Foreign cos won't pay withholding tax for fin services

Thursday, 26 May 2011, 04:28 IST
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New Delhi: Foreign corporates with subsidiaries in the country are not subject to payment of withholding tax for financial services like discounting of bills provided to their Indian arms. In a ruling, the Authority of Advanced Rulings (AAR) also held such companies are also not liable to pay income tax in case the firm is based in a country which has a Double Taxation Avoidance Agreement (DTAA) agreement with India. "The applicant will not be subject to withholding of tax," the AAR said. The ruling came in response to an application filed by US-based ABC International. The firm has an Indian subsidiary -- ABC India -- which is engaged in the business of trading food products and other activities. ABC International provides various financial services to its subsidiary, including discounting of bills of exchange or promissory notes and buying and underwriting negotiable instruments and commercial papers. The company had sought to know whether income earned by it by way of providing financial services to its subsidiary is liable to be taxed in India under the Income Tax Act, 1961, or the Double Taxation Avoidance Agreement between the country and USA. It also asked whether the income will be subject to witholding tax, in which case the company withholds the tax before the money is spent for any purpose and is paid to the government. "Discounting of a bill of exchange or promissory note, being a purchase of the instrument as it were and especially when it is discounted without recourse... The applicant is not liable to tax in India in view of the DTAA between India and USA," the AAR said. It said in view of the fact that double taxation is not applicable, the firm is also not be subject to withholding tax. AAR further said there is no need for filing transfer pricing documentation for this kind of transaction.
Source: PTI