A Multidimensional Analysis of the Concept of ‘Place of Effective Management’ in India: A Panacea to the Double Taxation Conundrum?

Abstract

Today, at a time when unprecedented structural and reformative changes are taking place in the Indian Taxation paradigm, the recent amendment in section 6(3)(ii) of the Income Tax Act, 1961 through Finance Act, 2015 acquires critical importance. Section 6(3)(ii) determines ‘residence’ of a company i.e. if the company is found to be resident in India, Income Tax would be levied upon its worldwide income. By amendment, the ‘control and management’ test has been replaced by ‘place of effective management’ test which would be effective from the assessment year of 2017–2018. In December 2015, draft guidelines regarding the aforementioned were released by the Central Board of Direct Taxes. The authors in the present article attempt to distinguish between source and residence based taxations along with an elaborate discussion of the Organization for Economic Co-operation and Development’s interpretation of the ‘place of effective management’ test. After a detailed study of the US, UK, and South Africa’s variations of the same test and the Double Taxation Agreements entered into by India with the said three countries, the authors argue that the test has to be applied on a case by case basis depending upon the peculiarities in the factual scenario. The authors highlight the drawbacks in the old test and analyse as to what extent the new test remedies the anomalies with a critical analysis the draft guidelines. The possible implications of the test have been discussed sector wise which is followed by recommendations/suggestions of the authors. In the conclusion, the authors assert that it is necessary to remedy the loopholes before releasing the final draft of the test.