India: Non-withholding of tax on fees paid to foreign company

India: Non-withholding of tax on fees paid

The Delhi High Court held that a payment of administrative fees to a foreign company is not subject to disallowance under section 40 (a)(i) of the Income-tax Act, 1961 for the non-withholding (deduction) of tax at source in view of non-discrimination clause under the India-United States income tax treaty.

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The case is: CIT v. Herbalife International India Pvt. Ltd (ITA No. 7/2007)

Overview

The taxpayer—an Indian subsidiary of a U.S. company—engaged in trading and marketing of the products for use by customers in India. The taxpayer agreed to pay the U.S. entity for various services provided (including data processing, financial, accounting, planning, and marketing services), and the taxpayer claimed these fees as an expenditure in computing its taxable income. 

The Assessing Officer, however, determined that these expenses were to be treated as “fees for technical services” and as such, the taxpayer was to have withheld (deducted) tax at source. Because the taxpayer did not withhold, the Assessing Officer disallowed the claimed deduction for the expenditure. 

The taxpayer filed for judicial review by a tribunal, that held that the administrative fees paid by the taxpayer were allowable as a deduction because, in part, the Assessing Officer could not invoke section 40(a)(i) to disallow the claim for deduction, since the payment was not taxable in the hands of the payee (here, the U.S. entity).

The Delhi High Court held that the payment of administrative fees to a foreign company is not to be disallowed under section 40(a)(i) for non-withholding of tax at source in light of the “non-discrimination clause” of the India-United States income tax treaty.

 

Read a May 2017 report [PDF 320 KB] prepared by the KPMG member firm in India

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