Residential status of a Company – (Part-1)
Introduction : In our previous article we have covered residential status for individual; in this article we will cover provisions relating to residential status of corporate entity. It is important to know that how residential status for corporate entity can be determine, is there any special provision which is required to be taken care while determining residential status of corporate entity.
How residential status can be determined?
It has been determined that company would be resident in India in any previous year, if-
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.
Other question that arises is what is place of effective management; it has been defined that 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 are undertaken substantially.
What are the guiding principles for determination of Place of Effective management (‘POEM’) of a Company, other than an Indian company?
Before moving with guiding principle, it shall be noted that; there can be more than one place of management, but it can have only one place of effective management at any point of time.
Primary base to determine Place of Effective Management is that whether the company is engaged in active business outside India?
For determining the said following points are worth noting; A company shall be said to be engaged in ‘active business outside India’ if it is fulfilling all the conditions mentioned below:
If passive income is not more than 50% of its total income, i.e., if Income aggregating from the transactions where both the purchase and sale of goods is from/to its associated enterprises; and income by way of royalty, dividend, capital gains, interest (this is point not applicable to banking and financial institute), or rental income; is not more than 50% of Income computed for tax purpose in accordance with the laws of the country of incorporation and as per as per books of account, where the laws of the country of incorporation does not require such a computation.
Illustrations: AB Ltd has sold good to its associated enterprise, the amount of Rs. 20,00,000/- from the said transaction; along with this it has sold goods worth Rs. 70,00,000/- to external parties. Apart from this it has other income (including rent, royalty and interest) worth Rs. 30,00,000/-. Whether the first condition is said to be fulfilled? In the incorporation of country of AB Ltd it is mandatory to have computation of Income and income as per said computation is Rs. 1,40,00,000/-.
It has been stated that first condition will be fulfilled if passive income is not more than 50% of its total income; passive income means Income aggregating from the transactions where both the purchase and sale of goods is from/to its associated enterprises; and income by way of royalty, dividend, capital gains, interest (this is point not applicable to banking and financial institute), or rental income. Here total passive income is Rs. 50,00,000/- and as they are liable to maintain computation of Income, total income will be Rs. 1,40,00,000/- and passive income is less than 50% of total income therefore first test is passed by AB Ltd.
What if they are not liable to maintain computation of Income as per law of country in which it was incorporated?
In said case total income will be Rs. 1,20,00,000/- and passive income is Rs. 50,00,000/- which is not exceeding 50% of total income therefore again first test will be passed by AB Ltd.
Second condition that is required to be fulfilled is; Less than 50% of its total asset are situated in India; i.e., for the purpose of determination of total value of asset:
|Value of assets||Assets being individually depreciable.||The average of its value for tax purposes in the country of incorporation of the company at the beginning and at end of the previous year.|
|Assets being pool of fixed assets being treated as block of assets for depreciation.||The average of its value for tax purposes in the country of incorporation of the company at the beginning and at end of the year.|
|For other assets (Non-depreciable asse||Value as per Books of Accounts|
Illustrations: AB Ltd has Machine which is not following under any block of asset Rs. 20,00,000/- the value at the end of year is Rs. 14,00,000/-; some of the assets which are following under block of assets for depreciation. Value of such assets as per books of account is 35,00,000/- aggregately and value of block as per law prevailing in that country is 30,00,000. There is land which is situated in India and the value of such land recognized in books of accounts is Rs. 20,00,000/-.
Whether the second condition is said to be fulfilled?
It has been stated that second condition will be fulfilled when less than 50% of its total asset are situated in India. The valuation of assets is to be done as per the table given above; and therefore, value of machinery will Rs. 17,00,000/- and value of assets which are depreciated under block of assets will be Rs. 15,00,00/- (Here book value will not be considered as per rules). While considering value of land, book value will be considered and book value for the said purpose will be Rs. 20,00,000/-Total value of asset is 42,00,000/- and out of which assets situated in India is 20,00,000/- which is not less than 50%, therefore it will fulfil the second condition.
In this part we have discussed the first two condition which are required to be fulfilled in case assessee wants to establish that it has Active Business Outside India. In next part we will cover the remaining two conditions along with relevant illustrations.