The Indian Income Tax Appellate Tribunal (ITAT) delivered a ruling dated 31 May 2007 (reported in September 2007) in the case of Radha Rani Holdings (P) Ltd v. Assistant Director of Income Tax, International Taxation (16 SOT 495) on whether the residential status of a foreign company could change to that of a "resident" of India, if a resident of India holds a 99% stake in the foreign company.
(a) Facts. The Taxpayer (i.e. Radha Rani Holdings (P) Ltd) was a Singaporean company and filed its tax return in India as a "non-resident" company. The tax authorities noticed that 99% of the share capital of the company was owned by a resident of India and 1% by a director, who was a resident of Singapore. The tax authorities also noted that the company belonged to a group of companies, which was headquartered in India, and all the investments of the Taxpayer company were made in the group companies and the source of the investments of the Taxpayer company was from India. The tax authorities proceeded to examine the "resident" status of the Taxpayer under Sec. 6 of the Indian Income Tax Act 1961 (ITA) as well as under Art. 4 of the India-Singapore tax treaty (the Tax Treaty).
As per Sec. 6 of the ITA, a company is regarded as a resident of India for tax purposes if (i) it is an Indian company, or (ii) the control and management of its affairs is situated wholly in India during the relevant year. The tax authorities took note of the extracts of the minutes of the board meeting held in April 2001 and May 2001, at the registered office of the company in Singapore and compared the same with the passport details of the director who held the 99% stake and established that the said director was not in Singapore at the time the board meetings were held.
The tax authorities further noticed that the Taxpayer did not have any employees in Singapore and the office premises in Singapore were merely for the purpose of having an address. The tax authorities held that the Taxpayer had been incorporated outside India (in Singapore) solely for the purposes of routing money and making investments in a group of companies in India (i.e. the Singaporean entity was merely a paper company to route the money from outside India).
The tax authorities accordingly concluded that the control and management of the Taxpayer was wholly in India and as such, was to be assessed to tax in India as a "resident" as per Sec. 6 of the ITA as well as under the Tax Treaty.
On appeal, the Commissioner of Income Tax (Appeals) agreed with the views of the tax authority and rejected the Taxpayer's appeal. The Taxpayer filed an appeal with the ITAT.
(b) Issue. The issue to be decided by the ITAT was whether the residential status of a foreign company would change to that of a "resident" of India, if a resident of India held a substantial stake in the foreign company and the source of all the foreign company's investments is in India.
(c) Decision. The ITAT ruled that the Taxpayer was not a resident of India for tax purposes even though a resident of India held a substantial (i.e. 99%) stake.
The ITAT tested the residence of the Taxpayer under the provisions of Sec. 6(3) of the ITA, which stipulates that a company is regarded as a resident of India for tax purposes if (i) it is an Indian company, or (ii) the control and management of its affairs is situated wholly in India during the concerned year. Being a Singaporean registered company, the Taxpayer was not a "resident" company under the first criterion. In the case of a foreign company, even if the slightest control and management is exercised from outside India, it would not fall within the scope of Sec. 6 of the ITA and hence, the Taxpayer would be regarded as a "non-resident" under the second criterion.
The ITAT observed that the expression "control and management" would mean central control and management and not carrying on the day-to-day business by the employees and agents of the company. Even a partial control of the company outside India would make the entity a non-resident entity.
The ITAT noted that all the board meetings of the Taxpayer were held in Singapore (and not in India). Since the board of directors, subject to the overall supervision of shareholders, actually controls and manages the affairs of a corporate entity effectively as against the day-to-day operations of the company, the situs of the board of directors should determine the place of control and management of the Taxpayer. This would not mean where one or more of the directors normally reside, but where the board actually meets for the purpose of determination of the key issues and business aspects relating to the Taxpayer.
Thus, whether or not one of the shareholders was a "resident" of India, was not decisive in determining the tax residence status of the Taxpayer. It was not disputed that the other members of the board, who happened to have acted as chairman of all the board meetings was not only a resident of Singapore, but had never visited India. Concerning board matters, all the directors enjoy equal powers irrespective of the actual shareholding position by the respective directors. The chairman of the board enjoys some special powers in a board meeting. Therefore, it is not correct to say that simply because one of the directors held a 99% stake in the company, he had special powers over other board members.
The ITAT held that the tax authorities' stand that the affairs of the Taxpayer comprised mostly of, and related to, matters in India such as funds, investments and loans, was of little consequence in deciding the tax residence status. The relevant issue was from where the business was being conducted, rather than where it was actually conducted.
The ITAT also observed that the Taxpayer being an "investment company" may invest its entire funds in India but so long as the "investment decisions" were taken outside India, it could not be said that the control and management of its affairs was situated wholly in India so as to treat it as "resident in India". The investment in India was the result of business decisions taken outside India. The ITAT further observed that this may be relevant to determine where the income accrues, but is not relevant for the purpose of deciding the residential status of the taxpayer company.
Similarly, the operation of the Taxpayer's bank account by the director holding the 99% stake would alone, or by itself, not determine the position and status of control and management of the Taxpayer. Further, the contention of the tax authorities that the Taxpayer had a close connection with a group of companies operating in India would not make it a "resident" of India.
Likewise, a Singaporean company having an Indian company as its subsidiary would also not alter this position. A foreign company can very well have a wholly-owned subsidiary company abroad and if the company is controlled and managed from the country of its incorporation, then its residential status would continue to be in that country irrespective of the fact whether it owns other companies in India.
Accordingly, the ITAT concluded that the Taxpayer was not "resident" in India for tax purposes and hence, not liable to tax in India.
(Note: At the time of publication, it was not known if the tax authorities had appealed the decision.)