Taxability of Interest Income for Non-Resident Foreign Companies under IT Act
Summary: Under the Income Tax Act, 1961, a “Company” encompasses various entities, including foreign corporate bodies and institutions deemed as companies for specific assessment years. For non-resident entities, Section 5(2) outlines that total income includes all income received or accruing in India, irrespective of its origin. Section 9(1)(v) specifies that interest income on money borrowed is deemed to accrue in India if paid by the government, a resident (unless used for overseas business), or another non-resident conducting business in India. For foreign banks, interest from Indian branches to overseas head offices is taxable in India. According to Section 139(1), anyone with taxable income must file a return unless exempt under Section 115A(5). Specifically, under Section 115A(1)(a), foreign companies earning interest income in foreign currency from the Indian government or Indian entities are taxed at a flat rate of 20%, provided TDS has been deducted at this rate. This comprehensive framework ensures that the interest income of non-resident foreign companies is systematically taxed, with clear stipulations on income accrual and return filing requirements.
Non-resident Foreign Company Interest Income Taxability as per Income Tax Act, 1961
As per Sec. 2(17) of the Income Tax Act, 1961 (“the Act”), Company means:-
i. Indian company;
ii. Body corporate incorporated by or under the laws of a country outside India;
iii. Institution, association or body which is or was assessable or was assessed as a Company for any assessment year under the Income Tax Act; or
iv. Institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a Company.
Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years as may be specified in the declaration.
As per Sec. 5(2) of the Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which,
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1: Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2: Income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.
As per Sec. 9(1)(v) of the Act, Interest income on money borrowed shall be deemed to accrue or arise in India if payable by,
i. government; or
ii. resident person, except where the moneys borrowed and used for the business or profession carried on by him outside India, or for earning any income from any source outside India); or
iii. non-resident person, where the moneys borrowed and used for the business or profession carried on by him in India.
Explanation: In the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment (ref. section 92F(iiia)) in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery shall apply accordingly;
As per Sec. 139(1) of the Act, Every person, if his total income or the total income of any other person in respect of which he is assessable under this Act exceeded the maximum amount which is not chargeable to income tax, shall, on or before the due date, furnish a return of his income or the income of such other person during the previous year.
As per Sec. 115A(5) of the Act, Assessee referred to Sec. 115A(1) not required to furnish the income tax return u/s 139(1) of the Act, if,
a) only of income referred to Sec. 115A(1)(a); and
b) the TDS has been deducted @20% u/s 115A(1)(a).
As per Sec. 115A(1)(a) of the Act, Interest income (not being interest received from an infrastructure debt fund referred to Sec. 10(47) or interest of the nature and extent referred to in section 194LC) earned by the foreign company on monies provided or debt given to the government / Indian concern, in foreign currency, the income tax shall be payable @20%.
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