CBDT's guidelines for Place of effective management would lead to increase in tax litigation

Place of effective management - "concept is one of substance over form"

CBDT has issued certain guidelines, providing clear rules to establish if a company has effective management in India. This has to be determined on the basis of facts and circumstances of each case depending whether or not the company is engaged in active business outside India. 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. 

Sec-6(3) of the Income Tax Act, 1961 provided that a company is said to be a resident in India in any previous year if it is an Indian company or if during that year the control and management of its affairs is situated wholly in India. This allowed companies to avoid paying tax in India by artificially escaping the residential status by shifting insignificant or isolated events related with control and management outside India. Finance Act, 2015 amended the existing provision of Sec-6(3) w.e.f. 1st April 2016. The concept of 'effective' management has been incorporated into the provision. Now the provision provides that a company will be said to be a resident in India in any previous year if it is an Indian company or its place of effective management in that year is in India. 

"Place of effective management" means 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. 

As per the guidelines, a company shall be said to be engaged in "active business outside India" if the passive income is not more that 50% of the its total income and less than 50% of its total assets situated in India, less than 50% of total number of employees are situated in India or are resident in India and the payroll expenses incurred on employees is less than 50% of its total payroll expenditure. 

The determination of place of effective management would be a two stage process which would include the identification and ascertainment of  the person/ or persons who actually make the key management and commercial decision for conduct of the company's business as a whole and secondly the determination of place where such decisions are made. Hence, its the place where these management decisions are made would be more important than the place where such decisions are implemented.

Mere formal holding of Board meetings at a place would not be conclusive for determination of place of effective management being at that place. If the key decisions of the directors are taken in a place other than the place where formal meetings are held then such other place would be relevant for place of effective management. 

Location of company's head office is an important factor in determination of company's place of effective management. There are some deciding factors that determines the location of the head office of the company; such as, if company's senior management and the staffs are based in a single location and that location is held out to the public as company's principle place of business then that place would be considered as location where the head office is situated.

Another interesting fact is that, since 'residence' is determined for each year, place of effective management will also be required to be determined on year to year basis. The guidelines emphasizes that determination of PoEM will be based on the relevant facts related to the management and control of the company and not to be determined on the basis of isolated facts since that by itself do not establish effective management. For example - fact that if one or some of the directors of foreign company reside in India will not be conclusive evidence that satisfies the conditions for establishing PoEM in India. The guideline lays down that before holding a company incorporated outside India on the basis of its PoEM, as being resident in India by the Assessing officer, prior approval from the Principal Commissioner or Commissioner has to be obtained. 

The norms clarified that 'snapshot' approach is not to be adopted and no single principle will be decisive in itself. Since, the guidelines have left room for interpretation, this would lead to litigation. 

To read in detail check the notification: 
http://www.incometaxindia.gov.in/news/poem-note-for-uploading.pdf

Advance Ruling is case specific but it serves as a good indication as to how a business transaction should be interpreted

Recently, North American Coal Corp. India, the local subsidiary of US-based North American Coal Corp, sought a ruling on the application of service tax on social security benefits given by the parent to an employee working in India on contract. Tax authorities are of the view that the practice of paying salaries for work in India that are then transferred to foreign accounts by the parent company and reimbursed to it by the Indian subsidiary make it akin to supply of manpower and hence taxable. 

It was contended that the service rendered was in the capacity as an employee as per the agreement and hence no question of any service tax provision is applicable to the salary paid by the local subsidiary to the employee. In the past regime, there was a specific Entry No. Section 65(68) read with Section 65 (105)(k). But after 2012 and after the advent of the Negative List, all those entries had gone into the oblivion and now there is a fresh definition of service under Section 65 (44). The applicant relied upon the definition of service and more particularly on the exclusion provision which is under Section 65 (44)(b), which suggests that a provision of service by an employee to the employer in the course of or in relation to his employment shall not be included in the definition of service.

