Cross-border intellectual property (IP) transfers are now common in the digital and innovation-driven economy, where patents, trademarks, copyrights, and software often represent a company’s most valuable assets. Many multinational corporations centralize ownership of these rights to streamline management, protect them under favorable legal systems, and maximize their commercial potential. However, such transfers whether through licensing, assignments, or corporate restructuring bring with them complex tax and legal issues. Misclassification or incomplete documentation can expose businesses to double taxation, denial of treaty benefits, transfer pricing disputes, and regulatory penalties.

To ensure smooth transactions, businesses must multiple legal layers. These include domestic tax laws like the Income Tax Act and GST law, IP-specific statutes such as the Patents Act and Trade Marks Act, and international frameworks like DTAAs and OECD Transfer Pricing Guidelines. Keeping agreements aligned with recent judicial precedents and policy updates is essential to avoid disputes.

In this article, CA Manish Mishra talks about Handling Cross-Border IP Transfers Without Triggering Tax Disputes.

Tax Treatment under Indian Law

Royalty and Fees for Technical Services (FTS)

The Indian Income Tax Act adopts a wide definition of “royalty” and “FTS.”

• Section 9(1)(vi): Royalty income is deemed to accrue in India if the intellectual property (IP) is used in India. This means even if the agreement is signed abroad or the payment is made outside India, tax liability arises if the IP is exploited in India.

• Section 9(1)(vii): Fees for technical services include managerial, technical, or consultancy services, even when rendered outside India, if utilized in India.

• Section 44DA: When royalty/FTS is connected to a Permanent Establishment (PE) in India, the income is taxed on a net basis (after expenses), unlike simple withholding on gross basis.

• Section 115A: For non-residents without a PE, royalty/FTS is taxed at concessional rates. However, the Finance Act, 2023 raised the rate from 10% to 20%, increasing reliance on treaty benefits.

Key Issue: India’s domestic definition of “royalty” is often broader than the narrower definitions under many tax treaties, leading to frequent disputes.

Withholding Obligations

India follows a withholding tax system for payments to non-residents.

• Section 195: Any sum paid to a non-resident that is chargeable under the Act requires tax deduction at source (TDS). The payer (Indian entity) is responsible, and failure makes the payer an “assessee in default.”

• Section 195(2): If only a portion of payment is taxable (e.g., part of a composite contract), the payer can apply to the Assessing Officer for determination, ensuring tax is withheld only on the chargeable amount.

• Section 197: Provides relief by allowing a non-resident or payer to apply for a lower or nil deduction certificate, avoiding excess withholding and refund delays.

Classification Risks

The correct treatment of IP-related payments is important for compliance are:

• Outright Sale vs. License:

  • If all rights are fully transferred (assignment), the consideration is treated as capital gains.

  • If limited rights are granted (license to use), the payment is classified as royalty.

• Mixed Agreements: Contracts often include both IP rights and services (e.g., trademark license + technical know-how support). Unless properly segregated, the entire payment may be treated as royalty, increasing tax liability.

Treaty Benefits and Anti-Abuse Safeguards

DTAA Relief

Double Taxation Avoidance Agreements (DTAAs) aim to prevent the same income from being taxed in two countries. They often contain narrower definitions of “royalty” and “fees for technical services (FTS)” compared to Indian domestic law.

• Why It Matters: Many payments that are taxed as “royalty” under the Income Tax Act may not qualify as royalty under a DTAA, leading to lower or no tax liability in India.

• Business Profits: If the income is classified as “business profits,” it is taxable in India only when the foreign entity has a Permanent Establishment (PE) here.

• Example: Under the India-USA DTAA, certain software payments (for copyrighted articles rather than transfer of copyright) do not qualify as royalty. Instead, they may fall under business profits, exempt from Indian tax if no PE exists.

