Government said it aims to target the shell companies that are created to evade taxes through the place of effective management (POEM) rules, but excluded firms with an annual turnover of less than Rs 50 crore from its purview.
The Central Board of Direct Taxes (CBDT) today made public the long-pending "guiding principles" to determine place of effective management of a company, which have been effective April 1, 2016.
The PoEM rules with an aim to assess the tax liability was to come into effect in the current fiscal. The final guidelines have now been issued.
"The final guidelines on POEM contain some unique features. Active Business Outside India (ABOI) test has been provided so as not to cover companies outside India which are engaged in active business," CBDT said in a statement.
"The intent is not to target Indian multinationals which are engaged in business activity outside India. The intent is to target shell companies and companies which are created for retaining income outside India although real control and management of affairs is located in India."
The tax department also said "the guidelines are not intended to cover foreign companies or to tax their global income, merely on the ground of presence of permanent establishment or business connection in India".
Also, the POEM guidelines will not apply to companies having a turnover or gross receipts of Rs 50 crore or less in a financial year.
"Adequate administrative safeguards have been incorporated in the guidelines by mandating that the assessing officer (AO), before initiating inquiry for POEM in a case of a taxpayer, will seek approval from Principal Commissioner or Commissioner of Income-Tax. The AO shall also obtain approval from Collegium of Principal Commissioners of Income-Tax before holding that POEM of a non-resident company is in India," it said.
The modification of the existing norms was necessary as
many companies skip tax liability by misusing the guidelines.
As per the Guiding Principles, "place of effective management" is defined as a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.
The place of effective management "in case of a company engaged in active business outside India" shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.
"However, if on the basis of facts and circumstances, it is established that the board of 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 India, then the place of effective management shall be considered to be in India," the guidelines stated.
In cases of "companies other than those that are engaged in active business outside India", the determination of POEM will be a two-stage process.
The first stage would be identification or ascertaining the persons who actually make the key management and commercial decision for conduct of the company's business as a whole. The second stage would be determination of place where these decisions are in fact being made.
"The place where these management decisions are taken would be more important than the place where such decisions are implemented. For the purpose of determination of POEM, it is the substance which would be conclusive rather than the form," the guidelines said.
POEM is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognise the concept of place of effective management for determination of residence of a company as a tie-breaker rule for avoidance of double taxation.
"The concept of POEM for deciding the residential status of a company was introduced by the Finance Act, 2015. It is effective April 1, 2016, and accordingly shall apply from assessment year 2017-18 onwards," CBDT said.
