CU-MBA-SEM-III-Tax Planning and Management- Second Draft-converted

2. What are all the items to be added/reduced from the profit in order to arrive at the book profit? 3. Explain the provisions relating to set off of credit under section 115JB. 4. Explain the concept of fringe benefit tax in detail 5. List out a few items which are deemed as fringe benefit. 6. The profit as per the statement of profit and loss of XYZ Ltd., an Indian company, for the year ended 31.3.2021 is ₹ 190 lakhs arrived at after making the following adjustments: Particulars ₹ (in Lakhs) (i) Depreciation on assets 100 (ii) Reserve for currency exchange fluctuation 50 (iii) Provision for tax 40 (iv) Proposed dividend 120 Following further information are also provided by company: (a) Provision for tax includes ₹ 2 lakhs of interest payable on income-tax. (b) Depreciation includes ₹ 40 lakhs towards revaluation of assets. (c) Amount of ₹ 50 lakhs credited to statement of P & L was drawn from revaluation reserve. (d) Balance of statement of profit and loss shown in balance sheet at the asset side as at 31.3.2020 was ₹ 30 lakhs which includes unabsorbed depreciation of ₹ 10 lakhs. Compute the book profit under section 115JB for the year ended 31.3.2021. B. Multiple Choice Questions 51 1. MAT is payable at ____ of book profit. a. 20% b. 15.6% c. 18.5% d. 15% 2. For computing the book profit, ________ shall be increased to the profit. a. Brought forward loss b. Unabsorbed depreciation CU IDOL SELF LEARNING MATERIAL (SLM)

c. Income Tax d. All of these 3. Profit as per profit and loss statement is ₹ 15 Lakhs. Brought forward business loss is ₹ 8.5 Lakhs and the unabsorbed depreciation is ₹ 2.3 Lakhs. The amount of book profit would be a. 23.5 Lakhs b. 12.7 Lakhs c. 6.5 Lakhs d. 4.2 Lakhs 4. MAT credit is allowed to be carried forward for ____ number of years. a. 15 b. 10 c. 12 d. 5 5. Which of the following is deemed as fringe benefit? a. Hotel, boarding, lodging b. Scholarship to employees’ children c. Employee welfare d. All of these Answer 1-d 2-c 3-b 4-a 5-d 2.10 REFERENCES • Prasad, Bhagabati: Direct Tax Law & Practice, New Age Publ., N. Delhi. • H.C. Mehrotra –Income Tax Law & Practice • H.P. Ranina: Corporate Taxation: A Hand Book (Tax Mann). • V.S. Datey: Indirect Taxes – Law and Practice (Tax Mann Publications Limited) • Ahuja, Girish & Gupta, Ravi: Systematic Approach to Income Tax; Central Sales Tax, Bharat Law House, N. Delhi. 52 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 3: TAX PLANNING Structure 3.0 Learning Objectives 3.1 Introduction 3.2 Concept of tax planning 3.3 Tax planning, tax evasion, tax avoidance 3.4 Tax Management 3.5 Summary 3.6 Keywords 3.7 Learning Activity 3.8 Unit End Questions 3.9 References 3.0 LEARNING OBJECTIVES After studying this unit, you will be able to: • State the concept of tax planning • Differentiate between tax planning, tax evasion and tax avoidance • Explain the concept of tax management 3.1 INTRODUCTION Tax planning involves an intelligent application of the various provisions of the direct tax laws to practical situations in such a manner as to reduce the tax impact on the assessee to the minimum. A thorough understanding of the principles, practices and procedures of tax laws is required to effectively apply those concepts. Method of study of tax planning: A thorough up-to-date knowledge of tax laws is a pre-requisite for a successful study of tax planning techniques. Not only an up-to-date knowledge of the statute is necessary, but one must also be aware of the contents of the various circulars issued by the CBDT and also of case laws in the form of various decisions of the Courts. One of the best methods to study tax planning in action is to analyze the case laws. In view of this position, students should realise the importance and usefulness of keeping track of the judgments of Supreme Court and of various High Courts reported in tax law journals from time to time. Students should make it a point to go through the relevant cases and understand the issues involved and the rationale of the judgments. Of course, tax planning in a particular case would depend on the facts and circumstances of that particular case. 53 CU IDOL SELF LEARNING MATERIAL (SLM)

