However, there were some proposals particularly relating to the field of international taxation, which deserve serious consideration. It has been widely reported that the Finance Minister has an open mind about the various provisions proposed by the DTC and that a final call will be taken after due consideration of the views of the different stakeholders. The DTC was put in public domain and comments were invited from the public including the trade bodies. The FM also had an interaction with the chambers of commerce and others in the month of October.

News reports suggest that the areas which drew maximum flak from the interested quarters were the provisions relating to the proposal relating to change over to asset based Minimum Alternate Tax (MAT), the proposals relating to General Anti Avoidance Rule (GAAR), the definition of effective management of an enterprise, the provision relating to treaty override and the switchover from the so called EEE to EET. Surprisingly, most of the concerns expressed by the trade bodies related to non-resident taxation. Grapevine has it that industry bodies had lobbied hard to get these proposals shelved. It is therefore necessary to analyze some of the proposals, particularly relating to international taxation so that informed decision can be taken about their retention or modification or otherwise.

Today, we intend to take up one of the areas that seem to have generated substantial controversy- the corporate residence. Let us first see what the extant laws are in this regard and what the DTC proposes.

Section 6(3) of the ITA states as follows:

“A company is said to be resident in India in any previous year, if-

•  it is an Indian company; or

•  during that year, the control and management of its affairs is situated wholly in India" .( Emphasis supplied)

‘Indian company' is separately defined in section 2(22). Without going into details, for the purpose of our present discussion, it can be said that a company that is incorporated in India is an Indian company and is automatically resident in India. Even a foreign company, a company that is incorporated abroad, can also be resident in India if, during the year, its ‘control and management' is situated wholly in India. It is quite possible for a company to be incorporated outside India but being wholly managed from India. In such a situation, but for this provision, it would have been very easy to escape domestic taxation by the simple expedience of incorporating companies outside India. That is the reason why the alternate test of residence finds place in section 6 of the ITA.

For the purpose of determination of residential status, companies are treated differently from other entities such as firms and A.O.P. In case of these unincorporated entities, section 6(4) of the ITA provides that they are deemed to be resident in India unless the control and management of such entities are wholly outside India during the year. In other words, an unincorporated entity is deemed to be resident in India unless it can show that all of its control and management was outside India. Even if a fraction of control is exercised from India, such unincorporated entities are treated as residents. In the case of companies, it is the other way round. Here, although no deeming fiction is used, the revenue has to show that the control and management of the entity was wholly in India. Here, even if a tiny fraction of such control and management is outside India, under the existing law, such a company cannot be treated as resident of India.

What is ‘control and management' poses difficult questions. But, in the Indian context, following the precedents in other common law jurisdictions, it has been laid down by the Courts that the term implies where the ‘head and brain' of the organization is. It has been held that the expression "control and management" means de facto control and management and not merely the right or power to control and manage. From the Indian perspective, broadly speaking, it is where the meetings of the Board of Directors are held that is considered most important since the major decisions of the company are taken there even if the entire business of the company is carried on elsewhere.

As against this position of the current law, the DTC, in the proposed section 4(3), lays down as follows:

“A company shall be resident in India in any financial year, if-

•  it is an Indian Company; or

•  its place of control and management, at any time in the year, is situated wholly , or partly, in India". (Emphasis supplied)

For the unincorporated entities also the proposed section 4(4) provides the same criterion i.e., the control and management of its affairs is situated, at any time in the year, wholly or partly in India.

One can, therefore, argue that the DTC brings the companies and the unincorporated entities at par. However, nothing is explicitly mentioned in the code. In Para 4.12 of the discussion paper, it is merely mentioned as follows:

“ An Indian company will always be treated as resident in India. However, a foreign company can either be resident or non-resident in India. It will be treated as resident in India, if at any time in the financial year, the control and management of its affairs is situated wholly or partly in India (it need not be wholly situated in India, as at present)”.

Unfortunately, no reason is given for making such a change in the provisions relating to corporate residency, which is continuing, from the 1922 Act.

