A company is treated as a resident of India in any previous year if:
- it is an Indian company, or
- its PoEM in that year is in India (see below).
An Indian company is always resident even if it is controlled from a place located outside India or even if shareholders of the Indian company controlling more than 51% voting power are non-residents. However, a partnership firm, a limited liability partnership (LLP), and other non-individual entities are treated as resident in India if any portion of their control and management is in India. They are non-resident if their control and management is situated wholly outside India.
Place of effective management (PoEM)
Presently, a foreign company is considered resident in India if the control and management of its affairs is situated wholly in India.
To bring to tax those companies that are incorporated outside India but controlled from India, the condition of PoEM has been introduced. PoEM is an internationally recognised concept accepted by the Organisation for Economic Co-operation and Development (OECD).
A foreign company will be regarded as a resident in India if its PoEM is in India in that year. Since ‘residency’ is determined for each year, PoEM is also required to be determined on a year-to-year basis. The concept of PoEM is one of substance over form. The term PoEM has been explained to mean 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. To provide clarity and address certain concerns with regard to implementation of determination of residency of a foreign company on the basis of PoEM, the CBDT has issued a circular laying down guidelines. The guidelines laid down the concept of determination of PoEM based on bifurcation of companies engaged in active business outside India and other companies. The circulars clarify that the PoEM provisions shall not apply to a foreign company having turnover or gross receipts of INR 500 million or less in a tax year.
Permanent establishment (PE)
A PE is defined in India as a fixed place of business through which the business of an enterprise is wholly or partly carried on or through an agent who habitually exercises an authority to conclude contracts or regularly delivers goods or merchandise or habitually secures orders on behalf of a non-resident.
The scope of 'business connection' was amended under the Income-tax Act to align with the modified PE Rule as per the Multilateral Instrument (MLI).
'Business connection' includes business activities carried on by a non-resident through dependent agents. The scope of 'business connection' under the Income-tax Act is similar to the provisions relating to Dependent Agent Permanent Establishment (DAPE) in India’s tax treaties. The amendment provides that business connection shall also include any business activities carried through a person who, acting on behalf of the non-resident, habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by the non-resident. It further states that the contracts should be:
- in the name of the non-resident
- for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that the non-resident has the right to use, or
- for the provision of services by that non-resident.
Further, as per the provisions of the Income-tax Act, 'significant economic presence' would also constitute a 'business connection' in India.
The term 'significant economic presence' has been modified, and the applicability of same has been deferred to FY 2021/22.
'Significant economic presence' means:
- any transaction in respect of any goods, services, or property carried out by a non-resident with any person in India, including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed, or
- systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India as may be prescribed.
However, only so much of income as is attributable to such transactions or activities shall be deemed to accrue or arise in India. It is also proposed that the transactions or activities shall constitute significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India.