Foreign collaboration agreements and technology transfer agreements

1. Meaning and modes

Technology transfer is the transfer of systematic knowledge for the manufacture of a product, the application of a process or the rendering of a service, from one enterprise to another, usually across borders. It may take the form of a right to use patents, designs and trade marks, the communication of unpatented know-how and trade secrets, technical services and training, or the supply of plant with its technology. The modes are:

• FDI in a subsidiary or joint venture, the technology passing within the group;
• licensing of patents, know-how and trade marks to an unrelated Indian firm for royalty or a lump-sum fee;
• franchising (a brand and business format);
• turnkey contracts and supply of capital goods with technical assistance;
• technical service and consultancy agreements;
• joint research and development and cross-licensing.

2. The foreign collaboration or technology agreement: usual clauses

• Parties and recitals: the licensor's ownership of the technology and the licensee's purpose.
• Definitions: licensed patents, know-how, products, territory, improvements.
• Grant: exclusive, sole or non-exclusive licence; field of use; right to sub-license.
• Territory: manufacture in India, sale in India and export markets.
• Transfer of know-how: documents, drawings, training of personnel, deputation of experts.
• Improvements: whether improvements by either side are shared (grant-back), and on what terms.
• Payment: lump-sum technical fees and/or running royalty on net sales, minimum royalty, and the tax on payment (withholding under the Income-tax Act, 2025 read with the applicable tax treaty, and who bears it).
• Quality control and use of the licensor's trade mark.
• Confidentiality of know-how during and after the agreement.
• Warranties and indemnities: that the technology works as specified and does not infringe third-party rights.
• Duration and termination, and the licensee's rights in the technology after expiry.
• Governing law and dispute resolution, usually arbitration seated in a neutral venue.

3. Indian regulation: from approval to freedom

Before 1991 every foreign technical collaboration needed Government approval, with limits on royalty (often 5 per cent of domestic sales and 8 per cent of exports), lump-sum payments and duration, and prohibitions on restrictive clauses. The 1991 Industrial Policy gave automatic approval to technology agreements in high-priority industries within those limits. Further liberalisation followed, and by Press Note 8 (2009) the Government permitted payments for royalty, lump-sum fees for transfer of technology and use of trade marks and brand names under the automatic route without any limits, subject to reporting.

Today a payment for technology is a current account transaction under section 5 of FEMA, made through an authorised dealer bank. The Foreign Exchange Management (Current Account Transactions) Rules, 2000 no longer restrict royalty payments. The real controls are now tax (withholding and transfer pricing where the parties are related), the Patents Act and the Competition Act, and export controls on sensitive technology.

4. Controls on restrictive terms

• Patents Act, 1970, section 140: a condition in a contract relating to a patent is void to the extent that it requires the licensee to acquire from the licensor articles other than the patented article, prohibits him from using articles or processes of others, prohibits him from challenging the validity of the patent, provides for exclusive grant-back, or imposes coercive package licensing.
• Patents Act, section 84: compulsory licence after three years from grant if the reasonable requirements of the public are not satisfied, the invention is not available at a reasonably affordable price, or it is not worked in India. The first was granted to Natco for Bayer's cancer drug sorafenib in 2012.
• Competition Act, 2002: section 3 prohibits anti-competitive agreements, but section 3(5) preserves the right of an IP owner to impose reasonable conditions necessary to protect the right; section 4 prohibits abuse of a dominant position, including through licensing terms.
• Export controls: transfer of technology on the SCOMET list from India needs an authorisation under Chapter IVA of the Foreign Trade (Development and Regulation) Act, 1992.

5. International framework

• TRIPS Article 7: intellectual property protection should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users.
• TRIPS Article 8.2: members may take measures to prevent abuse of IP rights or practices that unreasonably restrain trade or adversely affect the international transfer of technology.
• TRIPS Article 40: licensing practices that restrain competition may be controlled, for example exclusive grant-back conditions, conditions preventing challenges to validity, and coercive package licensing.
• TRIPS Article 66.2: developed members shall provide incentives to their enterprises to promote technology transfer to least-developed members.
• UNCTAD draft International Code of Conduct on the Transfer of Technology (negotiated from 1976 to the mid-1980s): it listed restrictive practices to be avoided, but was never adopted, because developed and developing countries could not agree on its binding character.

6. Recent developments

• Liberalisation of royalty payments (2009) and the move of most FDI to the automatic route, so that technology now flows mostly within multinational groups and joint ventures.
• Production-linked incentive schemes since 2020 to attract manufacturing technology in electronics, solar modules, pharmaceuticals and semiconductors, and joint ventures for semiconductor fabrication.
• Defence offset and indigenisation policies requiring technology transfer to Indian partners.
• The Patents (Amendment) Rules, 2024, reducing the frequency of working statements, and continued debate on compulsory licensing and evergreening after Novartis AG v. Union of India, 2013 INSC 198, (2013) 6 SCC 1, which upheld the refusal of a patent under section 3(d).
• Press Note 3 (2020) screening investment from neighbouring countries, which also limits technology partnerships with Chinese firms.
• The Digital Personal Data Protection Act, 2023, which affects transfer of data under software and services agreements.

How this is examined

For a short note: meaning, modes, the main clauses, and the present liberal regime. For the February 2025 essay: add the history of Indian regulation, the controls on restrictive terms (section 140, compulsory licensing, the Competition Act and TRIPS Articles 7, 8 and 40), the UNCTAD draft code, and the recent developments in section 6.