Friday, June 23, 2017

Timing of India Withholding Tax on Royalty/Technical Service Fees for overseas entities– the Dichotomy continues?

Withholding Tax in India is often perceived to be a challenging matter by many overseas entities having operations/activities in India. This may be on account of various reasons like lock up of funds in India (on account of taxes withheld) where a position of non taxability of income is adopted, mismatch between the year in which taxes are withheld by the Indian payer of income vs. the year in which the income is offered to tax in India, challenges with claiming credit for taxes withheld in India in the home country. 

One of the issues on which there has been some judicial debate is the point of time when withholding tax obligation triggers for an Indian payer of income in relation to a Royalty/Technical Service fee ('Service fee') payment proposed to be made to an overseas entity.

So as to set a context to the issue which is discussed in this article, to start with, it may be relevant to make a quick note of the fact that Sections 5 and 9 of the Income-tax Act, 1961 ('IT Act') are provisions dealing with scope of incomes chargeable to tax in India in principle, whereas, Section 145 of the IT Act governs the timing of taxation of the incomes in India (i.e. based on the cash or mercantile system of accounting regularly followed). Section 195 of the IT Act deals with withholding tax obligations in relation to payments proposed to be made to non-residents which are chargeable to tax in India.

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