April  2010
volume 2  issue 2
Doing Business with India – Caution with withholding tax

With effect from 1st April 2010 every recipient including a non - resident / foreign company is required to furnish a Permanent Account Number (PAN) to the payer in India. If the recipient fails to provide the PAN, withholding tax rate would be the higher of the existing rate as per the ITA or treaty or 20%.

In the past two budgets that the Indian Government presented, there are a couple of amendments that would have significant ramifications not only for non‐residents/ foreign MNCs doing business in India but also for non‐residents/foreign MNCs doing business with India.

One such amendment (applicable from 1st April 2010) relates to the requirement of a foreign company to obtain a Permanent Account Number (PAN) i.e. to register with the Indian tax authorities.

Currently, foreign companies earning certain categories of income from India are subjected to withholding taxes at the rates prescribed under the Indian Income Tax Act (ITA) or relevant tax treaty whichever is more beneficial to the taxpayer. The withholding tax rate for royalties, fees for services and interest in most India’s tax treaties is 10%/15%.

However, with the above amendment, with effect from 1st April 2010 every recipient including a non‐resident/foreign company is required to furnish a Permanent Account Number (PAN) to the payer in India. If the recipient fails to provide the PAN, withholding tax rate would be the higher of the existing rate as per the ITA or treaty,  or 20%.  This would result in additional withholding taxes in India,  for which

there may not be any credit available in the foreign country.

Also, in the absence of a PAN, the Indian tax authorities will not entertain an applicationfrom the recipient for a lower withholding tax rate. The new provisions however are not applicable on categories of income, where there is no withholding tax applicable. For instance‐ on sale of goods to Indian customer, dividends on which dividend distribution tax is paid, etc. Currently though, the Indian law requires all the foreign companies to file return of income, with respect to income being earned from India– even if the applicable taxes have been paid in India. Till date, most foreign companies are practically not complying with the said provision and even the tax authorities do not have any mechanism to monitor the same. However, with the introduction of the above provision, the tax authorities can easily scrutinize the compliances by foreign companies in India based on the PAN allotted to foreign companies. Filing of return of income in India would be accompanied by a host of other compliances such transfer pricing compliance and tax audit, etc.

 
It  would  thus be  advisable for  foreign  companies to  initiate the  process for  obtaining  PAN  especially  if  they are

receiving certain royalties / fees / interest from their Indian group companies / collaborators.

Another important amendment relates to the taxability of technical, managerial or consulting services provided by foreign companies to the Indian clients; when such services are performed outside India. Foreign companies were taking a stand

 
In the absence of a PAN,
the Indian tax
authorities will not
entertain an
application from
the recipient for a lower
withholding tax rate.
 that such services should not be  taxable in  India, since they were      not performed in India and had no                territorial nexus with                           India. Their stand                            was vindicated by                          the Supreme Court                        (SC) in the case of                      Ishikawajima Harima                   Heavy Industries (288 ITR                 408), where the apex court               held that services should be

rendered as well as used in India for being taxed in India. It therefore held that if both conditions were not fulfilled, the fees for technical services was not chargeable to tax in India.

With the intention to overrule the decision of the SC requiring the rendition of services in India, the budget now seeks to substitute the current explanation retrospectively from 1st April 1976, that the income of non‐resident (from interest, royalties, fees for technical services) would be deemed to accrue or arise in India irrespective of whether the nonresident has a residence or place of business in India or irrespective of whether the non‐resident has rendered services in India.

With the above amendment, the place of performance of services would not be relevant and fees for any technical, managerial or consulting services paid by an Indian resident to a nonresident would be taxable in India. It is mainly the managerial/intra‐group services rendered by a group service centre or the architectural design and drawings services which are generally rendered from abroad that would be liable to tax based on the above amendment.

The non‐resident can yet take shelter under the tax treaty, especially India’s tax treaties with countries like Singapore, USA, UK, etc. that have a restricted/narrow definition of fees for technical services.

It any case it is advisable to seek professional advice on withholding tax aspects in the light of these amendments.
INSIDE THIS ISSUE

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