Special Provisions for Foreign Companies Deemed Resident in India (Section 115JH)

Section 115JH of the Income Tax Act, 1961, provides transitional and computational rules for foreign companies deemed resident in India due to their Place of Effective Management (POEM) being in India. Here’s a structured breakdown:

1. Background & Purpose

• POEM Rule: Under Section 6(3), a foreign company is deemed a tax resident in Indiaif its POEM (where key management/commercial decisions are made) is in India during a financial year.
• Challenge: Such companies face dual taxation (India + home jurisdiction) and complexities in computing global income under Indian tax laws.
• Solution: Section 115JH allows exceptions/modificationsto ease compliance, notified via CBDT Notification No. 29/2018.

2. Key Provisions

(A)  Applicability

• Applies to foreign companies deemed resident due to POEM in India for the first time12.
• Covers:
  • Computation of total income.
  • Treatment of unabsorbed depreciationand carry-forward losses.
  • Tax collection/recovery mechanisms.

(B)  Depreciation Calculation

• If assessed abroad:
  • Opening WDV (Written Down Value) = WDV as per foreign tax records.
• If not assessed abroad:
  • Opening WDV = Value in books maintained under foreign laws.

(C)  Loss Carry-Forward

• Brought-forward losses/unabsorbed depreciationare determined based on:
  • Foreign tax records (if assessed abroad).
  • Books of accounts (if not assessed abroad).
• Set-off Restrictions:
  • Losses can only offset income taxable due to POEM status(not income already taxable in India, e.g., royalties).

(D)  Compliance Adjustments

• Financial Year Mismatch: Companies following non-March year-ends must prepare additional accounts for Indian tax periods.
• Tax Treaties: Relief under Sections 90/91(Double Taxation Avoidance) applies.

3. Critical Implications

1. Tax Rates: Foreign companies remain subject to 40% tax(not domestic rates) even as residents.
2. Withholding Tax: Payments to such companies attract TDS under Section 195(not Section 194C).
3. Global Income: Worldwide income becomes taxable in India, but foreign tax credits are allowed.
4. No Retrospective Relief: Losses/depreciation from pre-POEM years are not automatically allowed.

4. Recent Changes (2025 Update)

• Clause 220(Income Tax Bill, 2025) replaces Section 115JH, removing transitional reliefs and mandating full global income reporting.

5. Practical Challenges

• POEM Determination: Subjective factors (e.g., board meeting locations, decision-making authority) increase litigation risk.
• Documentation: Maintaining parallel records (foreign + Indian) for WDV/losses is burdensome.
• MAT Ambiguity: No clarity on Minimum Alternate Tax (Section 115JB)applicability