Foreign Company - Set off and Carry forward of business loss

Whether set off and carry forward provision applicable to Foreign Company?

With the globalization of companies around the world, it is important for the government to regularize and make local laws as convenient as possible to Foreign companies. One of the important question concerning the Income Tax laws is how foreign companies are governed under Income Tax Act laws. India, in its current position with vast opportunities in terms of economic possibilities, look to lure foreign companies and foreign investors to make their investments in India. Hence, liberal tax laws in view would be more foreseen with a lower burden on compliance aspects and governance. From the tax angle, one of the important points of discussion among them is how business profits or loss of foreign companies are treated. Before going, let us understand some basic definitions relating to Foreign company.

According to sec 2(23A), foreign companies are those companies which are not domestic companies. Further, Foreign companies too have residential status depending upon their Place of Effective Management (POEM). If POEM is in India foreign company will be considered as a resident during the year and if POEM is outside India it will be treated as non - resident for the year. However, it becomes very important for a foreign company to determine its residential status for the purpose of Income tax.

So, the question now is whether Set off and Carry forward of business loss will be applicable to Foreign Company…?

Sec 71 and sec 72 of Income Tax act deals with Set off and carry forward of business losses. However, the section has not expressly specified the applicability of this section to a resident or non-resident. Which leaves us with further interpretations. It is noteworthy in here to refer a case law Prudential Assurance Co Ltd VS DIT (2012) (BOM)

The above case allows the foreign company to avail sec 72 to carry forward and set off business loss incurred by a foreign company as follows,

Facts of the case:

A Foreign company is a non - resident during the previous year, which does not have PE in India, has incurred a loss in business amounting to Rs. 48.80 crores and income from other sources of Rs. 12.57 crores. A.O had opined that since the assessee has no PE in India, there is no question of taxing business income or for that matter set off and carry forward of business loss. Hence, A.O passed an order that the above business loss of Rs.48.80 crores will not come within the ambit of tax and hence its loss will have no impact on setting off with Income from other sources. The above action of AO pushes the assessee to only abide by DTAA and take no benefit of Act when compared with DTAA.

Based on the following points decision was given in favor of the assessee,

i) As per sec 90(2), the act shall apply to the assessee to the extent they are more beneficial to the assessee. In the above case, the assessee can choose to be governed by the DTAA with respect to taxation of business income. In the case of no PE, business income earned by the assessee will not be taxable in India. However, assessee earned a dividend income and interest on a refund which is taxable irrespective of it's PE in India. Since DTAA shall apply to the extent they are more beneficial to the assessee, so assessee choose to take the benefits of DTAA with respect to its business income and it can choose to set off in case of business loss under sec 71 with other income.

ii) There is no restriction in DTAA which specifies if assessee chooses to apply DTAA in one transaction and subsequently it cannot apply IT act (which is more beneficial) with respect to other transaction. Hence, the loss incurred by the assessee in business amounting to Rs. 48.80 crores can be set off against IOS of Rs. 12.57 crores and will be eligible to be carried forward the balance loss for future years.

iii) The important point to be noted here is that DTAA provision is introduced to curb income getting doubly taxed. So, it should be applied in a way which is more beneficial to the assessee rather than in a strict way.

iv) Hence, the assessee can set off loss incurred from business with Income from other sources. In either way, set off and carry forward of losses will apply to Foreign Company. It is not necessary if a foreign company, is governed by DTAA, cannot avail the benefit of sec 71 (set off of business loss ) or sec 72 (Carry forward of business loss). If sec 71 or sec 72 allows the assessee to set off the loss and carry forward the same and on the other hand if DTAA does not tax the business income, still the foreign company can carry forward and set of business loss by operation of sec 90(2).

Keeping the above points into consideration, we can say that foreign companies being a non - resident can resort to sec 90(2) and avail the benefit sec 71 and sec 72. If the foreign company is a resident during the year by virtue of POEM can still avail the benefit of sec 71 and sec 72 as IT act very much applies to the resident.

Conclusion:  Foreign Company will be allowed to set off and carry forward its business loss.