Taxability of income in India of a foreign entity is on a receipt basis

 The taxability of income of a foreign entity can be a complex issue, and questions often arise regarding whether the income of a foreign entity would be taxed in India only when it is actually received by that entity or accrual basis. While the method of accounting used by the foreign entity does play a role, most global body corporates typically use the mercantile system of accounting.

In a recent ruling involving a Dubai company, Aircon Beibars (FZE), the Delhi Tribunal interpreted the term 'received' used in the India-UAE tax treaty as 'actual receipt' for the purpose of taxability. Notably, there are other Tribunal rulings supporting this view, such as in the matter of Saira Interiors.

However, adopting such an interpretation has its challenges. Tax treaties' language may not necessarily be interpreted literally, and the same yardstick applicable to a codified law may not always apply to a tax treaty. Some argue for a literal interpretation, while others contend that the authors of the tax treaties might not have fully understood the implications of certain words, and therefore, a more contextual approach is required to reflect the true intention.

It is generally advisable to take a conservative approach in such matters, and such interpretations could be applied in specific situations. For instance, in the case of Aircon Beibars, where the amount involved was in dispute, it might have made little sense for them to pay the tax even though withholding had been done and duly reflected.

In another scenario with one of our other clients who had already skipped withholding for one of the group companies, we attempted to use the judgment of Saira Interiors to our advantage. However, it's important to remember that planning for tax implications is one thing, and protecting oneself from potential risks is another matter altogether.