Tds on royalty
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
18 March 2013
Dear Professional Colleagues,
Please advice me Is TDS applicable on reimbursement of Royalty payment to a party.
eg. X paid royalty to Y and now X want reimburse of Royalty from us . Is there any TDS deduction required at the time of reimbursement of Royalty to x?
Regards.
Please advice me Is TDS applicable on reimbursement of Royalty payment to a party.
eg. X paid royalty to Y and now X want reimburse of Royalty from us . Is there any TDS deduction required at the time of reimbursement of Royalty to x?
Regards.
18 March 2013
Surely yes. But the basic question is that why would X pay royalty payable by your Company.
Anuj
femaquery@gmail.com
Anuj
femaquery@gmail.com
Querist : Anonymous
Querist :
Anonymous
(Querist)
19 March 2013
Dear Sir,
Thanks for your response.
There is a contract between our company and X to complete a project in which X required professional services of Y company. Y comapny is shareholder company of our company so X enforced us to pay royalty directly to Y company. But for avoiding tax procedure and ralated party transaction we made work order according to that X will pay royalty to Y and we reimburse payment of Royalty to X.
Now X has paid royalty to Y without deducting TDS and raise an Invoice to us mentioning Reimbursement of Royalty on behalf of ....company (mentioning our company name).
so there is no deduction made by X and they mentioned our company name on Invoice.
My concern is that not single TDS has been made by any company and government not got TDS amount yet.
In invoice it has been clearly mentioned that royalty payment has on behalf of our copmany so who will be ultimate responsible for TDS deduction.
Kindly resolve the issue.
Thanks for your kind support.
Regards.
Thanks for your response.
There is a contract between our company and X to complete a project in which X required professional services of Y company. Y comapny is shareholder company of our company so X enforced us to pay royalty directly to Y company. But for avoiding tax procedure and ralated party transaction we made work order according to that X will pay royalty to Y and we reimburse payment of Royalty to X.
Now X has paid royalty to Y without deducting TDS and raise an Invoice to us mentioning Reimbursement of Royalty on behalf of ....company (mentioning our company name).
so there is no deduction made by X and they mentioned our company name on Invoice.
My concern is that not single TDS has been made by any company and government not got TDS amount yet.
In invoice it has been clearly mentioned that royalty payment has on behalf of our copmany so who will be ultimate responsible for TDS deduction.
Kindly resolve the issue.
Thanks for your kind support.
Regards.
27 July 2025
This is a classic issue involving **reimbursement of royalty payments** and TDS responsibility. Here's a clear explanation:
---
### Situation Summary:
* Company **X** paid royalty to company **Y** (which is a shareholder company of your company).
* X did not deduct TDS while paying royalty to Y.
* X raised an invoice to **your company** for reimbursement of the royalty paid **on your company’s behalf**.
* Your company is now paying X, who paid Y.
* No TDS has been deducted by either company so far.
---
### Key Points:
1. **Who is responsible to deduct TDS?**
The person responsible to deduct TDS is the **person making the payment which is subject to TDS** under the Income Tax Act.
* Here, **the payment of royalty is actually from your company to Y** (via X as an intermediary).
* Even though the payment is routed through X, your company is the **ultimate payer** of royalty.
* Hence, **your company is liable to deduct TDS on the royalty amount while reimbursing X**.
2. **Why?**
The Income Tax law focuses on **economic substance over form**. Since the payment is for royalty and your company is the principal payer (not X), the obligation to deduct TDS lies with your company.
3. **Which Section of TDS applies?**
* TDS on royalty payments is governed by **Section 194J** (if royalty is for use of professional or technical services) or **Section 194M** (for payments to resident contractors, applicable post Sept 2019).
* The rate is generally **10%** (plus cess, as applicable).
4. **Is X liable for TDS?**
* Since X is only passing on the reimbursement and is not the actual payer, X is **not responsible** for deducting TDS.
* If X did not deduct TDS, your company should deduct it at the time of reimbursement.
5. **What if no TDS is deducted?**
* If TDS is not deducted, the payer (your company) can be held liable for **disallowance of expenses** and **penalties**.
* It is best to deduct TDS now and deposit with the government, obtain TDS certificate, and adjust accordingly.
---
### Suggested Action:
* While making payment to X (reimbursement), **deduct TDS on the royalty amount** mentioned in the invoice.
* File TDS returns accordingly.
* Obtain Form 16B or TDS certificate and provide it to X.
* Maintain documentation showing that payment is a reimbursement of royalty on your company’s behalf.
---
If you want, I can also draft a formal letter/email explaining this TDS deduction obligation to your finance or tax team. Let me know!
---
### Situation Summary:
* Company **X** paid royalty to company **Y** (which is a shareholder company of your company).
* X did not deduct TDS while paying royalty to Y.
* X raised an invoice to **your company** for reimbursement of the royalty paid **on your company’s behalf**.
* Your company is now paying X, who paid Y.
* No TDS has been deducted by either company so far.
---
### Key Points:
1. **Who is responsible to deduct TDS?**
The person responsible to deduct TDS is the **person making the payment which is subject to TDS** under the Income Tax Act.
* Here, **the payment of royalty is actually from your company to Y** (via X as an intermediary).
* Even though the payment is routed through X, your company is the **ultimate payer** of royalty.
* Hence, **your company is liable to deduct TDS on the royalty amount while reimbursing X**.
2. **Why?**
The Income Tax law focuses on **economic substance over form**. Since the payment is for royalty and your company is the principal payer (not X), the obligation to deduct TDS lies with your company.
3. **Which Section of TDS applies?**
* TDS on royalty payments is governed by **Section 194J** (if royalty is for use of professional or technical services) or **Section 194M** (for payments to resident contractors, applicable post Sept 2019).
* The rate is generally **10%** (plus cess, as applicable).
4. **Is X liable for TDS?**
* Since X is only passing on the reimbursement and is not the actual payer, X is **not responsible** for deducting TDS.
* If X did not deduct TDS, your company should deduct it at the time of reimbursement.
5. **What if no TDS is deducted?**
* If TDS is not deducted, the payer (your company) can be held liable for **disallowance of expenses** and **penalties**.
* It is best to deduct TDS now and deposit with the government, obtain TDS certificate, and adjust accordingly.
---
### Suggested Action:
* While making payment to X (reimbursement), **deduct TDS on the royalty amount** mentioned in the invoice.
* File TDS returns accordingly.
* Obtain Form 16B or TDS certificate and provide it to X.
* Maintain documentation showing that payment is a reimbursement of royalty on your company’s behalf.
---
If you want, I can also draft a formal letter/email explaining this TDS deduction obligation to your finance or tax team. Let me know!
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