Withholding taxes are a governments way of making sure that the proper taxes are paid on an

item by way of either withholding or deducting the relevant tax amount from an individuals or
an enterprises income. They are of particular note to international companies doing business
with India yet without a presence there, as some services provided to Indian customers can be
subject to withholding tax. They may also impact on foreign subsidiaries of international
companies in inter-company agreements.
Withholding taxes in India
Chapter XVII-B of Indias Income Tax Act provides for the deduction of taxes at the source of
any payments made by an assessee. Furthermore, section 195 of the Income Tax Act casts an
obligation on the person responsible for the payment to the non-resident to deduct the relevant
tax amount at the source at the time of payment or at the time that the sum is credited to the non-
residents account.
These provisions also apply to payments made to non-residents.
Withholding taxes for NRIs and foreign companies
Withholding tax rates for payments made to non-residents are determined by the Finance Act
that Parliament periodically updates. The current rates are:
1. Interest on investment income 20 percent of gross amount;
2. Dividends 10 percent;
3. Royalties 25 percent;
4. Technical services 25 percent;
5. Any other services individuals 30 percent of net income; and
6. Companies/corporations 40 percent of net income
Note: the above rates are for general reference only, and are only valid for income earned by
companies based in countries with which India does not currently have a double taxation
avoidance agreement (DTA). Details of the countries India has a DTA with are here:
Director of income tax (international taxation)
Statutory functions in respect of taxation of foreign companies and non-residents and
withholding taxes payments on amounts to be remitted abroad are performed by the relevant
Director of Income Tax (International Taxation).
There are currently eight DITs located throughout India, namely in Delhi, Mumbai, Kolkata,
Chennai, Bangalore, Pune, Ahmedabad and Hyderabad.
Permanent account numbers and filing of returns
In 2010, the Indian government passed various amendments relating to the requirement that a
foreign company must obtain a permanent account number (PAN) to register with the Indian Tax
authorities. As such, foreign companies are now required to furnish a PAN when selling to an
Indian company.
If the recipient fails to provide the buyer with its PAN, then the applicable withholding tax rate
would be based on the existing rates listed above, or at 20 percent (whichever is higher).
Furthermore, in the absence of a PAN, Indian tax authorities will not allow foreign companies to
apply for lower withholding tax rates.
Currently, Indian law requires that all foreign companies file returns on all income earned in
India even if the applicable taxes have already been paid in India. It would thus be advisable for
foreign companies to initiate the process to obtain a PAN, especially if they expect to receive
certain royalties/fees/interest payments from their Indian group companies/collaborators.
Taxability of technical, managerial or consulting services provided by foreign companies to
Indian clients performed outside India
Another important amendment relates to the taxability of technical, managerial or consulting
services provided by foreign companies to Indian clients when such services are performed
outside of India.
However, foreign companies decided to take a stand against the issue, citing that such services
should not be taxable in India since they were not actually physically performed in India. This
culminated in the Indian Supreme Court case of Ishikawajima Harima Heavy Industries (288
ITR 408), where the apex court held that services that are both rendered and used in India are to
be taxed in India. Simply put, the Supreme Courts opinion was that if both of conditions were
not fulfilled, then the fees for such services are not to be charged as a tax in India.
Relevant Case Studies
Samsung case
In the Samsung Case, the Karnataka High Court observed that every overseas payment would be
liable to withholding taxes despite the payment ultimately being taxable income in India or not.
Prasad Productions case
A special bench of the Chennai tribunal ruled that tax needs to be withheld only on payments
made overseas that are taxable in the hands of the non-resident. However, that ruling is
contradictory to the Karnataka High Court decision in the Samsung case, which said that every
overseas remittance had to withhold tax unless it had a nil withholding order from the Revenue
Department.
The Chennai Tribunal, however, further observed that it is up to the taxpayer to decide whether a
transaction is taxable. If not there is no need for a nil withholding order.
Van Oord case
In this case, the Delhi High Court ruled that withholding taxes apply only to payments that are
taxable in India.
Vodafone case
Retrospective amendments were created to further clarify the legislative intent of the source rule
of taxation on non-residents in India, particularly in respect of indirect transfers of underlying
assets.
Under the proposed amendment, all persons (whether residents or non-residents) who have
business connections in India will be required to deduct taxes at source and pay them to the
Indian government even if the transaction is executed on foreign soil. This amendment is crucial
because a review petition by the government is currently pending before the Supreme Court,
which may now revise the changes in tax laws when it revisits its previous judgments.
India-Singapore tax treaty
The Authority for Advance Ruling (AAR) held that fees paid by Indian companies for technical
services provided by a foreign company are not taxable in India under the India-Singapore tax
treaty. The rationale given behind this decision is that advisory services do not fall within the
purview of the term Fee for Technical Services under Article 12 of the said treaty.
This AAR ruling came upon the wake of an application being filed by the Bharati AXA General
Insurance Co. Ltd. (BAGICL) to see if a foreign company is liable to pay taxes in India in
respect of the fees received from BAGICL.
This ruling has come as a relief to foreign companies that render support services in that it
ensures uniformity and flawless quality in future business dealings. Furthermore, this ruling can
provide some respite to companies that do not have a permanent establishment (PE) in India as it
also states that payments received by companies that do not have a PE in India cannot be taxed
as business profits under the treaty.