Legal basis: FEMA 1999 s.5 read with the FEM (Current Account Transactions) Rules 2000 (Schedule II item 8 omitted w.e.f. 16 Dec 2009) and Press Note 8 (2009 Series); Consolidated FDI Policy Circular of 2020 paras 3.1.1 and 5.2.5.1; NDI Rules 2019 Schedule I; Trade Marks Act 1999 ss.38, 45, 49; Income-tax Act 1961 ss.9(1)(vi), 55(2)(a), 92E, 115A, 195 — Effective: ongoing. Source: https://www.dpiit.gov.in/static/uploads/2025/07/b47aae36097489b8491056c03de0eab8.pdf. Last reviewed by CA Harun Raaj: September 2026.
A German industrial-equipment group is incorporating a wholly owned Indian private limited subsidiary in Pune to assemble and sell its machines. The board minute reads: "Group IP stays with the parent; India will pay a royalty." Nobody asks whether the India-registered trademark and the know-how the Pune team will create should sit in Germany or in India. Either answer is legal. What changes is the tax on every rupee of royalty, the customs value of every imported kit, and what the parent can take out on exit.
Key point: Since Press Note 8 (2009) removed the royalty ceiling, a foreign parent can charge its Indian subsidiary an arm's-length trademark royalty with no FEMA cap — but who owns the India-registered mark still changes the withholding tax, the customs value, and the exit tax the group eventually pays.
What the regulation actually says
Entry route first. Manufacturing is on the 100% automatic route under para 5.2.5.1 of the Consolidated FDI Policy Circular of 2020 and Schedule I of the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (the "NDI Rules", the Ministry of Finance rules governing equity investment into India). No government approval is needed, provided the Press Note 3 (2020) test is passed: under para 3.1.1(a), an entity of a country sharing a land border with India, or an investment whose beneficial owner is a citizen of such a country, may invest only under the government route. Press Note 2 (2026 Series) tightened this — para 3.1.1(c) now imports the beneficial-owner test of the Prevention of Money-laundering (Maintenance of Records) Rules 2005, and para 3.1.1(d) adds a reporting obligation even where land-border ownership exists below the approval threshold. A parent with a shareholder above the PMLA threshold from such a country fails this test whichever entity owns the brand.
Royalty is a current account transaction, and it is uncapped. Under FEMA 1999 s.5, foreign exchange for a current account transaction may be drawn freely unless the Central Government restricts it by rule. Schedule II item 8 of the FEM (Current Account Transactions) Rules 2000 once required Ministry approval where royalty exceeded 5% of domestic sales or 8% of exports, or a lump-sum fee exceeded US$2 million. Press Note 8 (2009 Series) dated 16 December 2009 placed all payments for royalty, technology transfer, and use of trademark or brand name on the automatic route, and item 8 was omitted by G.S.R. 382(E) dated 5 May 2010 with effect from 16 December 2009. The Schedule III item on "purchase of trademark or franchise in India" had gone in 2006. Today the AD bank (an Authorised Dealer Category-I bank licensed by the Reserve Bank to handle foreign exchange) remits royalty against the licence, the invoice, and the income-tax remittance certificate — no FEMA ceiling, no government file.
Two lawful models. Under Model A the parent registers the mark in India in its own name and licenses it to the subsidiary; the subsidiary pays a royalty. Under Model B the Indian subsidiary applies for and owns the India-registered mark and any India-developed know-how; no royalty flows out. The Trade Marks Act 1999 accommodates both: s.38 makes a registered mark assignable with or without goodwill, s.45 requires the assignee to record its title with the Registrar (an unrecorded assignment is ineffective against a later bona fide acquirer), and s.49 lets proprietor and licensee jointly register the licensee as a "registered user".
IP can even be swapped for shares. Para 6(ii) of the Consolidated FDI Policy annex on conversion of ECB, lump-sum fee and royalty into equity gives general permission to issue equity against a lump-sum know-how fee or royalty due, and against any other sum payable whose remittance needs no prior permission — subject to entry route, sectoral cap, and pricing guidelines. A parent that assigns the India mark to the subsidiary for a price may therefore take shares instead of cash, reporting the allotment in Form FC-GPR (the form for a fresh issue of equity instruments to a non-resident) within 30 days of issue under Annex 1 para 1.3.1(1) of the Reserve Bank's Master Direction on Foreign Investment in India, via the FIRMS portal's Single Master Form with AD bank approval.
