The obligation to file a return of income under the Income -tax Act, 1961 arises by virtue of section 139 of that Act. Section 139(1) provides that every person, being a company or a firm, or being a person other than a company or a firm, having total income exceeding the maximum amount not chargeable to income tax during the previous year, shall file a return of income in the prescribed manner. The provisos to this s/s. and s/s.s (4A) to (4F) of this section, require filing of returns of income by various entities, even where these entities’ income may not be chargeable to tax.
The 3rd proviso to section 139(1) provides that every company or firm shall furnish its return of income or loss before the due date in every previous year. The 4th proviso further requires every person, who is resident and ordinarily resident and who otherwise is not required to furnish a return of income, and who holds any foreign asset as a beneficial owner or otherwise, or who is a beneficiary of any foreign asset, to file a return of income. Sub-section (4A) applies to charitable or religious institutions claiming exemption u/s.s 11 and 12, s/s. (4B) applies to political parties, s/s. (4C) applies to research associations, news agencies, profession regulatory bodies, educational institutions, hospitals, mutual funds, securitisation trusts, venture capital funds, trade unions, infrastructure debt funds, etc., s/s. (4D) applies to research organisations, s/s. (4E) applies to real estate investment trusts and infrastructure investment trusts, while s/s. (4F) applies to alternative investment funds.
A foreign company may at times have income which is chargeable to tax in India under the provisions of the Act, but which may be exempt from tax by virtue of the provisions of a Double Taxation Avoidance Agreement (“DTAA”). The issue has arisen before the Authority for Advance Rulings (“AAR”) as to whether such a foreign company, whose entire Indian income is not taxable in India by virtue of a DTAA, is required to file its return of income in India. There have been conflicting rulings of the AAR on this issue, at times holding that there is no such obligation to file a return of income in India, while at times holding that a return of income has necessarily to be filed in India by a foreign company, irrespective of the fact that its income is not liable to tax in India.
Castleton Investment Ltd ’s case
The issue had arisen before the AAR in the case of Castleton Investment Ltd, in re, 348 ITR 537.
In this case, the assessee was a Mauritius company, part of a multinational group, which held shares of a listed company in India, amounting to 3.77% of the paid-up capital of the listed company. As a part of the reorganisation of the group structure, it proposed to transfer the shares held by it in the listed company in India to another group company based in Singapore, either through a transaction on a recognised stock exchange on which the shares were listed, or through an off market sale.
It filed an application for a ruling before the AAR, as to whether the capital gains arising from transfer of the shares of the listed company would be subjected to tax in India, or whether such capital gains would be exempt from tax by virtue of paragraph 4 of Article 13 of the India Mauritius DTAA . It also raised the question as to whether the provisions of section 115JB, relating to Minimum Alternate Tax (MAT) was applicable to it. One of the other questions raised by it in the application was that if the transfer of shares of the listed company was not taxable in India, whether it was required to file any return of income u/s. 139.
The authority held that the capital gains arising to the assessee was not chargeable to tax in India by virtue of paragraph 4 of Article 13 of the DTAA between India and Mauritius. As regards the issue of whether the assessee was under an obligation to file the return of income, it was argued on behalf of the assessee that since the income was not taxable in India under the Act read with the DTAA, there was no obligation on the assessee to file a return of income u/s. 139. On behalf of the revenue, it was argued that whatever may be the position under the DTAA , the applicant was bound to file a return of income as mandated by section 139.
The AAR, analysing the provisions of section 139, observed that every person, being a company, firm or a person other than a company or firm, had to file a return of income if its/his total income exceeded the maximum amount which was not chargeable to income tax. If an assessee had income which was chargeable under the Act, or after claiming the benefit of a DTAA, if it had chargeable income exceeding the maximum amount not chargeable to tax, it was bound to file a return as per the language of section 139.
The Authority observed that a person claiming the benefit of the DTAA could do so by invoking the provisions of section 90(2) of the Income-tax Act to claim such benefit. In other words, a person earning an income that was otherwise chargeable to tax under the Act had to make a claim by invoking section 90(2) of the Act for getting the benefit of a DTAA in order to enable him to be not liable to payment of tax in India. According to the AAR, even if a person was entitled to a relief under the DTAA , he had to seek it, and that would be during the consideration of his return of income or at best, while filing the return of income. The AAR accordingly was of the view that the obligation u/s. 139 did not simply disappear merely because a person was entitled to claim the benefit of a DTAA.
