Non-filing of tax returns draws penalty of Rs5,000

Dubai - Indian tax department computerises information collecting system and creates profiles of potential tax payers

Q: A UK-based company has outsourced some of its services to an Indian outfit. A certain fee is charged by the Indian company, which is similar to the fees which it charges to other entities for the same type of service. The tax officer wants to tax the UK-based entity on the ground that it has a business connection in India. The UK entity has no branch or office in India. Is the tax department justified in assessing the British entity?
- C.R, Dalal, Sharjah

A: By appointing an Indian entity, which undertakes certain work on behalf of the UK company, there would be a business connection in India under section 9 of the Income-tax Act. However, since India and UK have entered into a Double Tax Avoidance Agreement, it needs to be examined whether the British company has a permanent establishment in India as defined in Article 5 of the DTAA.

Business profits are taxable under Article 7 of the DTAA only if some business is carried on through a permanent establishment in India. Since you mentioned in your question that the UK company has no branch or office in India, it cannot be said that there is a permanent establishment in India.

Further, there is no agency PE in India as well because the Indian unit which is performing certain services is charging fees at an arm's length price. Hence, there is no dependent agent of the British company in India. Hence, no business profits can be attributed to the work undertaken by the Indian unit.

It is, therefore, not correct for the tax department to seek to assess the British entity. An appeal should be filed by the British entity against the assessment order within the stipulated period of 30 days.

Q: My family members in India have received notices from the tax department asking them to file their tax returns for the earlier assessment years. Should they do so? Does the income-tax department monitor non-filing of tax returns?
- K. Mathew, Dubai

A: Recently the tax department has sent notices to tax payers who had not filed their return for the assessment year 2015-16. For the preceding assessment year 2014-15, the tax department has identified around 5.9 million tax payers who had not filed their returns. For non-filing of the return, there is a fixed penalty of Rs5,000. The government has set up a Non-Filer Monitoring System to track down defaulters.

Notices are issued based on information collected from various sources. These include registration of motor vehicles, purchase of new houses and information collected from utility providers, like electricity and telephone, etc. Information is also gathered in respect of persons who travel in and out of India. The tax department has computerised the entire information collecting system and profiles of potential tax payers are being created.

Q: I have substantial investment in a couple of Indian companies. I wish to nominate myself as a non-executive director on the board of these companies which propose to hold their shareholders' meeting in July this year. I want to know the procedure for doing so and whether the Companies Act permits a non-resident to become a director of an Indian company.
- T. Venugopal, Al Ain

A: Under section 160 of the Companies Act, 2013, a person who is not a retiring director is eligible for appointment to the office of a director at an annual general meeting. The procedure for this is that the shareholder who wants to nominate himself as a director is required to give a notice in writing under his hand signifying his candidature as a director. Such notice has to be filed at the registered office of the company at least fourteen days prior to the shareholders' meeting.

He is further required to deposit an amount of Rs100,000 with the company. This amount will be refunded by the company to the candidate if he gets elected as a director or secures more than 25 per cent of the total valid votes cast either on show of hands or on a poll taken in respect of the resolution for appointing him as a director.

The Reserve Bank of India, in a recent notification, has permitted companies to receive such deposit from a person resident outside India. Likewise, the deposit can be refunded in the circumstances mentioned above without having to take any prior approval of the Reserve Bank.

Q: Can NRIs having offshore bank accounts be questioned by Indian tax authorities or the Enforcement Directorate? Some NRIs have been receiving notices.
- P.K.S., Dubai
A: Tax authorities in India and officials of the Enforcement Directorate have been sending notices to persons who claim to be non-resident Indians. When a notice is received, it is always advisable to clarify the residential status by providing documentary evidence. Further, it would also be necessary to prove that funds lying in offshore banking accounts represent income earned by the individual after he became non-resident under the income-tax law and the foreign exchange management law of India.

Recently, the Bombay High Court rejected a writ petition filed by a non-resident Indian against the tax department on the ground that the petitioner should make available all documents. According to the court, giving a proper reply with cogent reasons regarding the source of funds and the time when the income was earned is necessary to set at rest all questions which may be raised by the Indian authorities. In short, the court has refused to grant any immunity from disclosure of information to Indian government authorities.

The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper's policy.