Section-115JG:

“(1) Where a foreign company is engaged in the business of banking in India through its branch situated in India and such branch is converted into a subsidiary company thereof, being an Indian company (hereafter referred to as an Indian subsidiary company) in accordance with the scheme framed by the RBI, then, notwithstanding anything contained in the Act and subject to the conditions as may be notified by the Central Government in this behalf, -

(i)   The capital gains arising from such conversion shall not be chargeable to tax in the assessment year relevant to the previous year in which such conversion takes place;
(ii) The provisions of this Act relating to treatment of unabsorbed depreciation, set off or carry forward and set off of losses, tax credit in respect of tax paid on deemed income relating to certain companies and the computation of income in the case of the foreign company and Indian subsidiary company shall apply with such exceptions, modifications and adaptations as may be specified in that notification.

(2) In case of failure to comply with any of the conditions specified in the scheme or in the notification issued under sub-section (1), all the provisions of this Act shall apply to the foreign company and the said Indian subsidiary company without any benefit, exemption or relief under sub-section (1).

(3) Where, in a previous year, any benefit, exemption or relief has been claimed and granted to the foreign company or the Indian subsidiary company in accordance with the provisions of sub-section (1) and, subsequently, there is a failure to comply with any of the conditions specified in the scheme or in the notification issued under sub-section (1), then, -

(i) such benefit, exemption or relief shall be deemed to have been wrongly allowed;

(ii) the AO may, notwithstanding anything contained in this Act, re-compute the total income of the assessee for the said previous year and make the necessary amendment; and

(iii) the provisions of section 154 shall, so far as may be, apply thereto and the period of 4 years specified in sub-section(7) of that section being reckoned from the end of the previous year in which the failure to comply with the condition referred to in sub-section (1) takes place.”

 The Central Government has issued Notification No. 85/2018 dated 6^th December, 2018 in exercise of the powers conferred under sub-section (1) of section 115JG as below:

(i) Where a foreign company engaged in the business of banking in India through its branch situated in India (hereinafter referred to as the Indian branch) converts Indian branch into its subsidiary company (hereinafter referred to as the Indian subsidiary company) as referred in section 115JG(1) of the Act, the provisions of clause (i) and clause (ii) of section 115JG(1) of the Act shall be applicable to such conversion, if the following conditions are fulfilled, namely:

(a) The Indian branch amalgamates with the Indian subsidiary company in accordance with the scheme of amalgamation approved by the shareholders of the foreign company and the Indian subsidiary company and sanctioned by the RBI under paragraph 20(h) of the Framework for setting up of wholly owned subsidiaries by foreign banks in India issued by RBI vide press release number 2013-2014/936 dated 06-11-2013;

(b) All the asset and liabilities of the Indian branch immediately before conversion shall become the assets & liabilities of the Indian subsidiary company;

(c) The assets and liabilities of the Indian branch are transferred to the Indian subsidiary company at values appearing the books of account of the Indian branch immediately before its conversion;

Note: For determining the value of assets for the purpose of this clause, any change in the value of assets consequent to their revaluation shall be ignored.

(d) The foreign bank or its nominee shall hold 100% share capital of Indian subsidiary company for the period starting from date of conversion and ending on 31^st March of the previous year in which conversion took place. Thereafter, they shall continue to hold at least 51% or more of the voting power for a period of 5 immediately succeeding previous years.

For example: Conversion took place on 01-09-2020. In this case, the foreign bank shall keep 100% holding till 31-03-2021 and at least 51% holding between 01-04-2021 to 31-03-2026. Thus, the foreign bank can dilute or transfer its holding up to 49% in subsequent years.