3.2 CONCEPT OF TAX PLANNING Planning is the formulation of a system which in its implementation is designed to achieve a specific result. Economic planning is the privilege of the State; tax planning is that of the subject. Men, material and money are the resources available at the disposal of a nation and to conserve the same, the State resorts to economic planning. Tax planning aims to reduce the outflow of cash resources made available to the Government by way of taxes so that the same may be effectively utilised for the benefit of the individual or the business, as the case may be. Just as sound economic planning is indispensable for a welfare State, a sound tax planning is equally indispensable for the welfare of the citizen. Before entering into a transaction or before starting a business, one normally considers its profitability and other aspects. Amongst other aspects, the tax implications of the transactions of the business have to be thought out before actually embarking on the deal. Otherwise, one may be caught unwittingly in huge tax liability. Planning from the point of view of taxation helps in generating greater savings of investible surplus. Tax planning may be defined as an arrangement of one’s financial affairs in such a way that, without violating in any way the legal provisions, full advantage is taken of all tax exemptions, deductions, concessions, rebates, allowances and other reliefs or benefits permitted under the Act so that the burden of taxation on the assessee is reduced to the minimum. It involves arranging one’s financial affairs by intelligently anticipating the effects which the tax laws will have on the arrangements now being adopted. As such it is a very stimulating intellectual exercise. Any tax planning scheme should be a natural one and should not give an appearance of an artificial arrangement on the face of it. The tax planner or the tax adviser should exercise great care and caution in designing any tax planning scheme as its failure will result in great difficulties and heavy burden of tax on the assessee for whom the scheme is evolved. 3.3 TAX PLANNING, TAX EVASION AND TAX AVOIDANCE Three methods of reducing taxes have been developed in most countries of the world in the past few decades. The dividing line between tax evasion and tax avoidance is very thin. Tax planning: • Availing tax exemptions or tax privileges offered by the Government, strictly in accordance with law. • Tax planning is a way by which you arrange your financial affairs in such a manner that without breaking up any law you take full advantage of all Exemptions, Deductions, Rebate and Reliefs allowed by law so that your tax liability will be reduced. 54 CU IDOL SELF LEARNING MATERIAL (SLM)

• For e.g., Mr. Arun has a huge earning from his business. He wants to reduce his tax liability by taking a Life Insurance Policy and paying a premium of ₹ 1,00,000. This contribution is an allowed deduction u/s 80C. Objectives of Tax Planning • Claim Deductions under sections 80C to 80U, • It will reduce your tax liability and you have to pay less tax, • Minimize the war between tax payer and tax administrator, Tax payer wants to pay less tax and Tax Administrator wants to extract most of the tax, by using Tax Planning this war is minimized as tax payer is using all legal ways to reduce tax liability, • Makes Investments: By tax planning, a tax payer will invest his money in some good funds which will result in productive returns for tax payer and transfer money to government for investment too. • Helps in growth of economy, • Makes society grow, • Money saved by the taxpayer will result in investment which will result in employment generation. Importance of Tax Planning For Tax payer: • Tax payer has to pay less tax by using tax planning because he is using all available exemptions, deductions, reliefs, and rebates. All of this is done within the boundaries of Law. For Government: • To use deduction or exemptions you have to invest money in some scheme which results in your money being transferred back to government and then they can use it to develop the country. For Society: • If government invests or starts any new project or if tax payer invests his saved money, it will generate employment. Government can invest in better projects which develop society. 55 CU IDOL SELF LEARNING MATERIAL (SLM)

