Royalty Tax Rate Between India and Australia Under DTAA

Royalty Tax Rate Between India and Australia

Under Article 12 of the India-Australia Double Taxation Avoidance Agreement (DTAA), royalties arising in one Contracting State and paid to a resident of the other Contracting State are subject to reduced withholding tax rates. The treaty distinguishes between two categories of royalties: payments for the use of copyrights, patents, trademarks, designs, and secret formulas are capped at 15%, while royalties for the use of industrial, commercial, or scientific equipment are limited to 10% of the gross amount.

This represents a meaningful reduction from India's domestic withholding rate of 20% (plus applicable surcharge and health and education cess) under Section 195 read with Section 115A of the Income Tax Act, 1961. The effective domestic rate, inclusive of surcharge and cess, can reach approximately 20.8% to 21.84% depending on the payee's total income bracket, making the treaty rates significantly more favourable for Australian residents receiving royalty income from India.

The India-Australia DTAA was originally signed on 25 July 1991 and entered into force on 30 December 1991. A protocol amending the treaty was signed on 16 December 2011 and became effective on 2 April 2013. Both countries have also ratified the Multilateral Instrument (MLI), with the synthesised text published by the CBDT reflecting the combined effect of the original treaty, the 2011 protocol, and MLI provisions.

Treaty Rate vs Domestic Rate: Detailed Comparison

Indian tax law imposes a domestic withholding tax rate of 20% (plus surcharge and health and education cess) on royalty payments to non-residents under Section 195 read with Section 115A of the Income Tax Act. This rate was increased from 10% to 20% effective 1 April 2023 by the Finance Act, 2023. Under Section 90(2), a non-resident can opt for the more beneficial rate available under the applicable DTAA.

The distinction between intellectual property royalties (15%) and equipment royalties (10%) is a key feature of the India-Australia treaty. For equipment royalties, the treaty rate of 10% provides a saving of approximately 10-12 percentage points compared to the effective domestic rate. For IP royalties at 15%, the saving is approximately 5-7 percentage points.

It is important to note that prior to April 2023, the domestic rate under Section 115A was also 10%, which meant the treaty provided no additional benefit for equipment royalties. However, with the doubling of the domestic rate to 20%, the treaty rates have become considerably more valuable for Australian residents.

Who Qualifies for the Reduced Rate

To claim the reduced royalty rates under the India-Australia DTAA, the recipient must satisfy several conditions:

Beneficial Ownership Requirement

The recipient must be the beneficial owner of the royalties. This means the recipient must have the right to use and enjoy the royalty income without any contractual or legal obligation to pass it on to another person. Post-MLI, this requirement has been strengthened through the Principal Purpose Test (PPT), which can deny treaty benefits if one of the principal purposes of an arrangement was to obtain the treaty benefit.

Tax Residency Requirement

The recipient must be a tax resident of Australia as defined under Article 4 of the treaty. A valid Tax Residency Certificate (TRC) issued by the Australian Taxation Office (ATO) is mandatory to establish residency status.

No Permanent Establishment Connection

The reduced rates do not apply if the beneficial owner carries on business through a permanent establishment (PE) in India and the royalty-generating right or property is effectively connected with that PE. In such cases, the royalties are taxed as business profits under Article 7.

GAAR Considerations

India's domestic General Anti-Avoidance Rules (GAAR), effective from April 2017, can override treaty benefits if the tax authority determines that the arrangement lacks commercial substance and was entered into primarily for obtaining a tax benefit.

Royalty-Specific Treaty Provisions

Article 12 of the India-Australia DTAA contains several important provisions specific to royalty taxation that distinguish it from other Indian tax treaties:

Broad Definition of Royalties

Under the treaty, the term "royalties" is defined broadly to include payments or credits, whether periodical or not, made as consideration for:

• The use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right
• The use of, or the right to use, any industrial, commercial, or scientific equipment
• The supply of scientific, technical, industrial, or commercial knowledge or information

No Separate FTS Clause

A critical distinction of the India-Australia DTAA is that it does not contain a separate clause for Fees for Technical Services (FTS). Unlike the India-USA or India-Canada DTAAs, which include specific provisions for technical services, the India-Australia treaty addresses certain technical service payments within the broader royalty definition. Payments for technical or consultancy services that involve making technical knowledge available may be covered under the royalty article, while standalone service payments without any knowledge transfer are taxed as business profits under Article 7.

