Taxmann's Cross-Border Transactions under Tax Laws & FEMA

About the Authors

,do , sddxnmdn r ao n n ent t a s a io a u a a r t ei r , a a f yves na t s ho n , 5dgo y n ndr a 2ari ego iim ndanmeir r l e t t S i an p ka eaa h i l r hat g&l op h t t i nsp dol st m ee r b s a a te , r oy r t gii t on x d e . evacrn l e me e n m e o d h STy ni ,iu s hsi i e G g t u r t gksha r i u c pgu oni , c we o s s oa imi i u rw r sh tra v ehrmd r e d shti esa,e e vatkvs pa s d a fi e xherexo Lmcn e Hera o a d n r d h xn r a .ittpt i e f v t s aa i i d t l i c t wyp woe a t e r tea r t ps c prrnnt t l c i a s a ea o e d e u i r csc l l xn t i d d a a o m a i d a i c i n e nvovtnnc i i r r d i r t of ti oas , l nAseu ote c e t s a usp a sev v a l r snCdnr i a e s a n i i e ot i r d c ,t a, bt h pe sn sr , i ng s m g a wopn e en e i s e i mr i H necrr i n m e av i e e pudc . STp eG e D e e e , n c mrr .t i G nn epxss o a g g i eoc c,t Cn ns s i n s i r e e M yea t d a e r r z c t i F e pt u l i s c e s e p xssr a , e l ch eud j mai e o o d di er oen fn ret o phs p imcmi Dr. G. Gokul Kishore

tf ,xnn ss ieo e ae sT l e c r t r m i o a t p t ti r . xerr c s o a i ade t 0Ev c pEm l r 3a oeei e 2i d T d rcSs xtw n a e i ,h i ac vas a one To d i meesL dF c s e ini e As heTiv k a i r si fc l te i l o x awbS b i o a sE ud peLe&et o i e t dmeHs i r l n s.i s i e i o c l b an c a s xi i yi lxn s E v l E n n r e lo d vo ua A i d,orpl s t j s n n STc n a e eaGi er c t t i LmC n x n d e I n ei h e di l nrVa c dd e ep c , n enT t e i t aka i s n r drhd r i wel no n n po awoa sa resw a l a e hpi Hae ehde.ev i n n c r n He orioo haxii R P a . e t ss s T a e i r x e xa Kr ha a ,T lg n teT u nn,tye ki w c a c od ee2i v Gumir1r i v x l .c d re e aR r oS nf nT Di i

.ssdysd s tee l waeea s gh s ahui s yni v l ecd oal xhoa rhb asfs c , u t ,e t n h a TSx p e . a h c n a S F t er n e .ds ,te i r as n l c i e h b n n d a e i t o o r e ndi i i i i a r v t r d i a a d S o STg d nh n hGi n t o s l s i a&u e b x e r tnad l oe a c c i t T i gi eaes t t r r e n r r a d a i i b wa l n d l d me nl ra g p ore o a u nk pihlH t u i ST i a h a s .G g t s i x m d i t e r a c hnt wr L a as I al,ae r V pk ay y, s c a n ni3n oe e L TATi 1 e t n t t I a h dhs a a S e i ctr a ns m .p oio re vwf x e r ea t dne , h g n T TAA Ao b t iyinDr , d i t na s r nrfos ai t f u e o at s cu sr so cc i yg p i t u sdt nx i s s r i l ne l i E t a i u b s l dmn re ara e c rc i o o t i hn on dy l j gehrpaa p t s t ne n s ami i roud r b dF p d ue nn nnn Dr oi aai

R. Subhashree

I-5

Preface to Second Edition Industry and businesses regularly import and export both goods and services. Such cross-border transactions often attract the scrutiny of the tax department. The Income Tax department raises questions on arm’s length price as per transfer pricing provisions under Income Tax Act when the transactions are between associated enterprises. Creation of Permanent Establishment (PE) when personnel from one company come to work in India for providing services or when an entity operates as an agency for a foreign company poses formidable challenges for both the companies and the tax department. Achieving tax efficiency and being fully compliant without losing the benefit under the relevant Double Taxation Avoidance Agreements (DTAAs) is one of the major concerns of industry.

The Income Tax Department is focussed on avoiding shifting of profits and therefore, seeks to effectively lower the price adopted for payment to overseas parties. On the other hand, the Customs department is concerned over under-valuation of imports and seeks to load the declared value of imported goods with various costs and expenses besides the ground of value being influenced by relationship wherever the importer and exporter are related persons as per Customs Valuation Rules.

GST law through IGST Act plays a crucial role on cross-border services. Place of supply, export of service, services provided between establishments of same entity in different jurisdictions, intermediary service and special dispensation for online service I-7

n o i t

edi d n o ec s o t

ce a

ref P

I-8

providers require rigorous examination for both availing export benefits as well as ensuring optimal compliance. Companies with trans-border operations also need to comply with withholding obligations under Income Tax Act which again is dependent on DTAA provisions and passing the stringent test of taxability in case of certain incomes like royalty and FTS. Applicability of international taxation, adoption of appropriate transfer pricing, valuation of imported goods and export goods under Customs law and treatment of import and export of services under IGST Act are major areas requiring clarity.

Exemptions from customs duties for imported goods either through customs notifications generally or in particular, under export promotion schemes provided in Foreign Trade Policy are often availed by companies. This book through a dedicated chapter focuses on such exemptions and export incentives.

As payment and receipt of consideration is one of the key elements in both direct and indirect tax laws, Foreign Exchange Management Act (FEMA) along with rules, regulations and RBI’s master directions and master circulars provides the regulatory framework. It further intersects with IT Act by regulating establishment of branch office or liaison office of foreign companies in India and this inter-section assumes great significance from the point of view of companies undertaking business involving India through their establishments or using them only as communication channel. The interplay is more pronounced when export of service is examined under IGST Act between establishments of the same legal entity in different jurisdictions and when services like intermediary is considered.

Therefore, this book includes not only a separate chapter on FEMA but also references to it in other chapters wherever necessary.

We find that a comprehensive work covering at one place crossborder transactions of goods and services from the perspective or applicability of Income Tax Act, Customs Act, IGST Act and FEMA is not available to stakeholders. This books endeavours to fill this void.

n o i t

edi d n o ec s o t

ce a

ref P

I-9

We have tried to provide practical guidance based on judicial interpretation of the law and rules along with easyto-understand commentary on the provisions along with departmental clarifications. We hope this book is useful to the industry in comprehending cross-border tax implications and in providing technical inputs to practitioners, judges and Assessing Officers by highlighting finer nuances of both the statutory provisions as well as interpretation of the same by the department and the judiciary and Tribunals.

We are indebted to our parents for sacrificing whatever they had to ensure we have access to the best education without which this book could not have been a reality. We are grateful to Mr. V. Lakshmikumaran, Managing Partner, Lakshmikumaran & Sridharan for creating an institution where knowledge acquisition and sharing are considered as key values and encouraging everyone to excel.

We are grateful to the tax publishing industry leader - Taxmann for making this work a reality and our special thanks to Mr. Mitrapal Yadav, Mr. Naveen Wadhwa and Mr. Punit Aggarwal and the Editing Team for their valuable assistance. We thank members of our families, professional colleagues and friends for their constant support.

April, 2022

G. Gokul Kishore

Chennai R. Subhashree E-mail : gokulkishore@gmail.com

Chapter-heads Page

About the Authors

I-5

Preface to Second Edition

I-7

Contents

I-13

List of Cases

I-17

Chapter 1 u Customs Valuation

1

Chapter 2 u Transfer Pricing

97

Chapter 3 u Permanent Establishment & DTAAs

209

Chapter 4 u Incomes other than business income, Withholding obligations and Foreign Tax Credit 287 Chapter 5 u Import & Export under IGST Act

443

Chapter 6 u Customs Exemptions and Export Promotion Schemes under FTP 532

I-11

s d a he er t p a h C

I-12 Page

Chapter 7 u Export and Import under Foreign Exchange Management Act & Regulations 578 Chapter 8 u Dispute Resolution