Model A vs Model B at a glance
| Aspect | Model A — parent owns the mark, subsidiary pays royalty | Model B — subsidiary owns the India mark |
|---|---|---|
| Royalty outflow | Uncapped since Press Note 8 (2009); no FEMA ceiling on remittance | None — no royalty leaves India |
| Withholding tax | 20% under s.115A(1)(b)(A), or treaty rate with residency certificate; deducted under s.195 | Not applicable during operation |
| Transfer pricing | Royalty benchmarked and reported in Form 3CEB under s.92E | Applies only when the mark is later assigned to the parent |
| GST / customs | Reverse-charge IGST on the licence under IGST Act s.5(3); customs duty added under Rule 10(1)(c) if royalty is a condition of the kit purchase | No royalty-linked customs addition |
| Exit / brand transfer | Brand stays with parent, portable on a group sale | Cost of acquisition taken as nil under s.55(2)(a); full arm's-length price taxed as gain in India |
| Control | Licensed asset; subsidiary is only a registered user under s.49 | Asset of the Indian company; moves automatically with a share sale |
Practical implications
Model A — the parent owns, the subsidiary pays.
- Withholding. Royalty payable by a resident for a right used in an Indian business is income deemed to accrue in India under s.9(1)(vi)(b) of the Income-tax Act 1961. It is taxed in the parent's hands at 20% under s.115A(1)(b)(A) (plus surcharge and cess), unless the applicable tax treaty gives a lower rate and the parent produces a tax residency certificate and the prescribed declarations. Under s.195 the subsidiary must deduct that tax at credit or payment, whichever is earlier. Miss it and the subsidiary loses the deduction and becomes assessee-in-default for the tax.
- Transfer pricing. The royalty is an international transaction with an associated enterprise. Section 92E requires an accountant's report (Form 3CEB for AY 2026-27; the Income-tax Act 2025 governs tax year 2026-27 onward and renumbers these provisions) supported by a benchmarking study showing the rate is at arm's length. A rate above what unrelated licensees pay for a comparable mark is the most common adjustment foreign-owned subsidiaries face.
- GST on the way in. Import of services by a person from a related person in the course of business is a supply even without consideration (CGST Act 2017, Schedule I para 4), and integrated tax on import of services falls on the Indian recipient under reverse charge under IGST Act 2017 s.5(3) read with the notified categories. Even a "royalty-free" group licence needs an open-market value and a reverse-charge payment.
- Customs on every kit. Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules 2007 adds to the assessable value "royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale". If the licence and the supply agreement make the royalty a condition of buying kits from the parent, customs duty is charged on the royalty too.
Model B — the subsidiary owns.
- No royalty leakage, but the exit is different. When the parent later wants the brand back — on a group sale or an India shutdown — the transfer is a sale of a capital asset. Under s.55(2)(a) the cost of acquisition of a self-generated trademark or brand name is taken to be nil, so the entire arm's-length sale price is taxable gain in India, and the price itself must survive s.92 scrutiny because the buyer is an associated enterprise.
- Control. A subsidiary-owned mark is an asset of the Indian company: visible to Indian creditors, movable only by board resolution and an assignment recorded under s.45, and acquired by whoever buys the shares.
- FDI reporting is unchanged. Whichever model, every equity infusion is reported in Form FC-GPR within 30 days of allotment, every resident–non-resident share transfer in Form FC-TRS within 60 days of transfer or receipt of funds (whichever is earlier), and the annual Foreign Liabilities and Assets return by 15 July, under the Master Direction on Reporting under FEMA (updated 24 June 2026).
When the reporting slips. A late FC-GPR attracts the Late Submission Fee ("LSF" — the Reserve Bank's administrative alternative to compounding) under A.P. (DIR Series) Circular No. 16 dated 30 September 2022: ₹7,500 plus 0.025% of the amount involved multiplied by the number of years of delay, capped at 100% of the amount, and available only within three years of the due date. Beyond that, or where the LSF advice is unpaid after 30 days, the contravention goes to compounding under FEMA s.15 — an application to the Reserve Bank under the Foreign Exchange (Compounding Proceedings) Rules 2024 and the Master Direction on Compounding of Contraventions dated 22 April 2025, decided within 180 days of receipt.
