RCM on import of technology transfer IPR royalties

In practice, during reconciliation work with manufacturing plants, engineering companies, and technology firms, cross-border payments for intellectual property frequently trigger audit disputes. For example, when an Indian enterprise licenses proprietary manufacturing know-how, technical drawings, patent rights, or enterprise software from an overseas affiliate, finance teams often focus on withholding tax under Section 195 of the Income-tax Act and transfer pricing documentation. However, the indirect tax consequences under the Integrated Goods and Services Tax Act are equally strict and create immediate cash outflows.

Under Indian GST law, the transfer of technical know-how and intellectual property licensing is treated as an import of service. Because the overseas licensor is outside Indian tax jurisdiction, the statutory mechanism shifts the complete tax payment obligation onto the Indian recipient. Companies that fail to identify these transactions face retrospective tax demands with mandatory 18 percent annual interest. Conversely, teams that pay RCM but mishandle reporting between GSTR-3B and GSTR-2B face automatic scrutiny notices under Form DRC-01C.

Statutory framework for import of services under Section 5(3)

The reverse charge mechanism for cross-border services operates under reverse charge provisions of Section 5(3). That section empowers the Central Government to notify categories of supplies on which the tax shall be paid by the recipient on reverse charge basis. All provisions of the Act apply to the recipient as if they were the person liable for paying the tax.

The operative notification governing import of services is Entry 1 of Notification 10/2017-IT(Rate), dated 28 June 2017, published in the official CBIC reverse charge notification repository:

“Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient.” Entry 1, primary cross-border RCM notification (Notification 10/2017-IT(Rate))

Under this entry, whenever any person located in a non-taxable territory (outside India) supplies a service to a business entity located in the taxable territory (India), the Indian recipient is legally designated as the person liable to pay the integrated tax. For broader context on international logistics and import levies, review our analysis of GST RCM on import of services and ocean freight.

Three statutory tests for import of services under Section 2(11)

To determine whether a technology transfer or royalty arrangement falls under reverse charge, the transaction must meet the definition of an "import of services" under Section 2(11) of the IGST Act. That definition requires three conditions to be met concurrently:

1. The supplier of the service must be located outside India.
2. The recipient of the service must be located in India.
3. The place of supply of the service must be in India under Section 13(2).

The place of supply for cross-border services is governed by Section 13 of the IGST Act. Where either the supplier or the recipient is located outside India, Section 13(2) provides the default rule: the place of supply of services shall be the location of the recipient of services. Because the Indian licensee is located in India, the place of supply is within India. Consequently, all three elements of Section 2(11) are satisfied, and the supply constitutes a taxable import of service under Section 5(1) and Section 5(3) under the IGST Act.

Classification of technology transfers, patents, and IPR licensing

Under Schedule II Paragraph 5(c) of the CGST Act, "temporary transfer or permitting the use or enjoyment of any intellectual property right" is classified specifically as a supply of services. This classification covers a wide spectrum of commercial arrangements:

• Patents and technical know-how: Licensing rights to manufacture patented industrial formulations, mechanical components, or production blueprints.
• Trademarks and brand royalties: Consideration paid for displaying overseas corporate brand names, logos, or commercial trade names in the Indian market.
• Software licensing and source code access: Granting end-user or distribution licenses for proprietary enterprise software, customized algorithmic suites, or firmware updates.
• Engineering design drawings and proprietary data: Technical assistance packages provided by overseas design bureaus to optimize domestic assembly lines.

Under Heading 9973 (Licensing services for the right to use intellectual property and similar products), the applicable rate of Integrated Goods and Services Tax is 18 percent.

Transactions between foreign associated enterprises under Schedule I

A significant portion of cross-border technology transfers takes place within multinational corporate groups, such as an Indian subsidiary receiving technology from its foreign parent or group affiliate. These entities qualify as "associated enterprises" under Section 92A of the Income-tax Act, 1961, and are treated as "related persons" under the Explanation to Section 15 of the CGST Act.

