TDS on Transfer Pricing Payments: Interest, Royalty and Service Fees
TDS (tax deducted at source) on the intra-group payments: the characters — interest, royalty, technical fees — the domestic rates, the DTAA layer and the lower-of rule.
Definition
TDS — tax deducted at source — is the withholding that attaches to the intra-group payment as it leaves India: the payer withholds at the rate for the payment’s character, remits it to the government, and the payee (usually the non-resident related party) reports it against its liability. The TP angle is that the character and the rate are set by the payment’s nature, not by its transfer pricing position — the arm’s length rate on the intra-group loan and the withholding rate on the interest it carries are two different numbers on the same payment.
The characters, the provisions and the domestic rates (plus surcharge and cess):
| The payment | The character (provision) | The domestic rate |
|---|---|---|
| Interest on the intra-group loan | Interest (s.194A) | 16% (resident payee) / 19.5% (non-resident payee) |
| Royalty — the consideration for the use of, or right to use, a patent, design, model, plan, secret formula, process or information concerning industrial, commercial or scientific experience | Royalty (s.194A) | 20% |
| Fees for technical services | Technical fee (s.194J) | 10% |
| Management / consultancy fees | Fee (s.194J) | 10% |
| Fees for inclusion in income (the yield on the funding) | Fee for inclusion (s.194A) | 20% |
The DTAA layer: where the double tax avoidance agreement applies and the payment’s character maps to a treaty article — Article 11 (interest), Article 12 (royalties), Article 7 (business profits, where the service is the character and no PE exists) — the withholding runs at the lower of the DTAA rate and the domestic rate, on the documented treaty basis (the treaty residency, the beneficial ownership, the character). The character that decides the most tax is the royalty-versus-service question: the payment for the use of the intangible is the royalty (20% domestic; Article 12), the payment for the service performed is the technical/business fee (10%; Article 7) — and the agreement’s fee structure (the split priced and labeled at the paper stage) is what keeps the characterization the agreement’s, not the tribunal’s. See the TDS on TP payments guide for the fact patterns and the dispute mechanics.
Example
An Indian subsidiary pays its US parent ₹10 crore of interest on the intra-group loan (priced at arm’s length — MCLR plus the credit spread, per the intercompany finance benchmark) and ₹4 crore of a technology license fee. The interest is withheld at the DTAA Article 11 rate (typically 10%, where the treaty applies and the interest is the character) — the lower of 10% treaty and 19.5% domestic. The license fee is the royalty (the use of the technology is what is bought) — Article 12, typically 10% treaty against 20% domestic. The same ₹14 crore of outflow, withheld on two characters at two rates — and the TPO’s question on the loan’s rate is a different question from the withholding on its interest.
See also
- TDS on Transfer Pricing Payments (the guide)
- Intercompany Loans, Guarantees & Cash Pooling
- Section 92 (s.92)
FAQ
Is the TDS rate the same as the arm’s length rate on the loan? No — the two numbers answer two questions. The arm’s length rate (the TPO’s question) is what an unrelated lender would charge — the safe harbour or the benchmark sets it. The TDS rate (the withholding question) is the statutory/treaty rate on the character of the interest payment. The file that conflates them has priced the payment it has not withheld correctly.
Who bears the TDS cost in practice? The payee (the non-resident parent) — the withholding reduces the remittance, and the parent reports the gross amount against its treaty position (the credit for the Indian tax, the residency certificate, the 26Q evidence). The practical work is the withholding agent’s: the character called, the rate applied, the deduction remitted, the 26Q issued — and the fee structure in the agreement that makes the character defensible.
Does the safe harbour change the TDS? No — the safe harbour prices the transaction (the loan at the prescribed circumstance, the guarantee at the prescribed fee); the TDS characterizes the resulting payment at its statutory or treaty rate. The two instruments run in parallel on the same payment, each on its own basis.
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