Addressing the argument that a DTAA overrides the Act, and was not the same as claiming an exemption under the Act, the AAR observed that surely, in terms of section 90(2), it had to be shown that the benefit of a DTAA was being claimed, that the claimant was eligible to make that claim, and that the DTAA was more beneficial to the claimant than the Act. According to the AAR, that had to be shown before the assessing authority, and this emphasised the need to file a return of income to claim such a relief. The AAR therefore held that the assessee had an obligation to file a return of income in terms of section 139. Incidentally, in this case, the AAR also held that the provisions of section 115JB relating to MAT on book profits, applied to the assessee.
A similar view had been taken by the AAR in the cases of VNU International BV, in re 334 ITR 56, SmithKline Beecham Port Louis Ltd., in re 348 ITR 556, ABC International Inc., in re 199 Taxman 211, and XYZ/ABC Equity Fund, in re 250 ITR 194, in all of which cases, the income was taxable in India under the Act, but exempt under the DTAA . In XYZ/ABC Equity Fund’s case, a case where business profits earned in India were held not liable under the DTAA in absence of a permanent establishment in India, a view has been taken that:
“‘Total income’ is to be computed in accordance with the provisions of the Income-tax Act. According to section 5, total income of a non-resident includes all income from whatever source derived which is received or is deemed to be received in India in a given year or accrues or arises or is deemed to accrue or arise to the non-resident in India during such year. Therefore, if the income received by or on behalf of the non-resident exceeds the maximum amount which is not chargeable to income-tax, a return of income has to be filed. It may be that in the final computation after all deductions and exemptions are allowed, it will turn out that the assessee will be not liable to pay any tax. The exemptions and deductions cannot be taken by the assessee on his own. He is obliged to file his return showing his income and claiming the deductions and exemptions. It is for the Assessing Officer to decide whether such deductions and exemptions are permissible or allowable. The assessee cannot be allowed to pre-judge the issues and decide for himself not to file the return, if he is of the view that he will not have any taxable income at all.”
Even in the case of Deere & Co, in re 337 ITR 277 (AAR), where the transaction of gift of shares to another group company was not chargeable to capital gains tax at all even under the Act, as well as under the DTAA , the AAR has taken the view that the assessee was under an obligation to file its return of income, following its earlier rulings.
FactSet Research System’s case
The issue had also come up before the AAR in the case of FactSet Research Systems Inc, in re 317 ITR 169.
In this case, the assessee was a US company, which maintained a database of financial and economic information, including fundamental data of a large number of companies worldwide, at its data centres located in the USA. The databases contained the published information collated, stored and displayed in an organised manner, which facilitated retrieval of publicly available information in a shorter span of time and in a focused manner by its customers, who were mostly financial intermediaries and investment banks. The customers paid a subscription to access the database.
Besides seeking a ruling from AAR as to whether such subscription received from customers in India would be taxable in India under the Income-tax Act or under the DTAA between India and the USA, the assessee also raised the question of whether it was absolved from filing a tax return in India under the provisions of section 139 with regard to the subscription fees, assuming that it had no other taxable income in India.
The AAR held that the payment of the subscription fees did not constitute royalty either under the Act [as it then stood before the retrospective amendment to section 9(1)(vi)] or under the India USA DTAA. While examining whether the subscription fees was taxable as business income under the DTAA , the AAR took note of the assessee’s submissions that the Mumbai office of a group subsidiary provided marketing and support services to its customers in India, but that, after initial discussions with the prospective customers, the contract was signed by the customer and by the assessee, and that the Mumbai office did not have the authority to conclude contracts with customers. The AAR accepted the assessee’s submission, but left it open to the Department to make enquiry as to the existence or otherwise of an agency PE, and as to the attribution of income to such PE.
As regards the question of obligation to file a return of income, based on its finding that there was no royalty income and on the facts stated by the assessee that there was no PE in India, the AAR held that there was no obligation on the assessee to file the return of income in India.