Key Judicial Precedents

Indian courts have played a major role in clarifying treaty interpretation in cross-border IP cases:

• Engineering Analysis Centre v. CIT (2021): The Supreme Court ruled that payments for shrink-wrapped or off-the-shelf software are not royalty under many DTAAs. This was a landmark decision protecting taxpayers from broad domestic definitions.

• Nestlé SA v. Union of India (2023): The Supreme Court held that Most Favoured Nation (MFN) clauses in treaties cannot be automatically applied. They require a specific government notification to take effect. This closed the door on taxpayers unilaterally claiming lower tax rates from other treaties without official approval.

Anti-Abuse Provisions

To prevent misuse of treaties, anti-abuse measures apply:

• Principal Purpose Test (PPT) under the Multilateral Instrument (MLI): If obtaining a treaty benefit (like reduced withholding tax) is one of the principal purposes of a transaction, the benefit can be denied. This ensures that tax treaties are used for genuine business purposes, not artificial tax planning.

• General Anti-Avoidance Rules (GAAR): Found in Sections 95–102 of the Income Tax Act, GAAR allows Indian tax authorities to disregard arrangements lacking commercial substance and deny tax benefits. For example, if a company routes IP through a shell entity in a treaty-friendly jurisdiction only to avoid taxes, GAAR can apply.

Digital Economy and New Nexus Rules

Significant Economic Presence (SEP)

The traditional concept of taxation required a physical presence (office, factory, or PE) in India to establish a nexus. However, with the growth of the digital economy, businesses can earn significant revenues from Indian users without having any physical setup here.

• Introduction: To address this, India introduced the concept of Significant Economic Presence (SEP) under Section 9(1)(i), Explanation 2A of the Income Tax Act.

• Thresholds:

  • If a non-resident earns revenue exceeding ₹20 million from Indian users, or

  • If it engages with more than 300,000 Indian users,
    it is deemed to have a taxable nexus in India, even without a physical presence.

• Current Limitation: SEP rules have not yet been integrated into India’s tax treaties (like India-USA DTAA, etc.). Since treaties override domestic law, relief may still be available under DTAAs. However, the risk remains for companies operating in a treaty-less context or where treaty benefits are denied due to anti-abuse rules.

Practical Impact: Global digital platforms social media companies, streaming services, SaaS providers must monitor their Indian revenues and user base closely, as India could assert taxing rights under SEP in the future.

Equalisation Levy (EL)

The Equalisation Levy is India’s response to taxing the digital economy, separate from income tax. It targets payments made to non-resident digital service providers.

• 6% Levy (2016): Applies to payments made by Indian businesses to non-residents for online advertisements, digital ad space, or related services. For example, payments to Google or Facebook for ads.

• 2% Levy (2020): Imposed on non-resident e-commerce operators (companies facilitating digital sales of goods/services in India). This applies to online marketplaces, SaaS platforms, and e-commerce websites.

• Compliance Aspect: The Equalisation Levy is independent of the Income Tax Act but has strong enforcement:

  • Non-compliance results in disallowance of expenses under Section 40(a)(ib) of the Income Tax Act. This means the Indian payer cannot claim such payments as deductible expenses if EL is not deposited.

Key Difference from SEP: While SEP is about establishing tax nexus for income tax, the Equalisation Levy is a standalone charge specifically created to capture digital transactions.

Transfer Pricing and DEMPE Analysis

Applicability

Cross-border IP transfers are treated as “international transactions” under Indian transfer pricing law.

• Section 92B: Covers international transactions, including transfer of intangible property such as patents, trademarks, copyrights, and know-how. Even intra-group licensing arrangements fall within its ambit.

• Rule 10D: Mandates detailed transfer pricing (TP) documentation. Taxpayers must maintain local files, benchmarking studies, and justifications for royalty rates or IP valuations. This documentation is critical during tax audits.

• Section 92CE: Introduces the concept of secondary adjustments. If primary TP adjustments are made (i.e., profits are shifted to India), the corresponding excess money must be repatriated to India. If not, it is treated as a “deemed advance” and attracts imputed interest or additional tax.

