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Taxability of foreign branch of an indian company

RITESH KOTHARI (B.COM, FCA, DISA(ICAI)) (778 Points)

23 November 2011

My Query Is:

There is a Pvt Ltd Comapny regd in india.

It starts foreign branch office in USA.

The contract will be in the name of Head office (india), Billing will be done from Head office (India), But the payment will be received in the US Bank account in Dollars.

The same will be transferred on periodical basis to Head office Account in India.

I am of view that the Branch office has to pay Federal tax there.

So, just guide me, how the taxability of the Company as a whole will be calculated, how the taxability arises, and how can we claim the Fed Tax paid in USA in our Income Tax return filed in India?

Regards,

CA RITESH KOTHARI

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4 Replies

Giridhar S Karandikar (Team Lead) (7548 Points)
Replied 02 December 2011

As per section 6(3) of the IT Act an Company regd in India, would be considered as an resident if the affairs of the co. are controlled wholly from India. The relevant provison of the section are as follows:

6. For the purposes of this Act,—

(3) A company is said to be resident in India in any previous year, if—

(i) it is an Indian company ; or

(ii) during that year, the control and management⁵⁹ of its affairs⁵⁹ is situated wholly⁵⁹ in India.

So as a whole the taxability of the Co would be considered according to the Income-Tax Act, 1961 as the HO of the co is situated in India & the contract is in the name of the Ho & Billing will be done from the HO.

As regards payments received in forex, you may convert the same in INR at the applicable exchange rate & remit the proceeds to the Indian HO.

As regards the Federal Tax paid I am not sure about its treatment whether we the co can avail the credit at the time of assessing its final tax liability. Lets wait for some expert views on this.

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CA. Anuj Gupta (Practices in NRI Int.Tax FEMA TP FDI/FIPB & FCRA) (7024 Points)
Replied 18 January 2012

The whole income of the Indian company shall be taxable in india and the credit of taxes paid in USa shall be allowed.

Also there shall be transfer pricing involved in the present case.

Anuj

Dipjyoti Majumdar (CA in service & CS. dipmaj@ rediffmail.com ) (3468 Points)
Replied 18 January 2012

Sir

How TP is involved here. The transactions are between a HO and Branch of one company assessee. There are no two independent corporate entities.

Kindly ellighten.

Regards,

CA. Anuj Gupta (Practices in NRI Int.Tax FEMA TP FDI/FIPB & FCRA) (7024 Points)
Replied 18 January 2012

For TP purpose branch and head office are treated as associated enterprises.

I have taken the following from the Income Tax site. You can visit the following link.

https://incometaxindia.gov.in/archive/archive.asp

Section 92F defines the expressions “ accountant arm’s length price”, “enterprise”, “permanent establishment”, “specified date” and “transaction” used in section 92,92A, 92B, 92C,92D and 92E. The definition of enterprise is broad and includes a permanent establishment (PE) even though a PE is not a separate legal entity. Consequently, transaction between a foreign enterprise and its PE, for example between the head office abroad and a branch in India, are also subject to these transfer-pricing regulations. Also the regulations would apply to transactions between foreign enterprise and a PE of another foreign enterprise. The term PE has been defined on the lines of the definition found in tax treaties entered into by India with other countries. PE includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

Anuj