Budget 2015- Scope of residential status of companies widen                                             -By Samir Shah                                                                                                               Introduction                                                                                                                                       On 28 February 2015, the Indian Finance Minister presented his budget in the Parliament. In his budget speech, he mentioned that few aspects of the Direct Tax Code have been addressed in the budget. One of such aspects is widening of scope of residential status of companies by substitution of section 6(3) of the Income Tax Act. The existing section 6(3) of the Income Tax Act, inter alia, provides that a foreign company is said to be resident in India in any previous year, if during that year, the control and management of its affairs is situated wholly in India. Proposed Amendment Proposed section 6(3) of the Income Tax Act, inter alia, provides that a foreign company is said to be resident in India in any previous year if its' place of effective management (POEM), at any time in that year, is in India. As per Explanation to this clause, "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 memorandum, explaining the provisions of the Finance Bill 2015, due to the requirement that whole of control and management should be situated in India and that to for whole of the year, the condition has been rendered to be practically inapplicable. A foreign company can easily avoid becoming a resident by simply holding a board meeting outside India. In view of the same, a concept of POEM is proposed to be introduced and if a foreign company has its POEM in India at any time during the year, it will be considered as a company resident in India. The said memorandum also proposed that in due course, a set of guiding principles will be issued to determine POEM which would benefit the tax payers as well as the tax administration. In view of the above amendments, a company incorporated outside India will be treated as a resident in India if its POEMat any time during a tax year is situated in India.For example, an Indian company may have a subsidiary company outside India and if the key management and commercial decisions related to this subsidiary company are taken in India, the subsidiary company will be considered as a company resident in India. If a company is considered as resident in India, it is liable to pay tax on its global income in India. Place of Effective Management (POEM) As per Explanation, POEM 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. The issue arisingfor consideration is, if a director of a foreign company is resident in India, whether a foreign company will be considered as resident in India. The residence of director may not determine the residential status of a company. One should always consider a place where key managerial and commercial decisions in substance are made. In such a case, it is always advisable that an Indian resident director travels to a foreign country to attend board meetings, and key managerial and commercial decisions are taken in board meetings held outside India. It is possible that directors of the company may hold a board meeting via video conferencing for taking key managerial and commercial decisions. These directors may be present in various countries including India at the time of board meeting. In this connection, reference may be made to observations made bythe Delhi Tribunal in the case of Radha Rani Holdings (P.) Ltd.2 In the aforesaid decision, the Delhi Tribunal observed that "in the days of technological advancements conducting meetings by telephonic conversations or video conferencing process is very much prevalent in the world and, therefore, the actual presence of a person at the exact place of meeting or conference may not be necessary. The board resolution may also be by way of circular suggestion". The Delhi Tribunal accepted the claim of the tax payer that board meeting was held in Singapore based on the minutes of the meeting authenticated by the Indian High Commission in Singapore. There may be a situation where a foreign company is considered as resident of foreign country due to place of its incorporation or registration in that country. If POEM of such company is in India, a foreign company will be resident of that country as well as of India. In such a case, a tie breaker rule provided in double taxation avoidance agreement (DTAA) entered into by India with the foreign country needs to be examined. For example, in the India-UK DTAA, in case of tie breaker, POEM of the company determines the residential status of a company whereas in the India-USA DTAA, in case of tie breaker, such company is considered to be outside the scope of India-USA DTAA except for purposes of certain articles of DTAA. As per India-Japan DTAA, in case of tie breaker, the competent authorities of Contracting States shall determine by mutual agreement the Contracting State of which that person is deemed to be a resident. As per OECD Model Commentary 2014 on Article 4, competent authorities having to apply such a provision to determine the residence of a legal person for purposes of the Convention would be expected to take into account various factors, such as where the meetings of its board of directors or equivalent body are usually held, where the chief executive officer and other senior executives usually carry on their activities, where the senior day-to-day management of the person is carried on, where the person's headquarters are located, which country's laws govern the legal status of the person, where its accounting records are kept, whether determining that the legal person is a resident of one of the Contracting States but not of the other for the purpose of the Convention would carry the risk of an improper use of the provisions of the Convention etc. Conclusion The proposed amendment in section 6(3) of the Income Tax Act has far more consequences and should beconsidered by an Indian group before incorporating any company outside India. ■■