Introduction
Obligation under income tax act, amongst others, includes determining residential status, chargeability of income, rates of taxes, payment of taxes, filing of return of Income and necessary forms, responding to tax authorities etc. Under Indian tax regulation, a resident is required pay tax on its global income where as a non-resident (including a foreign company) is taxable in India only on the income accruing or arising in India or received in India. Determining taxability of income and related controversies in case of foreign companies depends on particular facts of each case and is separate subject in itself. Broadly speaking, preparing and filing a return of income in Indian automatically takes care of many of such aspects of Indian tax regime. In this article we will try to address the obligation of foreign companies to file the return of income and related compliances.
Legal Framework
Section 139 of The Income-tax Act, 1961 (‘Act’) deals with provisions to file return of income in India. As per sub section 1 of section 139 every person being company or firm shall file his return of income on or before the due date. Third proviso to section 139 states that every company or a firm shall furnish on or before the due date the return in respect of its income or loss in every previous year. Section 2(17) of the Act defines a ‘company’ to mean ‘anybody corporate incorporated by or under the laws of a country outside India’, amongst others. Hence, under act company includes foreign company. Fundamentally, foreign companies earning India sourced income is required to assess the applicability of provisions related to filing of Income.
Exemptions
- Section 139 (1C) of the Act empowers Central Government to exempt any class or classes of persons from the requirement of furnishing a return of income. By virtue of this Non-Resident/Foreign company earning Income from units of AIF located in IFSC and an eligible foreign investor earning income from transfer of capital assets such as bonds/ GDR/ Derivatives/ Rupee denominated bonds listed in recognized stock exchange located in IFSC are exempted from requirement of furnishing a return of income as per Notification No 119 dated October 11, 2021
- Section 115A deals with rate of tax on dividends, Interest, royalty and fees for technical service in the case of a non-residents/foreign company. Sub section (5) of section 115A exempts such persons from furnishing a return of income subject to certain conditions namely
- The said person’s income during the previous year, consists only of income from dividends, Interest, royalty and fees for technical services and
- The tax deductible at source thereon under the provisions of the Act has been deducted and the rate of tax deduction is not less than the rate prescribed under section 115A of the Act.
It is pertinent to note here that one of the conditions for exemption is to deduct tax at source at a rate not less than the rate prescribed under section 115A. The question may arise whether exemption from filing of tax return in case of foreign company enjoying lower rate of taxation as per DTAA is available or not. As the exemption is subject to certain specific conditions, any de facto breach of such conditions leads to withdrawal of exemption. Accordingly, foreign company earning income specified in section 115A(1) and opting lower tax rate as per DTAA, requires to file its return of Income.
Return filing obligation in case income is exempted under the Act
Section 139(1) of the Act requires every company and a firm to file a return of its income. Third proviso to section 139 states that every company or a firm shall furnish on or before the due date the return in respect of its income or loss in every previous year. Company includes foreign company and Income includes both incomes exempt as well as taxable. As is noticed, while casting obligation to file return of income by a company, the Legislature in its wisdom has omitted to include the expression ‘exceeded the maximum amount which is not chargeable to income-tax’. Filing of income tax return in case of companies [section 139(1)(a)] is not qualified by any condition as like in case of other persons [section 139(1)(b)]. On plain reading of section does not give any indication of exemption from filing income tax return in case of foreign companies earning exempted income. It is worthy to understand that power has been given under section 139(1C) to notify the class or classes of persons to give exemption from the requirement of furnishing a return of income. If legislation intends to exempt any class of companies, it would exercise the power given under section 139(1C) to notify under respective sections. Further, where it is not necessary for a non-resident to furnish return under section 139(1) of the Act, the statute has specifically provided, as is the case under section 115A(5) of the Act. In the absence of any specific exemption under act, it would be erroneous to assume the exemption from filing of tax return by foreign companies earning exempted income. Practically, filing of return of income in case where income is not taxable under the act looks absurd and serve no purpose but on technical ground every company is required to file return of income unless specifically exempted.
Return filing obligation in case where income is taxable under the Act but exempted under DTAA
In case of foreign companies, the act has dedicated bunch of provisions to tax the Income which is accruing and arising in India. The scope of total income has been given in section 5. As per sub-section (2), the total income of a non-resident includes all income from whatever source derived which accrues or arises; deemed to accrue or arise in India. Section 9 covers various stream of income that accrues or arise in India. Section 90 allows to get relief under Double Taxation Avoidance Agreement (DTAA) if the provisions of DTAA is more beneficial. One should note that filing of income tax return under section 139 in case of companies is not qualified by any conditions. There are scenarios where the particular stream of income is taxable under the act but exempt under DTAA. One can argue that the provision of section 90 has overriding impact over other provisions of the act and hence can override section 139 also.