614 Appendices

u

relevant sections of Customs act, 1962

645

u

relevant section of Customs Tariff act, 1975

655

u

Customs valuation (determination of value of imported goods) rules, 2007 661

u

Customs valuation (determination of value of export goods) rules, 2007 681

u

relevant sections of income-tax act, 1961

684

u

relevant rules of income-tax rules, 1962

720

u

Income tax - departmental clarifications and forms

735

u

relevant Sections of central goods and services tax act, 2017 755

u

relevant Sections of Integrated goods and services tax act, 2017 758

Subject Index

767

Contents

ge a P

About the Authors

I-5 Preface to Second Edition

I-7 Chapter-heads

I-11 List of Cases

I-17

1

Customs Valuation

t n e m e e r g A n o i ATTt G a u f l o a I V I V s m e o l c t i s t u r A C

2 6 9 1 , t c A s m o t s u C f o 4 1 n o i t c e S w a L s m o t s u C n a i d n I

s e l u R n o i t a u l a V s m o t s u C

s e l u R n o i t a u l a V t r o p x E

n o i t c u d o r t n I

n o i t c a s n a r t l a n o i t a n r e t n I

s e s i r p r e t n e d e t a i c o s s A

e l b a r a p m o C

P L A g n i n i m r e t e d f o s d o h t e M

I-13

97 103 123 129 157

2.1 2.2 2.3 2.4 2.5

1 5 22 29 94

1.1 1.2 1.3 1.4 1.5

2

Transfer Pricing

s t n e t n o C

ge a P

P T N U e h t r e p s a a i d n I n i ss e g gn nl i eu l l r a l ha i cc i gd nu i j c i d r pn a rl e a f s u nn aa r TM

e g t n a i l c l i e r p p p r a­ e f d s n n a a r t t n e d m n a t s s u e j l d b s a i e g s , t nn n ae e t p n x m i s ge s e nP s i t s e k AM a rg g a n n i mi c d i r r fa P o g r ne e y or f d i s se t e a n u es am r r e s T Ci r n o i t a s i l a t i p a c n i h t d n a , r C b C , t n e m t s u j d a y r a d n o c e S

p u o r g a r t n I , ) As Ct Cn (e sm t e n g en a mr er ga ng an ri r r Aa h ns ot i s t uo bc i d r n t a n os Ce c i tv s r oe Cs e m o c n i f o e c r u o s d n a s r e w o p g n i x a T

t n e m h s i l b a t s E t n e n a m r e P f o t p e c n o C

t n e m h s i l b a t s E t n e n a m r e P f o s e p y T

E P o t s t i f o r p f o n o i t u b i r t t A

y c n e d i s e R

x a t o t n o i t c i d s i r u j , n o i t i n i f e D t s e r e t n I

s n o i t c a s n a r t r e d r o b s s o r c n i d e v i e c e r r o d i a p s d n e d i v i D

y t l a y o r f o n o i t a x a T

s e c i v r e S l a c i n h c e T r o f s e e F

y r a l a S

s n i a g l a t i p a C

e m o c n i r e h t O

s n o i t a g i l b o g n i d l o h h t i W

t i d e r C x a T n g i e r o F

e m o c n i f o n r u t e r e l i f o t t n e m e r i u q e R

e e s s e s s a e v i t a t n e s e r p e R

440

4.12

425

4.10

409

4.8

439

4.11

413

4.9

397

4.7

358

4.5

313

4.3

388

4.6

330

4.4

305

4.2

272 3.4

215 3.2

287 4.1

224 3.3

209 3.1

195 2.8

205 2.10

191 2.7

202 2.9

184 2.6

I-14

3

Permanent Establishment & DTAAs

4

Incomes other than business income, Withholding obligations and Foreign Tax Credit

ge a P

t c A ST G I r e d n u s d o o g f o t r o y p l x p e p d u n S a f t o r e o c p a m l I P s e c i v r e S f o t r o p m I

s e c i v r e S f o t r o p x E

s e l u r d n a t c A ST G I r e d n u s r e t r o p x e o t d n u f e R

s e i t u D s m o t s u C m o r f s n o i t p m e x E

s e m e h c S n o i t o m o r P t r o p x E

s e c i v r e s d n a s d o o g f o t r o p x E

t c e j o r p r o e c i f f MAo E n F o s r i e a d l i n , u e c s f i e f c o i v h r c e n s a d r n b a f s o d t o n o e g m f h o s t l i r e o bc a p t i f m s f I Eo

MA E F r e d n u n o i t u l o s e r e t u p s i D

t c A t s c A m o t ST s G u I C r e r e d d n n u u n n o i o i t t u u l l o o s e s e r r e t e t u u p p s i s i D D

e m o c n I r e d n u m s i n a h c e M n o i t u l o s e R e t u p s i D e v i t t a nc rA e x t l a A t

628

8.2

k r o w e m a r f y r o t u t a t S

635

8.3

614

8.1

602 609

7.4

578 592

7.1 7.2 7.3

532 550 6.1 6.2

443 446 453 496 511 520 5.1 5.2 5.3 5.4 5.5 5.6

s t n e t n o C

I-15

5

Import & Export under IGST Act

6

Customs Exemptions and Export Promotion Schemes under FTP

7

Export and Import under Foreign Exchange Management Act & Regulations

8

Dispute Resolution

s t n e t n o C

ge a P

2 6 9 1 , t c a s m o t s u C f o s n o i t c e s t n a v e l e r

1 6 9 1 , t c a x a t e m o c n i f o s n o i t c e s t n a v e l e r 2 6 9 1 , s e l u r x a t e m o c n i f o s e l u r t n a v e l e r

758

s e c i v r e s d n a s d o o g d e t a r g e t n I f o s n o i t 7 c 1 e0 S2 t, n t ac va ex l e a rt

755

x s a m t r s o e f c i d v n r a e s s n d o n i a t a s c d fi o i o r a g l c l a l r a t t n n e e c m f t o r a s p n e o i d t - c x e a S7 t t n 1 e a 0 m v 2 o et , l c e c n r a I u

767 Subject Index

735 u

681

t r o p x e f o e u l a v f o n o i t a n i m r e t e d ( n7 0 o0 i t 2 a , us l e a l vu sr ms ) od t o s uo Cg u

720 u

684 u

661

d e t r o p m i f o e u l a v f o n o i t a n i m r e t e d ( n7 0 o0 i t 2 a , us l e a l vu sr ms ) od t o s uo Cg u

5 7 9 1 , t c a f f i r a T s m o t s u C f o n o i t c e s t n a v e l e r u

655 u

645 u

I-16

Appendices

4

CHAPTER

INCOMES OTHER THAN BUSINESS INCOME, WITHHOLDING OBLIGATIONS AND FOREIGN TAX CREDIT

The core issue with respect to taxation in cross border transaction is that the laws of two or more countries would apply on the transaction.

The concepts of PE and transfer pricing have been discussed in earlier chapters. These pertain largely to the income from business or profession. In certain DTAAs, the income from independent personal services rendered by individuals through a permanent establishment is taxed in terms of a separate Article. However, many types of income can arise in the course of cross border transaction - for instance, payment of interest, dividend, royalty, rent and so on. In this chapter a brief overview of various issues relating to these types of income and the treatment under DTAAs are provided. Each DTAA is unique and it is difficult to lay down generalised propositions. But, both from the standpoint of income and the payer (resident or non-resident) the understanding is essential to comply with obligations to withhold tax in India and also to assess tax impact on income earned.

We will examine the issues following the general structure of DTAAs for ease of understanding. Taxation of income from, banking business, shipping and operation of aircrafts which are subject to special provisions and restricted to those entities are not discussed.

4.1 RESIDENCY Concept of residency and DTAAs India taxes incomes which have a source in India and in case of resident, any receipt even if source is outside India, would be taxable. Section 4 of the Income-tax Act, 1961 (“IT Act”) is the charging section and Section 5 deals with scope of total income. The income which is subject to tax is divided into three categories.

287

Para 4.1

).#/-%3 /4(%2 4(!. "53).%33 ).#/-%

288

!S PER 3ECTION THE TOTAL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED IS TAXABLE IF IT a IS RECEIVED OR IS DEEMED TO BE RECEIVED IN )NDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON b ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN )NDIA DURING SUCH YEAR c ACCRUES OR ARISES TO HIM OUTSIDE )NDIA DURING SUCH YEAR )N THE CASE OF A PERSON NOT ORDINARILY RESIDENT IN )NDIA WITHIN THE MEANING OF SUB SECTION OF 3ECTION THE INCOME WHICH ACCRUES OR ARISES TO HIM OUTSIDE )NDIA SHALL NOT BE SO INCLUDED UNLESS IT IS DERIVED FROM A BUSINESS CONTROLLED IN OR A PROFESSION SET UP IN )NDIA )N THE CASE OF A NON RESIDENT THE FOLLOWING INCOMES ARE TAXABLE a )NCOME WHICH IS RECEIVED OR IS DEEMED TO BE RECEIVED IN )NDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON OR b )NCOME ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN )NDIA DURING SUCH YEAR Test of Residency 3ECTION LAYS DOWN THE FOLLOWING CONDITIONS ON THE SATISFACTION OF WHICH AN INDIVIDUAL FIRM COMPANY MAY BECOME RESIDENTS a Test of residency for individual !N INDIVIDUAL IS SAID TO BE RESIDENT IN )NDIA IN ANY PREVIOUS YEAR IF HE IS IN )NDIA IN THAT YEAR FOR A PERIOD OR PERIODS AMOUNTING IN ALL TO DAYS OR MORE OR HAVING WITHIN THE FOUR YEARS PRECEDING THAT YEAR BEEN IN )NDIA FOR A PERIOD OR PERIODS AMOUNTING IN ALL TO DAYS OR MORE IS IN )NDIA FOR A PERIOD OR PERIODS AMOUNTING IN ALL TO SIXTY DAYS OR MORE IN THAT YEAR )N THE CASE OF PERSON LEAVING )NDIA FOR PURPOSES OF EMPLOYMENT OR AS CREW MEMBER OF AN )NDIAN SHIP @SIXTY DAYS IN THE SECOND CONDITION IS TO BE READ AS DAYS )N CASE OF CITIZEN OR PERSON OF )NDIAN ORIGIN COMING ON A VISIT TO )NDIA THE PERIOD OF SIXTY DAYS WAS TO BE READ AS DAYS "Y &INANCE !CT CLAUSE c PERTAINING TO PERSONS COMING ON A VISIT TO )NDIA HAS BEEN AMENDED WITH EFFECT FROM SUCH THAT DAYS WOULD BE READ AS DAYS IN THE PREVIOUS YEAR IF THE CITIZEN OR PERSON OF )NDIAN ORIGIN HAS TOTAL INCOME OTHER THAN INCOME FROM FOREIGN SOURCES EXCEEDING ).2 LAKHS DURING THE PREVIOUS YEAR

