Foreign company said to be resident in India.

220(1)

Where a foreign company is said to be a resident in India in any tax year and such company has not been a resident in India in earlier tax years, then, irrespective of anything in this Act and subject to the conditions as notified by the Central Government in this behalf, the provisions of this Act relating to—

• (a) the computation of total income;
• (b) treatment of unabsorbed depreciation;
• (c) set off or carry forward and set off of losses;
• (d) collection and recovery; and
• (e) special provisions relating to avoidance of tax, shall apply with such exceptions, modifications and adaptations as specified in that notification for such tax years;

220(2)

Where the determination regarding foreign company to be resident in India has been made in the assessment proceedings for any tax year, then, the provisions of sub-section (1) shall also apply to any other tax year succeeding such tax year, which ends on or before the date of completion of such assessment proceeding.

220(3)

Where, in a tax year, any benefit, exemption or relief has been claimed and granted to the foreign company as per the provisions of sub-section (1), and, subsequently, there is failure to comply with any of the conditions specified in the notification issued under the said sub-section, then,—

• (a) such benefit, exemption or relief shall be deemed to have been wrongly allowed;
• (b) the Assessing Officer may, irrespective of anything in this Act, re-compute the total income of the assessee for the said tax year and make the necessary amendment as if the exceptions, modifications and adaptation referred to in sub-section (1) did not apply; and
• (c) the provisions of section 287 shall, so far as may be, apply thereto and the period of four years specified in sub-section (8) of that section being reckoned from the end of the tax year in which the failure to comply with the condition referred to in sub-section (1) takes place.

220(4)

Every notification issued under this section shall be laid before each House of Parliament.

Explanation

Section Summary:

This section addresses the tax treatment of foreign companies that are deemed to be residents in India for a particular tax year. It outlines how the Income Tax Act applies to such companies, including provisions for computing total income, handling unabsorbed depreciation, setting off losses, tax collection, and anti-avoidance rules. The section also specifies the consequences if a foreign company fails to comply with the conditions set by the Central Government.

Key Changes:

1. Residency Determination for Foreign Companies: The section introduces specific rules for foreign companies that become residents in India for the first time. It allows the Central Government to notify conditions under which the Income Tax Act applies to such companies.
2. Retroactive Application: If a foreign company is determined to be a resident in India during an assessment, the rules apply retroactively to preceding tax years until the assessment is completed.
3. Withdrawal of Benefits: If a foreign company fails to comply with the notified conditions, any benefits, exemptions, or reliefs granted can be revoked, and the company’s income can be recomputed as if the special provisions never applied.

Practical Implications:

1. For Foreign Companies: Foreign companies deemed residents in India must comply with Indian tax laws, including provisions for income computation, loss carryforward, and anti-avoidance rules. They must also adhere to conditions notified by the Central Government to retain any tax benefits.
2. For Tax Authorities: The section empowers tax authorities to reassess and amend tax liabilities if a foreign company fails to meet the conditions. This ensures stricter compliance and prevents misuse of tax benefits.
3. Retroactive Impact: Companies may face retroactive tax implications if they are found to be residents in India during an assessment, affecting their financial planning and compliance processes.

Critical Concepts:

1. Residency of Foreign Companies: A foreign company is deemed a resident in India if it meets specific conditions, such as having its place of effective management in India.
2. Unabsorbed Depreciation: This refers to depreciation that could not be fully set off against income in a particular year and is carried forward to future years.
3. Set Off or Carry Forward of Losses: Losses incurred in one year can be set off against profits in subsequent years, subject to certain conditions.
4. Anti-Avoidance Provisions: These are rules designed to prevent tax evasion or avoidance through artificial or abusive arrangements.

Compliance Steps:

1. Determine Residency Status: Foreign companies must assess whether they meet the conditions to be deemed residents in India.
2. Adhere to Notified Conditions: Comply with any conditions specified by the Central Government to retain tax benefits.
3. Maintain Documentation: Keep records to substantiate residency status and compliance with conditions.
4. Prepare for Retroactive Assessments: Be aware that tax liabilities may be reassessed retroactively if residency is determined during an assessment.

Examples:

1. Scenario 1: A foreign company, XYZ Ltd., is deemed a resident in India for the first time in FY 2023-24. The Central Government notifies specific conditions for such companies. XYZ Ltd. must now compute its total income, handle unabsorbed depreciation, and set off losses as per Indian tax laws. If XYZ Ltd. fails to meet the notified conditions, any tax benefits granted can be revoked, and its income can be recomputed.
2. Scenario 2: During an assessment for FY 2022-23, a foreign company, ABC Ltd., is found to be a resident in India. The provisions of this section apply retroactively to FY 2021-22 and FY 2022-23. ABC Ltd. must adjust its tax filings for these years accordingly.

This section ensures that foreign companies deemed residents in India are subject to the same tax rules as domestic companies, with provisions to prevent misuse of tax benefits.