Regulations on Royalty Payments in India

Introduction

Royalty is a fee that is charged to the party who wishes to use the intellectual property of another. Royalties can be accrued for any Intellectual Property in existence if another is allowed to use it, the following are major areas in which Royalty Rights are prevalent:-

  • Patents
  • Copyright
  • Trademarks etc.

Royalty In Law

Although there is no specific definition prescribed for the term in Indian statutes. There are many international conventions, policies, and regulations which address this topic. India being a signatory to it has helped the IP Industry thrive, a few among them are mentioned below:

  • The Berne Convention allows an inalienable right to the author/creator of the work.
  • Article 15(2)5 of the Rome Convention (for sound recordings)
  • Article 9(1) of the TRIPS Agreement.

The Copyright (Amendment) Act of 2012 has recognized that performers have a vested interest in their performance or creative work, they have rights in both economic and moral sense. All performers have the right to royalty which comes from the commercial use of their performances regardless of any contractual agreements. They have the right to receive 50% of the share of Royalties accrued from their work excluding theatrical exploitation of the film.

Did you know that the last season of the famous show “Friends” was aired in the year 2003 and yet 13 years later the cast still earns a lot in royalty!

We need to understand that in India the payment of Royalty on copyright was never a norm, the owner of the copyright of any creative work has the basic rights, and as for the case of movies, producers are the owners, hence the majority of the revenue goes to them or their firm, not the performers. We can say that in India no absolute rights have been provided but a certain monetary interest is created.

Earlier, the Indian Copyright Act provided guiding parameters for the calculation of Royalty; the Copyright Board had the authority to determine the “share” under Section 53A (inserted with Amendment) of the Copyright Act, and their judgement was rendered final and binding on the parties. However, this power of the Board was merged with the Intellectual Property Appellate Board (“IPAB”), according to the Tribunals Reforms (Rationalisation and Conditions of Service) Ordinance, 2021.

Royalties In the Corporate World

It is well established that Royalty is the share of a product or a profit reserved by the owner for permitting another to use his/her property. It is not just musical work, movies, publishing, or literary work that attracts Royalty, even patents, any technical knowhow or technology transfer falls within the ambit of ‘Royalty Payment’ outrightly in an exploitative manner, which is seen in the deals of Multinational Companies and their Subsidiaries.

MNCs extract ‘extra profits’ from the actual financial performance of their domestic subsidiaries as ‘Royalty’, which may lead to the shareholders not being paid dividends for years!

Regulating bodies like SEBI have not barred such methods but have only prescribed for a shareholder’s approval (Tips Case, MANU/IC/0068/2020) to make the payment. We could say that a foreign Company and its subsidiary have relations not based on profit or sale but a facade of exorbitant surplus i.e. Royalty, which is extracted from the Indian Market per se and given to the indifferent masters of MNCs sitting Abroad.

Calculation of Royalty is based on the terms mentioned in the Licensing Agreements signed as a part of negotiations, they are usually calculated in percentages in varying structures, a few of the various methods are highlighted below:

  1. Royalty Percentage- For an IP that is yet to arrive in the market or is already well established, a fixed specific percentage along with a prescribed threshold limit after which the percentage may increase or decrease depending on the sale. For example, 8% Royalty payments on a specific amount of gross sale of a product.
  2. Fixed Amount- A fixed amount is finalised as payment of Royalty, the gross value of sale shall not be assumed in calculation. However, this is a rarity as it might lead to the unfair and unjust treatment of the owner of rights.

On Taxability of Royalty

The Indian Copyright Act only provides guiding parameters for the copyright board to ascertain the royalty fee to be paid for use of a copyrighted work.

Payments of Royalty are subject to the Goods and Service tax applicable all over India as well under the Reverse charge Mechanism6 which puts the onus of payment on the recipient rather than the supplier of goods and services.

Ever heard that Intellectual Property is ‘Royalty Free’?

Don’t confuse it with open use without consent!

It means that once permission is sought from the original owner of the work, the person has the right to recurrently use such IP without paying any amount as ‘Royalty’.

Conclusion

India being a budding hub of Intellectual Property needs to have specific provisions to safeguard the creators and make regulations in their interest to support growth and nurture them. The country may face repercussions if this is not resolved expeditiously both in corporate and economic capacity. India is seriously lacking in regulations relating to Royalty and it is about time, exploitation, and ambiguity under this head are removed.

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