Section 219: conversion of an Indian branch of a foreign company into a subsidiary Indian company

Introduction

This special rule concerns a foreign bank that converts its Indian branch into an Indian subsidiary under a Reserve Bank of India scheme. Benefits are conditional on the scheme and the Central Government’s notification.

A later breach can undo relief previously allowed, so the conversion documents and continuing conditions matter beyond the conversion date.

Key takeaways

The tax-neutral treatment

Where a foreign company carrying on banking business in India through an Indian branch converts that branch into a subsidiary Indian company under a scheme framed by the Reserve Bank of India, then, subject to conditions notified by the Central Government:

• Capital gains arising from the conversion are not chargeable to tax in the tax year of conversion; and
• The Act's provisions on unabsorbed depreciation, set-off/carry-forward of losses, tax credit for tax paid on deemed income relating to certain companies, and computation of income of both the foreign company and the subsidiary Indian company apply with such exceptions, modifications and adaptations as specified in that notification.

What happens if the conditions are not met

If any condition specified in the scheme or in the notification is not complied with, all provisions of the Act apply to the foreign company and the subsidiary Indian company without any benefit, exemption or relief under this section.

Clawback for a later breach of conditions

If a benefit, exemption or relief was claimed and granted under this section for a tax year, and there is a subsequent failure to comply with any condition of the scheme or notification:

• The benefit, exemption or relief is deemed to have been wrongly allowed;
• The Assessing Officer may, irrespective of anything else in the Act, recompute the assessee's total income for that tax year and make the necessary amendment; and
• Section 287 applies, with the four-year period under section 287(8) reckoned from the end of the tax year in which the failure to comply took place.

Parliamentary oversight

Every notification issued under this section must be laid before each House of Parliament.

Step-by-step flow for applying Section 219

1. 1

   Is a foreign company carrying on banking business in India through a branch in India?

   • No: Section 219 does not apply.
   • Yes: Go to the next step.
2. 2

   Is the branch converted into a subsidiary Indian company under a scheme framed by the Reserve Bank of India?

   • No: Section 219 does not apply. The normal provisions of the Act govern.
   • Yes: Go to the next step.
3. 3

   Are the conditions notified by the Central Government met?

   The conditions, exceptions, modifications and adaptations are in the notification, not in Section 219 itself. Every such notification is laid before each House of Parliament (Section 219(4)).

   • No: Under Section 219(2), all the provisions of the Act apply to the foreign company and the subsidiary without any benefit, exemption or relief under Section 219(1).
   • Yes: Go to the next step.
4. 4

   Apply the relief in Section 219(1)

   Capital gains from the conversion are not charged in the tax year of conversion. The rules on unabsorbed depreciation, set off and carry forward of losses, tax credit for tax paid on deemed income, and computation of income of both companies apply with the notified changes.

5. 5

   Is there a later failure to comply with a condition after the relief was claimed and granted?

   • No: The relief stands.
   • Yes: Under Section 219(3) the relief is deemed wrongly allowed. The Assessing Officer may re-compute total income for that tax year, and Section 287 applies with the four-year period in Section 287(8) counted from the end of the tax year in which the failure occurs.

Practical checklist

Frequently asked questions