A royalty and technical fee payment audit recomputes the amount paid against the formula actually specified in the licence or technical assistance agreement — typically a percentage of net sales, gross sales, or a fixed fee — confirms the royalty rate itself is consistent with industry benchmarks or a transfer pricing study where the payment is to a related party, and separately tests whether withholding tax was correctly deducted under section 195 at the rate prescribed under the Income Tax Act or the lower rate available under the applicable Double Taxation Avoidance Agreement, supported by a valid Tax Residency Certificate and Form 10F from the recipient for the year of payment.
Recomputing the payment against the agreement
- Obtain the current licence or technical assistance agreement and confirm the rate and base used in the computation — royalty is usually computed on net sales after specified deductions, and an error in what is netted off before the rate is applied is a common source of overstatement or understatement.
- Check for any agreement amendment during the year, and confirm the payment was computed on the correct rate for the correct period if the rate changed mid-year.
- Where the royalty is capped under the agreement or under any regulatory limit applicable to the sector, confirm the computed amount does not exceed the cap.
Arm's-length benchmarking and withholding tax
| Check | Evidence | What it catches |
|---|---|---|
| Rate benchmarking | Transfer pricing study, industry comparable data | A royalty rate set well above what unrelated licensors charge for comparable technology or brand use |
| Base computation accuracy | Sales register, agreement's definition of the royalty base | Incorrect deductions taken before applying the rate, understating or overstating the base |
| Withholding tax rate | Section 195 computation, DTAA rate if claimed | Domestic rate applied when a lower DTAA rate was claimed without the supporting TRC, or vice versa |
| Grossing-up treatment | Agreement terms on tax responsibility, tax computation | Incorrect grossing-up calculation when the agreement requires the payer to bear the withholding tax |
Regulatory requirement
Withholding tax on royalty and technical fee payments to a non-resident is governed by section 195 of the Income Tax Act, with the rate subject to reduction under an applicable DTAA where the recipient furnishes a valid Tax Residency Certificate and Form 10F. Confirm the current rates and conditions before relying on a prior year's withholding treatment.
How we think about this
Recomputing a royalty formula against the agreement and checking a withholding rate against a published DTAA table are both exact, rule-based calculations that software should get right every time. Whether the rate itself, as negotiated, reflects what an unrelated party would actually pay for the same technology is the judgement a benchmarking study and the auditor's own scepticism need to supply.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Related parties & disclosuresRelated-party transaction testing under AS 18 / Ind AS 24Testing related-party transactions means proving the population is complete before checking what management already disclosed.
- Related parties & disclosuresTesting arm's-length pricing in related-party transactionsMost related-party transactions have no clean comparable. The honest audit response is to say so, not to manufacture a benchmark that does not exist.
- Related parties & disclosuresIdentifying related parties: the audit starting pointA client declaration is a starting point for the related-party list, not evidence of it. How to build and cross-check the list independently.
- CARO & Companies ActCARO clause 3(xiii): related party compliance, and the two provisions it checks togetherTwo separate Companies Act provisions, both checked by one clause — approval through the audit committee, and approval under Section 188's own separate threshold.
Free tools, no signup
Each one reads a file entirely in your browser — or, for two of them, just answers a few questions — and nothing is ever uploaded.
- Purchase register checkDuplicate payments, round-sum amounts, weekend-dated invoices, incomplete records.
- GSTR-2B reconcilerMatches your purchase register against GSTR-2B — missing invoices either side, amount mismatches.
- Bank reconciliation checkerMatches your cash book against a bank statement — what's outstanding on each side.
- Fixed asset register checkDuplicate asset codes, missing location or useful life, negative net book value.
- Payroll red-flag scannerBank accounts shared across employees, and records missing an ID, PAN or salary.
- CARO applicability checkerAnswer a few questions about the company and see which CARO 2020 clauses likely apply.
- MSME payment delay checkerMSME-flagged invoices paid — or still unpaid — beyond the 45-day Section 22 limit.
- Depreciation useful life checkerCompares a useful life in use against the Schedule II, Part C indicative figure.
- Materiality calculatorOverall and performance materiality against PBT, revenue, assets or equity, with reasoning shown.
- Sample size calculatorStatistical sample size for a test of controls or a substantive test of detail.