The Authority for Advance Rulings (‘AAR’) in case of Veneburg Group, In re [2007] held that so far as filing of income-tax return is concerned, the liability to pay tax is founded upon sections 4 and 5, which are the charging sections. Section 139 and other sections are merely machinery sections to determine the amount of tax. There would be no occasion to call a machinery section in aid where there is no liability at all. Therefore, the applicant will not be required to file any tax returns.
On the contrary the AAR in case of VNU International B.V., In re [2011] 334 ITR 56 (AAR), while ruling on the identical issue, held that that so far as filing of return is concerned, first step to proceed is to see whether a particular source of income is taxable in India. If that particular source of income is also taxable in the other country, then the second step is to see whether there is a compromise between tax claims of the two concerned Governments. The relief by way of compromise is then achieved by referring to the DTAA. This exercise, from start to finish, is carried out under the Act. While doing so, the compliance to machinery provisions under section 139(1) assumes importance. The process of filing of the return would facilitate the applicant in all future interactions with the Income-tax Department. Further it has stated that it is clear from a reading of section 139(1) that while casting an obligation to file return of income by a company the Legislature in its wisdom has omitted to include the expression ‘exceeded the maximum amount which is not chargeable to income-tax’. Then, as per the third proviso, every company is required to file its return of income, whether it has an income or a loss.
Although AAR ruling is binding on the applicant only it carries persuasive value. In case of VNU International B.V the concept analysed by the AAR gives more insight to the legislative intention and technical interpretation where as in case of Veneburg case AAR emphasised that machinery provision has no impact where there is no liability at all. On personal front, we are of the view that, even though the resulting tax is Nil on account of the applicability of DTAA, it is obligatory to file return of income by a foreign company.
Transfer pricing compliances by Foreign Companies
In case foreign company enter in to any transactions with its Indian group entities that qualifies as associated enterprise under Indian transfer pricing regulation, it is required to comply with transfer pricing provisions which includes flip side reporting of international transactions in prescribed form (Form 3CEB), maintaining robust transfer pricing documentations, complying with master filing requirements, if any, etc. One should take a note of judiciary’s strong view on TP compliances by foreign company pronounced by Kolkata Tribunal in the case of Instrumentarium Corporation wherein it was held that even if interest not charged for loan advanced by foreign company (AE) to its Indian AE, foreign company has to comply with Indian TP regulation and figure out Arm’s Length interest income to offer tax in India. Failing to comply with transfer pricing regulation may attract penalty to the tune of INR 1,00,000 /- for non-filing of Form 3CEB and penalty of 2% of value of international transactions for failure to report a transaction and for not maintaining of transfer pricing study report.
Obligation on residents with whom the foreign company enters transaction
As such primary obligation to comply with requirement of act is of the person on whom the responsibility is casted by act. That means the primary responsibility is of foreign company. Section 163 treats a resident or any non-residents as agent of non-resident in India if such person is employed by, has business connection with, is payer of income to and is trustee of Non-residents. As agents are representative assessee, tax authority may initiate any proceedings under the act including recovery of taxes from such agents. Indirectly, by virtue of section 163 subject to approval of concerned authority, officer may cast responsibility on residents to ensure compliances in India by such Non-residents/foreign companies with whom they are dealing with.
Penal Consequences
Section 234F impose penalty for delay in filing return of income beyond the due date amounting to Rs. 10,000. In addition to this, non-filing of return of income may also be construed as under reporting of income, a penalty will be levied on the under reported income. Further prosecution, punishable with rigorous imprisonment of three months to seven years and a fine may be attracted.
Conclusion
Obligation to file income tax returns and consequential tax compliances in case of foreign company lead to many procedural challenges like obtaining PAN, Digital Signature, hiring consultant, responding to tax authorities, book keeping etc. At the same time any non-compliance may invite litigation and may end up with tax/interest/penalty outflows. As residents dealing with foreign company may be treated as representative assesse of such foreign company, exposure of tax litigation and tax outflows on residents should be assessed cautiously. It is recommended to take compliance friendly approach till the time tax authorities/Judiciary come up with some concrete guidelines for such compliance challenges.
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Disclaimer: This blog is intended for educational purposes only and should not be interpreted as tax advice. It is recommended to seek guidance from a qualified professional for advice relevant to your circumstances. For any feedback, inquiries, or suggestions, please feel free to reach out to the author at niranjan@snssindia.in / Contact No +91 982 586 0488
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