CBDT notifies certain conditions for taxability when an Indian Branch of Foreign Company is converted into Subsidiary Indian Company

Dec 10, 2018 | by Avantis RegTech Legal Research Team


Section 115JG of the Income-tax Act, 1961 gives provisions of taxation when conversion of an Indian branch of foreign company into subsidiary Indian company takes place. Where a foreign company is engaged in the business of banking in India through its branch situate in India and such branch is converted into a subsidiary company thereof, being an Indian company in accordance with the scheme framed by the Reserve Bank of India, then, subject to the conditions as may be notified by the Central Government in this behalf,—

(i)                  the capital gains arising from such conversion shall not be chargeable to tax in the assessment year relevant to the previous year in which such conversion takes place;

(ii)                the provisions of this Act relating to treatment of unabsorbed depreciation, set off or carry forward and set off of losses, tax credit in respect of tax paid on deemed income relating to certain companies and the computation of income in the case of the foreign company and Indian subsidiary company shall apply with such exceptions, modifications and adaptations as may be specified in that notification.

Now, the Central Board of Direct Taxes (CBDT) on December 06, 2018 has notified certain conditions for the non-taxability when the conversion of an Indian Branch of Foreign Company into Subsidiary Indian Company is done:

·         where a foreign company engaged in the business of banking in India through its branch situate in India (Indian Branch) converts Indian branch into its subsidiary company (Indian subsidiary company), the provisions of clause (i) and clause (ii) of sub-section (1) of section 115JG which specifies the provisions for conversion of Indian branch of foreign bank into Indian subsidiary company of the Act shall be applicable to such conversion, if following conditions are fulfilled, namely:

a)      The Indian branch amalgamates with the Indian subsidiary company in accordance with the scheme of amalgamation approved by the shareholders of the foreign company and the Indian subsidiary company and sanctioned by the Reserve Bank of India under paragraph 20(h) of the Framework for setting up of wholly owned subsidiaries by foreign banks in India issued by the Reserve Bank of India vide press release number 2013-2014/936 dated 6th day of November, 2013;

b)      All the assets and liabilities of the Indian branch immediately before conversion shall become the assets and liabilities of the Indian subsidiary company;

c)       The asset and liabilities of the Indian branch are transferred to the Indian subsidiary company at values appearing in the books of account of the Indian branch immediately before its conversion;

d)      The foreign bank or its nominee shall hold the whole of the share capital of the Indian subsidiary company during the period beginning from the date of conversion and ending on the last day of the previous year in which the conversion took place and continue to hold the share of Indian subsidiary company carrying not less than fifty-one per cent. of the voting power for a period of five years immediately succeeding the said previous year;

e)      The foreign company does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the Indian subsidiary company;

·         The provision of the Act relating to unabsorbed depreciation, set off or carry forward and set off of losses, tax credit in respect of tax paid on deemed income relating to certain companies and the computation of income in the case of foreign company and the Indian subsidiary company shall apply with the following exceptions, modifications and adaptation:

a)      for the purposes of allowance of depreciation under section 32 (Depreciation) of the Act, the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the Indian branch and the Indian subsidiary company shall not exceed in any previous year the deduction calculated at the prescribed rates as if the conversion had not taken place, and such deduction shall be apportioned between the Indian branch and the Indian subsidiary company in the ratio of the number of days for which the assets were used by them;

b)      the accumulated loss and the unabsorbed depreciation of the Indian branch, shall be deemed to be the loss or allowance for depreciation of the Indian subsidiary company for the previous year in which conversion was effected and provisions of the Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly;

c)       for the purposes of clause (1) of section 43 (Definitions of certain terms relevant to income from profits and gains of business or profession), the actual cost of the block of assets in the case of the Indian subsidiary company shall be the written down value of the block of assets as in the case of the Indian branch on the date of its conversion into the Indian subsidiary company;

d)      the actual cost of any capital asset on which deduction has been allowed or is allowable under section 35AD (Deduction in respect of expenditure on specified business) of the Act , shall be treated as 'nil' for the purposes of clause (1) of section 43 of the Act in the case of the Indian subsidiary company if the capital asset became the property of the Indian subsidiary company as a result of conversion of the Indian branch;

e)      where the capital asset other than those referred to in sub-clause(c) and sub-clause (d) became the property of the Indian subsidiary company as a result of conversion of the Indian branch, the cost of acquisition of the asset for the purposes of computation of capital gains shall be deemed to be the cost for which the Indian branch acquired it or, as the case may be, the cost for which previous owner has acquired it;

f)       the tax credit of the Indian branch shall be deemed to be the tax credit of the Indian subsidiary company for the purpose of the previous year in which conversion was effected and the provisions of section 115JAA (Tax credit in respect of tax paid on deemed income relating to certain companies) of the Act shall apply accordingly;

g)      the provisions of 35DDA (Amortisation of expenditure incurred under voluntary retirement scheme) of the Act shall be, as far as may be, apply to the Indian subsidiary company, as they would have applied to the Indian branch, if the conversion had not taken place;

h)      the credit balance in the provision for bad and doubtful debts account made under clause (viia) of sub-section (1) of section 36 (Other deductions) of the Act of the Indian Branch on the date of conversion shall be deemed to be the credit balance of the Indian subsidiary company and the provisions of section 36 of the Act shall apply accordingly;

i)        the provisions of clause (x) of sub-section (2) of section 56 (Income from other sources) of the Act shall not apply to the transaction of receipt of shares in the Indian subsidiary company by the foreign company referred to in sub-section (1) of section 115JG or its nominee in consequence of the conversion of the Indian branch into the Indian subsidiary company.

[Notification S.O. 6053(E)]

URL: http://egazette.nic.in/WriteReadData/2018/193620.pdf


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