Cross-border IP deals must be priced at arm’s length and justified with robust evidence.

DEMPE Framework (OECD-Aligned)

The DEMPE framework adopted from OECD guidelines ensures that returns from IP align with economic substance, not just legal ownership.

• Develop: Who conducts R&D, employs scientists, and bears the associated risks?

• Enhance: Who invests in further development or upgrading of the IP?

• Maintain: Who ensures the IP remains valuable, including updates and renewals?

• Protect: Who is responsible for defending patents, trademarks, or copyrights in court?

• Exploit: Who commercially uses or licenses the IP, bearing market risks?

Tax authorities closely examine whether the entity legally owning the IP also performs/controls the DEMPE functions. If not, they may reallocate profits to the entity performing substantive functions.

Valuation of IP

Valuing intangibles is one of the most disputed areas in tax audits. Accepted valuation methods include:

• Relief-from-Royalty Method: Estimates the value of IP by calculating the royalties that would otherwise have been paid if the company did not own the IP.

• Multi-Period Excess Earnings Method (MPEEM): Discounts future cash flows attributable specifically to the IP, after subtracting returns for other assets.

• Profit-Split Method: Allocates profits among related parties based on their relative contributions, often used when intangibles are highly integrated across group companies.

Choice of method depends on the type of IP, industry, and availability of comparable data.

Risk Management

To reduce litigation and double taxation, companies can adopt proactive measures:

• Advance Pricing Agreements (APAs):

  • Legally binding agreements with tax authorities that pre-approve royalty rates or IP valuation methods.

  • Provide certainty for 5+ years and reduce transfer pricing disputes.

  • India has signed a large number of APAs in recent years, especially covering royalty and intangibles.

• Mutual Agreement Procedure (MAP):

  • A mechanism under DTAAs where competent authorities of two countries resolve double taxation issues.

  • Useful when both countries attempt to tax the same IP transaction.

  • Helps businesses avoid prolonged litigation and ensures treaty relief is applied consistently.

Characterization and Withholding Tax

Royalty vs. Business Profits

The first step in determining taxability of cross-border IP payments is deciding whether the payment is royalty or business income.

• If treated as royalty under Indian law, it becomes taxable in India irrespective of whether the foreign company has a Permanent Establishment (PE). This broad approach allows India to tax most IP-related payments.

• If categorized as business profits under a tax treaty, India can tax such income only if the foreign entity maintains a PE in India. Without a PE, the taxing right rests with the foreign company’s home country.

Thus, correct classification has a direct bearing on whether India can levy tax at all.

Withholding Compliance

Indian payers must exercise caution when remitting payments to foreign IP owners, as tax must be withheld at source.

• Treaty Documentation: To claim DTAA benefits like reduced tax rates, the non-resident must furnish a Tax Residency Certificate (TRC) along with Form 10F. Absence of these documents may force the payer to deduct tax at the higher domestic rate.

• Section 195(2) Applications: Where contracts involve both taxable and non-taxable elements (for instance, offshore licensing plus local installation), payers may apply to the Assessing Officer to determine the exact portion chargeable to tax. This prevents excess withholding and avoids disputes later.

Recent Challenge

The Finance Act, 2023 sharply increased India’s domestic tax rate on royalties and FTS from 10% to 20% (plus surcharge and cess).

• This change has increased reliance on DTAAs, as many treaties cap royalty/FTS taxation at 10% or 15%, which is more favorable.

• As a result, businesses now focus heavily on treaty eligibility, ensuring proper documentation and compliance to lawfully reduce withholding exposure.

Corporate and IP Law Compliance

While taxation determines how cross-border IP transfers are treated from a revenue standpoint, compliance with intellectual property laws ensures that the transfer itself is valid and enforceable. If proper legal formalities are not followed, the transaction may be challenged in court, weakening both commercial rights and tax positions.

