TECHNOLOGY TRANSFER FEES AND ROYALTY PAYMENTS

NO LONGER REQUIRE GOVERNMENT APPROVAL

 (ALL UNDER AUTOMATIC ROUTE)

 

Prof. R. Balakrishnan, CS

 

1. Foreign Technology Transfer fees & Royalty payments  

 

The Press Note 8 (2009 series) dated 16th December 2009 issued by the FC section of Ministry of Commerce and Industry, Department of Industries Policy and Promotion of  Government of India further liberalized the foreign technology collaborations fees and the royalty payments through automatic route and done away with the prior approval from the Government beyond certain specified limit which was the case earlier.

 

Prior to the issue of this Press Note No. 8 (2009 series) prior approval is required to be obtained from the Foreign Investment Promotion Board (FIPB) for a lump sum payment in excess of US$ 2 million since one could remit amount not exceeding US$ 2 million only under automatic route.

 

2. Liberalization after the Press Note release

 

The following is the comparative chart on the remittance of technology fees and the royalty payments after and before issue of the Press Note 8 (2009 series) through the automatic route

 

 

 

Details

Before  issue of Press Note 8 (2009 series)  Prior to

16-12.2009

After issue of Press Note 8 (2009 series)

with effect from

16-12.2009

Lump sum payments

Not exceeding US$ 2 million

No limit now

Royalty payable

5% on domestic sales and

8 % on export

No restrictions - subject to FEMA  (Current Account Transactions) Rules, 2000 

Duration of royalty payments

No restrictions

No restrictions

Royalty limits are

Net of taxes and are calculated according to standard conditions

Net of taxes and are calculated according to standard conditions

 

2.1 Method of Calculating Royalty Payments

 

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. and this condition has been there all along and this would continue to be there.

 

3. Foreign Direct Investment via automatic route

 

As per the current policy of the Government of India all items / activities for foreign direct Investment up to hundred percent falls under the automatic route except the (i) ones which are requiring an industrial licence (ii) all proposals in which the foreign collaborator had a previous venture/ tie up in India.(iii) All proposals relating to acquisition of existing shares in an existing Indian Company by a foreign investor and (iv) All proposals falling outside notified sectoral policy/ caps or under sectors in which foreign direct investment is not permitted.

 

4. Foreign Direct Investment requiring approval from FIPB

 

For all activities which are not covered under the automatic route, one has to obtain the approval from the Foreign Investment Promotion Board (FIPB) and a composite approvals involving foreign investment and foreign technical collaboration would be required.

 

5. Examination by FIPB while granting approval

 

The Foreign Investment Promotion Board (FIPB) examines the objections if any by the earlier partner objectivity and Press Note 18 issued on this is very relevant which says that no automatic route for foreign direct investment and / or technology collaboration for those who have or had any previous joint venture / technology transfer / trade mark agreement in the same or allied filed.

 

5.1. Determination of same filed or allied field

 

The same field would have to be determined with reference to four digit National Industrial Classification Code of 1987 (NIC 1987 Code) and the allied filed would have to be determined with reference to three digit National Industrial Classification Code of 1987 (NIC 1987 Code)

 

The only exception to this is the IT sector and International Financial Institutions.

 

6. Applicability of Takeover Code

 

Acquisition of more than specified equity stakes in an Indian listed company would entail public offer under the Substantial Acquisition of Shares and Takeovers Regulation of India 1987 as amended in 2002 – known as “Takeover Code”.

 

Unless the completion of takeover code formalities is completed, the management of the Indian company cannot be taken over by the collaborator under the collaboration agreement. The takeover code also specifies the method of pricing of the shares in the takeover code procedure.

 

4. Method of remittance of payments  

 

The Reserve Bank of India has delegated the powers to Authorized Dealers (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 vide circular no. RBI/2004/74 - A.P. (DIR Series) Circular No.76 dated 24 of February 2004.

 

The relevant portion of the content of the above referred circular is as given below:-

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Foreign Exchange Management Act (FEMA), 1999 –

Current Account Transactions – Liberalization

 

Attention of Authorized Dealers (ADs) is invited to Annexure I of A.D. (M.A. Series) Circular No.11 dated May 16, 2000 with regard to Rules relating to Current Account Transactions.

