Section 115A: Tax on Royalty and Technical Service Fees Paid to Non-Residents

When an Indian company pays a foreign vendor for software, technical know-how, brand royalty, or consultancy, two questions decide the tax bill. Is the payment royalty or FTS in character, and does the recipient have a permanent establishment in India. Section 115A of the Income Tax Act, 1961 answers the rate side of that question for non-residents who do not carry on business through a PE here.

The provision matters because the payer carries the risk. The Indian company is the one obliged to withhold tax under Section 195, and if it gets the rate or the documentation wrong, the expense can be disallowed and the shortfall recovered from the payer with interest. This guide walks through what Section 115A covers, how the Finance Act 2023 changed the rate, and how DTAA relief actually works in practice.

What Section 115A Covers

Section 115A applies to a non-resident (not being a company) or a foreign company that earns specified income from India. For our purposes the relevant streams are royalty and fees for technical services received from the Government or an Indian concern under an agreement.

The defining condition is the absence of a permanent establishment. If the royalty or FTS is effectively connected with a PE or a fixed place of profession in India, Section 115A steps aside and the income is taxed as business income under Section 44DA at normal corporate rates on a net basis (after allowable expenses). Section 115A instead imposes a flat rate on the gross amount, with no deduction for expenses and no need to file under the regular computation machinery.

This gross-basis design is deliberate. The Indian tax authority cannot easily audit a foreign vendor's costs, so it taxes the receipt at source at a fixed percentage and lets the treaty mechanism, rather than expense deductions, provide relief. The trade-off is simplicity for the revenue against a higher headline rate for the taxpayer.

The Rate: Before and After Finance Act 2023

For years, Section 115A taxed royalty and FTS at a concessional 10%. The Finance Act 2023 doubled that base rate to 20% with effect from Assessment Year 2024-25 (income earned from financial year 2023-24 onward).

The 20% is a base rate. On top of it sit surcharge (for foreign companies, depending on income slabs) and a 4% health and education cess. Taking a representative surcharge of 2% applicable to many foreign companies, the arithmetic runs:

• Base tax: 20%
• Surcharge at 2% of tax: 0.40%
• Subtotal: 20.40%
• Cess at 4% of (tax + surcharge): 0.816%
• Effective rate: approximately 21.84%

The exact effective rate moves with the surcharge slab (foreign company surcharge is 2% above Rs 1 crore and 5% above Rs 10 crore), so 21.84% is the commonly cited figure for the 2% band. The headline takeaway for payers is blunt: the domestic-law fallback rate is now roughly twice what it was, which makes claiming the DTAA rate far more valuable than it used to be.

What Qualifies as Royalty

Royalty is defined in Explanation 2 to Section 9(1)(vi). It is broad and covers consideration for the transfer of rights in, or the use or right to use:

• A patent, invention, model, design, secret formula, or process
• A trademark or similar property
• A copyright, literary, artistic, or scientific work (including films, subject to specific carve-outs)
• Information concerning industrial, commercial, or scientific experience (the classic "know-how" limb)
• The use of industrial, commercial, or scientific equipment

The Software Royalty Question

The most litigated category is payment for software licences. The Income Tax Act was amended (Explanations 4, 5, and 6 to Section 9(1)(vi), inserted by Finance Act 2012 with retrospective effect) to expand royalty to cover software and the right to use computer software. Under domestic law, the Revenue's position was that software licence fees are royalty.

The Supreme Court resolved much of the dispute in Engineering Analysis Centre of Excellence Pvt Ltd v CIT (2021). The Court held that payments by Indian end-users or distributors for the resale or use of shrink-wrapped, off-the-shelf software are not royalty under the relevant DTAAs, because what the buyer acquires is a copy of a copyrighted article, not the copyright itself. Since Section 90(2) lets the taxpayer rely on the more beneficial treaty, the expansive domestic definition cannot override a narrower treaty meaning of royalty. The practical effect is that many standard software payments to vendors in treaty countries are not taxable as royalty, and so attract no Section 195 withholding on that basis.

This does not make all software payments tax-free. Customised software, payments that grant copyright exploitation rights, and payments where no qualifying treaty applies can still be royalty. The character of the licence and the wording of the specific DTAA decide the outcome.

What Qualifies as Fees for Technical Services

FTS is defined in Explanation 2 to Section 9(1)(vii) as consideration for rendering managerial, technical, or consultancy services, including the provision of technical or other personnel. It excludes consideration for construction, assembly, mining, or like projects, and amounts chargeable as salary.

The crucial divergence between Indian domestic law and many treaties is the "make available" condition. Several DTAAs (notably the India-USA and India-UK treaties) require that the technical service "make available" technical knowledge, skill, or know-how to the recipient, meaning the recipient is enabled to apply the technology independently in future without recourse to the provider. Where this test is not met, the payment is not FTS under the treaty even if it would be FTS under domestic law.

