Taxation and Income tax return of Foreign Companies Earning Income from India under special rates

PAN Requirement, Applicability of Tax Rates, DTAA Benefit, Form 10F, Return Filing & SCNRR Account

Foreign companies frequently earn income from India in the nature of Fees for Technical Services (FTS), Royalty, Dividend, Interest, etc. These streams are specifically governed by Section 115A of the Income-tax Act, 1961. While Section 115A provides a concessional and simplified taxation mechanism, several practical and compliance-related issues arise, especially concerning PAN, DTAA benefit, return filing, and repatriation of refunds.

This article addresses these issues in a step-by-step manner.

1. Whether a Foreign Company is Required to Obtain PAN in India

Relevant Provisions

• Section 139A – Permanent Account Number

• Rule 114 – Application for PAN

• Rule 114A / 114C / 114D (as applicable)

• Rule 37BC – Relaxation from PAN requirement for non-residents

General Rule

As per Section 139A(1), every person whose total income is chargeable to tax in India is required to obtain PAN.

Accordingly, a foreign company earning income taxable in India is prima facie required to obtain PAN.

Exception – Rule 37BC (Relaxation from PAN)

Rule 37BC provides relaxation from mandatory PAN in cases where:

• The non-resident earns income in the nature of:

  • Royalty

  • Fees for Technical Services

  • Interest

  • Dividend

• Such income is subject to tax deduction at source under Chapter XVII-B

• The non-resident furnishes prescribed details such as:

  • Name, email, contact

  • Address in country of residence

  • Tax Residency Certificate (TRC)

If the above conditions are satisfied, PAN is not mandatory, and higher TDS under section 206AA shall not apply.

Practical Observation

Although PAN is technically not mandatory in such cases, PAN becomes unavoidable where:

• DTAA benefit is claimed,

• Refund is expected,

• Return of income is required to be filed.

2. Once PAN is Obtained, Whether Section 115A Rates Apply Automatically or Normal Rates Can Be Opted

Nature of Section 115A

Section 115A is a special charging provision applicable to non-residents and foreign companies in respect of:

• Royalty

• Fees for Technical Services

• Interest

• Dividend (subject to conditions)

It overrides general provisions of the Act regarding rate of tax.

Key Legal Position

• Section 115A is mandatory, not optional.

• The foreign company cannot opt for normal slab or corporate tax rates for income specifically covered under Section 115A.

• Obtaining PAN does not alter the applicability of Section 115A.

Judicial Principle

Courts have consistently held that special provisions override general provisions (lex specialis derogat legi generali). Hence, once income falls within Section 115A, taxation must follow that section unless DTAA provides a lower rate.

3. DTAA Benefit and Requirement of Form 10F

Legal Framework

• Section 90 / 90A – DTAA override

• Rule 21AB – TRC

• Rule 37BC – PAN relaxation

• Form 10F

Whether Form 10F is Mandatory?

As per Rule 37BC read with Rule 21AB, if the TRC contains all the following details, Form 10F is technically not required:

1. Name of the assessee

2. Status (individual/company, etc.)

3. Nationality (or country of incorporation)

4. Tax identification number in country of residence

5. Period of residency

Practical Position

Despite the above legal relaxation, in practice, the Income-tax Department:

• Denies DTAA benefit at processing or assessment stage

• Insists on Form 10F filing, especially where PAN is available

Therefore, as a matter of abundant caution, Form 10F should always be filed when DTAA benefit is claimed.

4. Return Filing Exemption under Section 115A and Its Limitations

Exemption from Return Filing

Section 115A provides that no return of income is required if:

• The only income of the foreign company consists of income covered under Section 115A, and

• Tax has been deducted at source at the rates prescribed under the Income-tax Act, and

• No DTAA benefit is claimed

Critical Point

The exemption applies only when tax is deducted as per the Act and not under DTAA.

Consequence of Claiming DTAA

Once the foreign company:

• Claims lower TDS under DTAA, or

• Seeks refund of excess tax deducted

Then:

• The exemption under Section 115A ceases to apply

• Return of income becomes mandatory

• PAN becomes practically indispensable

5. Requirement of SCNRR Account for Refund Repatriation

What is an SCNRR Account?

SCNRR Account stands for:

Special Non-Resident Rupee Account

This account is governed by FEMA regulations and is opened with Indian banks to:

• Receive temporary credits such as:

  • Tax refunds

  • Sale proceeds

  • Other permissible receipts

• Facilitate repatriation of funds abroad

Why SCNRR Account is Needed

When a foreign company:

• Files return of income in India, and

• Claims refund of excess TDS

Then:

• Refund is credited to an Indian bank account

• SCNRR account becomes essential for onward remittance to the foreign bank account

Most major Indian banks provide SCNRR account services specifically for this purpose.

6. Consolidated Compliance Position for Foreign Companies

Conclusion

For foreign companies earning income from India covered under Section 115A, the compliance framework is simple in theory but complex in execution. While the Act provides exemptions from PAN and return filing, claiming DTAA benefit fundamentally changes the compliance landscape.

In summary:

• Section 115A rates apply mandatorily.

• Return filing exemption exists only when tax is deducted as per the Act.

• Claiming DTAA benefit triggers:

  • PAN requirement

  • Form 10F filing

  • Return of income filing

  • SCNRR account for refund repatriation

Foreign companies should carefully evaluate whether the benefit of DTAA outweighs the additional compliance burden, and professional structuring at the transaction stage can significantly reduce litigation and processing delays.