A similar view had been taken by the AAR in the case of Venenburg Group BV, in re (2007) 289 ITR 462, where the AAR observed that the liability to pay tax was founded upon sections 4 and 5 of the Act, which were the charging sections. Section 139 and other sections were merely machinery sections to determine the amount of tax. According to the AAR, relying on the decision in the case of Chatturam vs. CIT (1947) 15 ITR 302, there would be no occasion to call a machinery section to one’s aid, where there was no liability at all. Therefore, the assessee was not required to file any tax returns, though the capital gains from the proposed transaction would be chargeable to tax under the Act, but would be exempt under the DTAA .
Observations
Section 139(1) requires a filing of return of income by a person other than a company or a firm if income exceeds the maximum amount which is not chargeable to income tax. Clause(a) provides for filing of return of income by a company or a firm and in doing so does not expressly limit the requirement to the cases of income exceeding the maximum amount not chargeable to tax. This may be on account of the fact that a company or a firm does not have any maximum amount which is not chargeable to income tax, since it is liable to pay tax on its entire chargeable income at a flat rate of tax.
The definition of “company” u/s. 2(17) includes a body corporate incorporated by or under the laws of the country outside India and a foreign company would be subjected to the provisions of the Act provided its activities has some connection with India. Obviously, every company in the world cannot be required to file its return of income in India, if it does not have any source of income in India keeping in mind the fact that the scope of the Act as envisaged in section 1(2) is restricted to India and the intention is to charge income, which has some connection with India.
Section 5 of the Act in a way spells out the connection with India which creates a charge to tax, when read with section 4. For a non-resident, the charge to tax is of income received or deemed to be received in India, or income accruing or arising or deemed to accrue or arise in India.
Section 90(2) of the Act spells out the overriding nature of DTAA s. It provides that where a DTAA has been entered into by the Central Government with the Government of any country outside India for granting relief of tax or avoidance of double taxation, in case of an assessee to whom the DTAA applies, the provisions of the Act will apply to the extent that they are more beneficial to the assessee. Therefore, the provisions of the DTAA or the Act, whichever is more beneficial to the assessee, would apply. The DTAA would therefore override all the provisions of the Act, except chapter X-A relating to General Anti-Avoidance Rules, as provided in section 90(2A).
It must be remembered that the charge to tax u/s. 4 is on the total income, and the total income is computed under the Act, after various exemptions and deductions, including those available under the DTAA . If income of an assessee is completely exempt from tax, there is no charge to tax at all. Similarly, if the income does not accrue or arise or is not deemed to accrue or arise or is not received or deem to be received in India, it does not fall within the scope of total income, and there is no charge to tax of such income. Given the fact that there is no charge to tax, can the other machinery provisions relating to filing of return, computation of tax, etc. apply?
The AAR in Venenburg Group’s case (supra) rightly referred to the decision of in Chatturam’s case. In that case, the assessee was a resident of a partially excluded area, and received a notice to furnish his return of income. His assessment was completed, and his appeals to the tribunal were dismissed. A notification was issued after he had filed his return, but before completion of his assessment, directing that certain income tax laws would apply to that area where the assessee was a resident retrospectively. The Court, while holding that the assessments were validly made on the assessee, observed as under:
“The income-tax assessment proceedings commence with the issue of a notice. The issue or receipt of a notice is not, however, the foundation of the jurisdiction of the Income-tax Officer to make the assessment or of the liability of the assessees to pay the tax. It may be urged that the issue and service of a notice under Section 22(1) or (2) may affect the liability under the penal clauses which provide for failure to act as required by the notice. The jurisdiction to assess and the liability to pay the tax, however, are not conditional on the validity of the notice. Suppose a person, even before a notice is published in the papers under Section 22(1), or before he receives a notice under Section 22(2) of the Income-tax Act, gets a form of return from the Income-tax Office and submits his return, it will be futile to contend that the Income-tax Officer is not entitled to assess the party or that the party is not liable to pay any tax because a notice had not been issued to him 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 etc are the machinery sections to determine the amount of tax. Lord Dunedin in Whitney v. Commissioners of Inland Revenue [1926] AC 37; 10 Tax Cas 88 stated as follows:—”Now, there are” three stages in the imposition of a tax. There is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment, that ex hypothesi has already been fixed. But assessment particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery if the person taxed does not voluntarily pay”. In W.H. Cockerline & Co. v. Commissioners of Inland Revenue [1930] 16 Tax Cas 1, at p. 19, Lord Hanworth, M.R., after accepting the passage from Lord Dunedin’s judgment quoted above, observed as follows:—”Lord Dunedin, speaking, of course, with accuracy as to these taxes was not unmindful of the fact that it is the duty of the subject to whom a notice is given to render a return in order to enable the Crown to make an assessment upon him; but the charge is made in consequence of the Act, upon the subject; the assessment is only for the purpose of quantifying it He quoted with approval the following passage from the judgment of Sargant, L.J., in the case of Williams Not reported: —” I cannot see that the non-assessment prevents the incidence of the liability, though the amount of the deduction is not ascertained until assessment. The liability is imposed by the charging section, namely, Section 38 (of the English Act) the words of which are clear. The subsequent provisions as to assessment and so on are machinery only. They enable the liability to be quantified, and when quantified to be enforced against the subject, but the liability is definitely and finally created by the charging section and all the material for ascertaining it are available immediately”. In Attorney-General v. Aramayo and Others [1925] 9 Tax Cas 445, it was held by the whole Court that there may be a waiver as to the machinery of taxation which inures against the subject. In India these well-considered pronouncements are accepted without reservation as laying down the true principles of taxation under the Income-tax Act.”
