Royalty payment to parent co.

This query is : Resolved

Nazir (Querist)
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03 April 2009 Hi,

we need to pay royalty on the software licence sale amounting to Rs 50 lac. which is 50% of total cost, can i pay this much royalty under FEMA???

Nazir

CA. B.SRINIVASULU

CA. B.SRINIVASULU (Expert)
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03 April 2009 Yes. You can pay. But you should deduct the applicable tds as per section 195 or as per DTAA with that country. Percentage of royalty is not specified in the act. Even you can pay 99% also nothing harm in it.

However if the transaction is between two interested conncers or companies then tranfer pricing will be applicable.

Nazir

Nazir (Querist)
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03 April 2009 Thanks Srini,

Below is the clause i found in FEMA, can you please throw some light on it.

• II - Foreign Technical Collaboration

1. What are the payment parameters for foreign technology transfer under the Automatic Route of Reserve Bank of India? How should royalty be calculated?
• Payment for foreign technology collaboration by Indian companies are allowed under the automatic route subject to the following limits:
• Lump sum payments not exceeding US$ 2 million.
• Royalty payable being limited to 5 per cent for domestic sales and 8 per cent for exports, without any restriction on the duration of the royalty payments.
• The royalty limits are net of taxes and are calculated according to standard conditions.
• The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc.
• RBI has delegated the powers to ADs to make payment of royalty under such agreements. The requirement of registration of the agreement with the Regional Office of Reserve Bank of India has been done away with.

Nazir

CA. B.SRINIVASULU

CA. B.SRINIVASULU (Expert)
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03 April 2009 The above is applicable if you want to choose automatic route. To reduce the procedures for small payments the government has brought out the above method.

But if yours is a fit case you have to apply to RBI for specific permission for release of royalty 50% by giving sufficient reasons on how you have arrived at it and it should be reasonable whe rbi compares with the same type of industry and you can pay.

Only you have to adhere to the procedures and RBI wants that no person should utilise this route for hawala transactions. That is idea of the government and not that you should do the business as per percentages given in automatic route.

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