[Opinion] Stumpers in Section 115A for Non-residents

CMA Raji Nathani & CA Gopal Nathani – [2024] 158 taxmann.com 34 (Article)

Non–residents’ payment – a tight rope procedure

Those who have certain incomes in the nature of interest,dividends, royalties and fees for technical services and to earn them they do not have to set up a shop or establishment in India have something to rejoice for because in their case there is no return filing obligations if taxes as applicable u/s 115A of the Indian Income TaxAct, 1961 are being withheld on such amounts at the time of payments by the person responsible for making such payments. The primary duty is cast upon the deductor to follow due procedure as he is obliged under the law to follow in procuring set of documents comprising of agreements, invoices, TRC, NO PE declaration and Form 10F and thereupon also obtain a certificate from the practicing Chartered Accountant in Form 15CB of the rate applicable u/s 115A considering the relief available under the Double Taxation Avoidance Agreement. Besides the deductor is required to provide a self-declaration and undertaking to own up for any shortfalls etc. On top of it the deductor is required to provide information of each such payments at the income tax portal on real time basis. This large an exercise is required to make up for the relaxation given to the non-residents.

Income tax return filing rigmarole

Section 139 (1) of the Indian Income Tax Act, 1961 cast a tax filing burden upon a company or a firm as well as upon every other person if his total income in respect of which he is assessable under this Act during the previous year exceed the threshold or the maximum amount which is not chargeable to income-tax. And this compliance is required irrespective of the status of such persons whether resident or non-residents or not ordinarily residents.

Filing of income tax returns is like getting into a second courtship. It is a rigmarole and juggle-puzzle that can lead to great amount of stress upon foreign taxpayer and undue harassment due to faceless culture. Filing a return even when there is an exemption available under the Act can be both regretful and dreadful.

In Nestle SA v. Asstt. (International Taxation) [2019] 108 taxmann.com 237/417 ITR 213 (Delhi) as regards the non-filing of return of income by the foreign company it was stated that the assessee’s income from India consisted only of dividend and interest on which tax had been deducted at source in accordance with the Act or the Double Taxation Avoidance Agreement between India and Switzerland and that the assessee was specifically exempted from filing the return under section 115A(5). The matter went to High Court where it claimed that that there was no obligation on the petitioner to file a return of income for the assessment year in question and his mere forced upon filing a return in response to S. 148 notice could not have been construed as an admission by it of a legal obligation to file a return.Noting this fact, the High Court ultimately quashed the notice u/s148 for reopening.

Thus it is better not to venture into filing like this unless there is a proper advice and opinion in hand. It is always better to say NO requirement than to file and regret later.

Section 115A (5) relaxation unplugged

Chapter XII of the Act provide for determination of tax in certain cases. Section 115A under this Chapter provide for determination of tax on dividends, interest, royalty and technical service fees in the case ofa non-resident (not being a company) or of a foreign company.It provides for the determination of tax for a non-resident whose total income consists of:

(a) certain dividend or interest income;

(b) royalty or fees for technical services (FTS) received from the Government or Indian concern in pursuance of an agreement made after 31st March 1976, and which is not effectively connected with a PE, if any, of the non-resident in India.

Section 115A when read along with section 90 affords twin relaxation. One on account of lower than prescribed rate of tax in sub-section (1) and in the second for exemption on account of legal obligation to file return of income u/s 139(1). It provides that

• a non-resident is not required to furnish its return of income under sub-section (1) of section 139 of the Act, if its total income, consists only of certain dividend or interest income, royalty or fees for technical services (FTS) and
• the TDS on such income has been deducted under the provisions of Chapter XVII-B of the Act at the rates which are not lower than the prescribed rates under sub-section (1) of section 115A.

In the context of cross border incomes India has Double Taxation Avoidance Agreement with other countries to regulate taxation of incomes of residents of such countries who meet the tests of non-residents under section 6 and section 90 of the Income Tax Act, 1961. Section 90 of the Income tax in this regard further provides that the provisions of Income Tax Act, 1961 shall come into application in the case of such non-residents only to the extent they are more beneficial to the double taxation avoidance agreements entered by India. Without a DTAA, they could face the double whammy of paying taxes in both countries on the same income.

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