Source Country Taxation

The treaty explicitly allows the source country (where the payer is resident) to tax royalties, but limits the rate to the percentages specified above. The residence country must then provide relief from double taxation through a tax credit mechanism as outlined in Article 24.

Documentation Required

Australian residents claiming the reduced royalty rates on payments from India must furnish the following documents to the Indian payer:

Tax Residency Certificate (TRC)

A valid TRC from the Australian Taxation Office (ATO) confirming that the recipient is a tax resident of Australia for the relevant financial year. This is the primary document for claiming treaty benefits under Section 90(4) of the Income Tax Act.

Form 10F

If the TRC does not contain all the prescribed particulars (name, status, nationality, tax identification number, period of residency, and address), the recipient must file Form 10F electronically on the Indian Income Tax portal.

Self-Declaration

A self-declaration confirming that the recipient is the beneficial owner of the royalty income, does not have a PE in India to which the income is attributable, and that the arrangement is not primarily motivated by tax avoidance.

PAN Considerations

While having an Indian PAN is not mandatory for claiming treaty benefits, Section 206AA may trigger higher withholding at 20% if the recipient does not furnish a PAN. However, per CBDT Notification No. 53/2016, treaty rates prevail over Section 206AA rates for non-residents who furnish the prescribed documents (TRC, Form 10F, and self-declaration).

Withholding Procedure for Indian Payers

Indian companies or individuals paying royalties to Australian residents must follow specific compliance procedures under Section 195 of the Income Tax Act:

Step 1: Classify the Royalty Payment

Determine whether the payment falls under the IP royalties category (15%) or the equipment royalties category (10%). This classification is critical as it determines the applicable treaty rate. Payments for software licences, patent use rights, and trademark licences generally fall under IP royalties, while payments for equipment rental or lease fall under equipment royalties.

Step 2: Verify Documentation

Before applying the reduced treaty rate, verify the TRC, Form 10F, and beneficial ownership declaration from the Australian recipient. The payer bears responsibility for ensuring all conditions are met.

Step 3: Deduct TDS at Treaty Rate

Deduct TDS at the applicable treaty rate (10% or 15%) on the gross royalty amount. The TDS must be deposited with the government within 7 days of the following month.

Step 4: File Form 15CA/15CB

For remitting the royalty to Australia, the payer must file Form 15CA electronically. If the remittance exceeds INR 5 lakh in a financial year, a Chartered Accountant's certificate in Form 15CB is also required, certifying the nature of remittance, applicable TDS rate, and treaty provisions relied upon.

Step 5: Issue TDS Certificate

The payer must issue a TDS certificate in Form 16A to the Australian recipient within 15 days from the due date of furnishing the quarterly TDS return.

Common Disputes and Judicial Precedents

Several key issues have arisen in the interpretation of royalty taxation provisions under the India-Australia DTAA:

Software Payments as Royalties

A recurring question is whether payments for software licences constitute royalties under the treaty. The Supreme Court of India in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) held that payments for copyrighted software (as opposed to payments for the copyright itself) do not constitute royalties. This ruling has significant implications for Australian software companies selling licences to Indian customers.

Equipment vs IP Royalties Classification

Disputes frequently arise over whether a payment should be classified as an equipment royalty (10%) or an IP royalty (15%). The ITAT has examined whether the substance of the transaction involves the use of physical equipment or the transfer of intangible rights, applying the substance-over-form principle in determining the correct treaty rate.

Cricket Australia Ruling (2024)

In a notable 2024 case, the ITAT held that consideration received by Cricket Australia for granting live transmission rights to an Indian broadcaster was not royalty under Article 12(3) of the India-Australia DTAA, on the basis that a live broadcast feed does not involve the use of a copyright, so the payment fell outside the treaty's royalty definition.

