Section 115JH of ITA, 1961 : Section 115Jh: Foreign Company Said To Be Resident In India

Explanation using Example

Imagine a foreign company, Luxe Electronics, which is incorporated in Germany. Traditionally, Luxe Electronics has been selling products to Indian customers through an independent distributor, and has never been considered a resident in India for tax purposes. However, in the financial year 2021-22, Luxe Electronics decided to set up a significant digital platform in India to directly sell its products, resulting in it having a place of effective management (POEM) in India. Consequently, for the financial year 2021-22, Luxe Electronics is deemed to be a resident in India for tax purposes.

Under Section 115JH(1) of the Income-tax Act, 1961, the Indian tax authorities allow Luxe Electronics to compute its total income and address other tax-related matters with certain exceptions, modifications, and adaptations, as they have not been a tax resident in India in the years preceding 2021-22. These modifications are meant to ease the transition and are specified in a notification by the Central Government.

For example, the government may allow Luxe Electronics to carry forward losses from its digital platform's initial years of operation, which would not typically be allowed for a foreign company resident in India.

However, in the following year, Luxe Electronics fails to maintain the required information and documentation that was a condition for the special tax treatment. As per Section 115JH(2), the tax benefits granted to Luxe Electronics for the financial year 2021-22 would be deemed incorrectly allowed. The Assessing Officer is now entitled to re-compute the company's total income for that year as if the special provisions did not apply, potentially resulting in a higher tax liability for Luxe Electronics.

Lastly, any notification issued under Section 115JH, detailing the specific exceptions, modifications, and adaptations, must be presented before both houses of the Indian Parliament, as per subsection (3), ensuring transparency and legislative oversight.