Whether to file Income tax return in India or Not by non-resident companies on Income received from Indian Companies?

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 (“Non-Resident Companies” or “NRC” for short) which have been regularly providing their expert services to the companies all over India specifically in the field of technical, project management & installation, software, managerial, royalty, financing services etc.

It is thus imperative for such Non-Resident Companies to comply with the Indian laws and related compliances on them. With the complex structure of Indian taxes and its compliances there have been few challenges and controversies prevailing which are being faced by NRC related to taxation and compliances in India.

This article will give an insight to non-resident companies to understand one of the very recent and pertinent controversy and challenge faced by NRC in India and the legal resort available with them – “Whether to file Income Tax Return in India or NOT on income received from Companies incorporated in India”

What and Why of the Controversy?

NRCs are taxable in India on income received / deemed to be received or accrue / deemed to be accrue in India subject to the Double Taxation Avoidance Agreements (“DTAAs”) with the country of residence. The DTAAs override the Indian Income Tax Act provisions to the extent they are more beneficial to non-resident companies. There can be two situations in such case:

Case Withholding Tax as per Income Tax Act 1961 Withholding Tax as per Double Taxation Avoidance Agreement Payer require to Withhold Tax of NRC
Case 1 No No No
Case 2 Yes No No
Case 3 Yes Yes Yes

Further, NRCs do not require to apply for a PAN Card (Permanent Account Number) in India in lieu of amendment in Section 206AA of the Income Tax Act 1961 and Rule 37BC of the Income Tax Rules 1962. NRCs are required to provide the following information in the absence of PAN Card:

  1. name, e-mail id, contact number;
  2. address in the country or specified territory outside India of which the NRC is a resident;
  3. a certificate of his 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;
  4. Tax Identification Number of the NRC in the country or specified territory of his 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 he claims to be a resident.

However, recently, Income Tax Department in India are issuing income tax notices to non-resident companies 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 is issuing such notices on the basis of the information being 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. It is pertinent to understand Indian law and Indian judiciaries viewpoint on same. Therefore, lets first understand who are required to file Income tax return in India as per Indian law.

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

As per Income Tax Act 1961 in India, every company is required to submit Income Tax Return (ITR) on or before the time period specified under Section 139 (1) of the Act (ibid).

The “company” here means any Indian company, or body corporate 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 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 mentioned 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 monies 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

 

AND

  1. 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 act (ibid), 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 NRC 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 judiciaries

It is imperative to review various judicial pronouncements in India which decrees that NRC’s are not required to file the Income Tax return in India under specified conditions. Few of such pertinent and famous verdicts are mentioned hereunder:

Pronouncements in favour of NRC

  1. It was held that here is no requirement to file the income tax return if capital gain arising on transfer of shares are exempt from tax - Advance Ruling of Vanenburg Group B.V (2007)
  2. It was held that foreign company not taxable in India is under no obligation to file the income tax return - Advance Ruling of Dow Agro Sciences Agricultural Products Ltd (2017)
  3. The liability to pay tax is founded upon section 4 and 5 of the Income Tax Act 1961, 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 - Chatturam vs. CIT [1947] 15 ITR 302 (FC)

However, there are few pronouncements which says that NRC are required to file income tax return in India.

Pronouncements in favour of Income Tax Department in India

  1. 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 Income Tax Act 1961. 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 - Advance Ruling of VNU International B.V (2011)
  2. It was held that any person claims the benefit of Double Taxation Avoidance Agreement under Section 90(2) of the Income Tax Act 1961 can avail such benefit only if the such person submits the income tax return - Advance Ruling of Castleton Investment Limited (2012)

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.

As per other school of thought, NRCs should file the Income Tax Return following a conservative approach.

It is imperative and expected 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; income tax in case is deducted & deposited or not deducted & deposited by the Indian companies on their behalf but having no PAN Card. Further, it would be a hassle and additional cost to non-resident companies to hire professionals in India file Income tax return and obtain PAN card for filing income tax return in India even if single transaction has been done.

 

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