AAR is of the view that one must look from the perspective of the definition of service and if the definition of service excludes the service offered by an employee to the employer then it has to be so held. 

A view is expressed that this ruling must be taken into consideration for examining identical situations of other companies even though AAR ruling does not have binding effect on them. This can guide companies on potential tax liabilities. 

For details

Source:

http://www.cbec.gov.in/resources//htdocs-cbec/aar/rulings/st-rulings/st-ruling-18-north-america.pdf;jsessionid=0BEFE1F18254A8E5135419A6ADE2EBB1

Right of review is a creature of statute. Tribunal is the creation of statute.

Hon’ble Supreme Court in the case of Grindlays Bank Ltd. vs. Central Government Industrial Tribunal and Ors.[1] have discussed the connotation of the expression ‘review’. 

This expression is used in the two distinct senses, namely:

(1) a procedural review which is either inherent or implied in a court or Tribunal to set aside a palpably erroneous order passed under a misapprehension by it; and

(2) a review on merits when the error sought to be corrected is one of law and is apparent on the face of record.

Thus, we can say that review is a reconsideration of the subject-matter by the same Bench. However, the power to review is a restricted power which authorizes the court or the Tribunal which has passed the order sought to be reviewed to look over through the order not in order to substitute a fresh or second order, but to correct it or improve it because some material which it ought to have considered had escaped its consideration.[2] Such power of review is not inherent in a court or Tribunal. 

The Hon'ble Supreme Court in the case Patel Nareshi Thakershe vs. Pradyum Singhji Arjun Singhji[3] has held that the Income Tax Act, 1961 has not conferred jurisdiction on the Tribunal to review and revise its order, as the Tribunal is not a Court and it has no power to review its orders adjudicated on merits. Hence, the power of review is not an inherent power, but it must be conferred either specifically or by necessary implication.

The Act has specified the scope of powers of the tax authorities including appellate authority, wherein the Tribunal has been specifically vested to rectify any mistake apparent from the record under section 254(2) of the Act. It is important to note that the Appellate Tribunal is vested with all the powers as that of the income tax authorities referred to in section 131 by virtue of section 255 (6). It clarifies that any proceeding before the Appellate Tribunal shall be deemed to be judicial proceedings within the meaning of sections 193 and 228 and for the purpose of section 196 of the Indian Penal Code. 

Section 255 (6) states that the Appellate Tribunal shall be deemed to be a Civil Court for all the purposes of section 195 and Chapter XXXV of the Code of Criminal Procedure, 1898. Section-131 clearly states the scope of the power regarding discovery, production of evidence, etc. vested by the Act when trying a suit. For purpose of ease the said section is reproduced herein below,-

(1) The Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner, Commissioner (Appeals), [Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner and the Dispute Resolution Panel referred to in clause (a) of sub-section (15) of section 144C shall, for the purposes of this Act, have the same powers as are vested in a court under the Code of Civil Procedure, 1908 (5 of 1908), when trying a suit in respect of the following matters, namely:-

(a) discovery and inspection;
(b) enforcing the attendance of any person, including any officer of a banking company and examining him on oath;
(c) compelling the production of books of account and other documents; and
(d) issuing commissions

Thus, it is clear from the provisions of the Income Tax Act, 1961 that the Code of civil procedure does not apply to the proceedings under the Income Tax Act, 1961. Section 131 has laid down parameters for exercising its power for a limited purpose of discovery and inspection, enforcing the attendance of any person, including any officer of a banking company and examining him on oath, compelling the production of books of account and other documents and issuing commissions. The Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner, Commissioner (Appeals), Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner and the Dispute Resolution Panel have, for the purposes of the Act, been given the same powers as are vested in a court under the Code of Civil Procedure when trying a suit. Therefore, courts having general jurisdiction like civil courts have inherent power. But the courts or Tribunals of limited jurisdiction created under special statutes have no inherent power. [4] 

