Companies
engaged in international transactions play a significant role in India's global
economy. As per the Income Tax Act of India, these companies are required to
file a comprehensive tax return that accurately reflects their international
dealings. This article provides an overview of the company tax return process
for entities involved in international transactions within India, highlighting
key considerations and obligations.
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. Understanding
International Transactions
International
transactions encompass various business activities conducted between two or
more countries, including cross-border sales, purchases, provision of services,
loans, royalty payments, and more. These transactions give rise to tax
implications for the involved entities and necessitate proper reporting and
compliance with tax regulations.
Applicability
and Legal Framework
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.
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. 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, 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
Companies
undertaking international transactions in India are obligated to file their tax
returns in accordance with the provisions of the Indian Income Tax Act, 1961.
The tax return filing requirements for such companies are governed by the
provisions of Transfer Pricing regulations and the guidelines issued by the
Central Board of Direct Taxes (CBDT).
Transfer
Pricing
Transfer
Pricing refers to the pricing of international transactions between related
parties, such as parent companies, subsidiaries, or associated enterprises. The
Indian Income Tax Act mandates that these transactions should be conducted at
an arm's length price, which is the price that would be agreed upon between
unrelated parties in similar circumstances.
Documentation
Requirements
Companies
with international transactions must maintain detailed documentation to
substantiate the arm's length nature of their transactions. This documentation,
known as Transfer Pricing Documentation, includes a Master File, Local File,
and Country-by-Country Report. These documents provide relevant financial and
operational information about the company, its international transactions, and
the adopted transfer pricing methodologies
Tax Return
Filing Obligations
Companies
with international transactions in India are required to file their tax returns
electronically, using the prescribed forms and within the specified due dates.
The most commonly used form for filing corporate tax returns is the Form ITR-6.
The tax return must accurately disclose the company's income, expenses,
profits, taxes paid, and details of international transactions.
Transfer
Pricing Reporting
In addition
to the tax return, companies with international transactions are required to
submit a Transfer Pricing Report (TPR). The TPR provides a detailed analysis of
the company's international transactions, the methodologies employed,
comparable data used for benchmarking, and the determination of the arm's
length price.
Audit and
Penalties
The two main laws that govern and prescribe the rules for
NRIs in India are as follows: Income Tax Act - Governs the tax liabilities of NRIs. Foreign Exchange and Management Act (FEMA) - Governs all
transactions and investments, the opening of bank accounts, etc., of NRIs .The definition of NRI is different under these acts. In this
article, we have covered the definition of NRIs under the Income Tax Act, 1961. The tax
authorities in India conduct Transfer Pricing Audits to ensure compliance with
the arm's length principle and other transfer pricing regulations.
Non-compliance or incorrect reporting can result in penalties, transfer pricing
adjustments, and potentially increased tax liabilities. Therefore, it is
crucial for companies to maintain accurate documentation and ensure compliance
with the prescribed regulations.
Conclusion
Filing a
company tax return for entities involved in international transactions in India
involves adherence to Transfer Pricing regulations and compliance with the
Income Tax Act. It requires companies to maintain comprehensive documentation,
accurately report their income and expenses, and submit a Transfer Pricing
Report. Non-compliance can lead to penalties and increased tax liabilities. By
understanding the obligations and following the prescribed guidelines,
companies can ensure proper compliance and avoid potential penalties or adverse
consequences.
Created & Posted By Suraj kumar
Accountant at TAXAJ
TAXAJ is a consortium of CA, CS, Advocates & Professionals from specific fields to provide you a One Stop Solution for all your Business, Financial, Taxation & Legal Matters under One Roof. Some of them are: Launch Your Start-Up Company/Business, Trademark & Brand Registration, Digital Marketing, E-Stamp Paper Online, Closure of Business, Legal Services, Payroll Services, etc. For any further queries related to this or anything else visit TAXAJ
TAXAJ Corporate Services LLP
Address: 1/11, 1st Floor, Sulahkul Vihar, Old Palam Road, Dwarka, Delhi-110078
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