Introduction
The Income-tax Act, 1961 (‘Act’) seeks to charge tax on the total income of every ‘person’. The Act contains separate codes for determining the income taxable in India, the rate of tax thereon, etc. as well as a separate code of procedural requirements like registration with the Indian Revenue Authorities, obligation to file annual returns, etc.
While a person resident of India is liable to tax in India on income earned anywhere across the global, a non-resident (including a foreign company[1]) is taxable in India only on the income accruing or arising in India or received in India[2]. The income earned in India is then subjected to tax based upon various criteria. In a few cases, the income is eligible for exemption from taxation too – either under the Act itself, or under the terms of Double Taxation Avoidance Agreement (‘DTAA’/ ‘Treaty’) entered into with various countries[3].
On the procedural aspect, the Act requires every company to furnish an annual return of income. A ‘company’[4] is defined to include a foreign company. In this background, one of the issues which has been of wide interest and contemplation is, whether a foreign company is liable to file an annual return of income in India.
Scheme of furnishing return of income in India
Section 139(1) of the Act requires every company to furnish a return of its income for the previous year. Section 2(17) of the Act defines a ‘company’ to mean ‘any body corporate incorporated by or under the laws of a country outside India’, amongst others. Thus, under the Act, a company includes a foreign company. Consequentially, strictly reading Section 139(1) with Section 2(17), every foreign company is required to furnish a return of its income. This requirement of filing a return of income, however, has to be read with Sections 4 and 5 of the Act. That is, if a foreign company does not have any income accruing or arising in India, then, no purpose is served by asking a foreign company to file a return of income in India. To extend it further, even if the Legislation casts an obligation on a company not having any connection in India, to file a return of income in India, non-compliance of such regulation would have no equitable or practical remedy. The moot question, however, is whether a foreign company is liable to file a return in India. when the foreign company has earned income from India, but the income is not liable to tax, either because of an exemption under the Act or on account of the beneficial provisions of the DTAA.
To partly resolve this controversy, sub-section (1C) of Section 139 of the Act was introduced by Finance Act, 2011 (w.e.f. 1.6.2011), empowering the Central Government to exempt any class or classes of persons from the requirement of furnishing a return of income. Pursuant thereto, the Central Government has, vide Notification No. 119 dated 11.10.2021, exempted certain class of persons from the requirement of furnishing a return of income under section 139(1) of the Act from assessment year 2021-2022 onwards, subject to the fulfilment of certain conditions[5].
It is highlighted that the transactions and the income earned therefrom referred to in the aforesaid notification are exempt from income-tax under the Act[6]. That is, the Central Government has done away with the requirement of filing of return in the certain cases of income which are in fact not liable to tax in India. The question that therefore arises is whether the corollary to this also holds true i.e., whether where a foreign company which has earned income in India, but such income is not liable to tax in India by virtue of some exemption, the foreign company is liable to file a return of such income in India.
Independent of this exemption, sub-section (5) of Section 115A of the Act[7], which prescribes rate of tax on dividends, royalty and technical service fees in the case of a foreign company, exempts a foreign company from furnishing a return of income if the following conditions are satisfied:
- The assessable income under the Act, during the previous year, consists only of income from dividend, interest, royalty or fees for technical services, and
- The tax deductible at source thereon under the provisions of the Act has been deducted, where the rate of tax deduction is not less than the rate prescribed under section 115A of the Act.
In view of Section 115A(5) of the Act, the question that arises is whether a foreign company is liable to file a return of its income comprising of dividend, interest, royalty or fees for technical services even if the said incomes are exempt from taxation under the DTAA or where the tax has been deducted as per the rate of tax under the DTAA which is lesser than rate of tax prescribed under Section 115A(5) of the Act.
Filing of return of income: Liability of a foreign company
The questions raised in the foregoing paragraphs can broadly be analysed by classifying them as under:
When there is income accruing or arising in India but the same is not liable to tax on account of an exemption under the Act
The two possible views in case of an income accruing or arising to a foreign company in India but not being liable to tax on account of an exemption under the Act, are briefly explained in the subsequent paragraphs.
Section 139(1) of the Act requires every company and a firm to file a return of its income. However, specific exemptions have been provided to foreign companies from filing of a return under the Act in certain cases where the income referred to is income exempt from taxes under the Act. That is, though the income is earned in India, there is no liability to pay taxes on the same, and yet, a specific provision exempting from the filing of return has been provided for under the Act.
Further, Section 139(1) also requires every person other than a company to file a return, if their total income which is assessable under the Act during the previous year exceeds the maximum amount which is not chargeable to income-tax. It is pertinent to note that section 139(1) uses the phrase ‘furnish a return of his income’ in respect of companies, amongst others. The phrase is not qualified by any condition as to the chargeability of the said to tax under the Act, as in the case of other persons. Meaning thereby that the income earned or received in India shall be covered within the meaning of the phrase, irrespective of whether such an income is liable to tax or not. Therefore, one view could be that when a foreign company has an income accruing or arising in India but the same is not liable to tax under the Act, even then, the foreign company is under an obligation to file a return of its income so accrued or arisen in India.
