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.
Source: A.A.R. No.727 OF 2006, Vanenburg Group B.V. Vanenburgerallee13, 3882