Residential Status Of Firm And Company

Residents of India and Non-Residents of India are the two different categories of taxpayers. Whether a person generating the income is a resident or a non-resident, Indian income is taxable in India. On the other hand, a person's foreign income is only taxable in India if they reside in India. A non-resident's foreign income is not subject to tax in India.

In the case of "Rai Bahadur Seth Teomal v. CIT", it was held that itis the assessee's responsibility to present all material information to the income-tax authorities when determining whether he/she is a resident or a non-resident.

A Partnership Firm and an Association of Persons are deemed to be residents of India if, throughout the pertinent prior year, "Control and Management" of their activities were entirely or partially located inside of India. However,if the management and control of their business are located entirely outside ofIndia, they are classified as non-residents of India.

It should be noted that a company or an association of people cannot be "ordinarily"or "not ordinarily resident". The residential status of partners or members is irrelevant while ascertaining the firm/association's status.

Inthe case of "Subbayya Chettiar v. CIT", The Supreme Court ruled that section 6(2) creates an implication that a firm must be a resident in India and that it is their responsibility to establish that they are not residents.

What Is Control And Management?

While control and management are placed in the partners' hands in a firm, they are placed in the chief officer's hands in an association of persons. Control and management  refer to actual control and management, not just the legal right to do so. The seat, the head, and the instructing power are often where the management and control are located. The general assumption is that a firm is resident in India if its partners are based there. However, this assumption can be successfully refuted by demonstrating that the firm's control and management are located entirely outside of India. The assessee is responsible for disproving the assumption.

Residential Status Of A Company Under Section 6(3):

The residential status of a company during the pertinent previous year determinesits total income. Either the company's incorporation or the control and administration of its business serve as the basis for determining its residential status.

In the case of "Moosa S. Madha v. CIT", it was held that the department is responsible for demonstrating that a company is a resident of India.

Two sorts of companies can be distinguished based on their residential status:

(A)"Resident Companies under Section 6(3)":

A Corporation is deemed to have been a resident of India in any prior year if (A)It is regarded as an Indian corporation; (B) The control and administration of its activities were entirely located in India throughout the relevant prior year.

Observations:

1.Even though the control and administration of an Indian company's affairs are centralised outside of India, the company is still considered to be a resident for income tax reasons.

2.A foreign or a non-Indian corporation will only be regarded as a "resident" of India for any prior year if its complete management and control of activities during the pertinent prior year was based in India.

For instance, one company is registered in India, but its headquarters are in Colombo,and another is registered in Sri Lanka, but its headquarters are in Kolkata. In the first instance, it is a resident corporation because it was founded and registered in India, and the location of its headquarters is irrelevant. Subsequently,even though the second corporation was formed outside of India, all of its management and control are located in India, making it a "resident company".

(B)"Non-Resident Companies under Section 2(30)":

If a corporation is not an "Indian company" and its "place of effective management"during that year is outside of India, then it will be a non-resident during any prior year. It denotes that a foreign corporation will be a non-resident company if its control and management are entirely or largely located outside of India. For instance, if an American corporation held 8 of its complete 12 meetings in India during the prior year, it would be considered a non-resident for the reasons of income tax.

In"Radha Rani Holdings (P) Ltd. v. Director of Income Tax", the tribunal had to decide whether the control and management of the Singapore-incorporated company's business fell inside of India under "Section 6(3) of the Income TaxAct, 1961", in its entirety. Following were the observations given by theTribunal:

(1)Central control and management, rather than day-to-day operations/affairs, mustbe used to oversee a company's activities. What matters is where the company's head and brain are located, together with the authority of direction and control.

(2)Possession of majority of the company's shares does not imply control andmanagement authority, nor does it establish residency.

In"Narottam & Prakash Ltd. v. CIT", the court ruled that the location of the business and the carrying place of the income are completely unimportant. he actual management and control, or the "de-facto CnM" rather than the "de-jure CnM", must be taken into account rather than the ability orpower to manage and control.

A Foreign Company's Residential Status as of The "2016–17 Assessment Year":

If a foreign corporation's "place of effective management (POEM)" for the pertinent prior year was in India, that company will be considered a resident of India. The POEM refers to a location where crucial managerial and business choices that are essential for the operation of an entity as a whole are, in essence, made. The Board of the taxpayers' benefit as well as tax administration may issue a set of guidelines to be followed in determining POEM for this purpose.

In the case of "CIT v. Nandlal Gandalal", it was held that the controland management refers to actual management and monitoring, not only the legal authority to do so.

It is evident that both the POEM criterion alongside the "construction permanent establishment" criterion perform a highly significant part in finding out the "residential status of a company" under the 1961 Act, thereby leading to liabilities/implications related to tax upon the corporation.

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