Should Non-Resident Companies File Income Tax Return on Income Received from Indian Companies?

In the absence of a liability to tax in India due to the availability of tax treaty benefits, the Non-Resident Company (NRC) is not be required to file a tax return in India.

Over the last two decades, the Government of India has significantly liberalized the economic policies which transformed India into one of the most favourable markets in the world. As a result, there has been increase in Multinational Companies or Non-Resident Companies or (NRCs) which have been regularly providing their expert services to the companies all over India in varied fields like technical, project management & installation, software, managerial, royalty, financing services etc.

It is thus imperative for such NRCs to comply with the Indian laws and related compliances. With the complex structure of Indian taxes and its compliances there have been few challenges and controversies which are being faced by NRCs. This article will give an insight to NRCs to understand a pertinent challenge faced by them in India and the legal resort available with them.

What and Why of the Controversy?

NRCs are taxable in India on income received / deemed to be received or accrued / deemed to be accrued in India subject to the Double Taxation Avoidance Agreements (“DTAAs”) with the country of residence. The DTAAs override the Income Tax Act, 1961 (ITA) provisions as they are more beneficial to NRCs. NRCs do not require to apply for a PAN Card (Permanent Account Number) in India in lieu of amendment in Section 206AA of the ITA and Rule 37BC of the ITA. NRCs are required to provide the following information in the absence of PAN Card:

  • Name, e-mail ID, contact number;
  • Address in the country or specified territory outside India of which the NRC is a resident;
  • A certificate of them being resident in any country or specified territory outside India from the Government of that country or specified territory if the law of that country or specified territory provides for issuance of such certificate;
  • Tax Identification Number of the NRC in the country or specified territory of their residence and in case no such number is available, then a unique number on the basis of which the NRC is identified by the Government of that country or the specified territory of which they claim to be a resident of.
However, recently, Income Tax Department in India started issuing income tax notices to NRCs providing their services to companies in India for non-filing of Income Tax returns in India in both the above-mentioned cases. The Income tax department issued such notices on the basis of the information provided by the Indian companies during filling of Withholding Tax returns (Form 27Q) or on the basis of income tax assessment of the Indian company. It is important to add that any company including Non-Resident Company cannot file the income tax return without the PAN card.

This step of the Income tax department in India reflects the intention to widen their tax base and data base pertaining to compliances. At this point, it is pertinent to understand the Indian law and Indian judiciary’s viewpoint on the subject. Therefore, let’s first understand who are required to file Income tax return in India as per the Indian law.

Obligation to File Income Tax Return in India under Income Tax Act:

As per ITA, every company is required to submit Income Tax Return (ITR) on or before the time period specified under Section 139 (1) of the Act.
A ‘company’ here means any Indian company, or body incorporated by or under the laws of a country outside India under Section 2 (17) of the Income Tax Act 1961 which means non-resident companies too are required to submit the Income Tax Return in India.

However, Section 115A (5) of the Income Tax Act 1961 provides exemption to NRC’s on non-filing of ITR subject to the cumulative satisfaction of conditions prescribed below:

1. The total income of NRCs includes by way of:-
  • dividends other than dividends referred under Income Tax Act 1961,
  • interest received from Government or an Indian concern on an amount borrowed in foreign currency,
  • interest received from an infrastructure debt fund,
  • interest in respect of units of Investment funds
  • income in respect of units purchased in foreign currency
2.The payer has deducted the Income Tax of NRCs under the provisions of Income Tax Act 1961.

On conjoint reading of section 139(1) read with Section 2(17) and Section 115A (5) of the ITA, any income other than above received by NRC from company in India (and income tax has been deducted by payee) would be outside the ambit of above exemption and NRCs would be required to file Income tax return in India.
 
In other words, if NRC’s are providing services in the nature of technical services, project management & installation, software, managerial, royalty, financing services etc. to the companies incorporated in India, they are required to file the Income Tax Return in India.

What is the point of view of Indian Judiciary?

Let us take a look at the various judicial pronouncements in India which decrees that NRC’s are not required to file the Income Tax return in India under specified conditions. Some famous verdicts are mentioned hereunder:

Pronouncements in favour of NRC:
  • In Re, Advance Ruling of Vanenburg Group B.V: It was held that there is no requirement to file the income tax return if capital gain arising on transfer of shares are exempt from tax.
  • In Re, Advance Ruling of Dow Agro Sciences Agricultural Products Ltd: It was held that a foreign company not taxable in India is under no obligation to file the income tax return.
  • Chatturam vs. CIT: The liability to pay tax is founded upon Section 4 and 5 of the ITA, which are the charging sections. Section 139 and other sections are merely machinery to determine the amount of tax. There would be no occasion to call machinery sections in aid where there is no liability at all. The applicant will not be required in this case to furnish any tax return.
Pronouncements in favour of Income Tax Department in India:
  • In Re, Advance Ruling of VNU International B.V: Every company is required to file the income tax return, whether it has an income or a loss. Since the applicant is a foreign company, it is covered in the definition of company under the ITA. The process of filling of income tax return would facilitate the applicant in all the future interaction with income tax department and would not cause any inconvenience to the applicant.
  • In Re, Advance Ruling of Castleton Investment Limited: It was held that any person claims the benefit of Double Taxation Avoidance Agreement under Section 90(2) of the ITA can avail such benefit only if the such person submits the income tax return.
Conclusion

Presently there are two school of thoughts prevailing in India. One thought follows not to file Income tax return since no tax is required to be deposited by NRC and judicial pronouncements are in favour of this idea. On the other hand, the other school of thought articulates that NRCs should file the Income Tax Return following a conservative approach.

It is imperative that Income Tax Department to provide the clarification on whether NRCs are require to file Income tax return in India considering the fact that they do not have any fixed establishment in India and. Further, it would be a hassle and additional cost to NRCs to hire professionals in India to file ITR and obtain PAN card for filing ITR in India even if single transaction has been done.