Critics and vested interests have been quick to point out that the proposal if implemented, will make a foreign company resident in India even if only a part of its control and management takes place in India. For example, if even a single board meeting takes place in India, Indian Revenue may claim the company to be resident in India and its entire global income will then become taxable in India. Additionally, it may also become liable to dividend distribution tax and will not benefit from any DTAA. By this standard, the foreign subsidiaries of Indian companies will also be deemed to be resident in India. The concomitant uncertainty is not supposed to be good for the investment climate for India.

The truth is that the current law is totally inadequate and is being rampantly misused in the name of foreign investment. Setting up a company in a jurisdiction like Mauritius or Singapore is extremely facile and all that one needs to ensure is that some meetings of the Board of Directors take place there. Then, armed with a tax residency certificate and relying on the CBDT Circular No.789 of April 13, 2000, one can even avail the treaty benefits even if all the action takes place in India and all the income is earned in India.

Let us examine the facts of a reported case and the decision rendered by the ITAT to get a proper perspective in the matter. In this case, the action takes place in Singapore but it could have been any other jurisdiction as well.

In the case of Radha Rani Holding (P) Ltd vs Assistant Director of Income Tax, (2007-TII-61-ITAT-DEL) the brief facts were as follows:

The assessee company was incorporated under the laws of Singapore and filed return of income in the status of non-resident showing some interest income. The A.O found out that paid up capital of the company consisted of 100 shares out of which 99 shares were held by one Mrs Geeta Soni, an Indian resident and 1 share was held by one Mrs Juliana Kassim, a resident of Singapore. The A.O also found that there was no employee of the company in Singapore, that the address the company operated from was in Delhi, that all the investments were made in group companies in India and the source of investment was also from India. He also found that all the loans and advances were also in the group companies in India. In order to prove its case before the A.O, the assessee filed extracts of the minutes of the Board of Directors allegedly held on 18-4-2001 and 2-5-2001 at the registered office of the company in Singapore wherein both the directors were supposed to be present. The A.O found that the meeting of the Board was supposed to have taken place on the 18th at 10.30 A.M. On examining the passport of Mrs Soni, the A.O found that on 18-4-2001, she was in fact in India and that she left India on the same day and came back on the 2nd May 2001. The A.O, therefore, came to the conclusion that it was a mere paper company formed for routing investments in India and that in any case the control and management of the company was wholly in India. In appeal, the CIT (A) brought on record some more facts and confirmed the A.O's order.

On further appeal, it was submitted before the ITAT that the meeting of the Board of Directors and also of shareholders are held at Singapore, the bank accounts are maintained at Singapore, the tax returns are filed in Singapore, a company secretary has been appointed and he operates from Singapore. The Tribunal put the argument of the Department on its head and held that the other director never visited India and hence it could not be said that any meeting of the Board of directors took place in India and even if one of board meetings be considered to have been held in India that does not negate the position that meeting of the Board of directors are held in Singapore.

To cut a long story short, the Tribunal held that the provision of section 6(3)(ii) relating to the control and management of the company being ‘ wholly ' situated in India is not satisfied in the case.

There are some other cases involving Mauritius as well where again the Tribunal has taken the view that the control and management of such companies set up by Indians can not be said to be ‘wholly' in India. Thus there is a need to rectify this position in the domestic law. If a company cannot be treated as resident for the purpose of the domestic law itself, the question of considering the treaty law will not arise at all. Therefore, there is a genuine need to strengthen the domestic law.

However, the solution proposed in the DTC goes to the other extreme as some commentators have rightly pointed out in as much as slightest control from India may render a foreign company tax resident of India. The solution seems to be rather simple. If the term ‘wholly' is deleted from the stipulation in existing section 6(3), a company will be resident in India if its control and management is in India.

An analysis of the facts of these cases and the arguments given by the judiciary will show that there is an urgent need to amend the law so that such cases of blatant abuse can be prevented. If we genuinely want to stop the charade of Indians masquerading as foreign investors and taking advantage of DTAAs and not paying their fair share of taxes and thereby pushing the tax burden on compliant taxpayers, such an amendment is absolutely necessary.