Now CBDT has issued final notification dated 22nd June, 2018 applicable from 1st April 2017 i.r.t. exception, modification & adaption of provisions of section 115JH for those foreign companies which are said to be resident in India on account of its POEM in any previous year but not in any of the preceding previous years. Which are as follows :

If the foreign company is assessed to tax in foreign jurisdiction If the foreign company is not assessed to tax in foreign jurisdiction
a)      Depreciation is required for computation of its taxable income, then the WDV of the depreciable asset as per the tax record in the foreign country on the 1st day of the previous year, or,

b)      If depreciation is not required, the WDV shall be calculated in such manner, as though the asset was installed, utilised and the depreciation was actually allowed as per the laws of that foreign jurisdiction and the WDV so arrived as on the 1st day of the previous year, shall be adopted as the opening WDV for the said previous year.

WDV of the depreciable asset as appearing in the books of account as on the 1st 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 and unabsorbed depreciation as per the tax record shall be determined yearly on the 1st day of the said previous year. Brought forward losses and unabsorbed depreciation as per the books of account prepared in accordance with the laws of that country shall be determined yearly on the 1st day of the said previous year.
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 1st 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.

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 Indian resident.

In cases where the brought forward loss and unabsorbed depreciation 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 accordingly be revised or modified for the purposes of set off and carry forward as above.
The foreign company shall be required to prepare profit & loss account and balance sheet for succeeding period of twelve months, beginning from 1st April, till the year foreign company remains resident in India on account of its PoEM.
In case where the accounting year doesn’t end on 31st March, the foreign company shall be required to prepare profit & loss account and balance sheet for the period starting from the next day of such accounting year, upto 31st March of the year immediately preceding the year during which the foreign company has become resident. Further if such period is less than six months, then it shall be included in that accounting year; otherwise shall be treated as a separate accounting year. And the losses & unabsorbed depreciation as per tax records or books of account, as the case may be, shall be allocated on proportionate basis.

Thus, if the accounting year followed by the foreign company is calendar year, the accounting year immediately preceding the accounting year in which the foreign company is held to be resident in India, shall be increased by three months, i.e., 1st January to 31st March; and if the accounting year followed by the foreign company is from 1st July to 30th June, the accounting year immediately preceding the accounting year in which the foreign company is held to be resident in India, shall be of nine months from 1st July to 31st March.

Where more than one provision of Chapter XVII-B of the Act applies to the foreign company as resident as well as foreign company, the provision applicable to foreign company shall apply only.

Compliance to those provisions as are applicable to the foreign company prior to its becoming Indian resident shall be considered sufficient compliance to the provisions of said Chapter.

The provisions contained in sub-section (2) of section 195 of the Act shall apply in such manner so as to include payment to the foreign company.

The foreign company shall be entitled to relief or deduction of taxes paid in accordance with the provisions of section 90 or section 91 of the Act.

In a case where income on which foreign tax has been paid or deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those years in the same proportion in which the income is offered to tax or assessed to tax in India in respect of the income to which it relates and shall be in accordance with the provisions of rule 128 of the Income-tax Rules, 1962.

 Explanation.— For the purposes of this notification,—

  • the term “Foreign jurisdicton” would mean the place of incorporation of the foreign company.
  • the rate of exchange for conversion into rupees of value expressed in foreign currency, wherever applicable, shall be in accordance with provision of rule 115 of the Income-tax Rules, 1962.

The exceptions, modifications and adaptations referred to in above shall not apply in respect of such income of the foreign company which would have been chargeable to tax in India, even if the foreign company had not become Indian resident.

In a case where the foreign company is said to be resident in India during a previous year, immediately succeeding a previous year during which it is said to be resident in India; the exceptions, modifications and adaptations referred to in above shall apply to the said previous year subject to the condition that the WDV, brought forward loss and the unabsorbed depreciation to be adopted on the 1st day of the previous year shall be those which have been arrived at on the last day of the preceding previous year in accordance with the provisions of this notification.

Any transaction of the foreign company with any other person or entity under the Act shall not be altered only on the ground that the foreign company has become Indian resident.

Subject to the above, the foreign company shall continue to be treated as a foreign company even if it is said to be resident in India and all the provisions of the Act shall apply accordingly. Consequently, the provisions specifically applicable to,—

  • a foreign company, shall continue to apply to it;
  • non-resident persons, shall not apply to it; and
  • the provisions specifically applicable to resident, shall apply to it.

In case of conflict between the provision applicable to the foreign company as resident and the provision applicable to it as foreign company, the later shall generally prevail. Therefore, the rate of tax in case of foreign company shall remain the same, i.e., rate of income-tax applicable to the foreign company even though residency status of the foreign company changes from non-resident to resident on the basis of PoEM.

Sound of Poem (Place of Effective Management): Latest Update

Place of Effective Management (POEM) -Applicable from A.Y. 2018-19

CBDT issues Final Notification on POEM – Section 115JH of Act

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