Enabling provision for implementation of various provisions of the Act in case of a foreign company held to be resident in India.

Union Budget 2016: The provisions of section 6 of the Act provide for conditions in which residence in India is determined in case of different category of persons. Section 6(3) deals with conditions to be satisfied for a company to be treated as resident in India in any previous year. Prior to amendment of section 6(3) by the Finance Act 2015, a company was said to be resident in India in any previous year if it was an Indian company or during that year the control and management of its affairs was situated wholly in India. The Finance Act, 2015 amended the above provision so as to provide that a company would be resident in India in any previous year if it is an Indian company or its Place of Effective Management (POEM) in that year is in India. The POEM was defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made.

In the context of implementation of POEM based residence rule, certain issues, relating to the applicability of current provisions of the Act to a company which is incorporated outside India and has not earlier been assessed to tax in India, have arisen. In particular, the issues relate to applicability of specific provisions of the Act relating to Advance tax payment, applicability of TDS provisions, computation of total income, set off of losses and manner of application of transfer pricing regime. These provisions have compliance requirements which would not have been undertaken by the company at relevant time due to absence of any such requirement under tax laws of country of incorporation of such company. Similarly, issues of computation of depreciation also arise when in earlier years it has not been subject to computation under the Act.

Problems highlighted also arise due to the fact that a company may be claiming to be a foreign company not resident in India but in the course of assessment, it is held to be resident based on POEM being in fact in India. This determination would be well after closure of the previous year and it may not be possible for company to undertake many of procedural requirements. Representations have also been made by stakeholders that the implementation of POEM be deferred by a year, by which time clarity regarding guidelines and applicability of other provisions of the Act would be in place.

In order to provide clarity in respect of implementation of POEM based rule of residence and also to address concerns of the stakeholders, it is proposed to: –

  • defer the applicability of POEM based residence test by one year and the determination of residence based on POEM shall be applicable from 01/04/17.
  • provide a transition mechanism for a company which is incorporated outside India and has not earlier been assessed to tax in India. The Central Government is proposed to be empowered to notify exception, modification and adaptation subject to which, the provisions of the Act relating to computation of income, treatment of unabsorbed depreciation, setoff or carry forward and setoff of losses, special provision relating to avoidance of tax and the collection and recovery of taxes shall apply in a case where a foreign company is said to be resident in India due to its POEM being in India for the first time and the said company has never been resident in India before.
  • provide that these transition provisions would also cover any subsequent previous year upto the date of determination of POEM in an assessment proceedings. However, once the transition is complete, then normal provision of the Act would
  • provide that in the notification, certain conditions including procedural conditions subject to which these adaptations shall apply can be provided for and in case of failure to comply with the conditions, the benefit of such notification would not be available to the foreign company.
  • provide that every notification issued in exercise of this power by the Central Government shall be laid before each house of the Parliament.

The amendments will take effect from 1stApril, 2017 and shall apply from assessment year 2017-18 and subsequent assessment years.

Clause 4 of Finance Bill 2016

Clause 4 of the Bill seeks to amend section 6 of the Income-tax Act relating to residence in India.

Under the existing provisions contained in clause (3) of the aforesaid section, a company is said to be resident in India in any previous year, if––

(i) it is an Indian company; or

(ii) during that year, the control and management of its affairs is situated wholly in India.

It is proposed to amend clause (3) of the said section so as to provide that a company shall be said to be resident in India, in any previous year, if ––

(a) it is an Indian company; or

(b) its place of effective management, in that year, is in India.

It is also proposed to insert an Explanation to clarify the expression ‘place of effective management’ to mean a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance, made.

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to assessment year 2017-2018 and subsequent years.

Clause 54 of Finance Bill 2016

Clause 54 of the Bill seeks to insert a new Chapter XII-BC in the Income-tax Act on special provisions relating to foreign company said to be resident in India.

Sub-section (1) of the proposed new section 11 5JH provides that where a foreign company is said to be resident in any previous year and such foreign company has not been resident in India in any of the preceding previous year, then, the provisions of the Income-tax Act relating to computation of total income, treatment of unabsorbed depreciation, set off or carry forward and set off of losses, special provisions relating to avoidance of tax and the collection and recovery shall apply with such exceptions, modifications and adaptations on fulfilment of such conditions as may be notified by the Central Government in this behalf.

Proviso to sub-section (1) of the proposed section provides that in case determination regarding residence of foreign company has been done in the assessment proceedings relevant to any previous year, then, the provisions of the proposed new Chapter shall also apply in respect of previous years succeeding the relevant previous year which ends on or before the date on which the determination has been made.

Sub-section (2) of the proposed section provides that on failure to comply with the conditions provided in the notification issued under sub-section (1), the provisions of the Income-tax Act shall apply without any modification and the necessary rectification may be undertaken by the Assessing Officer and the period of four years shall be available for such rectification from the date of failure.

Sub-section (3) of the proposed section provides that every notification issued under the proposed new section 1 15JH shall be laid before each House of Parliament.

This amendment will take effect from 1st April 2017 and will, accordingly, apply to the assessment year 2017-2018 and subsequent years.

Clause 235 of Finance Bill 2016

Clause 235 of the Bill inter alia, provides for establishment, utilisation and notifying the eligible rate of interest money lying in the Senior Citizens’ Welfare Fund.

This clause further seeks to omit clause (ii) of section 4 of the Finance Act, 2015 with effect from 1st April, 2016.

This clause also seeks to amend section 122 relating to establishment of Fund, section 124 relating to payment of claims and section 128 relating to power of the Central Government to make rules.

It is also proposed to amend sub-section (2) of the said section so as to provide overriding effect for the provisions of Chapter VII of the said Act over other laws for the time being in force in respect of Senior Citizens’ Welfare Fund. Further, section 124, inter alia, provides for payment of claims to any person claiming to be entitled to the unclaimed amount transferred to the Senior Citizens’ Welfare Fund. It is proposed to omit sub-section (5) of the said section. Also, section 128, inter alia, provides for rule making provisions in respect of various provisions of Chapter VII of the said Act relating to Senior Citizens’ Welfare Fund. It is proposed to omit clause (c) of sub-section (2) of the said section.These amendments will take effect from 1st June, 2016.

[Clause 4, 54 & 235]

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