Under Section 7(1)(c) read with Paragraph 2 and Paragraph 4 of Schedule I of the CGST Act, supplies between related persons or distinct persons made in the course or furtherance of business constitute a taxable supply even if made without consideration:

“Import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business.” Paragraph 4, Schedule I, CGST Act

This statutory provision means that even if an overseas parent company does not formally invoice its Indian subsidiary for engineering support, management oversight, or shared technology infrastructure, a taxable import of service takes place under GST law. For related internal corporate transfers, see our analysis of ITC on head office trademark royalty and cross-charge and GST on corporate guarantees under Circular 210.

Relief for full ITC entities under Circular 210/4/2024-GST

To eliminate unnecessary tax disputes where the domestic company is entitled to full credit, the Central Board of Indirect Taxes and Customs issued CBIC Circular No. 210/4/2024-GST. Paragraph 3.7 of this circular clarifies that in cases involving import of services between related persons where full input tax credit is available to the recipient domestic entity, if no invoice is issued by the foreign affiliate, the value of such services may be deemed to be declared as Nil. That Nil valuation is accepted as the open market value under the second proviso to Rule 28(1) of the CGST Rules. However, where an invoice or debit note is actually raised, or consideration is agreed upon, tax must be discharged on that specified value.

Time of supply for associated enterprises under Section 13(3)

Determining the exact tax period in which reverse charge tax must be deposited requires applying the time of supply rules under Section 13 of the CGST Act. For general reverse charge transactions, Section 13(3) fixes the time of supply as the earlier of the date of payment entered in books or debited in bank account, or the 61st day from the invoice date.

However, for cross-border associated enterprises, the statute creates a specific rule in the special proviso under Section 13(3):

“Provided further that in case of supply by associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier.” Second proviso to Section 13(3), CGST Act

This proviso has major practical implications for Indian finance teams. During year-end financial closings in March, companies commonly record an accounting accrual or provision for royalty expenses payable to foreign parents based on annual sales volumes. Under the associated enterprise proviso to Section 13(3), the moment that expense is entered in the books of account, the GST time of supply is triggered immediately. The company cannot defer the reverse charge liability until the actual foreign currency remittance occurs through banking channels months later.

Mandatory cash ledger payment under Section 49(4)

A frequent compliance error made by corporate accountants is attempting to offset reverse charge liability against accumulated input tax credit balances in the electronic credit ledger. Under Section 49(4) of the CGST Act, the electronic credit ledger can only be used to make payments towards output tax. Section 2(82) of the CGST Act defines output tax as the tax chargeable on taxable supply of goods or services made by the taxpayer, but explicitly excludes tax payable under reverse charge.

Consequently, reverse charge liability on imported technology transfers, patents, and software licenses cannot be settled using existing ITC. The Indian recipient must deposit cash into the electronic cash ledger using Form GST PMT-06 and discharge the entire integrated tax liability in Table 6 of Form GSTR-3B.

Input tax credit eligibility and documentation under Section 16

Once the integrated tax liability is paid in cash, the Indian company can claim the full amount back as input tax credit. Under Section 2(62) of the CGST Act, input tax explicitly includes the tax payable under Section 5(3) of the IGST Act. The company qualifies for credit by fulfilling the statutory requirements of Section 16 of the CGST Act:

1. Under Section 16(1), business furtherance requires that Technology transfers, manufacturing patents, and operational software licenses directly support taxable commercial manufacturing or service delivery.
2. Possession of tax-paying document (Section 16(2)(a)): Under Rule 36(1)(b) of the CGST Rules, an invoice issued in accordance with the provisions of Section 31(3)(f) of the CGST Act serves as the legal tax-paying document. For import of services from unregistered foreign entities, the Indian recipient must generate a self-invoice and a payment voucher under Section 31(3)(g).
3. Under Section 16(2)(b), receipt of service requires that The technical data, patent permissions, or software access keys must have been delivered to and utilized by the Indian entity.
4. Payment of tax to government (Section 16(2)(c)): The tax is paid when the company offsets Table 3.1(d) liability in cash in Table 6 of Form GSTR-3B.
5. Under Section 16(2)(d), filing of return requires that The return in Form GSTR-3B is furnished under Section 39.

