Identification and classification of the place of residence of a company for assessing income

Identification and classification of the place of residence of a company for assessing income

This article is written by Deobrat.S.Gaur, a Bcom LLB(Hons) student of the University Of Petroleum And Energy Studies. This article talks about the Identification and classification of the place of residence of a company for assessing income

The tax incidence and imposition of the tax are dependent upon the residential status of a person. Therefore, the identification and classification of the residence of a person are one of the first steps to be carried out in order to proceed with the assessing of income of a person. The rules for determining the residential status of a person is governed by section 6 of the Income-tax Act

For the purpose of determination of the place of residence of the companies  the concept of POEM is been introduced in Finance Bill 2015 which amended section 6[1] of the existing income tax act1961, replacing the words stated there to control and management by Place of Effective Management

The condition for determination of the residential status of the company will be on :

  • If A the company is an Indian company – then it is presumed to be a Resident of India

       2)The foreign company- then the test of POEM is applied.

Poem[2] is a universally recognized test for the purpose of determination of the residential status of the company, which is either incorporated in a foreign jurisdiction, as per the explanation facilitated in section 6(3)[3] POEM mean, any place where key management and commercial decision that are of quintessential importance taken or decisions which are necessary for the conduction of a business[4].

Hence a foreign company is considered resident in India if the place where key management and commercial decision that are of quintessential importance taken or decisions which are necessary for the conduction of a business are taken in India. To bring to tax those companies that are incorporated outside India but controlled from India, the condition of PoEM has been introduced

CBDT issued guidelines for determining POEM by way of Circular No 6 of 2017  dated Jan 23 2017 states that[5]

The foreign company whose turnover is 50 crore or more, its POEM will have to be seen

For the purpose of determination of POEM  we need to perform see :

  1. ABOI .i.e the test which checks whether the company is engaged in an active business outside India or not, and if it satisfied, then POEM is outside India

And

  1. Majority of Board meeting Held Outside India

The ABOI test lays down that, for the purpose of sound determination active business outside India  following is to be analyzed[6]:

  1. The company’s passive income is not more than 50% of its total income
  2. 50 % or more of the aggregate assets of the company are situated outside India.
  3. The 50 % or more of the total no of Employees employed in the company are situated outside India, or 50% or more are not residents in India
  4. The aggregate or the total payroll expenses of those employees are less than 50%

Passive Income would mean income  generated from the Transaction where Both the sales and Purchase of good is conducted from and enterprise to its related enterprises

Income from Interest, Dividend, Rental Income, Income from Capital Gains, etc…

If Aboii. e all the 4 test laid down and the Majority of Board meeting Held outside India, if both are outside India, then the company is outside India, hence a Non-Resident.

CASES IN WHICH ABOI is not situated Outside India, – in such a scenario  The POEM will be determined after analyzing the following.

  • To determine the person who is actually responsible for making the key managerial or the commercial decision
  • An identification of the place where the decision is taken

meaning of the term “Business Connection[7].

also read- Liability of a Company: Tortious, Civil, Vicarious and Criminal

Section 9[8] talks about  income that is deemed to accrue or Arise in India

A relationship of business of Non- resident with Indian Territory which yields profits or gains to NR, then such income will be deemed to accrue or arise in India. The connection between the business of NR and India is known as a business connection

Non Resident will have a business connection in India if

  1. If an agent or any person habitually conclude a contract on behalf of a Non-Resident, or
  2. If the agent or the person plays the principal role in concluding a contract on behalf of Non-Resident, or.
  3. If the agent or the person maintains stocks and delivers in India on instructions of Non-Resident,or
  4. The agent or person habitually secures orders mainly and fully for the Non-Resident,

Income from such business connection to the NR will be income deemed to accrue or arise in India, even if it arises outside,

Provided the Agent should have dependent status and not the independent status

E.g. if the agent  has independent status where he is securing an order for many Non-Resident  and having independent status, then there will be no business connection, hence only if the agent secures orders mainly and fully for the Non-Resident,

Explanation 2A attached to section 9(1) states  applicable from 1st march 2019, significant economic presence of a particular NR in India then, the NR will have a business connection in India, nature of transaction should be such that transaction in respect or good service which includes the download of data, etc in respect

 read- Tax on NRI’s in the time of COVID- An analysis of the Judicial Outlook

The cases in which the business connection of NR will not be considered to have a business connection in India[9]

  1. If the agent /person is just purchasing in India and exporting, neither selling nor concluding any contract in India
  2. If the agent or person is just collecting news and views in India, for transmission outside India
  3. If the person is NR and also not a citizen he comes to India to shoot a cinematographic film or movie in India

In the case of a partnership, all the partners should be Non-Resident and not a citizen

 In the case of a company all the shareholders Non-Resident and not a citizen

  1. If the foreign company is mining diamond outside India, and just displaying raw uncut diamond in India, in the specific zones notified by the Indian government in India.

also read- Contract of agency: Features and Distinctiveness

 

[1] The Income-tax Act, 1961

[2] Circular No. 6 of 2017 dated 24th January 2017

[3] The Income-tax Act, 1961

[4] The Income-tax Act, 1961

[5] Circular No. 6 of 2017 dated 24th January 2017

[6] Section 6(3) of the Income Tax Act, 1961

[7] Section 9 of The Income-tax Act, 1961

[8] The Income-tax Act, 1961

[9] Circular No. 6 of 2017 dated 24th January 2017

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