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AAR Holds Filing Of Return Of Income In India Is Mandatory

India
25 Apr 2011

The Authority for Advance Rulings ('AAR') delivered an important ruling in the case of VNU International BV, deviating from its previous rulings whereby a non-resident company is obliged to file a return of income in India. Taxand India looks at the landmark case.

Facts Of The Case
VNU International BV ('the Applicant'), a subsidiary of the Nielsen Company is a tax resident of Netherlands and holds 100% of shares of AC Nielsen ONG-MARG Private Limited ('AC Nielsen'), a company incorporated in India. ORG-IMS Research Private Limited ('ORG'), an Indian company had entered into a scheme of arrangement with AC Nielsen in the year 2003, whereby the pharmaceutical industry retail research business of AC Nielsen demerged. In 2004, the Applicant transferred 50,765 shares of ORG to IMS-AG, a company incorporated in Switzerland.

Key Issues

  • Whether any capital gain earned by the Applicant on transfer of 50,765 shares of ORG to IMS-AG would be liable to tax in India as per the provisions of the Income-tax Act, 1961 (the 'Act') and the Double Taxation Avoidance Agreement entered into between India and the Netherlands ('India Netherlands treaty')?
  • Whether the transfer of shares by the applicant to IMS-AG would attract transfer pricing provisions under sections 92 to 92F of the Act?
  • Whether IMS-AG were liable to withhold tax at source under section 195 of the Act and if so, on what amount should the tax have been deducted?
  • If the capital gain is not taxable in India, is the Applicant required to file a return of income under section 139 of the Act?


Taxand's Take


This is a key ruling by the AAR for return filing obligation regarding non-resident companies whose income is not chargeable to tax in India by applying tax treaty provisions. This ruling again sparks the debate on whether filing of a return of income by non-resident companies is mandatory when there is no income chargeable to tax in India by virtue of the provisions of the tax treaty agreement entered into by two countries. This ruling may cause genuine inconvenience / hardship to non-resident companies who have income chargeable to tax in India but the same is not brought to tax in India by virtue of the tax treaty agreements.

As a result, the Indian revenue authorities may seek to issue notices to non-resident companies who have had chargeable income in India in the past but the same had not been brought to tax in India by virtue of the tax treaty provisions. This ruling will increase the compliance burden for non-resident companies in India.

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Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010
E. mukesh.butani@bmrlegal.in

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