This is why purely automated digital services often fall outside FTS. If a foreign vendor runs an automated platform with no meaningful human technical intervention and transfers no skill to the Indian user, many treaties treat the receipt as ordinary business profit, taxable in India only if the vendor has a PE here. The "make available" filter, where a treaty contains it, is frequently decisive.

DTAA Override: How Treaty Rates Win

Section 90(2) of the Income Tax Act gives a non-resident the right to be taxed under either the Act or the applicable DTAA, whichever is more beneficial. Because nearly every relevant treaty caps royalty and FTS below the new 20% domestic rate, the treaty rate is now almost always the one to apply.

The rates above are indicative and must be verified against the current text of each treaty and any protocol or Most Favoured Nation (MFN) clause. The UAE treaty is a common trap, because it does not contain a standalone FTS article in the way the US or UK treaties do; the characterisation of a payment to a UAE vendor therefore needs careful reading of the business profits and royalty articles. Where a treaty has no FTS article and no PE exists, the receipt may escape Indian tax entirely as business profit, but that conclusion should never be reached without confirming the specific treaty.

The rule of thumb: if the DTAA rate is below the 20% Section 115A rate, the DTAA rate applies, provided the non-resident furnishes the documents below. If the non-resident cannot or will not produce them, the payer must default to the higher domestic rate.

Claiming the DTAA Benefit: The Document Trinity

A non-resident does not get the treaty rate automatically. The Indian payer can only apply it if the recipient supplies three things, and the payer should hold these on file before the payment is made.

1. Tax Residency Certificate (TRC). Issued by the tax authority of the recipient's home country, confirming residence there for the relevant period. This is the gateway document required under Section 90(4).
2. Form 10F. A self-declaration capturing details that the TRC may not contain (status, nationality, tax identification number, period and address of residence). Since the rollout of the online filing mandate, Form 10F must be filed electronically on the income tax e-filing portal, and the foreign recipient generally needs an Indian PAN or to register on the portal to do so.
3. No-PE declaration. A written confirmation from the recipient that it has no permanent establishment in India to which the income is attributable. This is what lets the payer treat the income under Section 115A and the treaty rate rather than as PE-connected business income.

Without this trinity, the payer is exposed. The safe course where documents are missing is to withhold at the full 20% (plus surcharge and cess), leaving the recipient to claim a refund by filing a return in India.

Who Is Affected

Section 115A and its withholding consequences touch a wide set of routine cross-border payments by Indian businesses:

• Software licence fees paid to Microsoft, Adobe, Oracle, SAP, and similar vendors (subject to the Engineering Analysis ruling on whether they are royalty at all).
• Technical know-how and management fees paid by Indian subsidiaries to a foreign parent.
• Trademark and brand royalty paid to a foreign brand owner for the right to use its marks in India.
• Consultancy and technical service fees paid to foreign engineering, design, or management consultants.
• Cloud, SaaS, and digital service charges, where characterisation as royalty, FTS, or business profit depends on the contract and the relevant treaty.

Section 195 TDS and the Payer's Liability

Section 195 obliges the Indian payer to deduct tax at source on any sum chargeable to tax that is paid to a non-resident. The rate is the Section 115A rate of 20% (grossed up with surcharge and cess for foreign companies), or the lower DTAA rate where the document trinity is in place.

Where the payer is unsure whether the sum is chargeable, it can apply to the Assessing Officer under Section 195(2) for a determination, or the recipient can seek a lower or nil withholding certificate under Section 197. These routes give certainty before payment rather than after a dispute.

The cost of getting this wrong is steep. Short or non-deduction attracts interest under Section 201(1A) (1% per month for non-deduction, 1.5% per month for deduction-but-non-deposit), a penalty equal to the tax not deducted under Section 271C, and, critically, disallowance of the entire expense under Section 40(a)(i) until the tax is paid. A Rs 1 crore royalty paid without proper withholding can therefore be added back to the payer's taxable income, a far larger hit than the withholding itself.

Section 206AA and 206AB: The PAN and Filing Loads

Section 206AA raises the stakes when the non-resident has no PAN. In that case TDS is the higher of the Section 115A or treaty rate, the rate in force, or 20%. The provision was designed to push deductees into the PAN net.

Relief exists. Rule 37BC carves out non-residents from the Section 206AA loading on royalty, FTS, interest, and dividends, provided the recipient furnishes specified details: name, email, contact number, address in the home country, the TRC, and the Tax Identification Number of that country. With these in hand, the payer can apply the treaty rate without the 206AA penalty even where the recipient has no Indian PAN.

Section 206AB is a separate, parallel loading aimed at non-filers of Indian income tax returns, applying a higher TDS rate to specified persons who have not filed returns. In most pure cross-border royalty/FTS situations the non-resident is not a "specified person" under 206AB if it has no PE and no return-filing obligation in India, but the payer should confirm the recipient's status rather than assume the section never bites.

