutory framework interact with the narrower, internationally accepted treaty, and how the treaty-override principle ultimately determines the tax position.

Category	What Falls Here	India’s View	OECD’s View	Core Difference
Focuses on who receives the loan/guaranteeIntellectual Property Rights	Licence to reproduce software, Right to adapt or modify copyrighted works, Right to manufacture under patents, Right to commercially exploit trademarks or brands	Grant of legal rights over intellectual property is sufficient. Where such rights are given and used for business in India, the payment is treated as royalty.	Takes the same view, treating payments as royalty only when enforceable IP rights are granted.	No divergence – consistent treatment.
Know-How & Technical Knowledge	Confidential formulas and recipes, Proprietary manufacturing methods, Technical manuals and documentation, Specialised commercial or technical know-how.	Transfer of confidential knowledge that remains with the Indian business and enables independent use is treated as royalty.	Follows a similar approach, treating know-how payments as royalty because knowledge, rather than manpower, is transferred.	No divergence – consistent treatment.
Use of Industrial, Commercial or Scientific Equipment	Satellite transponders, remote servers, industrial machinery, scientific tools, high-capacity data transmission equipment.	Law adopts a functional use-based approach. Courts hold consistently held where the Indian payer lacks possession or control and receives only output, the payment is a service, not royalty. (Asia Satellite Telecommunications, Delhi HC; New Skies Satellite, Delhi HC; DIT v. Bharti Airtel, Delhi HC).	Royalty only if user obtains possession or control. Where the provider operates the equipment and the customer only receives output, the payment is treated as a service.	Dispute area – domestic law is broad; courts and treaties insist on control.
Use of a Process	SaaS tools, ERP (SAP/Oracle), AI engines., Workflow systems cloud-based processes.	Indian law adopts a broad, use-based definition. However, courts have clarified that access to automated systems or processes without transfer of rights to operate or commercially exploit them does not constitute royalty (Engineering Analysis, SC).	Royalty is only when user obtains rights to operate/exploit the process. Merely receiving a process is not royalty.	Litigated - Both India and OECD taxes access.
Information & Ancillary Technical Services	Technical consulting on software configuration., Troubleshooting that involves expert diagnosis, not just execution., Advisory on system optimisation	Not treated as royalty in India, these payments are classified as Fees for Technical Services as they involve human skill or effort and do not result in transfer of intellectual property rights or enduring confidential know-how.	Generally ordinary services unless rights themselves are transferred. Assistance are not treated as royalty.	No royalty issue - classification squarely falls under services.

The Treaty Path – How Treaties Change the Royalty Outcome

India’s domestic law uses a broad, “use-based” definition of royalty, which brings many technology and digital payments into its scope. But most tax treaties follow a narrower, “rights-based” OECD definition. Section 90 of the Income-tax Act,1961 allows businesses to choose the treaty wherever it is more beneficial. As a result, payments that appear to be royalty under domestic can lose that character entirely once the treaty is applied.

Why Treaties Take a Narrower View

Treaties define royalty around the transfer of legal rights over intellectual property, using expressions such as “the right to use a copyright” or “the right to use a patent.” The emphasis is on what rights the payer receives, not on how important or valuable the technology is to the business.

Unless the payer is granted enforceable rights to copy, modify, commercially exploit, or otherwise deal in the intellectual property, the payment does not qualify as royalty under treaty standards. Mere access to software, cloud platforms, automated systems, or remote infrastructure does not satisfy this rights-based test and is treated as a service.

How Businesses Apply the Treaty Test

Every payment should be run through three simple questions:

Is there a tax treaty with the vendor’s country?
Does the treaty require rights to be transferred for royalty to arise?
Does the contract actually transfer any such rights?

If the treaty requires rights, and the contract transfers none, the payment is not royalty, and no TDS is required.

Final Takeaway

The royalty debate is therefore not about technology itself, but about the legal character of the payment. India’s domestic rules and tax treaties often point in different directions, and the outcome ultimately turns on whether legal rights not mere access or use are transferred. Applying this distinction at the contracting stage is essential to manage withholding risk and avoid unnecessary disputes.

Disclaimer:

The information contained in this document is for information purposes only. In no way, this document should be treated as advice. Please reach out to us or your consultants for undertaking detailed analysis.

This author will not be liable for any loss or damage caused by the reader’s reliance on information obtained through this report. The contents are provided for your reference only.