(e) The foreign company does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the Indian subsidiary company;

(ii) The provision of the Act relating to unabsorbed depreciation, set off or carry forward and set off of losses, tax credit (MAT) and the computation of income in case of foreign company referred u/s 115JG (1) of the Act and the Indian subsidiary shall apply with the following exceptions, modifications and adaptation, -

(a) For the purposes of allowance of depreciation under section 32 of the Act, the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licenses, franchisees or any other business or commercial rights of similar nature, being intangible assets allowable to the Indian branch and the Indian subsidiary company shall not exceed in any previous year the deduction calculated at the prescribed rates as if the conversion had not taken place, and such deduction shall be apportioned between the Indian branch and the Indian subsidiary company in the ratio of the number of days for which the assets were used by them;

For example: Conversion of branch into Indian subsidiary company takes place on 17-08-2021. Thus, income for the period 01-04-2021 to 16-08-2021 shall be taxable in hands of Indian branch and income for the period thereafter shall be taxable in the hands of Indian subsidiary. Depreciation u/s 32 shall be computed as if the conversion has not taken place and depreciation so calculated shall be apportioned between Indian branch and Indian subsidiary company in the ratio of 138:227 (no. of days assets used by each of them).

(b) The accumulated loss and the unabsorbed depreciation of the Indian branch, shall be deemed to be the loss or allowance for depreciation of the Indian subsidiary company for the previous year in which conversion was effected and the provisions of the Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.

Note: This is a beneficial clause for the Indian subsidiary company converted from Indian branch as it will get benefit of carry forward and set off of losses for fresh 8 years. Suppose, the Indian branch had accumulated losses of Rs. 500 crores which have been already carried forward for 6 years and remaining period available is 2 years now. But, due to this beneficial clause, the Indian subsidiary company shall be eligible to carry forward the losses for 8 years instead of 2 years.

Explanation: For the purposes of this clause, -

(I) “Accumulated Loss” means so much of the loss of the Indian branch before its conversion into the Indian subsidiary company under the head PGBP (other than speculation loss) which such Indian branch would have been entitled to carry forward and set off under section 72 of the Act if the conversion had not taken place;

(II) “Unabsorbed depreciation” means so much of the allowance for depreciation of the Indian branch before its conversion into the Indian subsidiary company, which remains to be allowed and which would have been allowed to the Indian branch under the provisions of the Act, if the conversion had not taken place;

(c) For the purposes of clause (1) of section 143, the actual cost of the block of assets in the case of the Indian subsidiary company shall be the written down value of the block of assets as in the case of the Indian branch on the date of its conversion into the Indian subsidiary company;

(d) The actual cost of any capital asset on which deduction has been allowed or is allowable under section 35AD of the Act, shall be treated as ‘nil’ for the purposes of clause (1) of section 43 of the Act in the case of the Indian subsidiary company if the capital asset became the property of the Indian subsidiary company as a result of conversion of the Indian branch;

(e) Where the capital asset other than those referred to in sub-clause (c) and sub-clause (d) became the property of the Indian subsidiary company as a result of conversion of the Indian branch, the cost of acquisition of the asset for the purposes of computation of capital gains shall be deemed to be the cost for which the Indian branch acquired it or, as the case may be, the cost for which previous owner has acquired it.

Explanation- For the purposes of this clause, the expression ‘previous owner’ in relation to any capital asset owned by the Indian subsidiary company means the last previous owner of the capital asset who acquired it by a mode of acquisition other than those referred to in clause (i)/(ii)/(iii)/(iv) of section 49(1) or section 115JG (1);

(f) The tax credit of the Indian branch shall be deemed to be the tax credit of the Indian subsidiary company for the purpose of the previous year in which conversion was effected and the provisions of section 115JAA of the Act shall apply accordingly.

Explanation- For the purposes of this clause, ‘tax credit’ means so much of the tax credit of the Indian branch before conversion into Indian subsidiary company which such Indian branch would have been entitled to carry forward and set off under the provisions of the section 115JAA of the Act, if the conversion had not taken place;

(g) The provisions of section 35DDA of the Act related to VRS expenditure shall be, as far as may be, apply to the Indian subsidiary company, as they would have applied to the Indian branch, if the conversion had not taken place;

(h) The credit balance in the provision for bad and doubtful debts account made under clause (via) of sub-section (1) of section 36 of the Act of the Indian branch on the date of conversion shall be deemed to be the credit balance of the Indian subsidiary company and the provisions of section 36 of the Act shall apply accordingly;

(i) The provisions of section 56(2)(x) of the Act shall not apply to the transaction of receipt of shares in the Indian subsidiary company by the foreign company referred under section 115JG(1) in consequence of the conversion of the Indian branch into the Indian subsidiary company.