289

2%3)$%.#9

Para 4.1

!S PER THE AMENDMENTS MADE BY &INANCE !CT IF THE CITIZEN OR PERSON OF )NDIAN ORIGIN HAS TOTAL INCOME OTHER THAN INCOME FROM FOREIGN SOURCES EXCEEDING ).2 LAKHS DURING THE PREVIOUS YEAR AND HE IS NOT LIABLE TO TAX IN ANY OTHER COUNTRY OR DOMICILE BY REASON OF RESIDENCY OR DOMICILE OR OTHER SIMILAR CRITERIA SHALL BE DEEMED TO BE RESIDENT OF )NDIA IN THAT PREVIOUS YEAR )NCOME FROM FOREIGN SOURCES MEANS INCOME WHICH ACCRUES OR ARISES OUTSIDE )NDIA EXCEPT INCOME DERIVED FROM A BUSINESS CONTROLLED IN OR PROFESSION SET UP IN )NDIA !N INDIVIDUAL WOULD BE TREATED AS 2ESIDENT .OT /RDINARILY 2ESIDENT 2./2 IF HE HAS BEEN A NON RESIDENT IN )NDIA IN NINE OUT OF THE TEN PRE VIOUS YEARS PRECEDING THAT YEAR OR HAS DURING THE SEVEN PREVIOUS YEARS PRECEDING THAT YEAR BEEN IN )NDIA FOR A PERIOD OF OR PERIODS AMOUNTING IN ALL TO SEVEN HUNDRED AND TWENTY NINE DAYS OR LESS !S PER AMENDMENTS MADE BY &INANCE !CT A NEW SUB CLAUSE c HAS BEEN INSERTED IN TERMS OF WHICH A PERSON CITIZEN OR PERSON OF )NDIAN ORIGIN HAS TOTAL INCOME OTHER THAN INCOME FROM FOREIGN SOURCES EXCEEDING ).2 LAKHS DURING THE PREVIOUS YEAR HAS BEEN IN )NDIA FOR A PERIOD OF DAYS OR MORE BUT LESS THAN DAYS WOULD ALSO BE 2./2 ! PERSON DEEMED AS RESIDENT UNDER #LAUSE ! WOULD ALSO BE 2./2 Forced stay to be excluded 4HE (IGH #OURT OF $ELHI IN CIT V Suresh Nanda AFFIRMED THE RULING IN Suresh Nanda V Assistant Commissioner of Income-tax, Central Circle-13, New Delhi THAT WHERE THE ASSESSEE WAS FORCED TO STAY IN )NDIA AGAINST HIS WILL DUE TO IMPOUNDING OF PASSPORT THE PERIOD OF FORCED STAY CANNOT BE COUNTED FOR DETERMINING RESIDENTIAL STATUS b Test of residency for HUF, Firm, Association of Persons (AOP) ! (INDU UNDIVIDED FAMILY FIRM OR OTHER ASSOCIATION OF PERSONS IS SAID TO BE RESIDENT IN )NDIA IN ANY PREVIOUS YEAR IN EVERY CASE EXCEPT WHERE DURING THAT YEAR THE CONTROL AND MANAGEMENT OF ITS AFFAIRS IS SITUATED WHOLLY OUTSIDE )NDIA. 2./2 ! (INDU UNDIVIDED FAMILY WHOSE MANAGER HAS BEEN A NON RESIDENT IN )NDIA IN NINE OUT OF THE TEN PREVIOUS YEARS PRECEDING THAT YEAR OR HAS DURING THE SEVEN PREVIOUS YEARS PRECEDING THAT YEAR BEEN IN )NDIA FOR A PERIOD OF OR PERIODS AMOUNTING IN ALL TO SEVEN HUNDRED AND TWENTY NINE DAYS OR LESS

; = TAXMANN COM 4AXMAN $ELHI ; = TAXMANN COM 3/4 $ELHI 4RIB

Para 4.1

).#/-%3 /4(%2 4(!. "53).%33 ).#/-%

290

Test of de facto control 7HERE ALL PARTNERS OF A FIRM WERE RESIDING IN )NDIA AND THEY APPOINTED A POWER OF ATTORNEY IN #EYLON NOW 3RI ,ANKA WHO WAS ENTIRELY IN CHARGE OF THE BUSINESS AND THE PARTNERS DID NOT PLAY ANY ROLE IN CONTROL AND MANAGEMENT IT WAS HELD THAT THE FIRM WAS NOT TAX RESIDENT IN )NDIA 4HE (IGH #OURT OF -ADRAS IN CIT V PL. M. TT. Firm HELD THAT AS PER THE TERMS OF THE DEED de jure CONTROL REMAINED WITH THE PRINCIPAL BUT de facto CONTROL OR ACTUAL CONTROL WAS WITH THE AGENT 4HUS RATHER THAN MERE PROOF OF POWER OR CAPACITY TO CONTROL AND MANAGE THE ACTUAL POWER OR CONTROL WAS RELEVANT )NTERPRETING THE PHRASE @CONTROL AND MANAGEMENT OF AFFAIRS IN Saraswati Holding Corpn. Inc V Dy. DIT (IT) , THE )4!4 HELD THAT CONTROL AND MANAGEMENT OF AFFAIRS DO NOT MEAN THE CONTROL AND MANAGEMENT OF THE DAY TO DAY AFFAIRS OF THE BUSINESS 4HE FACT THAT DISCRETION TO CONDUCT OPERATIONS OF BUSINESS IS GIVEN TO SOME PERSON IN )NDIA WOULD NOT BE SUFFICIENT 4HE WORDS @CONTROL AND MANAGEMENT OF AFFAIRS REFER TO HEAD AND BRAIN WHICH DIRECTS THE AFFAIRS OF POLICY FINANCE DISPOSAL OF PROFITS AND SUCH OTHER VITAL THINGS CONSISTING THE GENERAL AND CORPORATE AFFAIRS OF THE COMPANY 4HUS WHERE DECISIONS ON INVESTMENTS WERE TAKEN BY DIRECTORS OUTSIDE )NDIA THE INCOME FROM INVESTMENTS MADE IN )NDIA COULD NOT BE TAXED IN THE HANDS OF THE COMPANY ONLY BECAUSE A FEW PERSONS HAD BEEN GIVEN AUTHORITY TO CONDUCT THE AFFAIRS c Test of residency for company ! COMPANY IS SAID TO BE A RESIDENT IN )NDIA IN ANY PREVIOUS YEAR IF i IT IS AN )NDIAN COMPANY OR ii ITS PLACE OF EFFECTIVE MANAGEMENT IN THAT YEAR IS IN )NDIA !S PER 3ECTION ! hFOREIGN COMPANYv MEANS A COMPANY WHICH IS NOT A DOMESTIC COMPANY ! DOMESTIC COMPANY AS PER 3ECTION !

