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April 19, 2007
Foreign
Companies not required to file tax returns in
India
if found not taxable in
India
In
a recent ruling, the Authority for Advance Rulings (“Authority”)
found that in the absence of a liability to tax in India due to
the availability of tax treaty benefits, the non-resident assessee
would not be required either to file a tax return in India or to
comply with Indian transfer pricing regulations.
In
its application before the Authority, M/s Vanenburg Group B.V.
(“Applicant”) had
sought to determine the Indian tax impact on
the transfer of an Indian company’s shares in a group
reorganization
exercise. The Applicant, a Dutch tax resident, was transferring
its shareholding in its wholly owned Indian subsidiary to its
wholly owned Dutch subsidiary.
Under
the Indian Income Tax Act, 1961 (“ITA”),
the transfer of an Indian company’s shares, even between
two non-residents, would trigger a liability to Indian capital
gains tax. However, under the India -
Netherlands tax treaty (“Treaty”),
the transfer of shares by a Dutch resident would be taxable only
in the Netherlands and not in India, where
the transfer takes
place as a part of reorganization or where the shares are
transferred to a non-resident of India. The
provisions of the Treaty being more beneficial to the Applicant
than those of the ITA, it was found that the same would prevail
over the ITA. Hence, the Authority concluded that the Applicant
had no liability to tax in India on account of the transfer of the
Indian company’s
shares.
Importantly,
the Authority also found that in the absence of a liability to tax
in India on account of relief provided by the Treaty, there would
be no liability to withhold tax in India, and the provisions of
section 139 of the ITA governing the filing of tax returns would also not
apply. It was held that the said sections were only machinery provisions,
and in the absence of a liability to tax, the machinery provision
would not come into play.
The Authority also held that where there was no liability to tax
in India, the transfer of the shares of the Indian company in
question would not be subject to the Indian transfer pricing
regulations.
This ruling is of significance to non-residents who have no
liability to tax in India because of Treaty
benefits, but who continue to file 'Nil'
returns in India, which in some cases are required to be
accompanied by audited accounts. In
past, the Authority has pronounced rulings to the effect that
foreign companies should in any case file a tax return and claim exemption under
the tax treaty. Dispensing of the requirement to file
an Indian tax return may relieve many non-residents of the
cumbersome requirement to maintain separate accounts for Indian
operations.
The
advance rulings are binding only on the Applicant and Tax
Authorities with respect to the transaction undertaken by the
applicant. However they do have persuasive value for other
transactions.
Source:
A.A.R.
No.727 OF 2006,
Vanenburg
Group B.V. Vanenburgerallee13, 3882
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