With the Indian economy on an upswing, a large number of foreign companies are operating in the country through representative offices or representatives/consultants. Because of this, the number of cross-border transactions has increased substantially.
It has become an area of interest for both Reserve Bank of India (RBI) and the Income Tax (IT) department. RBI works as a watchdog for inflow and outflow of foreign funds while the IT department puts restrictions to ensure appropriate taxes have been paid on any revenue earned in India.
Review of the transactions by the Indian Revenue Authority is based on the types of transaction. We can put these transactions into two broad categories:
- Transactions which are of regular nature
- One-time transactions
Tax authorities are not too concerned about regular transactions as they can be tracked easily. But the key issues faced by the tax authorities concern one-time transactions. In India, most of these transactions are not reported, and no taxes are paid on them. For such one-time transactions, the IT department has put the onus on RBI to ensure there is no outflow of service fees from India without appropriate tax deductions or with valid reasoning, which is certified by a qualified chartered accountant.
The tax withholding is one part of the transaction, but the responsibility of the foreign company does not end by just getting the tax withheld. There are many more provisions, which if not done, have penal implications and direct liability on the foreign companies and their officers.
For the benefit of the readers, I have discussed two vital points, which are usually ignored by foreign companies who transact in India.
Filing Income Tax Return (ITR)
The Income Tax Act states the following concerning filing of Income Tax Return:
Due dates for filing of income tax return:
- For foreign company/non-residents other than foreign companies, the provisions with respect to the filing of income tax return mention that any company is required to file income tax return in India if it has earned, accrued or received any money in India. The definition of 'company' includes foreign companies. Thus, all the companies, which have had any transaction in which they have received/accrued payment from an Indian entity and tax has been deducted on such payments should file income tax return for such income.
- Effective from the financial year 2012/13, "a person claiming any relief of tax under section 90 or 90A or deduction of tax under section 91 of the Income Tax Act, shall furnish the return for the assessment year 2013/14 and subsequent assessment years", the Central Board of Direct Taxes said in a notification. Thus, a non-resident claiming relief under Double Taxation Avoidance Agreement, is mandatorily required to file its return even if the income is exempt.
- Although the Act states that the section mandating the filing of income tax return is merely a machinery section and would apply only where the transaction entered by the foreign assessee is liable to be taxed in India, a completely different view was taken in the Advance Ruling of VNU International B.V., wherein the Authority for Advance Ruling (AAR) held that a "company (including a foreign company) is required to file a return regardless of whether it earns income or incurs a loss."
- In the said case, the assessee applicant earned a capital gain by transfer of shares of an Indian company, which was exempt due to India-Netherlands Tax Treaty. The question was whether it was bound to file a return in the absence of any taxable income earned.
- The Authority of Advance Ruling held that even if the capital gain is not taxable in India, then also the assessee is required to file a return.
- Thus, this case law has further burdened all foreign companies and those receiving consideration from India, either in the form of reimbursement or any income, are required to report it through return filing. Also, if any assessee is availing the benefit of tax treaty entered by India with any country, then also reporting requirement is there.
It should be filed on or before the below-mentioned dates, from the closure of the relevant financial year:Particulars Due Date
Non-corporate Assessee July 31
Assessee is a company, not having any international and/or domestic specified transaction September 30
Assessee is a company and is required to furnish a report under section 92E November 30
Consequences of non-filing of returns
Any income tax return filed after the due date may attract:
Interest charges at a rate of 1 per cent for each month or part of a month for which a return is filed late; however, this would only be attracted if there is any outstanding tax liability.
A further penalty of Rs 5,000 can be levied by the concerned assessing officer if ITR is not filed till the end of the relevant assessment year.
In case tax has been evaded for concealment of income, a penalty can be imposed at a rate of 100-300 per cent.
In case the assessee does not file the return at all, he/she can be assessed under the best judgement assessment, along with the interest, penalty and prosecution charges.
Transfer Pricing Certification (Form 3CEB)
- Provisions with respect to Transfer Pricing Certification state that every person, who has entered into an international transaction (or specified domestic transaction) during a previous year, shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant, setting forth such particulars as may be prescribed.
- Most of the Indian companies, which are having any transaction with their foreign parent companies or related parties, are statutorily filing accountants' reports and certificates with the concerned departments.
- As these provisions apply to foreign companies as well, the provisions are equally applicable to foreign entities having international transactions with their associated enterprises.
Thus, any foreign entity, which has carried out a related-party transaction with any Indian conglomerate, would need to get a transfer pricing report prepared for the foreign company in lieu of the applicability of the filing section (Form 3CEB) on foreign companies.
Due date for filing Form CEB is November 30 of the relevant assessment year.
Consequences of non-filing of Form 3CEB:
Failure to furnish report under section 92E might attract a penalty of Rs 100,000.
Failure to furnish information or document about international transactions or specified domestic transactions under section 92D might attract a penalty equivalent to 2 per cent of the value of the transaction.
Failure to keep and maintain information and document, failure to report or furnishing inaccurate information might attract a penalty equivalent to 2 per cent of the value of the transaction.
Although most of the provisions and the penal provisions have been existent for many years, most of the foreign companies did not follow the return filing procedures due to the presumption that their responsibility ends if the tax has been deducted in India. The Indian revenue authorities have become very aggressive on this and have been issuing notices to such foreign companies. Ways and means are being identified to strengthen the revenue authority's database so that notices can be issued directly to the relevant entities.
Kapil Nayyar is Partner, International Business Advisors.