01 January 0001

Direct Tax Amicus: July 2017


Taxation of foreign companies regarded as ‘resident’ in India-

Residential status of a company was historically being determined under the Income-Tax Act based on the test of ‘control and management’ being situated in India, during the ‘whole’ of any previous year. In order to align with international best practices on taxation, the test for determination of residential status of a company was amended by the Finance Act 2017 to examine the ‘Place of Effective Management’ (‘PoEM’) is located in ‘India in that year’. The phrase PoEM has been defined as ‘a place where the key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made’. Apart from change brought out from examination of place of control and management to the place of effective management, the Act has also made two other significant changes in determination of residential status of a company. Firstly, the amended statute now explicitly provides that the test would require a ‘substance’ test for control as against the form in which the control is shown to be exercised. If a foreign company is regarded as a resident of India due to its PoEM being located in India, it would be subject to taxation in India on its global income. But, the computation of the taxable income is easily said than done…



  • Method of valuation of unquoted equity shares notified
  • Certain amendments and clarifications in respect of cash transactions issued


Ratio Decidendi

  • Service PE can be created even without satisfying the threshold for physical presence
  • Keeping shares in escrow account can be treated as transfer for levy of capital gains
  • No ALP adjustment to be made where AMP expenses solely benefitted India brands
  • Transfer of divisions not constituting demerger - Carry forward of loss not denied to existing company
  • Section 14A read with Rule 8D is applicable even when no expenditure is incurred
  • Special Bench insulates Section 115JB from disallowance under Section 14A read with Rule 8D
  • Amnesty scheme covers scenarios where penalty is imposed dehors assessment proceedings
  • Penalty not imposable on interest as same not covered under “tax in arrears”


July, 2017/Issue-35 July, 2017/Issue-35

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