Taxability of royalties and fees under treaty and withholding tax on book credit clarified for non-resident payments

Royalties and fees payable to non-resident companies were taxable in India under the Act, as treaty Article 12 did not shift chargeability to a cash or receipt basis and the word "paid" did not control the stage of taxation. Section 90(2) operated only to the extent the treaty was more beneficial, while section 195(1) required deduction of tax when the payer credited the amount to the payee's account or made payment, whichever was earlier. The payer's withholding obligation was separate from the recipient's stage of taxability, so tax had to be deducted on book credit.

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Issues: Whether royalties and fees payable to non-resident companies under the applicable tax treaties were taxable in India only on cash or receipt basis, and whether tax was required to be withheld under section 195(1) of the Income-tax Act, 1961 at the time of credit in the books.

Analysis: Section 90(2) makes treaty relief operative only to the extent more beneficial than the Act, while Article 12 of the relevant treaties permits taxation in India according to Indian law, subject to the treaty ceiling on tax rate where applicable. The term 'paid' in Article 12 does not control the stage of taxation in India, and the definition of royalties/fees in the treaty does not fix the point of chargeability. Section 195(1) is triggered when the payer credits the sum to the payee's account or makes payment, whichever is earlier, and its operation is not dependent on actual remittance or on the foreign recipient having received the amount. The stage of taxability in the hands of the payee is distinct from the payer's obligation to deduct tax at source.

Conclusion: The royalties and fees were taxable in India in accordance with the Act and not only on cash or receipt basis under the treaties, and the applicant was required to deduct tax under section 195(1) upon credit of the amounts in its books.

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