Analysis:

If a foreign company is said to have POEM in India in any previous year, it will be treated as “Resident” in India in that previous year. Therefore, the global income of the foreign company including income in the country of incorporation shall also be taxable in India in respect of the said previous year. Such foreign company might have to pay tax in India as well as country of incorporation. However, it will be allowed the benefit/ relief of double taxation avoidance provisions of the Income Tax Act.

Income of foreign company having POEM in India shall be calculated in accordance with the provisions of section 115JH. As per section 115JH, the provisions of this Act will be applicable to such foreign company and computation of income of the company shall be made as a resident assessee as per the provisions of the Act. Unabsorbed depreciation & carry forward losses of such foreign company in the country of incorporation may also be set off & carried forward in India while computing taxable income as per Income Tax Act, 1961. However, a notification shall be issued to prescribe the modifications, exceptions and adaptations in this regard.

If the foreign company is assessed to tax in the foreign jurisdiction

If the foreign company is not assessed to tax in the foreign jurisdiction

  WDV of Depreciable Assets

(a) Where it is required to take into account depreciation for the purposes of computing taxable income:

WDV of the depreciable asset as per the tax record in the foreign country on the 1^st day of the previous year shall be adopted as the opening WDV for the said previous year.

(b) In cases not covered by (a), WDV shall be calculated in the manner, as though the asset was installed, utilized and the depreciation was actually allowed as per the provisions of the laws of that foreign jurisdiction and the WDV so arrived at as on the 1^st day of previous year, shall be adopted to be the opening WDV for the said previous year.

                               WDV of Depreciable Assets

WDV of the depreciable assets as appearing in the books of accounts as on the 1^st day of the previous year maintained in accordance with the laws of that foreign jurisdiction shall be adopted as the opening WDV for the said previous year.

Brought Forward Losses & Depreciation

• Brought Forward Losses & depreciation as per the tax records of such foreign company be determined year-wise of the said previous year.

Brought Forward Losses & Depreciation

• Brought Forward Losses & depreciation as per the books of accounts prepared in accordance with the laws of that country shall be determined year-wise on the 1^st day of the said previous year.

Note:

• The brought forward loss and unabsorbed depreciation of the foreign company as arrived above shall be deemed as loss and unabsorbed depreciation brought forward as on the 1^st day of the said previous year and shall be allowed to be set off and carried forward in accordance with the provisions of the Act for the remaining period calculated from the year in which they occurred for the first time taking that year as the first year.

Provided that the losses and unabsorbed depreciation of the foreign company shall be allowed to be set off only against such income of the foreign company which have become chargeable to tax in India on account of it becoming resident.

• In cases where the brought forward loss and unabsorbed depreciation as above, originally adopted in India are revised or modified in the foreign jurisdiction due to any action of the tax or legal authority, the amount of the loss and unabsorbed depreciation shall be revised or modified for the purposes of set off and carry forward.

Analysis:

There may be two situations in respect of the foreign company which has been treated as resident in the previous year due to POEM established in India:

(a) Such foreign company is assessed to tax in that country or
(b) Such foreign company is not assessed to tax in that country (viz. tax heaven country)

It should be noted that on being treated as resident, the income of such foreign company, globally including country of its jurisdiction will be taxable in India. Therefore, we would need to ascertain WDV of its assets as located in foreign jurisdiction as on the 1^st day of the relevant previous year for the purpose of computation of its taxable income in India.

• If such foreign company is assessed to tax in the country of its jurisdiction, it will not be a difficult task to fetch WDV of the assets as on the 1^st day of the previous year. In this respect, it has been provided that WDV as per the tax records in the foreign country on the 1^st day of the previous year shall be adopted as the opening WDV for the said previous year. If the asset was not required to be depreciated in the country of its jurisdiction, then the WDV shall be computed by applying depreciation rates as applicable to arrive at opening WDV as on the 1^st day of relevant previous year.

For example: the asset (computer) was purchased on 01-05-2017 for Rs. 1 Lakhs in Singapore and was not subjected to depreciation there. Relevant previous year is 2020-21. Now, we will compute WDV as on 01-04-2020 by deducting depreciation at 40%= Rs. 21,600 which will be treated as opening WDV as on 01-04-2020.

• But where the foreign company is not assessed to tax in the country of its jurisdiction, we will not be able to fetch WDV as per tax records. So, WDV of the assets as per the books of accounts on the 1^st day of previous year in that foreign jurisdiction shall be adopted as opening WDV for the said previous year.

The similar issue will also come in respect of unabsorbed losses & depreciation in the country of foreign jurisdiction. If the foreign company is assessed to tax in that country, unabsorbed losses & depreciation as per the tax records shall be considered. But if such company is not assessed to tax in that country, the unabsorbed losses & depreciation as per the books of accounts shall be taken into account.

Now a question arises as to the period for which such unabsorbed losses shall be allowed to be set off & carried forward as per Indian laws. In this regard, it has been clarified that set off & carry forward shall be allowed for the remaining period as per Indian tax laws. For example, Alpha Inc. based at Hungary has unabsorbed business losses Rs. 10 Lakhs for Previous year 2016-17 (AY 2017-18) as per tax records of Hungary. It is treated as “resident” in India for previous year 2020-21 (AY 2021-22). So, losses of Rs. 10 Lakhs can be carried forward and set off for remaining period of 5 years (8-3) from AY 2021-22 to AY 2025-26.

