Herbalife – Delhi High Court finds that an Indian domestic provision denying the deduction of technical services fees paid to a non-resident where there was a failure to withhold back-up withholding violated the non-discrimination provision in the U.S.-India Treaty

Art. 26(3) of the U.S.-India Treaty, which is similar to Art. XXV(6) of the U.S.-Canada Treaty, provided that:

Except where the provisions of paragraph 1 of Article 9 (Associated Enterprises), paragraph 7 of Article 11 (Interest), or paragraph 8 of Article 12 (Royalties and Fees for included Services) apply, interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.

The Delhi High Court applied Art. 26(3) to override a domestic provision, which denied the deduction of technical service fees paid to a non-resident (in this case, a U.S. affiliate) where the Indian payer had failed to withhold back-up withholding. (This domestic provision applied even where, as here, the fees were exempt from Indian tax under the business profits/PE Articles of the Treaty.) Muralidhar J saw the matter quite simply:

[T]he condition under which deductibility is disallowed in respect of payments to non-residents, is plainly different from that when made to a resident. … The lack of parity in the allowing of the payment as deduction is what brings about the discrimination.

Neal Armstrong. Summary of CIT v. Herbalife International India PVP. Ltd., ITA 7/2007, 13 May 2016 (Delhi HC) under Treaties – Art. 25.