A college of income tax commissioners has ruled that even if the directors of a company sit in India and decide certain points of action, the situation does not warrant triggering provisions of the rules for the place of effective management (poem), thus providing clarity for several local ones Units that have recently held key meetings virtually due to the lockdowns.
The College of Three Income Tax Commissioners, led by the Gujarat Chief Commissioner, heard a case involving an Indian company and its Hong Kong-based entity in which the poem regulations were triggered by the tax authorities.
The tax department has not disclosed the company’s name in accordance with applicable regulations that allow confidentiality in certain disputes.
The Poem framework was introduced in 2018 to determine the tax payable by a foreign company that is managed for all purposes from India and yet does not pay any taxes domestically.
Many Indian companies that have traditionally used holding companies and subsidiaries overseas for various reasons have built additional structures into their overseas branches in accordance with regulations.
The tax department had stated that while the manager lived in Hong Kong, the board of directors resided in India and made decisions that were similar to running the company.
The college said the location of board meetings was not relevant if the manager was simply seeking India’s opinion.
“As for poem, there are guiding principles issued by the CBDT, but the final decision will depend on the facts and circumstances of the particular case. It’s about substance instead of form. The place where the management decisions are made would be more important than the place where such decisions are implemented ”, said Uday Ved, partner at the tax consultancy KNAV. “The local manager has to make the most important commercial and business decisions and the board of directors based in India can ratify them, but this does not necessarily mean that the place of effective management is in India.”
The “substance over form” tax doctrine is often used by the judiciary to distinguish whether a taxpayer has created a schema of transactional relationships in documents, primarily for tax purposes.
Tax experts say that any business can have more than one place of management, but it can only have one place of effective management at any one time.
The government had introduced Poem to ensure that certain organizations would not set up mailbox companies in tax havens or foreign jurisdictions to avoid paying domestic taxes.
As a result of these regulations, several companies had relocated key people to countries where the foreign company is located.
The companies were also obliged to hold board meetings in these legal systems and to record minutes of the meetings.
However, this has been disrupted for many companies as no physical board meetings have been held at the overseas location in the past two years due to the pandemic.
The tax department had started interviewing some local subsidiaries of multinational corporations to see if they had overseas operations managed from India.
In cases where this was found, the department wanted them to tax their income from such operations here, ET first reported in January last year.
The tax department had issued notices to the subsidiaries of several MNCs.