Note on Circular providing relief to small companies from POEM
CBDT released its final guidelines for determination of Place of Effective Management of a Company as per Section 6(3) of the Income-tax Act vide CircularNo. 6 of 24th January, 2017 (Annexure 1). A Press Note was also issued on 24th January 2017 (Annexure 2). The Press Release accompanying the Guidelines stated that the POEM guidelines shall not apply to companies having turnover or gross receipts of Rs. Fifty crore or less in a financial year. However, such a provision is not made in the main Circular No. 6 itself.
2. Different interpretations:
There were multiple views in the profession. One view was that the guidelines will not apply to companies (having turnover/gross receipts of Rs. 50Cr or less) at all. Therefore, Section 6(3) would apply to such companies without considering the guidelines. This in effect made determination of POEM in respect of such small companies difficult and uncertain.
Another view was that Press Release has no legal power and hence Guidelines would apply to all companies, irrespective of their turnover.
The third view was that the intention was to - not apply the POEM provisions to such small companies. This meant that such companies would not be covered within the broader provisions of Section 6(3). However, such a clarification would be required within the Act or at best in a CBDT circular. A press release cannot give such relief.
In view of the above, we had approached the CBDT for a proper clarification on 14th February 2017 (Annexure 3).
4. Clarification Issued:
Within a short span of less than 10 days, CDBT has come out with the clarification vide Circular no. 8 of 23rd February 2017 (Annexure 4). The circular provides relief from Section 6(3) to companies having a turnover or gross receipts of less than 50 crores in a financial year.
This provides the much required clarity on applicability of the provision to small companies. Section 6(3) will not apply to foreign companies having a turnover or gross receipts of Rs. 50Cr or less.
5. Some more Issues:
There are a few new points which arise from this clarification:
5.1 The circular provides a total exemption from POEM for the covered companies. This means that such foreign companies do not face any issue of tax residence in India even if fully managed from India. This is even more liberal than the old definition of residence (wholly controlled from India). This is likely to tempt assessees to abuse the circular and an abuse may prompt CBDT to modify/withdraw the circular.
Conservative course of action will be – not to abuse the relief.
5.2 The relief from Section 6(3) has been provided by way of a circular. Section 119 of the Income-tax Act provides CBDT to issue circulars only in certain cases which are mainly to alleviate operational problems in administering the law. A circular which goes against the clear scope of Section 6(3) may not stand scrutiny of law. However, as held by SC, CBDT can issue circular granting relief to the assessee. Hence this circular will be binding on the tax officers and it may effectively provide the relief to the tax payer.
See Annexures for the text of official circulars etc.