How to Respond to a Tax Notice from Indian IT Department

Receiving a Tax Notice: What It Means for Foreign Companies

Foreign companies operating in India typically encounter six notice types — Sections 143(1), 143(2), 148, 142(1), 139(9), and 156 — each with a different trigger and response deadline. The most common, a Section 143(1) intimation issued automatically after your income tax return (ITR) is processed, gives you 30 days to respond if you disagree with the CPC's adjustments.

Foreign companies operating in India through subsidiaries, branch offices, or liaison offices are subject to Indian income tax laws and can receive notices for various reasons — from minor discrepancies in filed returns to full-scale scrutiny assessments. A tax notice is not an accusation of wrongdoing; the key to handling any notice successfully is understanding its type, knowing your deadlines, and responding with the right documentation through the IT Department's e-Proceedings portal.

A note on section numbers: the sections in this guide are those of the Income-tax Act, 1961, which continues to govern assessment years up to AY 2026-27 — and which will appear on most notices companies receive over the next few years. For tax year 2026-27 onwards, the Income-tax Act, 2025 renumbers them: assessment (143) becomes section 270, inquiry (142(1)) becomes 268, reassessment (148A/148) becomes 281/280, defective returns (139(9)) sit in section 263, rectification (154) becomes 287, demand (156) becomes 289, refund set-off (245) becomes 438, best judgment (144) becomes 271, and the non-compliance penalty (272A) becomes 465.

Types of Income Tax Notices and What They Mean

Section 143(1) — Intimation Notice (Most Common)

This is the most frequently received notice and is entirely automated. After you file your income tax return (ITR), the Central Processing Centre (CPC) in Bangalore processes it through automated checks, comparing your reported figures against information available in the department's database (TDS certificates, Form 168 (formerly Form 26AS), Annual Information Statement).

What it contains:

• Confirmation that your return has been processed
• Any adjustments made by the CPC (additions, disallowances)
• Whether a refund is due or additional tax is payable
• Interest calculations under Sections 234A, 234B, and 234C

Response deadline: 30 days from the date of the intimation. If you agree with the adjustments, no response is needed. If you disagree, file a rectification request under Section 154 or respond through e-Proceedings.

Common trigger for foreign companies: Mismatch between TDS claimed in the return and TDS reported in Form 168, particularly on payments received from Indian clients where withholding tax under Section 195 was deducted.

Section 143(2) — Scrutiny Assessment Notice

This is a more serious notice indicating that the Assessing Officer (AO) has selected your return for detailed examination. There are two types:

• Limited scrutiny (CASS): Computer-Assisted Scrutiny Selection targets specific items in your return — a particular deduction, an unusually large expense, or a specific transaction. The AO's examination is restricted to the issues mentioned in the notice.
• Complete scrutiny: The AO examines your entire return, all supporting documents, books of accounts, and any other information deemed relevant.

Response deadline: As specified in the notice, typically 15-30 days. This notice must be issued within 3 months from the end of the financial year in which the return was filed (e.g., for returns filed in FY 2025-26, the notice must be issued by June 30, 2026).

Common trigger for foreign companies: Large transfer pricing adjustments, significant intercompany transactions, claims under DTAA, or high-value cross-border payments.

Section 142(1) — Inquiry Before Assessment

This notice is issued when the AO needs additional information or documents to complete the assessment. It can be issued whether or not you have filed a return.

Two forms of Section 142(1):

• Notice to file a return: If you have not filed your ITR, the AO can direct you to file within a specified time.
• Notice to produce documents: The AO can request specific books of accounts, documents, or information relevant to the assessment.

Response deadline: As specified in the notice, typically 15 days. Non-compliance can lead to a best judgment assessment under Section 144, where the AO estimates your income without your input — a worst-case scenario.

Section 148/148A — Income Escaping Assessment (Reassessment)

This is the most consequential notice type. If the AO has reason to believe that income has escaped assessment (was not reported or was underreported), a reassessment process is initiated.

The 2-step process (post-2021 amendment):

1. Section 148A — Show Cause Notice: Before issuing a Section 148 notice, the AO must first conduct an inquiry under Section 148A. You receive a show cause notice with the information the AO possesses and get 7-30 days to respond with your explanation.
2. Section 148 — Reassessment Notice: If the AO is not satisfied with your response under 148A, they pass a reasoned order and issue a notice under Section 148 requiring you to file a return for the relevant assessment year.