One may, however, argue that the specific exemption granted to the foreign companies from filing of return of income in India in certain cases is merely out of abundant caution in respect of such incomes of foreign companies. Further, that there no ‘Nil’ tax slab in the case of a company exempting its income to some extent from the chargeability of tax. Therefore, there is no condition, as is attached to the filing of return in other cases, provided in case of a company. Having said so, it may be argued that when no income of the foreign company is liable to tax in India, it is not liable to file a return of its income which is accruing or arising in India. When there is no tax liability, the compliance with the procedural provisions becomes redundant.[8]
When there is income accruing or arising in India which is liable to tax under the Act but is exempt from taxation under the DTAA
As aforesaid, there may be a scenario where the income earned by a foreign company in India is liable to tax under the Act but may be exempt from tax in India under the DTAA. The two possible views in such a case are briefly explained in the subsequent paragraphs.
The Authority for Advance Rulings (‘AAR’) in Veneburg Group, In re [2007] 289 ITR 464 and others, have held, on the issue of filing of the return by a foreign company whose income is exempt from tax under the DTAA, that Section 139 and other sections are merely machinery sections to determine the amount of tax and that there would be no occasion to call a machinery section in aid where there is no liability at all. And therefore, there is no requirement to file the return of income by such foreign companies. The AAR in holding so relied on Chatturam v. CIT [1947] 15 ITR 302 (FC). In Chatturam (supra), the Federal Court in a different context observed that ‘The liability to pay the tax is founded on Sections 3 and 4 of the Income tax Act, which are the charging sections. Section 22 [casted as section 139 under the 1961 Act] etc are the machinery sections to determine the amount of tax’.
Therefore, in one view, the DTAA provisions being more beneficial to the foreign company shall override the provisions of the Act and thus, Section 139(1) requiring the company to file a return of income shall not be applicable to such a company.
However, subsequently, the AAR in VNU International B.V., In re [2011] 334 ITR 56 (AAR), while ruling on the identical issue[9], noted that the Legislature in its wisdom has, while casting obligation to file return of income by a company, omitted to include the expression ‘exceeded the maximum amount which is not chargeable to income-tax’. Further, as per the third proviso, every company is required to file its return of income, whether it has an income or a loss. That a foreign company is covered within the definition of a company under Section 2(17) of the Act. It also took note of the fact that where it is not necessary for a non-resident to furnish return under Section 139(1) of the Act, the statute has specifically provided. It thus held that there is an obligation to file return of income by a foreign company on the income earned in India, even though the resulting tax is Nil on account of the applicability of DTAA.
Further, as regards the reliance placed on Chatturam (supra), it may be noted that the observation was that the liability to pay tax can only be as per sections 4 and 5. One may argue that what is contemplated under Section 139(1) is only to furnish a return of income; it does not contemplate the payment of taxes thereof and thus, he payment of taxes is still governed by the charging provisions.
Therefore, another view could be that when a foreign company has an income accruing or arising in India which is liable to tax under the Act but is exempt from taxation under the DTAA, even then, the foreign company is under an obligation to file a return of its income so accrued or arisen in India. That, the same shall also be applicable where the income of a foreign company comprises of dividend, interest, royalty or fees for technical services and the said incomes are exempt from taxation under the DTAA or the tax has been deducted as per the rate of tax under the DTAA which is lesser than rate of tax prescribed under Section 115A(5) of the Act.
Conclusion
As afore stated, there are two possible views in relation to the filing of return of income by a foreign company when it has some income accruing or arising in India, but which is not taxable in India, either by virtue of the exemption under the Act itself or under the DTAA. We are yet to see as to how the Indian Courts shall interpret the provisions and analyse the factual circumstance, and the view they would ascribe to.
[The Author is a Principal Associate, Direct Tax Team, Lakshmikumaran and Sridharan Attorneys, Mumbai]
[1] Section 6(3) of the Act: A foreign company is said to be a non-resident in India if, in the concerned year, its place of effective management is not in India. The ‘place of effective management’ means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.
[2] Or deemed to accrue or arises in India or deemed to be received in India.
[3] Section 90 of the Act empowers the Central Government to inter alia enter into a double taxation avoidance agreement with the Government of any foreign country. Sub-section (2) provides that a taxpayer shall be governed by the provisions of the Act or the DTAA, whichever is more beneficial to the taxpayer.
[4] In Section 2(17) of the Act.
[5] (I) A non-resident, including a foreign company who has income in India other than the income from investment in the Category III Alternative Investment Fund located in any International Financial Services Centre, all the units of which are held by non-residents, and (II) A non-resident, being an eligible foreign investor who has transacted only in capital asset referred to in section 47(viiab) of the Act, which are listed on a recognised stock exchange located in any International Financial Services Centre and the only income earned in India is the consideration on transfer of such capital asset which is paid or payable in foreign currency. The same are subject to the condition that the said person is not required to take a Permanent Account Number (‘PAN’) under section 139A of the Act r.w.r. 114AAB of the Income-tax Rules, 1962.
[6] Either under section 47 or section 10(4D) of the Act.
[7] Similar provision is contained in section 115AC(4) of the Act w.r.t. income by way of interest on bonds of an Indian company or of a public sector company, purchased in foreign company, and income by way of dividends on Global Depository Receipts, where tax has been deducted as per the rate under the Act.
[8] Veneburg Group, In re [2007] 289 ITR 464.
[9] Also see, Castleton Investment Ltd, In re [2012] 24 taxmann.com 150 (AAR – New Delhi).