Under the Income Tax Act, there is no power of review conferred on the Tribunal and in the absence of such specific conferment of such power cannot exercise the power of review of its previous judgment purporting to exercise power under Order 47, Rule 1 or section 151, CPC. The exercise of such power is completely different.[5] It was observed by Andhra Pradesh High Court in the case of CIT vs. Ram Murti,[6] that Appellate Tribunal is a judicial body exercising judicial powers under the statute. Whatever it does must be done in consonance with sound judicial principles and in accordance with well-accepted doctrines applicable to judicial bodies. Hon’ble Bombay High court in the case of Trikamal Maneklal In Re:[7] has observed that the Tribunal having once delivered a judgment which has by operation of law become final is not entitled to review its decision in a subsequent proceeding.

The general rule, however, is subject to exceptions, and one of the exceptions is that a Judicial Tribunal can always recall and quash its own order.  The Punjab High Court in Mangat Ram Kuthiala vs. CIT[8] has held that, it is a settled rule where a judicial Tribunal could recall and quash its own order in exceptional cases if it was shown that it was obtained by fraud or by palpable mistake or was made in utter ignorance of a statutory provision. Under such circumstances, Tribunal has inherent power to recall such an order, quash it, and make an order on merits and according to law in the ends of justice.

It is pertinent to mention an important judicial pronouncement where scope of inherent power of Tribunal has been adjudicated. In the case of Bhagwan Radha Kishen vs. CIT.[9], it was observed by the Hon’ble Allahabad High court that,

“there is no provision in the rules, for setting of an order of dismissal for default even in a case where the Tribunal might be later satisfied on unimpeachable evidence that notice was not in fact affected or that there was sufficient cause for non-appearance. It is true that there is no such rule but it must be held that there is inherent jurisdiction in the Tribunal to set aside an order of dismissal for default or an order passed on an appeal heard ex parte when it is satisfied that there was in fact no service of notice or that there was sufficient cause which prevented the appellant or the respondent from appearing on the date fixed.” 

Rule 24 and 25 of the Appellate Tribunal Rules, 1963 deals with procedure for hearing ex-parte by the Tribunal.

In view of the above discussion, it is thus important to understand the facts and circumstances of each case, scope of power of the Appellate Tribunal conferred by the statute and rely upon judicial pronouncements to come at a reasonable conclusion. It is a debatable point as to when the Tribunal can be said to be exercising its inherent power to correct a mistake or its statutory power to correct a mistake apparent from the records and when the exercise of such power tantamount to a review of its earlier order. 

The Income Tax Act is a self-contained code. The Income-tax Appellate Tribunal is a creation of the statute and its powers are circumscribed by the provisions of the Act. Appeals are filed before it under section 253 of the Act. Section 254(1) contemplates disposal of the said appeal after giving opportunity to both the parties of being heard. Sub-section (2) of section 254 enables the Tribunal to rectify any mistake apparent from the record. Sub-section (4) of section 254 specifies that save as provided in section 256, the order passed by the Appellate Tribunal on appeal are final. A reading of section 254 shows that the orders which are passed under section 254 are final except under two circumstances: (1) if a rectification is called for, then such an order can be passed under section 254 (2), and (2) a reference can be made on questions of law arising out of this order under the provisions of section 256. As far as the Tribunal is concerned, section 254(4) provides that the orders passed by it on appeal are final.[10]

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[1] 1980 Supp SCC 420

[2] Jaipur Finance & Dairy Products (P) Ltd. vs. CIT (1980) 125 ITR 404 (Raj.)

[3] AIR 970 SC 1273

[4] Gopinath Deb vs. Budhia Swain, AIR 1983 Orissa 31, 33

[5] CIT vs. Globe Transport Corporation (1991) (1992) 195 ITR 311 (Raj.)

[6] 167 ITR 603 (AP)

[7] 1958 33 ITR 725 (Bom.)

[8] 1960  38 ITR 1 (Punj.)

[9] 1952  22 ITR 104, 108

[10] CIT vs. K.L. Bhatia (1990) 182 ITR 361 (Delhi)