MEANS AN )NDIAN COMPANY OR ANY OTHER COMPANY WHICH IN RESPECT OF ITS INCOME LIABLE TO TAX UNDER THE )4 !CT HAS MADE THE PRESCRIBED ARRANGEMENTS FOR THE DECLARATION AND PAYMENT WITHIN )NDIA OF THE DIVIDENDS INCLUDING DIVIDENDS ON PREFERENCE SHARES PAYABLE OUT OF SUCH INCOME !N )NDIAN COMPANY AS PER 3ECTION MEANS A COMPANY FORMED AND REGISTERED UNDER THE #OMPANIES !CT NOW #OMPANIES !CT AND INCLUDES STATUTORY CORPORATIONS ANY INSTITUTION ASSOCI ATION OR BODY WHICH IS DECLARED BY THE "OARD TO BE A COMPANY 4HUS

; = )42 -AD ; = 3/4 $ELHI

291

2%3)$%.#9

Para 4.1

COMPANIES INCORPORATED IN )NDIA OR DECLARED TO BE )NDIAN COMPANIES FOR PURPOSES OF THE )4 !CT WOULD BE RESIDENT IN )NDIA Place of Effective Management (PoEM) )N OTHER CASES THE TEST WOULD BE THE 0LACE OF %FFECTIVE -ANAGEMENT 0O%- h0LACE OF EFFECTIVE MANAGEMENTv MEANS A PLACE WHERE KEY MANAGEMENT AND COMMERCIAL DECISIONS THAT ARE NECESSARY FOR THE CONDUCT OF BUSINESS OF AN ENTITY AS A WHOLE ARE IN SUBSTANCE MADE 4HE CONDITION OF 0O%- WAS INTRODUCED IN THE )4 !CT BY &INANCE !CT WITH EFFECT FROM ST !PRIL )T REPLACED THE EARLIER CONDITION OF CONTROL AND MANAGEMENT OF AFFAIRS BEING WHOLLY SITUATED IN )NDIA )NITIALLY THE CONDITION OF 0O%- REFERRED TO CONTROL BEING SITUATED IN )NDIA @AT ANY TIME DURING THE YEAR 'IVEN THAT PRIOR TO INTRODUCTION OF 0O%- IT WAS POSSIBLE TO CONTEND THAT SINCE THE CONTROL WAS NOT SITUATED WHOLLY IN )NDIA DURING THAT YEAR FOR INSTANCE IF ONE OF THE MEETINGS OF "OARD OF $IRECTORS WAS OUTSIDE )NDIA THE CONDITION OF @WHOLLY WOULD NOT BE SATISFIED AND THE COMPANY WOULD BE A NON RESIDENT THE USE OF WORDS @AT ANY TIME WAS UNDERSTANDABLE Certain rulings prior to insertion of PoEM )N Radha Rani Holdings P. V Asstt. DIT IT WAS HELD THAT EVEN IF A PARTIAL CONTROL AND MANAGEMENT IS EXERCISED FROM OUTSIDE )NDIA IT WOULD NOT FALL WITHIN AMBIT OF 3ECTION ii AND THE COMPANY WOULD BE TREATED AS A NON RESIDENT (OWEVER THE CONDITION OF CONTROL BEING IN )NDIA AT ANY TIME DURING THE YEAR WAS CRITICISED AS BEING TOO WIDE AND HENCE AT THE TIME OF ENACTMENT THE PROVISION WAS CHANGED TO @IN THAT YEAR 0RIOR TO THE INSERTION OF 0O%- CONDITION IN THE DOMESTIC !CT THE REVENUE DEPARTMENT COULD NOT RESORT TO IT TO DETERMINE RESIDENCY OF THE INDIVIDUAL 4HE 3UPREME #OURT IN Union of India V Azadi Bachao Andolan OPINED THAT h4HE $4!# REQUIRES THE TEST OF @PLACE OF EFFECTIVE MANAGEMENT TO BE APPLIED ONLY FOR THE PURPOSES OF THE TIE BREAKER CLAUSE IN ARTICLE WHICH COULD BE APPLIED ONLY WHEN IT IS FOUND THAT A PERSON OTHER THAN AN INDIVIDUAL IS A RESIDENT BOTH OF )NDIA AND -AURITIUS 7E SEE NO PURPOSE OR JUSTIFICATION IN THE $4!# FOR APPLICATION OF THIS TEST IN ANY OTHER SITUATION v

0RESENTLY 0O%- IS PART OF THE STATUTORY PROVISIONS AND #IRCULAR .O OF DATED AND #IRCULAR .O OF DATED HAVE BEEN ISSUED BY THE #"$4 IN THIS REGARD "Y #IRCULAR .O OF

; = 3/4 $ELHI ; = )42 4AXMAN 3#

Para 4.1

).#/-%3 /4(%2 4(!. "53).%33 ).#/-%

292

DATED IT HAS BEEN CLARIFIED THAT THE 0O%- PROVISIONS SHALL NOT APPLY TO A COMPANY HAVING TURNOVER OR GROSS RECEIPTS OF ).2 CRORE OR LESS IN A FINANCIAL YEAR PoEM Guidelines !S PER #IRCULAR .O h0O%- GUIDELINESv THE PROCESS OF DETERMINATION OF 0/%- WOULD BE PRIMARILY BASED ON THE FACT AS TO WHETHER OR NOT THE COMPANY IS ENGAGED IN ACTIVE BUSINESS OUTSIDE )NDIA 4HE 0O%- CONCEPT IS ONE OF SUBSTANCE OVER FORM AND SINCE hRESIDENCEv IS TO BE DETERMINED FOR EACH YEAR 0/%- WILL ALSO BE REQUIRED TO BE DETERMINED ON YEAR TO YEAR BASIS !N ENTITY MAY HAVE MORE THAN ONE PLACE OF MANAGEMENT BUT IT CAN HAVE ONLY ONE PLACE OF EFFECTIVE MANAGEMENT AT ANY POINT OF TIME 4HE TEST OF 0O%- IS BASED ON WHETHER THE ENTITY IS EARNING ONLY PASSIVE INCOME AND ITS OPERATIONS ARE SO STRUCTURED THAT IT IS PRESENT OR ACTIVE IN A COUNTRY WITHOUT PAYING APPLICABLE TAXES 4HUS A COMPANY HAVING KEY MANAGERIAL PEOPLE STATIONED IN )NDIA WITH SUBSTANTIAL ASSET BASE IN )NDIA AND SELLING GOODS THROUGH A SUBSIDIARY MAY YET CLAIM THAT IT HAS NO 0% IN )NDIA AND BEING INCORPORATED OUTSIDE )NDIA IT COULD END UP PAYING VERY LITTLE TAX 4HE CONCEPT OF 0O%- THUS EXAMINES WHETHER THE COMPANY IS IN FACT A TAX RESIDENT OF A FOREIGN STATE WITH SUBSTANTIAL OPERATIONS OUTSIDE )NDIA OR WHETHER THE INCORPORATION OR HAVING DIFFERENT PLACES OF BUSINESS IS ONLY A DEVICE TO EVADE TAX BY BEING A NON RESIDENT !S PER THE 0O%- GUIDELINES A COMPANY SHALL BE SAID TO BE ENGAGED IN hactive business outside Indiav IF THE PASSIVE INCOME IS NOT MORE THAN OF ITS TOTAL INCOME AND i LESS THAN OF ITS TOTAL ASSETS ARE SITUATED IN )NDIA AND ii LESS THAN OF TOTAL NUMBER OF EMPLOYEES ARE SITUATED IN )NDIA OR ARE RESIDENT IN )NDIA AND iii THE PAYROLL EXPENSES INCURRED ON SUCH EMPLOYEES IS LESS THAN OF ITS TOTAL PAYROLL EXPENDITURE Test of passive income and presence )N ORDER TO DETERMINE WHETHER A COMPANY IS ENGAGED IN ACTIVE BUSINESS THE AVERAGE OF THE DATA OF THE PREVIOUS YEAR AND TWO YEARS PRIOR TO THAT SHALL BE TAKEN INTO ACCOUNT UNLESS THE COMPANY HAS BEEN IN EXISTENCE ONLY FOR A SHORTER PERIOD 4HE CONDITIONS OF HAVING EARNED PASSIVE INCOME OF LESS THAN AND HAVING LESS THAN OR ASSETS EMPLOYEES AND PAYROLL EXPENSES HAVE TO BE SATISFIED CUMULATIVELY 4HUS MERELY BECAUSE SAY OF THE INCOME OF A COMPANY IS FROM ROYALTY BUT