How Tax Garden Helps

Tax Garden's compliance plans take the guesswork out of paying foreign vendors. We characterise each payment as royalty, FTS, or business profit, read the specific DTAA (including the "make available" test and MFN clauses), and fix the correct withholding rate. We collect and validate the TRC, file Form 10F online, and hold the No-PE declaration before you pay. We then deposit the TDS on time and file your quarterly Form 27Q with accurate deductee details, so your foreign expense stands up to scrutiny and does not get disallowed under Section 40(a)(i). Flat-fee pricing, no surprises.

Frequently Asked Questions

What is the current Section 115A tax rate on royalty and FTS paid to non-residents?

The base rate is 20% on the gross royalty or fees for technical services, effective from Assessment Year 2024-25 after the Finance Act 2023 doubled it from 10%. For a foreign company, surcharge and a 4% health and education cess apply on top, taking the effective rate to roughly 21.84% in the common 2% surcharge band. The rate applies only where the non-resident has no permanent establishment in India.

Can a foreign vendor pay tax at a lower DTAA rate instead of 20%?

Yes. Under Section 90(2), a non-resident is taxed under either the Income Tax Act or the applicable DTAA, whichever is more beneficial. Most treaties cap royalty and FTS at 10% to 15%, which is below the 20% domestic rate, so the treaty rate usually applies. To claim it, the recipient must furnish a Tax Residency Certificate, Form 10F filed online, and a No-PE declaration.

Are software licence payments to foreign vendors treated as royalty?

Not always. In Engineering Analysis Centre of Excellence (2021), the Supreme Court held that payments for standard, shrink-wrapped software are not royalty under many DTAAs because the buyer gets a copy of a copyrighted article, not the copyright itself. Where a beneficial treaty applies, such payments may attract no royalty withholding. Customised software or payments granting copyright exploitation rights can still be royalty, so the licence terms and the specific treaty must be checked.

What is the 'make available' test for fees for technical services?

Several DTAAs, including the India-USA and India-UK treaties, only treat a payment as FTS if the service makes available technical knowledge, skill, or know-how to the recipient, meaning the recipient can apply it independently in future. If the test is not met, the payment is not FTS under the treaty even if it qualifies as FTS under Indian domestic law. This is why many purely automated digital services fall outside FTS.

What documents must a non-resident provide to claim the DTAA rate?

Three documents are needed before the payer applies the treaty rate: a Tax Residency Certificate issued by the home country tax authority, Form 10F filed electronically on the Indian e-filing portal, and a No-PE declaration confirming the recipient has no permanent establishment in India. Without these, the Indian payer must withhold at the full 20% Section 115A rate, leaving the recipient to claim a refund later.

What happens if the Indian payer fails to deduct TDS correctly under Section 195?

Short or non-deduction triggers interest under Section 201(1A), a penalty equal to the tax not deducted under Section 271C, and disallowance of the entire expense under Section 40(a)(i) until the tax is paid. The disallowance is often the largest exposure, because the full payment can be added back to the payer's taxable income. Applying for a determination under Section 195(2) or a lower-deduction certificate under Section 197 gives certainty before payment.

What happens under Section 206AA if the foreign vendor has no PAN?

Section 206AA normally requires TDS at the higher of the applicable rate or 20% when the deductee has no PAN. However, Rule 37BC exempts non-residents from this loading on royalty and FTS if they furnish their name, address, country Tax Identification Number, a Tax Residency Certificate, and contact details. With those, the payer can apply the treaty rate without the 206AA penalty even without an Indian PAN.

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Sources and verification: This guide draws on Section 115A (tax on royalty and FTS earned by non-residents and foreign companies without a PE), Section 9(1)(vi) and Explanation 2 (definition of royalty, including Explanations 4 to 6 inserted by Finance Act 2012 on software), Section 9(1)(vii) and Explanation 2 (definition of FTS), Section 44DA (PE-connected royalty/FTS taxed on net basis), Section 90(2) (more-beneficial treaty rule), Section 90(4) and Rule 21AB (TRC and Form 10F), Section 195 (withholding on payments to non-residents), Section 195(2) and Section 197 (lower/nil withholding), Section 40(a)(i) (disallowance for non-deduction), Sections 201(1A), 271C (interest and penalty), Section 206AA with Rule 37BC (PAN-related higher TDS and relief), and Section 206AB (non-filer higher TDS) of the Income Tax Act, 1961. The rate increase from 10% to 20% is per the Finance Act 2023, effective AY 2024-25. The software royalty position is per the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt Ltd v CIT (2021). Indicative DTAA rates for the USA, UK, Germany, Singapore, Netherlands, and UAE must be confirmed against the current treaty text, protocols, and MFN clauses for each country. All rates, sections, and provisions confirmed as of June 2026.