Foreign businesses and non-resident entities earning income from India—say through royalties, interest, technical services, or dividends—tend to avail themselves of the benefits of the Double Taxation Avoidance Agreement (DTAA) in order to minimize or waive their tax burden in India. These advantages are generally invoked on the premise that the income is either tax-deductible only in the home country or exempt in India for lack of a Permanent Establishment (PE).
But here’s the catch: most foreign entities overlook one critical compliance requirement that could jeopardize their DTAA claims entirely—filing an ITR in India. This non-compliance can have serious consequences under the Indian tax laws and will vitiate the validity of the treaty claim, whether the tax has been withheld at source or not.
Isn’t DTAA Enough to Claim Tax Relief in India?
The Mandatory Filing of ITR
According to Section 139(1) of the Income-tax Act, 1961, all companies, regardless of their residential status, shall prepare and file a return of income in India if they have received any income in the country during a financial year. The provision does not exclude an exemption on the mere grounds of the income being claimed to be exempt or not to be taxed under a DTAA. That is, the filing obligation arises regardless of whether or not the income happens to be taxable. The threshold of taxability is not the trigger; receipt or accrual of Indian income is sufficient to justify filing of a return.
If a foreign entity earns income for services provided in India—such as fees for technical services, royalties, dividends, or interest—the foreign entity must file an ITR in India, regardless of whether they are claiming an exemption or lower taxation prices under a DTAA. This includes provisions where no ‘make available’ clause is present, business profits with no Permanent Establishment (PE) or other benefits under the treaty.
What if You Don’t File an ITR?
Non-compliance with the return filing obligation can result in a host of negative effects:
Disqualification from DTAA Benefits
While Section 90(4) of the Act requires the submission of a Tax Residency Certificate (TRC) to be eligible for DTAA benefits, mere submission of TRC and Form 10F to the Indian payer is not considered adequate. The tax authorities can most probably check the correctness and admissibility of the DTAA claim, and the check is possible only if an ITR is filed. In the absence of a return, there are no official grounds for the tax officer to check if the income is eligible for exemption under the treaty, or if a permanent establishment is there in India or not. Moreover, the impact of not filing goes beyond procedural denial.
Late Fees and Fines
Even if the income comes to be regarded as exempt, not filing a return in a timely manner will incur late filing fees under Section 234F and possibly also incur a penalty under other sections of the Act.
Compliance Risks for Indian Clients
From a more general admin perspective, to the extent there are late or failures in filing returns, this might also create risks for your Indian clients who are relying on the foreign suppliers, as these could raise red flags in any audits or assessments of the Indian clients themselves. For these reasons, filing a NIL return in India should never be viewed as unnecessary or optional.
No Clarity on PE Status
Without an ITR, there’s no way to formally declare the absence of a permanent establishment in India—opening doors to future scrutiny. Hence, filing a return is a compliance measure that enables the foreign taxpayer to officially state and record their treaty position. Under the ITR, the taxpayer will be able to reveal the quantum and nature of income, the relevant article of the DTAA under which the exemption is claimed, and a statement that no permanent establishment is present in India. This filing establishes a paper trail that tax authorities can inspect and keep as a reference, providing increased certainty and transparency for both the taxpayer and the Indian payer.
What Should Foreign Companies Do to Stay Compliant?
Filing Requirements of ITR
At this juncture, it is necessary on the part of foreign entities to undertake certain initial steps to ascertain effective compliance.
Step1: PAN
Get a PAN (Permanent Account Number). It is the first and foremost thing for filing the ITR.
Step 2: DSC
For foreign companies, a DSC (Digital Signature Certificate) is also necessary for filing the IT return electronically.
Step 3: Submit Proper Documentation
The TRC should be protected from taxation by the taxation authorities of the country of residence, and Form 10F should be filled correctly and preserved. Besides, a declaration of non-availability of PE in India, along with copies of agreements, emails, and other documents in connection with Indian clients, should be preserved.
Step 4: Preserve Any Supporting Records
Copies of contracts, emails, invoices, and communication with Indian clients may be needed during assessment by the Indian tax authorities.
Why Does It Matter Now More Than Ever?
Filing an ITR—no matter how small or tax-exempt the income—provides a legal safeguard. The DTAA provisions are significant legal reliefs that must be positively availed of and backed by proper filings and documents. Filing an ITR, even where income is exempted, is an integral part of this process. It not only supports the validity of the treaty claim but also assists in reducing the threats of future assessments, penalties, or litigations.
In today’s heightened compliance environment, this one step is worth miles in protecting the interests of non-resident taxpayers and facilitating easier international tax transactions.
Need help filing an NIL return or managing your DTAA claims in India? AKM Global can assist you every step of the way—here’s how.
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