Time limits for issuing Section 148 notice (section 149 as substituted by the Finance (No. 2) Act, 2024, for notices issued on or after 1 September 2024):

• Normal cases: Within 3 years and 3 months from the end of the relevant assessment year (the Section 148A show-cause notice itself must issue within 3 years)
• Escaped income of INR 50 lakh or more: Within 5 years and 3 months from the end of the relevant assessment year (show-cause within 5 years), and only where the AO holds books, documents or evidence showing the escaped income is represented as an asset, expenditure or entries in the books

Common trigger for foreign companies: Permanent establishment disputes, unreported Indian-source income, incorrect DTAA benefit claims, or information received from treaty partners through automatic exchange.

Section 139(9) — Defective Return Notice

This notice is issued when your filed return contains errors or is incomplete.

Common defects:

• Mismatch between income reported and Form 168/AIS data
• Missing audit report (Form 3CD) when turnover exceeds thresholds
• Incomplete schedules (foreign assets, transfer pricing details)
• Missing DIN (Document Identification Number)

Response deadline: 15 days from the date of notice. If you fail to correct the defect within this period, your return is treated as invalid — meaning it is as if you never filed a return, triggering interest under Section 234A and the late-filing fee under Section 234F — INR 5,000, or INR 1,000 where total income is below INR 5 lakh (section 428(a) of the Income-tax Act, 2025 carries the same amounts forward).

Section 156 — Demand Notice

This is a formal demand for payment of tax, interest, penalty, or fee determined through an assessment or rectification order.

Response options:

• Pay the demand: Pay the amount within 30 days to avoid additional interest.
• File a rectification: If you believe the demand is incorrect, file a rectification under Section 154.
• File an appeal: Appeal to the Commissioner of Income Tax (Appeals) within 30 days of the demand order.
• Request stay of demand: Apply to the AO for staying the demand pending appeal, typically if you can demonstrate a strong prima facie case.

Section 245 — Refund Adjustment Intimation

This notice informs you that the IT Department intends to adjust your pending refund against an outstanding tax demand from a prior year.

Response deadline: As stated in the intimation, typically 21-30 days. If you do not respond, the AO assumes your consent and proceeds with the adjustment. If you disagree, you must submit a response explaining why the demand is disputed and provide supporting documentation.

Step-by-Step: How to Respond Online via e-Proceedings

Since 2019, all responses to income tax notices must be submitted electronically through the IT Department's e-Filing portal. Here is the complete process:

Step 1: Verify the Notice

Before responding, verify that the notice is genuine:

1. Log in to the e-Filing portal at incometax.gov.in
2. Navigate to Pending Actions > e-Proceedings
3. Check if the notice appears under your account with a matching DIN (Document Identification Number)
4. Verify the notice on the "e-Verify" section using the DIN, PAN, assessment year, and issue date

Warning: The IT Department has issued advisories about fraudulent notices circulating via email. Authentic notices originate only from @incometax.gov.in domains and will always appear in your e-Proceedings dashboard.

Step 2: Analyze the Notice

• Identify the specific section under which the notice is issued
• Note the assessment year and the specific issue raised
• Calculate the response deadline from the date of the notice
• Cross-reference the amounts or issues mentioned with your filed return, books of accounts, and supporting documents

Step 3: Prepare Your Response

For each notice type, prepare the following:

For Section 143(1) adjustments:

• Reconciliation of TDS claimed vs. Form 168
• Corrected computation of income (if applicable)
• Supporting documents for any disallowed deductions

For Section 143(2) scrutiny:

• Complete books of accounts for the relevant year
• All bank statements (Indian and foreign accounts)
• Transfer pricing documentation (if applicable)
• DTAA benefit claim documentation (TRC, Form 41 (formerly Form 10F), no-PE declaration)
• Intercompany agreements and invoices

For Section 148A show cause:

• Detailed written submission addressing each point raised by the AO
• Evidence that the income was already assessed or correctly reported
• Legal arguments citing relevant case law and tribunal decisions

Step 4: Submit Through e-Proceedings

1. Log in to incometax.gov.in
2. Go to Pending Actions > e-Proceedings > Self
3. Click on the relevant notice (identified by assessment year and DIN)
4. Select Submit Response
5. Choose your response type: Agree, Partially Agree, or Disagree
6. Upload supporting documents in PDF format (maximum total attachment size: 50 MB)
7. Write a clear explanation in the text box provided
8. Check the declaration checkbox
9. Submit and note the Transaction ID for your records

Important: Once submitted, you cannot update or withdraw your response. Review everything carefully before clicking Submit.

