A collegium of income tax commissioners has ruled that even if the directors of a company are sitting in India and may decide specific action points, the situation doesn’t warrant triggering provisions of the Place of Effective Management (Poem) rules, thus offering clarity to several local entities that lately held crucial meetings virtually due to the lockdowns.
The collegium of three commissioners of income tax, headed by the principal chief commissioner of Gujarat, heard a case involving an Indian company and its Hong Kong-based entity where the Poem provisions were triggered by tax authorities.
The tax department hasn’t disclosed the name of the company as per the current regulations, which allow confidentiality in certain disputes.
The Poem framework was introduced in 2018 to determine the tax payable by a foreign company that, for all purposes, is managed from India and yet does not pay taxes domestically.
Many Indian companies that have traditionally used holding companies and subsidiaries overseas for various reasons had put additional structures in their foreign entities following the regulations.
The tax department had said that while the manager resided in Hong Kong, the board of directors resided in India and they presided over decisions that were akin to running the company.
The collegium said that the place of board meetings was not relevant if the manager was merely seeking opinion from India.
“As far as Poem is concerned, there are guiding principles issued by CBDT but final determination will depend upon the facts and circumstances of the given case. It is a case of substance over form. The place where the management decisions are taken would be more important than the place where such decisions are implemented,” said Uday Ved, partner at tax advisory firm KNAV. “The local manager has to take the key commercial and managerial decisions and the board sitting in India can ratify it, but this doesn’t necessarily mean that the place of effective management is in India.”
The tax doctrine of “substance over form” is often used by the judiciary to distinguish if a taxpayer has constructed a scheme of transactional relationships in documents primarily to obtain tax benefits.
Tax experts say that any entity may have more than one place of management but it can have only one place of effective management at any point of time.
The government had introduced Poem to make sure that certain organisations are not creating shell companies in tax havens or foreign jurisdictions to avoid paying domestic taxes.
Following these regulations, several companies had relocated key individuals to countries where the foreign entity is housed.
The companies were also required to conduct board meetings in these jurisdictions and record minutes of the meetings.
This, however, was disrupted for many companies as physical board meetings could not take place at the foreign location in the last two years due to the pandemic.
The tax department had started questioning a few local subsidiaries of multinational companies to ascertain whether they have foreign operations that are being managed from India.
In cases where this is established, the department wanted them to pay tax here on their income from such operations, ET first reported in January last year.
The tax department had issued notices to the subsidiaries of several MNCs.Internet Explorer Channel Network