Patents

• Section 68, Patents Act, 1970: Any assignment of a patent (or share in a patent) must be in writing and signed by the parties.

• Such assignments must also be recorded with the Patent Office to be legally enforceable against third parties.

• Without registration, the transferee’s rights may not be recognized in India, and tax authorities may question whether the payment is truly for a patent assignment or merely a license (impacting royalty vs. capital gains classification).

Copyright

• Section 19, Copyright Act, 1957: For copyright assignments to be valid, the agreement must:

  • Be in writing and signed,

  • Clearly specify the territory (e.g., India, worldwide),

  • State the duration of assignment, and

  • Mention the consideration (royalty, lump sum, etc.).

• If any of these are missing, the law assumes the assignment is valid for five years and limited to India.

• This directly affects tax treatment if the scope is unclear, authorities may recharacterize payments as ongoing royalty instead of a one-time transfer.

Trademarks

• Sections 37–45, Trade Marks Act, 1999: A proprietor can assign rights in a trademark or transmit them to another person.

• However, the assignment or transmission must be recorded with the Registrar of Trade Marks to be effective.

• If not recorded, the transferee may face difficulties enforcing rights against infringers, and tax authorities may argue that ownership never fully passed again impacting whether the payment is capital gains or royalty.

Tax Planning Opportunities

Cross-border IP transfers often attract scrutiny, but Indian law also provides favorable provisions that businesses can leverage for tax efficiency. Proper structuring ensures not only compliance but also optimization of tax costs.

Patent Box Regime

• Section 115BBF of the Income Tax Act introduces a “patent box” regime in India.

• Royalty income earned by a resident taxpayer from patents that are developed and registered in India is taxed at a concessional rate of 10% (plus surcharge and cess).

• This incentive encourages innovation in India and discourages shifting patents abroad for tax arbitrage.

• For cross-border transactions, if the Indian entity owns the patent and licenses it to overseas affiliates, the concessional rate significantly reduces tax costs and strengthens India’s case in transfer pricing evaluations.

Depreciation Benefits

• Section 32(1)(ii) of the Income Tax Act allows depreciation on acquired intangible assets, including:

  • Goodwill,

  • Trademarks,

  • Patents,

  • Know-how,

  • Licenses, and

  • Franchises.

• This provision helps taxpayers spread the cost of acquiring IP over time, reducing taxable income annually.

• For companies acquiring foreign IP, the depreciation deduction is a practical tool for offsetting tax liability while complying with Indian law.

GST Impact

Cross-border IP transfers are also governed by GST laws:

• Schedule II of the CGST Act: Treats the temporary transfer or permitting the use of IPR as a supply of service. This means GST applies to licensing or royalty arrangements, not outright sales.

• Section 13 of the IGST Act: Determines the place of supply in case of cross-border IP licensing. If the recipient is located outside India, the supply may qualify as an export of services, making it zero-rated under GST (eligible for refund of input tax credit).

• This alignment ensures that businesses avoid double taxation income tax applies on the income, while GST clarifies indirect tax treatment.

Best Practices to Avoid Disputes

Given the complexity of cross-border IP transfers, disputes often arise around classification, valuation, and substance. To minimize risk, businesses must adopt proactive strategies at both the contracting stage and the compliance stage.

Drafting of Agreements

• Precision in terms: IP agreements must clearly define exclusivity, territory, duration, sub-licensing rights, and scope of use. Ambiguity in these areas can lead to tax authorities reclassifying payments as royalty instead of business income or capital gains.

• Commercial Rationale: Agreements should not only contain legal clauses but also explain the business purpose why the IP was transferred or licensed, how it will be used, and what benefits it provides to the group. This demonstrates that the transaction is driven by genuine business needs, not tax avoidance.

Substantiating Substance

• DEMPE Alignment: The legal owner of the IP must align with the entity performing DEMPE functions (Develop, Enhance, Maintain, Protect, Exploit). For instance, if R&D is conducted in India, the Indian entity should reflect appropriate income.

