Provisions relating to filing of return of income are contained in section 139 of the Income-tax Act. As per section 139(1) a company is mandatorily required to file its return of income irrespective of the fact whether the company earns any income or not. A company incorporated outside India, i.e. a foreign company, is also covered within the definition of a "company" as defined in section 2(17) of the Income-tax Act.
The aforesaid provisions lead to a question as to whether a foreign company is required to file its return of Indian income in India even if the income earned by the foreign company is not liable to tax in India.
The above question has been raised before the Authority for Advance Rulings (AAR) in number of cases. The Hon'ble AAR in the case of Vanenburg Group B.V., [289 ITR 464] held that Section 139 and other sections are merely machinery provisions to determine the amount of tax. There would be no occasion to call a machinery section in aid where there is no liability at all". Therefore, when there is no taxable income, a foreign company is not required to file its return in India.
Recently, the question as regards filing of return of income again came up for consideration before the Authority in the case of VNU Internation B.V. The following question was raised before the Authority:
"On the facts and circumstances of the case, if the capital gain is not taxable in India, whether the applicant is required to file any return of income under section 139 of the Act."
The Ld. CIT appearing for revenue urged that for the purpose of determining the requirement of filing of return of income "first step to proceed is to see whether a particular source of income is taxable in India. If that particular source of income is also taxable in the other country, then the second step is to see whether there is a compromise between tax claims of the two concerned governments. The relief by way of compromise is then achieved by referring to DTAA." In simple terms, the Ld. CIT argued that if the income earned by the foreign company is chargeable to tax as per Income-tax Act, although no tax is actually payable under the DTAA, filing of return of income in India is mandatory.
On the other hand, the Ld. Counsel for the applicant submitted that "section 139(1) of the Act is merely a machinery section and would apply only where the transaction entered into by the foreign assessee is liable to be taxed in India". In this regard he placed reliance on the earlier decisions of the Authority in the case of Vebenburg Group BV [289 ITR 464], Dana Corporation [321 ITR 178], Amiantit Intl Holding Ltd. [322 ITR 678].
The authority vide its order dated 28.03.2011 observed that "in a case where, there is a liability to tax under the Income-tax Act and that liability is removed only by virtue of the provision in the Treaty, we think it proper to re-examine the question".
In view of the above, the authority ruled that the applicant is required to file its return of income in India despite its income not being liable to tax in India.
The Authority has clearly dissented from its own earlier decisions. However, it is unfortunate that no cogent reason has been given by the Authority for a dissenting decision. The observation of the authority that "A ruling under the Act is confined to the facts projected in the application leading to the ruling and binding only on that party and the Revenue" by implication means that the Authority is itself undermining its own decisions given earlier. This can hardly be called a healthy judicial practice.
With utmost respect the decision of the Hon'ble AAR requires a review because the said decision completely upsets the principle followed in large number of settled cases.
H.P.Agrawal (Author is a Sr. Partner in S.S. Kothari Mehta & Co.)