 

 (vi) Remittance of Royalty and Payment of

      lump-sum fee

 

In terms of item No.14 of Schedule III, RBI's prior approval is required if the agreement for technical collaboration has not been registered with RBI. Henceforth, ADs may allow remittances for royalty and payment of lump-sum fee provided the  payments are in conformity with the norms as per item No.8 of Schedule II i.e. royalty does not exceed 5 per cent on local sales and 8 per cent on exports and  lump-sum payment does not exceed USD 2 million.

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5. The circular issued by the Government of India

 

The circular referred in the first paragraph is reproduced below for the benefit of the readers liberalizing the royalty payments and the lump um fees which could be now made through automatic route without the prior approval of the Government (i.e. FIPB) subject to Foreign Exchange Management (Current Transactions) Rules of 2000.   

 

GOVERNMENT OF INDIA

MINSITRY OF COMMERCE AND INDUSTRY

DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION

(FC SECTION)

 

PRESS NOTE NO 8 (2009 SERIES)

 

Subject: Liberalization of Foreign Technology Agreement Policy

  

The existing policy of Government of India on the payment of royalties under Foreign Technology Collaboration provides for automatic approval of foreign technology transfers involving payment of lump sum fee of US$ 2 million and payment of royalty of 5% on domestic sales and 8% on exports. In addition, where there is no technology transfer is involved, royalty up to 2% on exports and 1% on domestic sales is allowed under automatic route on use of trade marks and brand names of the foreign collaborator. Separate norms are available for the hotel sector vide Press Note 18 (1991 series) and Press Note 1 (1995 series). Technology transfers involving payments above these limits required prior permission of the Government of India (Project Approval Board, Department of Industrial Policy and Promotion). 

 

2.         The Government of India has reviewed the extant policy and it has been decided to permit, with immediate effect, payments of royalty, lump sum fee for transfers of technology and payment of use of trade mark / brand name on the automatic route i.e. without any approval of the Government of India. All such payments will be subject to Foreign Exchange Management (Current Account Transactions) Rules, 2000 as amended from time to time.

following restrictions on remittances by residents.

      

3.         A suitable post-reporting system  for technology transfer / collaborations and use of trade mark / brand name will be notified by the Government separately. 

 

4.         These guidelines issue in modification of provisions relating to foreign technology proposals / approvals contained in paragraph 3 of Press Note 10 (1991), para 7 of Press Note 11 (1991), para 4 & 5 (a) of Press Note 12 ( 1991), para 2- 6 of Press Note 20 (1991), para 2 of Press Note 5 ( 1992), para 4 of Press Note 4 ( 1994), para 3 of Press Note 18 ( 1997), and Paragraphs III and IV of Press Note 9 (2000).This guidelines will issue in supersessions of provisions of Press Note 18 (1991), Press Note 4 (1992), Press Note 1 (1995), Press Note 4 (1996), Press Note 1 (2002) and Press Note 2 (2003).    

 

         Gopal Krishna

 Joint Secretary to the Government of India

D/0 1 PP F No. 5(6)/2008 – FC Dated 16.12.2009

 

Copy forwarded to:-

  1. Press Information Officer, Press Information Bureau – for giving wide publicity to above Press Note.
  2. BE section for uploading the Press Note on DIPP’s website
  3. PAB section, DIPP

 

PN_8_2009_Technology 2.doc

 

 

12. Conclusion

 

With the further liberalization on the technological lump sum fees with no restrictions and also the payments of royalty through the automatic route subject to FEMA (Current Transactions) Rules of 2000, would help in the further inflow of foreign direct investment in the country and many of the administrative procedures and time involved in getting the approvals etc are now stands curtailed with the revised liberalization policy of the Government. At the end one could conclude that the Government is really moving forward in more and more liberalization and make the things easier, simple and user friendly. The move would definitely attract continuous flow of technology transfers to our country and we can expect to see more and more joint ventures and collaborations in the near future.