Wikipedia defines Chinese Water Torture as
a process in which water is slowly dripped onto a person's forehead, allegedly driving the restrained victim insane.
Was this type of torture was ever applied?
Secondly, it's often stated (at least in Spain) that water drops would finally penetrate through the skin and bone. Some sources: Neoseeker's Forum, Ebaumsworld's Forum.
As the Wikipedia article says:
"Victims were strapped down so that they could not move, and cold or warm water was then dripped slowly on to a small area of the body; usually the forehead. The forehead was found to be the most suitable point for this form of torture because of its sensitivity: prisoners could see each drop coming, and after long durations were gradually driven frantic as a perceived hollow would form in the center of the forehead."
From the Wikipedia article in Spanish:
After a few hours, the continuous dripping caused physical damage to the skin (similar to the fingertips after a bath).
And in French:
... a drop of water falls in a given interval and steady always in the same place on the front or top of the head, the death is caused by the erosion of the skin.
My own speculation, not based off data, is that this is false. Drops won't have much pressure and skin would be able to regenerate, although the water wouldn't be very good to skin. Moreover, the bone would be much harder and it should take many years. Is my speculations correct?