These observations of the Court, when applied to provisions of section 139, clarifies that the machinery provisions cannot be divorced from the charging provisions.
There are various persons whose income is exempt from tax, and which were earlier not required to file a return of income u/s. 139, on account of the fact that the total income was exempt from tax. Wherever the legislature thought fit that such persons should file their returns of income, the law has been amended by insertion of various sub-sections to section 139, from time to time, being s/s.s (4A) to (4F) referred to earlier. There has been no such amendment requiring foreign companies whose total income is exempt under a DTAA to file their returns of income, in spite of the fact that the AAR has held as far back as 2007 that foreign companies need not do so.
As regards the argument that the availability of the exemption under the DTAA needs to be examined, and therefore the return of income needs to be filed, taking the argument to its logical conclusion, can one say that every agriculturist in India is required to file his return of income, even though he has only agricultural income, on account of the fact that, whether his income is agricultural or not and whether the exemption u/s. 10(1) is available or not, needs to be examined by the assessing officer?
Interestingly, this aspect of examination of the availability of exemption has also been a matter of controversy between the High Courts in the context of assessees exempt u/s. 10(22), with the Bombay High Court holding, in the case of DIT(E) vs. Malad Jain Yuvak Mandal Medical Centre (2001) 250 ITR 488, that the return of income was required to be filed for such examination of whether exemption was available, and the Delhi High Court, in the case of DIT(E) vs. All India Personality Enhancement & Cultural Centre For Scholars Aipeccs Society 379 ITR 464, holding that there was no such requirement to file return of income if the income was exempt u/s. 10(22).
A DTAA cannot be read in exclusion, but has to be read in conjunction with the Act. In particular, a DTAA does not create a charge to tax, but modifies the charge to tax created by the Act. The fact that DTAAs override the Act implies that, by virtue of the provisions of a DTAA , an income which would otherwise have been chargeable to tax under the Act, may not be chargeable to tax on account of the beneficial provisions of the DTAA. In such a case, one cannot take the view that the income is chargeable to tax in India under the Act, even though it is exempt from tax, since the DTAA takes such income outside the purview of sections 4 and 5 of the Act.
Given this background, the liability to file returns by a foreign company can perhaps be viewed by looking at the different possible situations relating to tax liability of a foreign company in India.
The first would be a situation where the income is chargeable to tax under the Act, as well as under the DTAA . In such a case, there is no doubt that the foreign company is liable to file its income tax return in India.
The second would be a situation where the income is exempt under the Act, as well as under the DTAA. In such a case, since even under the Act, there is no income chargeable to tax, the machinery section, section 139, cannot be brought into play, since it would serve no purpose. Therefore, in such a case, there would be no obligation to file the return of income in India.
The third will be the situation where the income is chargeable to tax under the provisions of the Act, but is exempt from tax by virtue of the DTAA beneficial provisions. In such a case, as discussed above, the better view would be that there is again no obligation to file the return of income in India, in the absence of a specific provision containing such requirement.
The fourth will be the situation where the foreign company has no activity in India and its income cannot be taxed in India under the Act and therefore, it is under no obligation at all to file its return of income under the Act, in India.