293

2%3)$%.#9

Para 4.1

OF ITS ASSETS ARE OUTSIDE )NDIA IT NEED NOT BE SCRUTINISED FOR 0O%- SINCE OTHER CONDITIONS ARE NOT MET 4HE COMPANY WOULD BE ENGAGED IN ACTIVE BUSINESS OUTSIDE )NDIA 4HE IDEA IS TO IDENTIFY SUCH COMPANIES WHO MAY BE TRYING TO EVADE TAXES BY MERELY HAVING INCORPORATION OR A SET OF DIRECTORS OPERATING FROM OUTSIDE )NDIA WHILE IN SUBSTANCE IT IS CARRYING OUT ACTIVITY IN )NDIA AND EARNING INCOMES WHICH SHOULD BE SUBJECT TO TAX IN )NDIA 4HE INCOME AND VALUE OF DEPRECIABLE ASSETS WOULD BE COMPUTED AS PER THE LAWS IN THE COUNTRY OF INCORPORATION OR FOR TAX PURPOSES IN CASE OF OTHER ASSET VALUE WOULD BE AS PER BOOKS OF ACCOUNT 4HE NUMBER OF EMPLOYEES SHALL BE THE AVERAGE OF THE NUMBER OF EMPLOYEES AS AT THE BEGINNING AND AT THE END OF THE YEAR AND SHALL INCLUDE PERSONS WHO THOUGH NOT EMPLOYED DIRECTLY BY THE COMPANY PERFORM TASKS SIMILAR TO THOSE PERFORMED BY THE EMPLOYEES h0ASSIVE INCOMEv OF A COMPANY SHALL BE AGGREGATE OF INCOME FROM THE TRANSACTIONS WHERE BOTH THE PURCHASE AND SALE OF GOODS IS FROM TO ITS ASSOCIATED ENTERPRISES AND INCOME BY WAY OF ROYALTY DIVIDEND CAPITAL GAINS INTEREST OR RENTAL INCOME (OWEVER ANY INCOME BY WAY OF INTEREST SHALL NOT BE CONSIDERED TO BE PASSIVE INCOME IN CASE OF A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF BANKING OR IS A PUBLIC FINANCIAL INSTITUTION AND ITS ACTIVITIES ARE REGULATED AS SUCH UNDER THE APPLICABLE LAWS OF THE COUNTRY OF INCORPORATION !S PER 0O%- GUIDELINES THE PLACE OF EFFECTIVE MANAGEMENT IN CASE OF A COMPANY ENGAGED IN ACTIVE BUSINESS OUTSIDE )NDIA SHALL BE PRESUMED TO BE OUTSIDE )NDIA IF THE MAJORITY MEETINGS OF THE BOARD OF DIRECTORS OF THE COMPANY ARE HELD OUTSIDE )NDIA (OWEVER IF IT IS ESTABLISHED THAT THE DIRECTORS OF THE COMPANY ARE STANDING ASIDE AND NOT EXERCISING THEIR POWERS OF MANAGEMENT AND SUCH POWERS ARE BEING EXERCISED BY EITHER THE HOLDING COMPANY OR ANY OTHER PERSON s RESIDENT IN )NDIA THEN THE PLACE OF EFFECTIVE MANAGEMENT SHALL BE CONSIDERED TO BE IN )NDIA #IRCULAR .O OF FURTHER CLARIFIED THAT SO LONG AS THE 2EGIONAL (EADQUARTER OPERATES FOR SUBSIDIARIES GROUP COMPANIES IN A REGION WITHIN THE GENERAL AND OBJECTIVE PRINCIPLES OF GLOBAL POLICY OF THE GROUP LAID DOWN BY THE PARENT ENTITY IN THE FIELD OF PAYROLL FUNCTIONS ACCOUNTING (2 FUNCTIONS )4 INFRASTRUCTURE AND NETWORK PLATFORMS SUPPLY CHAIN FUNCTIONS ROUTINE BANKING OPERATIONAL PROCEDURES AND NOT BEING SPECIFIC TO ANY ENTITY OR GROUP OF ENTITIES PER SE IT WOULD IN ITSELF NOT CONSTITUTE A CASE OF "O$ OF COMPANIES STANDING ASIDE AND SUCH

Para 4.1

).#/-%3 /4(%2 4(!. "53).%33 ).#/-%

294

ACTIVITIES OF 2EGIONAL (EADQUARTER IN )NDIA ALONE WILL NOT BE A BASIS FOR ESTABLISHMENT OF 0O%- FOR SUCH SUBSIDIARIES GROUP COMPANIES 4HUS TO DETERMINE 0O%- FIRST THE PERSONS WHO ARE MAKING THE KEY MANAGEMENT DECISIONS ARE IDENTIFIED AND THEN SECOND STAGE WOULD BE DETERMINATION OF PLACE WHERE THESE DECISIONS ARE IN FACT BEING MADE 4HE GUIDELINES DO RECOGNISE THAT PLACE OF DECISION MAY BE A LESS RELIABLE TEST GIVEN THE ADVENT OF MODERN TECHNOLOGY 4HUS IT HAS BEEN STATED THAT IN SUCH CASES THE PLACE WHERE THE DIRECTORS OR THE PERSONS TAKING THE DECISIONS OR MAJORITY OF THEM USUALLY RESIDE MAY ALSO BE A RELEVANT FACTOR Examples of PoEM 4HUS 0O%- COULD BE i 4HE LOCATION WHERE THE "OARD MEETS AND TAKES DECISIONS PROVIDED IT RETAINS THE AUTHORITY AND MAKES KEY MANAGEMENT AND COMMERCIAL DECISIONS NECESSARY FOR THE CONDUCT OF THE COMPANY S BUSINESS AS A WHOLE )F IT MERELY RATIlES DECISION SUCH PLACE WOULD NOT BE 0O%- ii 4HE PLACE WHERE THE %XECUTIVE #OMMITTEE MEMBERS ARE BASED AND WHERE THAT COMMITTEE DEVELOPS AND FORMULATES THE KEY STRATEGIES AND POLICIES FOR MERE FORMAL APPROVAL BY THE FULL BOARD iii 4HE LOCATION OF THE HEAD OFlCE IF COMPANY S SENIOR MANAGEMENT AND THEIR SUPPORT STAFF ARE BASED IN A SINGLE LOCATION AND THAT LOCATION IS HELD OUT TO THE PUBLIC AS THE COMPANY S PRINCIPAL PLACE OF BUSINESS OR HEADQUARTERS THEN THAT LOCATION IS THE PLACE WHERE HEAD OFlCE IS LOCATED )N CASE THE SENIOR MANAGEMENT OPERATES FROM MULTIPLE PLACES THEN THE PLACE FROM WHERE THEY ARE PRIMARILY BASED OR NORMALLY RETURN FROM TRAVEL WOULD BE A RELEVANT FACTOR iv 4HE PLACE WHERE THE PERSON ACTUALLY HAVING AUTHORITY TO DECIDE IS PRESENT IN CASE OF DECISIONS BY CIRCULAR RESOLUTION v 4HE PLACE WHERE SHAREHOLDER DECIDES WHERE IN FACT THE SHAREHOLDER INVOLVEMENT RESULTS IN EFFECTIVE MANAGEMENT 'ENERALLY THE DECISIONS MADE BY SHAREHOLDERS ON MATTERS WHICH ARE RESERVED FOR SHAREHOLDERS DECISION UNDER THE COMPANY LAWS ARE NOT RELEVANT FOR DETERMINATION OF A COMPANY S PLACE OF EFFECTIVE MANAGEMENT 4HIS IS BECAUSE SUCH DECISIONS TYPICALLY AFFECT THE EXISTENCE OF THE COMPANY ITSELF OR THE RIGHTS OF THE SHAREHOLDERS AS SUCH RATHER THAN THE CONDUCT OF THE COMPANY S BUSINESS FROM A MANAGEMENT OR COMMERCIAL PERSPECTIVE AND ARE THEREFORE

