ContractsSafeguards and Foreign Collaborations in Technology Transfer Agreement – II

Introduction

The Safeguards and Foreign Collaborations in Technology Transfer Agreement – II is a continuation of  Technology Transfer Agreement Series. In this blog, the potential safeguards and Foreign Collaborations pertaining to Technology Transfer have been discussed.

The Negotiating tip 101 is that that parties entering into the Agreement shall ensure that, the negotiation between them should not have a negative effect on the execution of the Agreement. In pursuance of this there are certain potential Safeguards can be taken by the parties in order to ensure the seamless execution of an agreement.

Safeguards 

 In order to safeguard the interests of the parties entering in a Technology Transfer Agreements, care must be taken:

1. Unjustified Obligations & Restrictions

The parties entering into the Agreement should ensure that they do not impose obligations, especially on the Licensee/Transferee, in any manner which creates adverse effect on productivity, profitability or efficient working of the said licensed Technology.

For example, the Licensee/Transferee can acquire raw material, source capital goods, etc. only from such distributor specified by the Licensor/Transferor or Licensee/Transferee is allowed to engage with a specified class of work force only to deal with the licensed Technology. All these obligations may disrupt the purpose of the Agreement and therefore, it should be avoided.

2. Absolute Right over Improvements

The parties while finalising the terms of the Agreement should ensure that neither party has absolute ownership over future improvements in the Technology, as such provisions increase the possibility of a dispute in future when such improvements take place.

Therefore, parties should avoid incorporation of such clauses and ensure ownership over improvement is properly addressed in the Agreement and the rights of all the parties under the Agreement is properly balanced.

Foreign Technology and Collaboration 

Policy

The Indian Government is aware that the Technology Transfer and its licensing plays a crucial role in all round development, which in turn results in the development of overall economy of the Country. Therefore, with the intention to inject the desired level of Technology and create an advanced technological dynamism in Indian industry.

Indian Government as per Industrial Policy of India will allow Foreign Direct Investment (FDI) through Automatic Route for high priority industries within specified parameters mentioned under Annexure III and through Government Approval Route for other industries. Further, the Indian companies will have a complete freedom to negotiate the terms of the Agreement with their foreign counterparts based on their own commercial judgment.

Procedure

1. Automatic Route

Reserve Bank of India will provide Automatic approval to the Foreign Collaborators for Foreign Technology Collaboration, provided they comply with the following conditions –

•  The lump sum payments is not more than US $ 2 million;
• The amount of Royalty payable is limited to 5 per cent of the domestic sales and 8 percent for export, Provided, total payment of Royalty is limited to 8 per cent on sales over 10 year period;
• In case a company wants to use Trademark and Brand Name of the Foreign Collaborator without transferring Technology, then the payment of Royalty should be limited to 2 per cent of export and 1 per cent of the domestic sales. However, in case company wants to use Technology, then payment of Royalty for use of such Technology will subsume the payment of Royalty for use of Trademark and Brand Name of the Foreign Collaborator;
• In case Technology Transfer Agreement is entered between Wholly Owned Subsidiary (WOS) Company in India and its offshore Company, then payment of royalty should be limited up to 8 per cent of export and 5 percent of domestic sales.

2. Government Approval Route

All other proposals of Foreign Collaborators, who does not meet the above parameters for Automatic Route is required to file an application to the Project Approval Board (PAB) chaired by Department for Promotion of Industry and Trade (DPIIT) and PAB will approve the application based on merits.

AMEGALS REMARKS

As we are already aware by now that sharing of Technology and its licensing plays a crucial role in development of a Country. Even though we already have a policy for Foreign Technology Collaborations, it is essential for India to develop its existing policy and allow more Foreign Companies to collaborate under its Automatic Route to increase the pace of technological development in India.

As discussed in this series, there are various types of Contractual relationships through which Technology can be transferred. It therefore becomes essential for Companies and Institutions to evaluate on case to case basis to decide, which type of relationship will be more suitable for them and negotiate accordingly.

The need for Technology Transfer Agreement has gained global popularity, as it helps the parties to reduce development expenses and to maximize the utility and income from the licensed Technology. However, at the same time, the importance of developing core skills on our own instead of depending on the know-how of other nations can’t be over emphasized. Therefore, keeping in mind the “Atmanirbhar Bharat” initiative it is time for India, to build the Technology on its own and provide it to other nations, while ensuring the interests of the parties through optimal Technology Transfer Agreements.

 ________________________________________________________________________________________________________________________________________

For any query or feedback, please feel free to connect with rohit.lalwani@amlegals.com or nikita.mulay@amlegals.com.