• Supporting Records: To evidence substance, companies should maintain:

  • Board resolutions approving IP transfers,

  • R&D expenditure records,

  • Employee role documentation,

  • Inter-company agreements showing actual responsibility for IP management.

• Without proper documentation, tax authorities may argue that the legal owner is a “shell” and reallocate profits to the jurisdiction where activities actually take place.

Proactive Compliance

• Advance Pricing Agreements (APAs): Useful when valuing IP or determining royalty rates is complex. APAs provide binding certainty for 5+ years, reducing transfer pricing disputes.

• Mutual Agreement Procedure (MAP): Where two countries both claim taxing rights, MAP allows competent authorities to resolve the issue and prevent double taxation.

• Monitoring Updates: Businesses must track CBDT circulars, court rulings, and OECD BEPS updates. For example, India’s adoption of the Principal Purpose Test (PPT) through the MLI requires companies to demonstrate genuine purpose in treaty-driven structures.

Recent Updates and Case Laws

• Engineering Analysis (SC, 2021): Ruled that payments for shrink-wrapped/off-the-shelf software are not royalty under many treaties, easing tax burdens on software imports.

• Nestlé SA (SC, 2023): Clarified that MFN clauses in treaties need a government notification before lower rates can apply, limiting automatic claims.

• CBDT Circular 1/2025: Explained the scope of the Principal Purpose Test (PPT) under MLI, stressing that treaty benefits will be denied if tax avoidance is a key purpose.

• APA Developments (2024–25): India signed record bilateral APAs, offering greater certainty on royalty rates and IP valuation for cross-border transfers.

Conclusion

Cross-border IP transfers require a complete compliance framework, as they involve multiple legal and tax dimensions. Businesses must address provisions under the Income Tax Act and GST law, apply relevant treaty reliefs, and ensure proper transfer pricing alignment with DEMPE principles. Equally important is compliance with IP laws patent, copyright, and trademark assignments must be validly executed and recorded to avoid disputes.

In today’s environment of digital economy taxation, BEPS measures, and enhanced global scrutiny, relying only on contractual form is risky. Tax authorities focus on actual functions, risks, and substance, not just ownership on paper. The strongest defense lies in clear agreements, consistent documentation, and demonstrated commercial purpose. With careful structuring, IP transfers can move from being a potential tax challenge to a strategic advantage for global growth.

Frequently Asked Questions (FAQs)

Q1. Why are cross-border IP transfers prone to tax disputes?

Ans. Cross-border IP transfers often involve different tax regimes, wide definitions of “royalty” in domestic law, and inconsistent treaty interpretations. Misclassification or lack of proper documentation can trigger double taxation and scrutiny.

Q2. What laws govern IP transfers in India?

Ans. They are governed by the Income Tax Act, 1961 (for royalty/FTS and transfer pricing), GST Acts (for supply classification), and IP-specific statutes like the Patents Act, 1970, Copyright Act, 1957, and Trade Marks Act, 1999.

Q3. How does the DEMPE framework affect IP taxation?

Ans. The OECD-aligned DEMPE model ensures that profits follow the entity performing actual functions Develop, Enhance, Maintain, Protect, Exploit. Tax authorities can reallocate income if legal ownership does not match economic substance.

Q4. Can treaties reduce Indian tax on IP payments?

Ans. Yes. Double Taxation Avoidance Agreements (DTAAs) often define “royalty” more narrowly and cap tax rates at 10–15%. However, businesses must provide a Tax Residency Certificate (TRC) and Form 10F to claim treaty relief.

Q5. How can businesses avoid disputes in IP transfers?

Ans. By drafting clear agreements, maintaining DEMPE-aligned documentation, seeking Advance Pricing Agreements (APAs) for valuation, using MAP for treaty disputes, and monitoring CBDT/OECD updates.