Because the cash tax payment and the credit claim occur in the very same return, the company can declare the liability in Table 3.1(d) and avail the credit in Table 4(A)(2) of the same Form GSTR-3B without waiting for the next monthly tax period.

Worked rupee example of quarterly IPR royalty payments

To examine the numerical mechanics, consider Bharat Precision Systems Private Limited, an industrial equipment manufacturer in Pune, Maharashtra. During the quarter ending September 2026, the company accounts for four distinct cross-border technology transactions:

• German parent technical know-how fee: €20,000 engineering transfer fee for hydraulic pump designs, booked at the SBI exchange rate of ₹90 per Euro on 30 September 2026, totaling ₹18,00,000.
• Japanese collaborator patent royalty: ¥50,00,000 quarterly production royalty for patented valve mechanisms, booked at ₹0.60 per Yen on 30 September 2026, totaling ₹30,00,000. Remittance is scheduled for December 2026.
• United States enterprise software license: $10,000 annual licensing fee for specialized computer-aided design software hosted abroad, booked at ₹84 per US Dollar, totaling ₹8,40,000. Paid immediately via corporate credit card on 15 September 2026.
• Singapore testing laboratory reports: S$5,000 specialized material stress test certification, booked at ₹64 per Singapore Dollar, totaling ₹3,20,000.

In this worked scenario, Bharat Precision Systems Private Limited processes the September 2026 return as follows:

1. Total taxable value of imported services equals ₹59,60,000.
2. The applicable integrated tax liability at 18 percent equals ₹10,72,800.
3. Even though the Japanese patent royalty of ₹30,00,000 will not be remitted until December 2026, the book entry on 30 September 2026 establishes the time of supply under the second proviso to Section 13(3). The ₹5,40,000 IGST cannot be postponed to the December return.
4. The company generates a Challan in Form GST PMT-06 and deposits ₹10,72,800 into the electronic cash ledger.
5. In Form GSTR-3B for September 2026, the company reports ₹59,60,000 taxable value and ₹10,72,800 IGST in Table 3.1(d).
6. In Table 6 of Form GSTR-3B, the company offsets ₹10,72,800 using cash ledger balances.
7. Simultaneously, the company avails ₹10,72,800 as eligible input tax credit in Table 4(A)(2) of Form GSTR-3B ("Import of services").
8. The net cash impact on the business is temporary working capital deployment, as the ₹10,72,800 paid in cash is credited back to the electronic credit ledger in the same return cycle to offset future domestic output tax liabilities.

GSTR-2B reconciliation and reporting rules for import of services

Understanding how cross-border services interact with the automated GST return architecture prevents common filing errors and unwarranted tax notices:

Absence from Form GSTR-2B: Unlike domestic reverse charge transactions where a registered vendor uploads an invoice with "Reverse Charge = Y" into GSTR-1, foreign licensors have no GST registration in India. Consequently, import of service invoices never appear in GSTR-2B. When preparing monthly filings, refer to the official GSTN GSTR-3B user manual and the GSTN return filing guide.

Correct table selection in Table 4: Form GSTR-3B provides two distinct reverse charge credit lines:

• Table 4(A)(2) (Import of services): This table is dedicated specifically to input tax credit on imported services. Figures in this line are self-declared based on company self-invoices and payment records. They are not expected to match GSTR-2B.
• Table 4(A)(3) Inward supplies liable to reverse charge: This table covers domestic reverse charge supplies, such as services from advocates, goods transport agencies, or director sitting fees. Registered domestic suppliers who flag RCM in GSTR-1 auto-populate into this table from GSTR-2B.
• Table 4(A)(5) (All other ITC): This table is strictly for normal forward charge supplies from registered domestic suppliers.

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Frequently asked questions

Last checked: 19 October 2026. Sources: IGST Act Section 5, Notification 10/2017-IT(Rate), CGST Act Section 13, CGST Act Section 7 and Schedule I, CBIC Circular No. 210/4/2024-GST, CGST Act Section 16, CGST Act Section 49, GSTN GSTR-3B User Manual, GSTN Creation, Saving, Payment of Taxes and Filing Manual.