Step-by-step: what to do
- Run the Press Note 3 test first. Map the parent's beneficial owners against para 3.1.1(c) as amended by Press Note 2 (2026). If land-border ownership exists, sequence the government-route application before choosing the IP model; if it sits below the threshold, diarise the para 3.1.1(d) reporting.
- Pick the model on the exit, not on year-one tax. A planned share sale to another foreign group favours Model A (the brand stays portable). An Indian buyer, a listing, or a long-lived India business favours Model B, or a hybrid — parent owns the global mark, subsidiary owns India-specific marks — avoiding a permanent 20% withholding and a customs add-on.
- Under Model A, draft two separate agreements. Keep the trademark/know-how licence independent of the kit-supply agreement so that the royalty is not "a condition of the sale" under Rule 10(1)(c) of the Customs Valuation Rules; register the subsidiary as a registered user under s.49 of the Trade Marks Act; and benchmark the rate before the first invoice, not at year-end.
- Under Model B, file the trademark application in the subsidiary's name from day one. If the mark is already registered to the parent, execute a written assignment, price it at arm's length, record it with the Registrar under s.45, and — if the parent takes shares instead of cash — allot against the sum payable under annex para 6(ii) of the FDI Policy, obtain the valuation certificate the pricing guidelines require, and file FC-GPR within 30 days on the FIRMS portal.
- Set up the remittance file with the AD bank. For each royalty payment the bank wants the licence, the invoice, the withholding computation, and the chartered accountant's remittance certificate and online declaration prescribed under the income-tax rules; Form 15CA/CB remittance tree walks through which certificate applies.
- Close the tax year properly. Deduct under s.195 on credit, deposit it by the seventh of the following month, obtain the s.92E accountant's report before the specified date, and pay reverse-charge IGST on the licence in the month the invoice is booked. The withholding logic for each type of payment to the parent is set out in foreign payments TDS.
- Keep the FEMA calendar independent of the IP decision. FC-GPR within 30 days of allotment, FC-TRS within 60 days of transfer, FLA by 15 July — these run on the subsidiary's private limited company compliance calendar.
Sources
- FEMA 1999 s.5 (current account transactions): https://indiacode.gov.in/items/74fe15b7-8213-46ea-a2cc-1024004fb6db
- FEMA 1999 s.15 (power to compound contravention): https://indiacode.gov.in/items/8e8c6b30-f86a-41b5-961e-f2b920b67a8e
- FEM (Current Account Transactions) Rules 2000, with footnote 25 recording omission of Schedule II item 8 by G.S.R. 382(E) dated 5 May 2010 w.e.f. 16 December 2009: https://indiacode.gov.in/items/358aca00-0b7c-4b13-9c59-78b8944c5500
- Press Note 8 (2009 Series), DIPP, dated 16 December 2009: https://www.dpiit.gov.in/static/uploads/2025/07/b47aae36097489b8491056c03de0eab8.pdf
- Consolidated FDI Policy Circular of 2020 (paras 3.1.1, 5.2.5.1; annex para 6 on conversion of lump-sum fee/royalty into equity): https://www.dpiit.gov.in/static/uploads/2025/07/6457fc2703ee6082366c4a958b6473a8.pdf
- Press Note 3 (2020 Series), DPIIT, dated 17 April 2020: https://services.dpiit.gov.in/lms/document/PressNoteFour2020.pdf
- Press Note 2 (2026 Series), DPIIT: https://www.dpiit.gov.in/static/uploads/2026/03/b9da5830b052c2f2d788593e97d07c63.pdf
- RBI Master Direction – Foreign Investment in India (para 3.2; Annex 1 para 1.3.1; para 8.1.1 pricing): https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11200
- RBI Master Direction – Reporting under FEMA (updated 24 June 2026): https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10202
- RBI A.P. (DIR Series) Circular No. 16 dated 30 September 2022 – Late Submission Fee: https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12393&Mode=0
- RBI Master Direction – Compounding of Contraventions under FEMA, 1999 dated 22 April 2025: https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12839