295

2%3)$%.#9

Para 4.1

GENERALLY NOT RELEVANT FOR THE DETERMINATION OF A COMPANY S PLACE OF EFFECTIVE MANAGEMENT vi 4HE PLACE WHERE DAY TO DAY OPERATIONAL DECISIONS ARE TAKEN WOULD NOT BE 0O%- 4HE #IRCULAR LISTS TWO ADDITIONAL FACTORS AS SECONDARY FACTORS NAMELY PLACE WHERE MAIN AND SUBSTANTIAL ACTIVITY OF THE COMPANY IS CARRIED OUT OR PLACE WHERE THE ACCOUNTING RECORDS OF THE COMPANY ARE KEPT 4HE EXISTENCE OF A 0% OR PERMANENT RESIDENCE OF A DIRECTOR IN )NDIA ETC ARE NOT RELEVANT IF THEY DO NOT MEET THE TEST OF KEY DECISION MAKING Determination of PoEM 4HE !SSESSING /FFICER !/ SHALL BEFORE INITIATING ANY PROCEEDINGS FOR HOLDING A COMPANY INCORPORATED OUTSIDE )NDIA ON THE BASIS OF ITS 0O%AS BEING RESIDENT IN )NDIA SEEK PRIOR APPROVAL OF THE 0RINCIPAL #OMMISSIONER OR THE #OMMISSIONER /N DETERMINING THAT 0O%- IS IN )NDIA THE !/ SHOULD SEEK PRIOR APPROVAL OF THE COLLEGIUM OF THREE MEMBERS CONSISTING OF THE 0RINCIPAL #OMMISSIONERS OR THE #OMMISSIONERS TO BE CONSTITUTED BY THE 0RINCIPAL #HIEF #OMMISSIONER OF THE REGION CONCERNED 4HE COLLEGIUM SO CONSTITUTED SHALL PROVIDE AN OPPORTUNITY OF BEING HEARD TO THE COMPANY BEFORE ISSUING ANY DIRECTIONS IN THE MATTER 4HREE ILLUSTRATIONS MENTIONED IN THE #IRCULAR ARE REPRODUCED FOR BETTER UNDERSTANDING %XAMPLE #OMPANY ! #O IS A SOURCING ENTITY FOR AN )NDIAN MULTINATIONAL GROUP INCORPORATED IN COUNTRY 8 AND IS SUBSIDIARY OF )NDIAN COMPANY " #O 4HE WAREHOUSES AND STOCK IN THEM ARE THE ONLY ASSETS OF THE COMPANY AND ARE LOCATED IN COUNTRY 8 !LL THE EMPLOYEES OF THE COMPANY ARE ALSO IN COUNTRY 8 4HE AVERAGE INCOME WISE BREAKUP OF THE COMPANY S TOTAL INCOME FOR THREE YEARS IS i OF INCOME IS FROM TRANSACTION WHERE PURCHASES ARE MADE FROM PARTIES WHICH ARE NON ASSOCIATED ENTERPRISES AND SOLD TO ASSOCIATED ENTERPRISES ii OF INCOME IS FROM TRANSACTION WHERE PURCHASES ARE MADE FROM ASSOCIATED ENTERPRISES AND SOLD TO ASSOCIATED ENTERPRISES iii OF INCOME IS FROM TRANSACTION WHERE PURCHASES ARE MADE FROM ASSOCIATED ENTERPRISES AND SOLD TO NON ASSOCIATED ENTERPRISES AND iv OF THE INCOME IS BY WAY OF INTEREST )NTERPRETATION )N THIS CASE PASSIVE INCOME IS OF THE TOTAL INCOME OF THE COMPANY 4HE PASSIVE INCOME CONSISTS OF i INCOME FROM THE TRANSACTION WHERE BOTH PURCHASE AND SALE IS FROM TO ASSOCIATED ENTERPRISES AND ii INCOME FROM INTEREST

Para 4.1

).#/-%3 /4(%2 4(!. "53).%33 ).#/-%

296

4HE ! #O SATISFIES THE FIRST REQUIREMENT OF THE TEST OF ACTIVE BUSINESS OUTSIDE )NDIA 3INCE NO ASSETS OR EMPLOYEES OF ! #O ARE IN )NDIA THE OTHER REQUIREMENTS OF THE TEST IS ALSO SATISFIED 4HEREFORE COMPANY IS ENGAGED IN ACTIVE BUSINESS OUTSIDE )NDIA %XAMPLE 4HE FACTS ARE SAME AS IN %XAMPLE BUT IT IS ESTABLISHED BY THE !SSESSING /FFICER THAT ALTHOUGH ! #O S SENIOR MANAGEMENT TEAM SIGNS ALL THE CONTRACTS FOR ALL THE CONTRACTS ABOVE 2S LAKH THE ! #O MUST SUBMIT ITS RECOMMENDATION TO " #O AND " #O MAKES THE DECISION WHETHER OR NOT THE CONTRACT MAY BE ACCEPTED )T IS ALSO SEEN THAT DURING THE PREVIOUS YEAR MORE THAN OF THE CONTRACTS ARE ABOVE 2S LAKH AND OVER PAST YEARS ALSO THE SAME TREND IN RESPECT OF VALUE CONTRIBUTION OF CONTRACTS ABOVE 2S LAKH IS SEEN )NTERPRETATION 4HESE FACTS SUGGEST THAT THE EFFECTIVE MANAGEMENT OF THE ! #O MAY HAVE BEEN USURPED BY THE PARENT COMPANY " #O 4HEREFORE 0O%- OF ! #O MAY IN SUCH CASES BE NOT PRESUMED TO BE OUTSIDE )NDIA EVEN THOUGH ! #O IS ENGAGED IN ACTIVE BUSINESS OUTSIDE )NDIA AND MAJORITY OF BOARD MEETING ARE HELD OUTSIDE )NDIA %XAMPLE !N )NDIAN MULTINATIONAL GROUP HAS A LOCAL HOLDING COMPANY ! #O IN COUNTRY 8 4HE ! #O ALSO HAS DOWNSTREAM SUBSIDIARIES " #O AND # #O IN COUNTRY 8 AND $ #O IN COUNTRY 9 4HE ! #O HAS INCOME ONLY BY WAY OF DIVIDEND AND INTEREST FROM INVESTMENTS MADE IN ITS SUBSIDIARIES 4HE 0LACE OF %FFECTIVE -ANAGEMENT OF ! #O IS IN )NDIA AND IS EXERCISED BY ULTIMATE PARENT COMPANY OF THE GROUP 4HE SUBSIDIARIES " # AND $ ARE ENGAGED IN ACTIVE BUSINESS OUTSIDE )NDIA 4HE MEETINGS OF "OARD OF $IRECTOR OF " #O # #O AND $ #O ARE HELD IN COUNTRY 8 AND 9 RESPECTIVELY )NTERPRETATION -ERELY BECAUSE THE 0LACE OF %FFECTIVE -ANAGEMENT OF AN INTERMEDIATE HOLDING COMPANY IS IN )NDIA THE 0O%- OF ITS SUBSIDIARIES SHALL NOT BE TAKEN TO BE IN )NDIA %ACH SUBSIDIARY HAS TO BE EXAMINED SEPARATELY !S INDICATED IN THE FACTS SINCE COMPANIES " #O # #O AND $ #O ARE INDEPENDENTLY ENGAGED IN ACTIVE BUSINESS OUTSIDE )NDIA AND MAJORITY OF "OARD MEETINGS OF THESE COMPANIES ARE ALSO HELD OUTSIDE )NDIA 4HE 0O%- OF " #O # #O AND $ #O SHALL BE PRESUMED TO BE OUTSIDE )NDIA

4HE 0O%- IS ALSO RELEVANT TO DETERMINE APPLICABILITY OF #HAPTER 8)) ' IN RESPECT TO INCOME OF SHIPPING COMPANIES WHEREIN THE COMPANIES CAN PAY TONNAGE TAX COMPUTED AS PER THE PROVISIONS OF THE SAID #HAPTER 4HE 0O%- OF THE QUALIFYING COMPANY SHOULD BE IN )NDIA AND IT IS DEFINED AS THE PLACE WHERE THE BOARD OF DIRECTORS OF THE COMPANY OR ITS EXECUTIVE DIRECTORS AS THE CASE MAY BE MAKE THEIR DECISIONS OR IN A CASE WHERE THE BOARD OF DIRECTORS ROUTINELY APPROVE THE COMMERCIAL AND STRATEGIC DECISIONS MADE BY THE EXECUTIVE DIRECTORS OR OFFICERS OF THE COMPANY THE PLACE WHERE SUCH EXECUTIVE DIRECTORS OR OFFICERS OF THE COMPANY PERFORM THEIR FUNCTIONS

297

2%3)$%.#9

Para 4.1

PoEM in DTAAs 4HE #IRCULAR ON 0O%- GUIDELINES INCORPORATES VARIOUS QUANTITATIVE TESTS 4HE CONCEPT OF 0O%- IS INCORPORATED IN VARIOUS $4!!S ENTERED INTO BY )NDIA &OR INSTANCE THE )NDIA .ORWAY $4!! IN !RTICLE STATES h&OR THE PURPOSES OF THIS !GREEMENT THE TERM hRESIDENT OF A #ONTRACTING 3TATEv MEANS ANY PERSON WHO UNDER THE LAWS OF THAT 3TATE IS LIABLE TO TAX THEREIN BY REASON OF HIS DOMICILE RESIDENCE PLACE OF MANAGEMENT OR ANY OTHER CRITERION OF A SIMILAR NATURE v !ND !RTICLE PROVIDES h7HERE BY REASON OF THE PROVISIONS OF PARAGRAPH A PERSON OTHER THAN AN INDIVIDUAL IS A RESIDENT OF BOTH #ONTRACTING 3TATES THEN IT SHALL BE DEEMED TO BE A RESIDENT ONLY OF THE 3TATE IN WHICH ITS PLACE OF EFFECTIVE MANAGEMENT IS SITUATED )F THE 3TATE IN WHICH ITS PLACE OF EFFECTIVE MANAGEMENT IS SITUATED CANNOT BE DETERMINED THEN THE COMPETENT AUTHORITIES OF THE #ONTRACTING 3TATES SHALL ENDEAVOUR TO SETTLE THE QUESTION BY MUTUAL AGREEMENT v