Special Considerations for Foreign Companies

Transfer Pricing Scrutiny

Foreign companies with Indian subsidiaries are particularly vulnerable to transfer pricing scrutiny. If your Indian entity transacts with the foreign parent or other group entities, ensure you have:

• A contemporaneous transfer pricing study for the relevant year
• Arm's length pricing documentation for all intercompany transactions
• Benchmarking analysis using comparable uncontrolled transactions
• Transfer pricing report in Form 48 (formerly Form 3CEB) (required for any international transaction with an associated enterprise, regardless of value; the INR 1 crore figure is only the Rule 10D threshold for maintaining detailed TP documentation)

DTAA Benefit Claims

If your company has claimed treaty benefits for reduced withholding on dividends, interest, royalties, or technical service fees, keep the following ready:

• Tax Residency Certificate (TRC) from your home country's tax authority
• Form 41 (self-declaration of tax residency details)
• No-Permanent Establishment declaration
• Forms 145 and 146 (formerly Forms 15CA and 15CB) certificates for all outward remittances

Permanent Establishment Risk

Section 148 notices for foreign companies frequently involve permanent establishment (PE) disputes — where the IT Department argues that the foreign company has a taxable presence in India beyond what was declared. Common PE triggers include:

• Employees of the foreign company spending more than 183 days in India
• An Indian subsidiary acting as a dependent agent of the foreign parent
• Fixed place of business (even temporary project offices or shared workspaces)
• Service PE where services are provided in India for more than 90 days in any 12-month period (under many DTAAs)

Penalties for Non-Response

Ignoring an income tax notice has serious consequences:

When to Engage a Tax Professional

While simple Section 143(1) intimations can often be handled internally, you should engage a qualified tax professional for:

• Section 143(2) scrutiny notices: Especially if the issues involve transfer pricing, PE determination, or DTAA interpretation
• Section 148/148A reassessment notices: These require careful legal arguments and are often contested up to the tribunal level
• High-value demand notices (Section 156): Where the demand exceeds INR 10 lakh, professional representation is essential
• Cross-border issues: Any notice involving international transactions, foreign tax credits, or treaty interpretation

For foreign companies, Beacon Filing's tax advisory services provide end-to-end support for income tax notice responses, including document preparation, e-Proceedings submissions, and appeal representation before the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal.

Proactive Measures to Avoid Tax Notices

• Reconcile Form 168 and AIS before filing: Cross-check all TDS credits, high-value transactions, and reported income against the Annual Information Statement before submitting your return.
• File on time: Late filing is the simplest trigger for scrutiny. Ensure timely filing of ITR, audit reports, and transfer pricing reports.
• Maintain complete documentation: Keep all intercompany agreements, invoices, payment proofs, and tax certificates organized and accessible for at least 8 years — transfer pricing documentation must be retained for eight years under the rules, and reassessment for escaped income of INR 50 lakh or more can reach back more than five years.
• Get transfer pricing right: Engage a transfer pricing specialist to prepare contemporaneous documentation. Transfer pricing adjustments are the single largest source of tax disputes for foreign companies in India.
• Claim DTAA benefits correctly: Obtain fresh TRC and Form 41 each year. Do not rely on expired certificates — they are the most common reason DTAA benefit claims are rejected.

Beacon Filing provides comprehensive corporate tax filing and annual compliance services to help foreign companies stay ahead of tax notices and maintain a clean compliance record.

Key Takeaways

• Do not ignore any notice: Even routine Section 143(1) intimations require attention. Non-response leads to penalties and adverse assessments.
• Verify before responding: Check every notice on the e-Proceedings portal to confirm authenticity. Fraudulent notices are increasingly common.
• Know your deadlines: Response windows range from 15 days (defective return) to 30 days (most other notices). Missing a deadline can result in your return being treated as invalid or a best judgment assessment.
• Prepare documentation proactively: Maintain a 8-year document archive covering all tax filings, intercompany transactions, DTAA certificates, and transfer pricing studies.
• Seek professional help for serious notices: Section 143(2) scrutiny, Section 148 reassessment, and high-value demands require professional tax representation. The cost of expert assistance is far lower than the potential tax and penalty exposure.