- Trade Marks Act 1999 s.38: https://indiacode.gov.in/items/297677c4-186b-451f-af24-ca3ee0b46de9 ; s.45: https://indiacode.gov.in/items/2cd3368f-f81a-424c-b126-311d5f193a4a ; s.49: https://indiacode.gov.in/items/d23c29eb-4745-4bd0-aece-aab7d50369bf
- Income-tax Act 1961 s.9: https://www.incometaxindia.gov.in/w/section-9-66 ; s.55: https://www.incometaxindia.gov.in/w/section-55-64 ; s.92E: https://www.incometaxindia.gov.in/w/section-92e-24 ; s.115A: https://www.incometaxindia.gov.in/w/section-115a-49 ; s.195: https://www.incometaxindia.gov.in/w/section-195-64
- Customs Valuation (Determination of Value of Imported Goods) Rules 2007, rule 10(1)(c): https://indiacode.gov.in/items/c62c8ebb-db61-4c75-b832-8102b3ab5d80
- IGST Act 2017 s.5: https://indiacode.gov.in/items/2c3af9af-15e5-4ea4-b3f3-ded6d2d83fd2 ; CGST Act 2017 Schedule I: https://indiacode.gov.in/items/d250dca8-426b-4657-ba5e-85fd3afcbf41
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See Also
Frequently Asked Questions
Can the parent charge the Indian subsidiary a royalty for a trademark that is not yet registered in India?+
Yes. Neither FEMA nor the FDI Policy requires registration before royalty is paid — Press Note 8 (2009) put payments for use of a trademark or brand name on the automatic route without conditions. The problems are elsewhere: an unregistered mark has only passing-off protection, s.49 registered-user recording is unavailable, and a transfer-pricing officer will ask why an arm's-length licensee would pay for it.
If the Indian subsidiary develops improvements, who owns them?+
Whoever the agreements say — and if they say nothing, the Indian company that employed the engineers. Under Model A the licence should state whether improvements vest in the parent (a grant-back, which itself has a transfer-pricing value). Under Model B they accrue to the subsidiary; a later assignment to the parent is a capital-asset transfer at arm's length with a nil cost under s.55(2)(a).
Does Press Note 3 apply to a trademark licence, or only to shares?+
Press Notes 3 (2020) and 2 (2026) amend para 3.1.1 of the FDI Policy, which governs equity instruments, so a bare licence from a land-border-country parent is not itself a "foreign investment" under the NDI Rules. But that parent's equity in the subsidiary is, and the licence will be examined in the government-route application. Treat the two together.
Is there still a cap on royalty payments to a foreign parent?+
No. Schedule II item 8 of the FEM (Current Account Transactions) Rules 2000, which capped royalty at 5% of domestic sales or 8% of exports, was omitted by G.S.R. 382(E) dated 5 May 2010 with effect from 16 December 2009, following Press Note 8 (2009 Series). Royalty is now remitted through the AD bank against the licence and invoice with no FEMA ceiling.
What happens if a company files Form FC-GPR late after issuing shares to a foreign parent?+
It attracts the Late Submission Fee under RBI A.P. (DIR Series) Circular No. 16 dated 30 September 2022: ₹7,500 plus 0.025% of the amount involved for each year of delay, capped at 100% of the amount, and only available within three years of the due date. Beyond that window, or if the LSF advice is unpaid after 30 days, the matter goes to compounding under FEMA s.15.
Can a foreign parent take shares in the Indian subsidiary instead of cash for a trademark it assigns?+
Yes. Para 6(ii) of the Consolidated FDI Policy annex gives general permission to issue equity against a lump-sum know-how fee, royalty due, or any other sum payable that needs no prior remittance permission, subject to the entry route, sectoral cap, and pricing guidelines. The allotment must still be reported in Form FC-GPR within 30 days of issue under Annex 1 para 1.3.1(1) of the RBI's Master Direction on Foreign Investment in India.
Does GST apply if the parent licenses the trademark to the subsidiary for free?+
Yes. Under CGST Act 2017 Schedule I para 4, an import of services from a related person in the course of business is a supply even without consideration, and IGST Act 2017 s.5(3) puts the tax on the Indian recipient under reverse charge. An open-market value must be determined and reverse-charge IGST paid even on a "royalty-free" intra-group licence.
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