A question arises is whether a foreign company which has earned income from a source in India is required to file its tax return in India.
Section 139(1) of The Income Tax Act deals with the subject of who is required to file tax return in India. According to section, every Company is required to furnish its Tax Return within the time frame allowed under that Section.
The defination of Company, as per Section 2(17) includes any body corporate incorporated outside India ie. a foreign Company. Therefore, every foreign company too is required to file its Tax Return in India. Although, the income that a foreign company is required to declare is only the income that accrues or arise in India or is deemed to accrue or arise in India. Therefore, one can say that every foreign company who derives taxable income in India must file its tax return in India declaring Indian income and payment of the tax thereon.
An exception is carved out under Section 115A (5) of the income Tax Act which states as follows:
A foreign company is not required to file its tax return in India if BOTH the following conditions are fulfilled:
- If the income of the foreign company in India consisted only income by way of:
- Dividend (other than dividend referred to in section 115-O);
- Interest received from Government or Indian Company on borrowing from them in foreign currency;
- Interest received from an infrastructure debt fund;
- Interest from certain Government bonds and securities
- Interest in respect of units of Investment funds;
- Income in respect of units purchased in foreign currency.
- The Payer of income (Indian Company) has deducted tax at source and paid to the Government of India in accordance with the provisions of the domestic Income Tax Act.
If both the above conditions are satisfied, the foreign company, though it has income from a source within India, is not required to file its tax return in India.
Now, let us assume a case where a foreign company does not have any Permanent Establishment in India. It has provided some technical services to an Indian company from a place outside India and the Indian company has deducted and paid the required amount of tax (Withholding tax) to the credit of Indian Government. Question arises that whether such foreign company is required to file its tax return in India or not.
The income in the nature of "fees for technical services" that a foreign company earns from an Indian Company is deemed to accrue or arise in India in view of Section 9(1)(vii). Assume that the same is also taxable in terms of Article 13 on "Royalties and Fees for Technical Services". On such payment, Indian company has deducted and paid Withholding Tax in accordance with Section 115A(1)(d) of the domestic Act or Article 13 of The Double Tax Avoidance Agreement.
In this case the foreign company does have a source of Income within India. This source of income (Fees for technical services) is not the source of income which is covered by the exemption granted by section 115A(5). Therefore, this foreign company is required to file its tax return in India within the timelines as specified under Section 139(1) of The Act.
However, since the Indian company, the payer, has deducted and paid the required amount of tax on such income, there will not be any additional tax liability on the foreign company. It will simply have to furnish its tax return declaring the income derived from India and claim the tax which is deducted and paid by the Indian company.
Whether this foreign company is required to file 'Transfer Pricing Report' along with its tax return?
In the above case, if the foreign company has earned fees for technical services from its 'related enterprise' in India, it has entered into an "international transaction" and therefore it is required to obtain a report from an accountant that the transaction entered into is at Fair Market Value. It is required to furnish the said report before the tax authority within the timeline prescribed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.