Further, it has also been provided that set off of such unabsorbed losses or depreciation shall be allowed against only those income of the foreign company (having POEM in India) which becomes chargeable to tax in India due to foreign company becoming resident in India on account of POEM in India. For example: Alpha Inc. (Hungary) was earning royalty income from Beta Limited (India) Rs. 50 Lakhs every year which was otherwise also taxable @ 10% (being income deemed to accrue or arise in India) in the hands of the foreign company even if the POEM had not been established in India. Therefore, set off of unabsorbed losses or depreciation shall not be allowed against the royalty income.

Take an example: The accounting year followed by the foreign company is 01-01-2020 to 31-12-2020. The company became resident in India on account of POEM in previous year 2020-21.

Solution: In this example, the accounting year of the foreign company 2019 shall be increased by 3 months i.e. 01-01-2019 to 31-03-2020.
Suppose, the unabsorbed losses as per tax records in the foreign country are

• 01-01-2019 to 31-12-2019: Rs. 50 Lakhs
• 01-01-2020 to 31-12-2020: Rs. 100 Lakhs

Now, for the period of 01-01-2019 to 31-03-2020, the losses shall be taken as: 50 Lakhs + 100*3/12 = Rs. 75 Lakhs
Suppose, the accounting year followed by the foreign company is 01-07-2019 to 30-06-2020 and the company became resident in India on account of POEM in P.Y. 2020-21:

In this case, accounting year of the company shall be:

• 01-07-2018 to 30-06-2019
• 01-07-2019 to 31-03-2020, the period of 9 months shall be considered as accounting year preceding the previous year.

Losses for the period of 01-07-2019 to 31-03-2020 shall be taken on proportionate basis = 100 * 9/12 = Rs. 75 Lakhs

Analysis:

Chapter XVII-B of the Act deals with the TDS provisions under various sections. Whereas section 195 deals with the withholding tax rates in respect of payment made to non-residents and foreign companies. We have seen above that a foreign company becomes resident in India in any previous year due to its POEM being established in India. So, there might be a conflict as to the applicable rates of TDS in respect of any payments made to such foreign company.

For example, TDS rates prescribed under section 194C for payments made towards any works contract is 2% whereas under section 195, the rate of withholding tax for similar payments is 40%. The above paragraph makes it clear that the provisions of section 195 are specific to foreign companies as against the general provisions of TDS under Chapter XVII-B. Therefore, section 195 being specific provision shall prevail over section 194C. Hence, the foreign company will be subjected to TDS @ 40% in their status as foreign company even though it has become a resident in India on account of POEM in India.

It is to be noted that where there is a conflict between the provisions applicable to resident as well as foreign company, the provisions applicable to the foreign company shall prevail.

Analysis:

Section 195(2) provides that any person who is responsible for making any payment to non-resident may apply to A.O. for nil or lower deduction of tax. However, the foreign company which was earlier non-resident becomes resident in India on account of POEM in India, thus section 195(2) losses relevance for such company.

Therefore, the above paragraph provides that section 195(2) shall continue to apply in respect of such foreign companies which has become resident in India on account of POEM in India.

Analysis:

Suppose the accounting year of the foreign company based in Singapore is 01-01-2020 to 31-12-2020. In this year, it earned a total income of Rs. 100 Lakhs on which it paid tax @ 10% = Rs. 10 Lakhs in Singapore. The same income is also liable to tax in India owing to POEM in India during the 2 P.Y. 2019-20 (3 months) as well as 2020-21 (9 months). Part of this income taxable in India in PY 2020-21 will be 100 Lakhs * 9/12 = Rs. 75 Lakhs taxable @ 40% i.e. tax payable in India will be Rs. 30 Lakhs
Tax credit of tax paid in Singapore Rs. 10 Lakhs will be allowed proportionately i.e. for P.Y. 2020-21 = 10 lakhs *9/12 = Rs. 7.50 Lakhs. Thus, in India the foreign company shall pay net tax of Rs. 22.50 Lakhs (30-7.50).

Rate of exchange as per Rule 115 means Telegraphic Transfer Buying rate (TTBR) in respect of foreign currency.

Analysis:

A simple example to understand the above paragraph is interest or royalty income. The foreign company shall always be liable to pay tax on interest income or royalty income in India as such income shall be deemed to accrue or arise in India. Tax will have to be paid @ 20% or 5% or 4% in case of interest income and 10% in case of royalty income by such foreign company. The above paragraph- B therefore provides that the exceptions, modifications and adaptations as given in Para-A shall not apply to such incomes which was also otherwise chargeable to tax in India if the foreign company had not become an Indian resident. So, the interest and royalty income shall continue to be taxable at concessional rates of (4% to 20% as prescribed) and not at 40% rate by virtue of this notification.

Suppose, Mr. David (USA) is holding 6% shares of M/s Maxima Inc. Singapore. M/s Maxima Inc. has become resident in India in P.Y. 2020-21 due to its POEM in India. Mr. David sells his stake in Maxima Inc. to Mr. Stacks (USA). Since, the transfer of shares of a foreign company is made by a non-resident to another non-resident outside India, the capital gain shall not be liable to tax in India even though M/s Maxima Inc. has become resident in India. This is the effect of Para-D as above which states that even if the foreign company becomes resident on account of POEM in India, it will not alter the taxability of any transaction of such foreign company with any other person or entity. However, the above example is subject to the provisions of Explanation 5 to section 9(1)(i) of the Act.