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 rhyme provisions were introduced by tax authorities.
The tax department does not disclose the name of the company as per existing rules, which allow confidentiality in certain disputes.
The poem’s framework was introduced in 2018 to determine the tax payable by a foreign company which, for all purposes, is managed from India and yet does not pay taxes domestically.
Many Indian companies, which have traditionally used holding companies and subsidiaries abroad for various reasons, have established additional structures in their foreign entities to comply with the regulations.
The tax department had said that the managers lived in Hong Kong, the board of directors resided in India and they presided over similar decisions of running the company.
The Collegium held that the venue of the Board’s meetings was not relevant if the manager was seeking opinion only from India.
“As far as the poem is concerned, there are guiding principles issued by the CBDT but the final determination will depend on the facts and circumstances of the given case. It is a matter of form more than matter. Uday Ved, partner at tax advisory firm KNAV, said the place where management decisions are taken will be more important than the place where such decisions are implemented. “The local manager has to make major commercial and managerial decisions and can board sitting in India
confirm But this does not mean that the place of effective management lies in India itself.”
The tax principle of “substance over form” is often used by the judiciary to distinguish whether a taxpayer has constructed a scheme of transactional relationships in documents primarily to obtain tax benefits.
Tax experts say that any entity can have more than one place of management but it can have only one place of effective management at any given time.
The government had introduced poetry to ensure that some organizations were not forming companies by name In a tax haven or foreign jurisdiction to avoid paying domestic taxes.
Complying with these rules, many companies relocate key individuals to countries where the foreign entity is located.
Companies were also required to hold board meetings in these jurisdictions and record the minutes of the meetings.
However, this was hampered for many companies as physical board meetings could not be held at the overseas location in the last two years due to the pandemic.
The tax department had started questioning some of the local subsidiaries of multinational companies to find out whether they have overseas operations that are being managed from India.
In cases where it is established, the department wanted them to pay tax on their income from such operations, as ET first reported in January last year.
The tax department had issued notices to the subsidiaries of several MNCs.