Residency Tax status

How to determine resident status of the Company:

As per the new norms a company shall be said to be a resident of India if:-

  • It is an Indian company, or
  • Its place of effective management (PoEM), in that year, is in India

Place of Effective Management (PoEM) has been defined in the finance bill to mean a place where the key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are made. As per the budget memorandum “The modification in the condition of residence in respect of company by including the concept of effective management would align the provisions of the Act with the Double Taxation Avoidance Agreements (DTAAs) entered into by India with other countries and would also be in line with international standards. It would also be a measure to deal with cases of creation of shell companies outside India but being controlled and managed from India”.

Service Permanent Establishment (“PE”)

  • Section 9(1)(i) of the Act provides for taxability of all income accruing or arising, whether directly or indirectly, through or from any business connection in India
  • Further, in the case of a business of which all the operations are not carried out in India, the income of the business deemed to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India
  • Such income would be taxable at the rates in force as per the Act, as applicable to a non-resident
  • Article 5 of most of the Tax treaties defines a PE
  • PE is defined to include the furnishing of services (other than services as defined in Article 12/ Article 13 pertaining to Royalties and FTS), within a Contracting State by an enterprise through employees or other personnel, but only if activities of that nature continue within that State for a period or periods specified in respective Tax Treaty
  • Accordingly, if the above conditions are fulfilled, there is an exposure that the services rendered by F Co through employees may constitute a service PE of the F Co
  • In the scenario, F Co would be treated as a non-resident and accordingly, the income of F Co in such case would be taxable at the rates is force as per the Act
  • Further, TP regulations shall apply to F Co and I Co for the transaction

Fixed place PE

  • Article 5(1) of the Tax Treaties defines Fixed place PE
  • Fixed Place PE exists only if all the following conditions are satisfied cumulatively:
  • There is a place of business (“place of business test”)
  • Such place of business is at the disposal of enterprise (“disposal test”)
  • Such place of business is fixed (“location test” and “permanence test”)
  • Such place of business is fixed (“location test” and “permanence test”)
  • The business of the enterprise is carried on (“business activity test”) wholly or partly through such fixed place of business
  • Existence of fixed place PE may also be evaluated if the employee has a fixed place at his disposal in I Co through which business of F Co is carried on
  • Further, TP regulations shall apply to F Co and I Co for the transaction

Summary of the tax implications discussed above are as under:

Particulars If I Co is the employer If F Co is the employer
Reimbursement of payments (i.e. salary) made by F Co to I Co Not income in the hands of F Co, if no profit element is Involved Income in the hands of F Co
PE for F Co in India No, as I Co is the Employer Possibility of Service PE or Fixed place PE (If the activities of employees amounts to stewardship activities, PE may not be constituted)
Whether payment made by I Co to F Co could be regarded as FTS No Possible
Applicability of TP regulations to the transaction No. But preferable to report reimbursement in Form 3CEB Yes

Typical Secondment Arrangement

Case law: Morgan Stanley & Co. [2007] 292 ITR 416 (SC)

Centrica India Offshore Pvt. Ltd. v. CIT [2014] 364 ITR336 (Del)