5SUALLY IN CASE OF INDIVIDUALS PERMANENT HOME THE HABITUAL ABODE OR CENTRE OF VITAL INTERESTS IS USED AS THE CRITERIA TO DETERMINE RESIDENCY (OWEVER IN CASE OF COMPANIES AND OTHER ENTITIES USUALLY THE PLACE WHERE IT IS REGISTERED UNDER THE LAWS OF A PARTICULAR 3TATE MAY BE TAKEN AS THE DOMICILE (OWEVER BY VIRTUE OF ITS OPERATIONS IT MAY MEET THE TEST OF RESIDENCY IN ANOTHER 3TATE ALSO )N ORDER TO AVOID DOUBLE TAXATION TREATIES USUALLY INCORPORATE THE SO CALLED @TIE BREAKER RULE TO DETERMINE RESIDENCY OF THE INDIVIDUAL 4HE DETERMINATION OF RESIDENCY IS IMPORTANT BOTH FROM POINT OF VIEW OF APPLICABILITY OF THE TAX LAW OF A 3TATE AS WELL AS FOR ELIGIBILITY TO TREATY BENEFITS !RTICLE OF A $4!! LAYS DOWN THE PERSONAL SCOPE i.e. WHO WILL BE COVERED

BY THE AGREEMENT 'ENERALLY !RTICLE PROVIDES THAT THE #ONVENTION SHALL APPLY TO PERSONS WHO ARE TAX RESIDENTS OF ONE OR BOTH OF THE #ONTRACTING 3TATES h4HIS !GREEMENT SHALL APPLY TO PERSONS WHO ARE RESIDENTS OF ONE OR BOTH OF THE #ONTRACTING 3TATES v !RTICLE OF )NDO #ANADA 4REATY

)F THE PERSON IS A TAX RESIDENT OF ONE OF THE CONTRACTING 3TATES THEN HE CAN CLAIM BENEFIT UNDER THE TREATY )N ING Bewaar Maatschappij I BV V Dy. CIT THE REVENUE DEPARTMENT SOUGHT TO DENY BENEFIT OF THE )NDIA .ETHERLANDS $4!! TO THE ASSESSEE WHICH WAS A FUND 3UB ACCOUNT WHICH WAS MANAGING THE INVESTMENT OF TRUST BASED IN .ETHERLANDS 4HE BENEFICIARIES OF THE TRUST PAID TAX ON THE INCOME EARNED BY THE TRUST IN .ETHERLANDS 4HE REVENUE DEPARTMENT WHILE ASSESSING THE INCOME IN

; = TAXMANN COM ; = )4$ -UM 4RIB

Para 4.1

).#/-%3 /4(%2 4(!. "53).%33 ).#/-%

298

THE HANDS OF THE REPRESENTATIVE ASSESSEE TRUSTEE CONTENDED THAT SINCE THE FUND WAS A TRANSPARENT ENTITY IT COULD NOT QUALIFY AS A RESIDENT FOR PURPOSES OF THE $4!! AND THE INCOME WAS TAXABLE IN )NDIA 4HE )4!4 HELD THAT RESIDENCY HAD TO BE TESTED qua THE BENEFICIARIES WHO WERE TAX RESIDENTS AND HENCE TREATY PROTECTION WOULD BE AVAILABLE Transparent entity and entities not recognised in another State !N ISSUE CAN ARISE IN CASE OF FISCALLY TRANSPARENT ENTITIES AND THOSE WHICH MAY BE PECULIAR TO A 3TATE &OR INSTANCE A (INDU 5NDIVIDED &AMILY (5& OR !SSOCIATION OF 0ERSONS !O0 WHICH IS RECOGNISED IN )NDIA AS A TAX RESIDENT BUT NOT IN OTHER COUNTRIES 4HE TAX RESIDENCY IS DETERMINED IN TERMS OF THE TAX LAWS OF 3TATE 4HUS AN ENTITY THAT IS NOT RECOGNISED AS RESIDENT FOR TAX PURPOSES SAY A PARTNERSHIP FIRM IN 5+ EARNING INCOME FROM )NDIA WOULD BE TAXED IN )NDIA HOWEVER SINCE THE INCOME IS NOT TAXED IN THE HANDS OF THE FIRM BUT IN THE HANDS OF THE PARTNERS IN 5+ MAY NOT BE ABLE TO CLAIM BENEFIT OF THE $4!! SINCE IT WOULD NOT BE A RESIDENT OF EITHER 3TATE 4HE ISSUE OF FISCALLY TRANSPARENT ENTITIES SUFFERING FROM ECONOMIC DOUBLE TAXATION THAT IS SAME INCOME GETTING TAXED TWICE THOUGH THE $4!! PROVIDES RELIEF FROM JURIDICAL DOUBLE TAXATION THAT IS SAME ENTITY RESIDENT GETTING TAXED IN TWO JURISDICTIONS WAS EXAMINED BY )4!4 -UMBAI IN Linklaters LLP V ITO 4HE ASSESSEE WAS A PARTNERSHIP FIRM IN 5+ AND THE REVENUE DEPARTMENT CONTENDED THAT IT CANNOT AVAIL BENEFIT OF THE $4!! SINCE IT WAS A FISCALLY TRANSPARENT ENTITY IN 5+ THE FIRM IS NOT TAXED ONLY PARTNERS ARE TAXED )T OPINED THAT THE TERM hLIABLE TO TAXv NEED NOT BE UNDERSTOOD TO INDICATE FISCAL DOMICILE h4HE TERM @LIABLE TO TAX BY REASONS OF HIS DOMICILE RESIDENCE PLACE OF MANAGEMENT OR ANY OTHER CRITERION OF SIMILAR NATURE 4HERE COULD BE SEVERAL REASONS FOR WHICH A PERSON MAY BE LIABLE TO TAX IN A TAX JURISDICTION SUCH AS SOURCE BASED TAXATION OF AN INCOME A PRESUMPTIVE TAX IN RESPECT OF AN OFFSHORE BUSINESS OR SIMPLY A TAX BECAUSE OF A PHYSICAL PRESENCE SUCH AS BY WAY OF A LIAISON OFFICE IN A TAX JURISDICTION OR BECAUSE OF A LOCALITY RELATED ATTACHMENT WHICH LEADS TO RESIDENCE BASED TAXATION 4HE TAXATION OF A PERSON IN ALL THESE SITUATIONS DOES NOT NECESSARILY INDICATE A FISCAL DOMICILE IN THAT JURISDICTION )N OUR CONSIDERED VIEW IN ITS CONTEXTUAL SENSE EXPRESSION @LIABLE TO TAX BY REASONS OF HIS DOMICILE RESIDENCE PLACE OF MANAGEMENT OR ANY OTHER CRITERION OF SIMILAR NATURE REFERS TO A SITUATION IN WHICH A PERSON IS LIABLE TO TAX IN A TAX JURISDICTION BY THE VIRTUE OF A LOCALITY RELATED ATTACHMENT WHICH LEADS TO RESIDENCE TYPE TAXATION v

; = 3/4 -UM

299

2%3)$%.#9

Para 4.1

2ELYING ON THE ,ATIN LEGAL MAXIM THAT @A rubro ad nigrum’ WHICH MEANS LITERALLY FROM RED TO THE BLACK ORIGINATING FROM OLDEN TIMES WHERE THE TITLE OF A STATUTE AS WELL AS HEADINGS OF A PROVISION IN THE STATUTE WERE WRITTEN IN RED WHILE ITS BODY TEXT WAS WRITTEN IN BLACK THE )4!4 HELD THAT THE PURPOSE OF !RTICLE IS ASCERTAINMENT OF FISCAL DOMICILE OF A PERSON AND A FISCAL DOMICILE IS A FACTUAL ASPECT WHICH CANNOT OSCILLATE DUE TO PERIPHERAL VARIATIONS IN THE SCHEME OF TAX LAWS OF THAT JURISDICTION !LSO )NDIA S POSITION HAS BEEN AND IS THAT PARTNERSHIPS MUST BE CONSIDERED AS RESIDENTS OF THEIR RESPECTIVE COUNTRIES IN VIEW OF THEIR LEGAL AND TAX CHARACTERISTICS 4HUS IT WAS HELD THAT THE PARTNERSHIP QUALIFIED AS A RESIDENT AND WOULD BE ELIGIBLE FOR TREATY BENEFIT !RTICLE OF THE -,) ON 4RANSPARENT %NTITIES STATES THAT FOR THE PURPOSES OF A #OVERED 4AX !GREEMENT INCOME DERIVED BY OR THROUGH AN ENTITY OR ARRANGEMENT THAT IS TREATED AS WHOLLY OR PARTLY FISCALLY TRANSPARENT UNDER THE TAX LAW OF EITHER #ONTRACTING *URISDICTION SHALL BE CONSIDERED TO BE INCOME OF A RESIDENT OF A #ONTRACTING *URISDICTION BUT ONLY TO THE EXTENT THAT THE INCOME IS TREATED FOR PURPOSES OF TAXATION BY THAT #ONTRACTING *URISDICTION AS THE INCOME OF A RESIDENT OF THAT #ONTRACTING *URISDICTION 4HUS SOME RELIEF IS PROVIDED TO SUCH ENTITIES AGAINST THE EFFECT OF ASYMMETRIC TAXATION Ruling based on PoEM in treaties 4HE SITUS OF THE "OARD OF $IRECTORS WHICH EXERCISES CONTROL AND PERFORM MANAGEMENT FUNCTIONS THAT IS THE RELEVANT CONSIDERATION TO DETERMINE 0O%- )N Nimbus Sport International Pte. Ltd. V Dy. DIT IT WAS HELD THAT THE APPELLANT IS A RESIDENT OF 3INGAPORE UNDER !RTICLE OF THE $4!!

