Permissibility Under Law

• Yes, a subsidiary in India can repatriate royalty payments to its foreign parent company for licensed use of intellectual property (IP) such as trademarks, patents, know-how, and technical services.
  
• Such payments are allowed under the Foreign Exchange Management Act (FEMA), 1999, and governed by RBI guidelines and FDI policy.
  
• Royalty transactions must be at arm’s length and supported by valid legal agreements.
  
• No prior approval from the Reserve Bank of India is required if conditions under the automatic route are satisfied.
  

Conditions and Caps

• Under the automatic route, royalty payments are permitted up to:
  
  • 5% of domestic sales and 8% of export sales for technology transfer agreements.
    
  • No monetary cap exists for use of trademarks or brand names under the FDI policy.
    
• Payments exceeding these limits require prior approval from the RBI or Department for Promotion of Industry and Internal Trade (DPIIT).
  
• Agreements must be genuine and not disguised forms of profit repatriation.
  

Documentation and Compliance

• A royalty agreement must be executed between the Indian subsidiary and the foreign parent, outlining scope, duration, rates, and territory.
  
• The transaction must comply with transfer pricing norms, supported by a chartered accountant’s certificate and benchmarking report.
  
• Subsidiaries must obtain a No Objection Certificate (NOC) from their authorized dealer (AD) bank.
  
• Remittance is made using Form A2, with supporting documents such as invoice, an agreement, and Form 15CA/15CB.
  
• All remittances must be reported under the RBI’s FIRMS portal in the appropriate category.
  

Taxation and Withholding

• Royalty payments to non-residents are subject to withholding tax under Section 195 of the Income Tax Act, typically at 10% plus surcharge and cess (or DTAA rate, if lower).
  
• To claim treaty benefits, the parent company must furnish a Tax Residency Certificate (TRC) and Form 10F.
  
• The Indian subsidiary must file Form 15CA (Part C) and Form 15CB certified by a Chartered Accountant for remittance over ₹5 lakh.
  
• TDS must be deposited before making the remittance and reported in quarterly TDS returns.
  

FEMA and RBI Reporting

• Although RBI approval is not needed under the automatic route, the remittance must be properly recorded and reported to the RBI via the AD bank.
  
• The authorized dealer must ensure compliance with FEMA (Current Account Transactions) Rules, 2000.
  
• Any violation of conditions may lead to penalties under FEMA, including compounding proceedings.
  
• All details of payments must be available for scrutiny in audit reports and statutory filings.