Technical Services Within Royalty Definition

Since the India-Australia DTAA lacks a separate FTS clause, disputes arise over whether certain technical service payments fall within the broad royalty definition. The ATO and Indian courts have taken differing views on the scope of "supply of knowledge or information" within Article 12.

Practical Examples and Calculations

Example 1: Patent Licence Fee

An Australian pharmaceutical company licences a patent to an Indian manufacturer for INR 50,00,000 per annum. Under domestic law, the Indian company would withhold TDS at 20% plus surcharge and cess (approximately 20.8%), resulting in a tax of INR 10,40,000. Under the India-Australia DTAA, the withholding is limited to 15%, i.e., INR 7,50,000 -- a saving of INR 2,90,000.

Example 2: Equipment Lease

An Australian mining company leases specialised drilling equipment to an Indian company for INR 1,00,00,000. As this qualifies as an equipment royalty, the treaty rate of 10% applies, resulting in a tax of INR 10,00,000 compared to INR 20,80,000 under domestic rates. The treaty saves INR 10,80,000.

Example 3: Software Licence

An Australian software company sells a standard shrink-wrapped software licence to an Indian business for INR 20,00,000. Following the Supreme Court's ruling in Engineering Analysis Centre (2021), this payment may not constitute a royalty at all, as it involves the purchase of a copyrighted article rather than the use of the copyright itself. If classified as a business profit, no Indian tax applies unless the Australian company has a PE in India.

Example 4: Trademark Licence

An Australian fashion brand licences its trademark to an Indian retailer for INR 30,00,000. Under the treaty, the withholding is capped at 15%, i.e., INR 4,50,000, compared to approximately INR 6,24,000 at the domestic rate (20.8%). The saving is INR 1,74,000.

Frequently Asked Questions

What is the royalty withholding tax rate under the India-Australia DTAA?

The India-Australia DTAA provides two royalty rates under Article 12: 15% for royalties related to copyrights, patents, trademarks, designs, and secret formulas, and 10% for royalties related to the use of industrial, commercial, or scientific equipment. Both rates are significantly lower than India's domestic rate of 20% plus surcharge and cess.

How is the 10% vs 15% royalty rate determined?

The 10% rate applies specifically to payments for the use of, or the right to use, industrial, commercial, or scientific equipment. All other royalty payments -- including those for copyrights, patents, trademarks, designs, secret formulas, and the supply of technical knowledge or information -- are subject to the 15% rate.

Does the India-Australia DTAA cover fees for technical services?

No. Unlike many other Indian DTAAs (such as those with the USA, Canada, and UK), the India-Australia DTAA does not contain a separate clause for Fees for Technical Services (FTS). Certain technical service payments that involve making knowledge available may fall within the broad royalty definition under Article 12, while standalone service payments are taxed as business profits under Article 7.

What documentation does an Australian company need to claim the reduced rate?

An Australian company must provide a valid Tax Residency Certificate from the Australian Taxation Office, Form 10F (if the TRC does not contain all prescribed particulars), and a self-declaration confirming beneficial ownership and absence of a PE in India.

How did the Finance Act 2023 affect royalty taxation under the DTAA?

The Finance Act 2023 doubled India's domestic withholding rate on royalties from 10% to 20% under Section 115A. This made the DTAA rates (10% and 15%) considerably more valuable for Australian residents. Prior to this amendment, the domestic rate was equal to or lower than the treaty rate for equipment royalties, providing no treaty benefit for that category.

Can an Australian company apply for a lower withholding certificate?

Yes. Under Section 197 of the Income Tax Act, an Australian company can apply to the Assessing Officer for a certificate authorising the Indian payer to deduct tax at a rate lower than the prescribed rate. This is useful when the actual tax liability is expected to be lower than the treaty rate due to deductions, expenses, or tax credits.

What happens if the Indian payer deducts TDS at the domestic rate instead of the treaty rate?

If the Indian payer deducts TDS at the domestic rate of 20% plus surcharge and cess instead of the applicable treaty rate (10% or 15%), the Australian recipient can file an Indian income tax return to claim a refund of the excess tax deducted. The refund process typically takes 6-12 months.