BECAUSE IT IS A RESIDENT UNDER THE DOMESTIC LAW OF 3INGAPORE AND hITS PLACE OF EFFECTIVE MANAGEMENTv IS LOCATED AT 3INGAPORE 7HILE THE ISSUE OF RESIDENCY WAS EXAMINED USING THE TEST OF CONTROL AND MANAGEMENT OF AFFAIRS IN THE DOMESTIC LAW CONSIDERING THE DECISION MAKING ACTIVITIES AND LOCATION OF MEETING IT WAS HELD THAT ASSESSEE COMPANY S CONTROL AND MANAGEMENT WAS LOCATED WHOLLY OUTSIDE )NDIA 4HE CASE OF ITO V Martrade Gulf Logistics FZCO-UAE REVOLVED AROUND THE ISSUE OF ELIGIBILITY FOR TREATY BENEFIT WITH THE ASSESSEE CLAIMING THE SAME UNDER )NDIA 5!% $4!! BUT REVENUE DEPARTMENT DENYING THE SAME CONTENDED THAT THE 0O%- WAS NOT IN 5!% BUT IN 'ERMANY &ACTUALLY THOUGH SHAREHOLDERS WERE NON 5!% RESIDENTS THE ASSESSEE BY REASON

0ARA ON POSITION AND RESERVATIONS ON !RTICLE /%#$ -4# ; = TAXMANN COM )4$ $ELHI 4RIB ; = TAXMANN COM 2AJKOT 4RIB

Para 4.1

).#/-%3 /4(%2 4(!. "53).%33 ).#/-%

300

OF INCORPORATION WAS A RESIDENT OF 5!% 4HE !/ HELD THAT THE PLACE OF EFFECTIVE MANAGEMENT THE DIRECTORS AND SOME BOARD MEETINGS WERE HELD OUTSIDE 5!% AND HENCE MERELY BY INCORPORATING THE ENTITY IN 5!% THE ASSESSEE WAS NOT ENTITLED TO TREATY BENEFIT (OWEVER THE #)4 ! GRANTED RELIEF TO THE ASSESSEE REASONING THAT NATIONALITY OF THE DIRECTOR PLACE OF HOLDING OF !'- AND RESIDENTIAL STATUS OF SHAREHOLDERS ARE NOT RELEVANT FACTOR FOR DETERMINING RESIDENTIAL STATUS OF THE COMPANY 4HE !/ HAD INVOKED THE ,IMITATION OF "ENEFITS ,O" CLAUSE !RTICLE OF )NDIA 5!% $4!! WHICH STATES THAT AN ENTITY WHICH IS A RESIDENT OF A #ONTRACTING 3TATE SHALL NOT BE ENTITLED TO THE BENEFITS OF THIS !GREEMENT IF THE MAIN PURPOSE OR ONE OF THE MAIN PURPOSES OF THE CREATION OF SUCH ENTITY WAS TO OBTAIN THE BENEFITS OF THIS !GREEMENT THAT WOULD NOT BE OTHERWISE AVAILABLE 4HE CASES OF LEGAL ENTITIES NOT HAVING bona fide BUSINESS ACTIVITIES SHALL BE COVERED BY THIS !RTICLE (OWEVER THE )4!4 HELD THAT THE MAIN PURPOSE OF INCORPORATION WAS NOT TO OBTAIN BENEFITS WHICH WOULD HAVE OTHERWISE NOT BEEN AVAILABLE AND IN ANY CASE SINCE THE )NDO 'ERMAN TREATY HAD SIMILAR PROVISIONS AS REGARDS TAXATION OF SHIPPING INCOME THE TEST OF ,O" COULD NOT BE INVOKED 7HILE EXAMINING THE 0O%- IN ADIT IT -3 2 , Mumbai V Bay Lines Mauritius THE )4!4 HELD THAT IN ORDER TO INVOKE THE TREATY THE 0O%MUST BE IN EITHER ONE OF THE #ONTRACTING 3TATES )N THE INSTANT CASE THE ASSESSEE WAS INCORPORATED IN -AURITIUS BUT SHAREHOLDERS AND TWO DIRECTORS WERE IN 5!% THOUGH THERE WERE TWO DIRECTORS IN -AURITIUS ALSO 4HE MEETINGS WERE HELD IN 5!% (ENCE IT WAS HELD THAT WHERE 0O%- WAS NOT IN )NDIA OR IN -AURITIUS !RTICLE OF THE )NDIA -AURITIUS $4!! COULD NOT BE INVOKED 4HE -,) ALSO ADVOCATES USE OF 0O%- TO DETERMINE RESIDENCY OF PERSON OTHER THAN INDIVIDUALS AND THE SAME HAS BEEN INCORPORATED IN THE /%#$ AS WELL AS 5. -ODELS !RTICLE OF THE /%#$ -4# IS REPRODUCED BELOW h 7HERE BY REASON OF THE PROVISIONS OF PARAGRAPH A PERSON OTHER THAN AN INDIVIDUAL IS A RESIDENT OF BOTH #ONTRACTING 3TATES THE COMPETENT AUTHORITIES OF THE #ONTRACTING 3TATES SHALL ENDEAVOUR TO DETERMINE BY MUTUAL AGREEMENT THE #ONTRACTING 3TATE OF WHICH SUCH PERSON SHALL BE DEEMED TO BE A RESIDENT FOR THE PURPOSES OF THE #ONVENTION HAVING REGARD TO ITS PLACE OF EFFECTIVE MANAGEMENT THE PLACE WHERE IT IS INCORPORATED OR OTHERWISE CONSTITUTED AND ANY OTHER RELEVANT FACTORS )N THE ABSENCE OF SUCH AGREEMENT SUCH PERSON SHALL NOT BE ENTITLED TO ANY RELIEF OR EXEMPTION FROM TAX PROVIDED BY THIS #ONVENTION EXCEPT TO THE EXTENT AND IN SUCH MANNER AS MAY BE AGREED UPON

BY THE COMPETENT AUTHORITIES OF THE #ONTRACTING 3TATES v ; = TAXMANN COM -UM 4RIB

Cross-Border Transactions under Tax Laws & FEMA AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO NO. OF PAGES BINDING TYPE

: : : : : : :

G. GOKUL KISHORE, R. SUBHASHREE TAXMANN APRIL 2022 2ND EDITION 9789356221116 838 PAPERBACK

Rs. : 1995 | USD : 61

Description This book provides practical guidance based on judicial interpretation of the law and rules. It also provides an easy-to-understand commentary (with departmental clarifications) on cross-border transactions with respect to the following laws: u Income Tax (including International Tax & Transfer Pricing) u Goods & Services Tax (GST) u Customs u Foreign Exchange Management Act (FEMA) This book will be helpful for practitioners, members of the bar & bench and industry, and assessing officers.

The Present Publication is the 2 nd Edition, authored by Dr. Gokul Kishore & R. Subhashree.

This book is updated till 1 st April 2022, with the following noteworthy features: u [Easy-to-Understand Practical Commentary] covering: n Income Tax (including International Tax & Transfer Pricing) u Implications of International Transactions u Adoption of Appropriate Transfer Pricing (TP) u Comprehending Creation of Permanent Establishment (PE) and Double Taxation Avoidance Arrangements (DTAA) u Ensuring Compliance with Withholding Obligations, when payment is made to non-resident u Issues relating to Royalty & Fees for Technical Services (FTS), Tax Residency and Foreign Tax Credit (FTC) n GST u Examination of Cross-Border Services by applying Place of Supply & Export of Service provisions under Integrated Goods and Services Tax Act (IGST), besides analyzing benefits to exporters n Customs u Valuation of Imported Goods under Customs Valuation Rules, when transaction value as declared by importer is not accepted u Availing Customs Duty Exemptions u Duty Remission and Rewards under various Export Promotion Schemes as provided in Foreign Trade Policy n FEMA u Compliance with Provisions of FEMA on Receipts and Payments for Export and Imports u [Exhaustive Discussion on both Basic Concepts and Issues faced by the Industry] combined with essential commentary on statutory provisions and the jurisprudence. u

[Cross-references to other Chapters] wherever implications need to be understood completely have been provided

ORDER NOW