Indian GCCs routinely pay their foreign parent or group companies for software licences, cloud services, management support and cost recharges. Each of these payments raises the same first question: does Indian tax need to be withheld? From 1 April 2026 the provision that answers it is Section 393(2) of the Income-tax Act, 2025, which replaced Section 195 of the 1961 Act.
1. The starting test
Withholding applies where a payment to a non-resident is chargeable to tax in India. If the payment is not income of the foreign party in India, no deduction is needed. Many GCC payments are reimbursements or are not taxable in India under the treaty, so the analysis matters before the rate does.
2. Work through each payment
| Step | Question |
|---|---|
| 1. Nature | Is it royalty, fees for technical services, a pure reimbursement, or another category? |
| 2. Source | Does the income arise in India under the Act? |
| 3. Treaty | Does the DTAA with the recipient's country reduce the rate or exclude the income? |
| 4. Evidence | Do you hold the recipient's tax residency certificate and any other documents the treaty claim needs? |
| 5. Rate | Apply the treaty rate if the conditions are met, otherwise the domestic rate. |
3. Reimbursements and recharges
A genuine reimbursement of cost, without any element of income, is often argued to fall outside withholding. The risk arises where the recharge carries a mark-up or the underlying service is itself a taxable category. The intercompany agreement and invoice detail should show what is being recharged.
4. The timing trap
Tax must be deducted at the earlier of credit to the account or payment. Booking a year-end provision for a group charge can itself trigger the obligation. Finance teams that wait for the cash payment may find the deduction was due earlier.
5. Returns and records
Deductions on non-resident payments are reported in the non-resident statement, now Form 144 (earlier Form 27Q). Keep the treaty documents and the working for each rate on file. The same file is useful if the assessing officer questions the treaty claim.
6. A short checklist
| Area | Question to ask |
|---|---|
| Agreement | Does it say who bears the tax if withholding applies? |
| Gross-up | If the parent expects a net amount, has the cost of grossing up been budgeted? |
| Documents | Is the residency certificate current for the year? |
| Provisioning | Do year-end accruals trigger deduction? |
| Reporting | Are non-resident payments reported on the right form? |
Conclusion
For GCCs, withholding on payments to the foreign parent is less about the rate than about classification, treaty evidence and timing. A short written analysis per payment type, refreshed each year, removes most of the risk.
Author: N. Sudheer, M.Com., FCS, LL.B., Partner, A2 Consultants, Hyderabad. The views are personal and for general information only.
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