A Foreign Company connects with India through various commercial transactions such as having a project office/ Branch Office/ Liaison Office in India, Making Foreign Direct Investment in Indian entities, setting up a Wholly owned Subsidiary in India, provisions of services to Indian Residents, etc.
So, an obvious question arises is whether such foreign entity is required to obtain PAN in India and whether such foreign company is required to file ITR in India. This question is dealt by Section 139A and Section 139 of Income Tax Act which provides provisions related to PAN and Filing of ITR.
This article discusses the detailed provisions related to the requirement of having a PAN and Filing of ITR in India by foreign companies.
1. Requirement of Having PAN in India
- As per Section 139A(1) of Income Tax Act, 1961, a company is required is mandatorily required to apply for allotment of PAN if:
- Its total Income exceeds the maximum amount which is not chargeable to tax;
- It carries on business or profession where total sale, turnover or gross receipts is likely to exceed INR 5 Lacs;
- It, being a resident, enters into a financial transaction of an amount aggregating to INR 2,50,000 or more in a financial year;
- Further, as per Section 139(5) of Income Tax Act, every person is required to quote PAN allotted to him:
- While filing his return of Income with Income Tax Authority;
- In all challans for the payment under Income Tax Act;
- Documents pertaining to such transaction as may by prescribed by the board.
- In terms of power given under Section 139(5) of Income Tax Act, the Board has specified various transactions where a person is mandatorily required to quote PAN under Rule 114B of Income Tax Rules.
- Relevant extract of Rule 114B, relevant for foreign companies, is as follows wherein foreign companies are mandatorily required to quote their PAN:
- Payment made to Company or an institution for acquiring debentures or bonds issued by it for amount exceeding INR 50,000
- Opening a bank account, other than time deposit and basic saving account, with a banking company or a co-operative bank
- While filing application for issuance of debit or credit card;
- Sale or purchase of shares of any company which is not listed on recognised stock exchange of an amount exceed INR 1,00,000
- Accordingly, if a foreign company carries out any of the transactions where it is required to specify PAN or is covered under any of the point of Section 139A(1) then foreign company is mandatorily required to obtain PAN.
- Therefore, if a foreign company acquires shares of any unlisted company of an amount exceeding INR 1,00,000 then such foreign company is mandatorily required to obtain PAN even if it has no obligation of filing ITR in Indian.
2. Issues where PAN is required to be obtained due to practical difficulties
- Income Tax Act provides various situations where a foreign company is mandatorily required to obtain PAN. However, there are various situations where PAN is not required as per Law, however, same is required due to practical compliances such as PAN for filing Form 10F for claiming benefit of Form 10F.
- As per Section 90 and 90A of Income Tax, a non-resident person is not required to get TDS deducted on his Indian Income if he is not required to pay tax on such income as per DTAA.
- However, for this purpose, non-resident entities are required to file Form 10F alongwith Tax residency certificate with his jurisdictional Assessing Officer.
- TIll 30th September, 2023, non-resident entities were having the option to file Form 10F manually.
- However, with effect from 01.10.2023, Form 10F is mandatorily required to be filed online on Income Tax portal.
- A person can login at Income Tax Portal with his PAN and Password only.
- Therefore, even if foreign entities are not required to obtain PAN as per Income Tax Act but same is required for filing of Form 10F.
3. Exemptions from obtaining PAN
Rule 114AAB of Income Tax Rules specifies the class of persons who are not required to obtain PAN. Rule 114AAB(2) is applicable to foreign companies which is as follows:
- As per Rule 114AAB(2) of Income Tax Rules, The provisions of section 139A shall not apply to a non-resident, being an eligible foreign investor, who has made transaction only in a capital asset referred to in Section 47(viiab) which are listed on a recognised stock exchange located in any International Financial Services Centre and the consideration on transfer of such capital asset is paid or payable in foreign currency.
- “eligible foreign investor” means a non-resident who operates in accordance with the Securities and Exchange Board of India, circular IMD/HO/FPIC/CIR/P/2017/003 dated 04th January, 2017
- Capital Asset covered under Section 47(viiab) are bond or Global Depository Receipt referred to Section 115AC(1) or rupee denominated bond of an Indian company or derivative made by a non-resident on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency.
- Such Exemption shall be available only if following conditions are fulfilled, namely:—
- Investor does not earn any income in India, other than the income from transfer of a such capital asset;
- Investor furnishes the following details and documents to the stock broker through which the transaction is made namely:
- Name, email id and contact Number;
- address in the country or specified territory outside India of which he is a resident;
- a declaration that he is a resident of a country or specified territory outside India
- Tax Identification Number or specific unique number in the country or specified territory of his residence
4. Filing of Income tax return by Foreign Companies
- After having a PAN, the question arises is whether such a company is required to file ITR in India?
- As per Section 139(1) of Income Tax Act, following persons are required to furnish ITR before the due date:
- A Company or Firm;
- A person, other than a company or a firm, if his total income during the previous year exceeded the maximum amount which is not chargeable to income-tax
- Therefore, Individual or HUF are required to furnish ITR only if they are liable to make payment of tax, i.e, there taxable income exceeds the exemption threshold.
- Whereas, Companies and firms are required to furnish ITR irrespective of their Income.
- Companies are defined as the companies Incorporated under Companies Act, 2013 including foreign companies.
- As per Section 2(42) of Companies Act, 2013 “foreign company” means any company or body corporate incorporated outside India which—
- has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
- conducts any business activity in India in any other manner.
- Considering the provisions of companies Act and Income Tax Act, following are the snarious of ITR filing by foreign companies:
a. Company which made FDI in India
- Companies, incorporated outside India, making FDI in India are not considered as Foreign Company as it does not have any branch office or agent in India. Therefore, it does not qualify the criteria of foreign company given under Companies Act.
- Therefore, these companies are required to have PAN for disclosure purpose and not required to file ITR unless they have any taxable Income in India
- A USA based Company made FDI of 1 Crores in India. Such a company has not received any dividend income during the year.
- Such USA based companies are required to obtain PAN in India due to disclosure requirements.
- However, since companies incorporated outside India, without having any branch office in India, are not “Foreign Companies” Therefore, they are not required to file ITR
b. Companies having Branch office/ Project Office/ Liaison office in India
- Since these companies are having a place of business in India therefore, they are considered as “Foreign Companies” under Companies Act..
- Accordingly, the foreign company is required to file ITR of such BO/PO/LO irrespective of its income.
c. Setting up Wholly Owned Subsidiary (WOS) in India
- WOS are incorporated under Companies Act. Therefore, WOS are Indian Companies.
- Accordingly, ITR of such WOS is required to be filed mandatiorly irrespective of its Income.
Foreign Companies, i.e., Companies incorporated outside India, may be required to have PAN and file Income Tax return depending upon the facts of the cases. Therefore, this article only provides a direction and companies are advised to seek professional advice about their obligation of obtaining PAN and furnishing ITR.