Tax evasion: • Tax Evasion is using illegal means to avoid paying taxes. • Usually, tax evasion involves hiding or misrepresenting income. • This might be underreporting income, inflating deductions without proof, hiding or not reporting cash transactions, or hiding money in offshore accounts. • Tax evasion is part of an overall definition of tax fraud, which is illegal intentional non- payment of taxes. Fraud can be defined as “an act of deceiving or misrepresenting,” • It is not legally permissible under taxing statue. • For e.g., Mr. Babu wants to reduce his tax liability. So, he conceals a part of income earned by him and balance only he reported to tax department and paid tax. This is a case of tax evasion. Common forms of tax evasion • Misrepresentation or suppression of facts; • Failure to record investments in books of account; • Claim of expenditure not substantiated by any evidence; • Recording of any false entry in books of account; • Failure to record any receipt in books of account having a bearing on total income; and • Failure to report any international transaction or deemed international transaction or specified domestic transaction. Tax avoidance: • Between the two extremes i.e., tax planning and tax evasion, a vast domain for selecting a variety of methods which, though technically satisfying the requirements of law, in fact, circumvent it with a view to eliminate or reduce tax burden. 3.4 TAX MANAGEMENT • It means planning affairs in such a manner, so that the tax obligation is managed properly. • The objective of Tax Management is to comply with the provisions of Income Tax Law and its allied rules. • Tax Management helps in avoiding payment of interest, penalty, prosecution etc. 56 CU IDOL SELF LEARNING MATERIAL (SLM)

3.5 SUMMARY 1. Tax planning involves an intelligent application of the various provisions of the direct tax laws to practical situations in such a manner as to reduce the tax impact on the assessee to the minimum. 2. Up-to-date knowledge of tax laws is a pre-requisite for a successful study of tax planning techniques. 3. Planning is the formulation of a system which in its implementation is designed to achieve a specific result. 4. Any tax planning scheme should be a natural one and should not give an appearance of an artificial arrangement on the face of it. 5. Between the two extremes i.e., tax planning and tax evasion, a vast domain for selecting a variety of methods which, though technically satisfying the requirements of law, in fact, circumvent it with a view to eliminate or reduce tax burden. 6. It means planning affairs in such a manner, so that the tax obligation is managed properly. 7. Tax Evasion is using illegal means to avoid paying taxes. 8. It is not legally permissible under taxing statue. 9. Tax evasion is part of an overall definition of tax fraud. 10. Usually, tax evasion involves hiding or misrepresenting income. 3.6 KEYWORDS • CBDT – Central Board of Direct Taxes • Tax planning – Intelligent application of various provisions of direct tax to reduce the tax impact to minimum. • Tax Evasion – Using illegal means to avoid paying taxes. 3.7 LEARNING ACTIVITY 1. A Client approaches you to know more about deductions. Explain more about deductions provided under Chapter-VIA. ________________________________________________________________________ ________________________________________________________________________ 2. List out various investment opportunities for tax planning. ________________________________________________________________________ ________________________________________________________________________ 3.8 UNIT END QUESTIONS 57 CU IDOL SELF LEARNING MATERIAL (SLM)

A. Descriptive Questions Short Questions 1. Explain the concept of tax avoidance. 2. Differentiate between tax planning, tax evasion and tax avoidance. 3. What is tax management? Explain briefly. 4. Mr. Ramu lists out some of the ways to reduce his tax liability. He hires you to find out which one comes under tax planning and which one are coming under tax evasion. 5. He has a let-out house property and earning rent from it. He took housing loan to build that house property which is let-out and he pays interest to the bank. He wants to claim that interest amount as deduction from the rental income. 6. He is running a shop. He has not issued invoices for certain high value transactions in order to conceal that part of income. 7. He took a medical insurance policy and wants to claim the premium amount paid as deduction. Long Questions 1. Briefly explain the concept of tax planning. 2. What are the objectives of tax planning? 3. Write short notes on tax evasion. 4. What are the common forms of tax evasion? B. Multiple Choice Questions 1. __________ may be defined as an arrangement of one’s financial affairs in such a way that, without violating in any way the legal provisions. a. Tax Management b. Tax Avoidance c. Tax Planning d. Tax Evasion 2. Which of the following is not an objective of tax planning? a. Minimize war between taxpayer and tax administrator b. Making investments c. Hiding the profits d. Make the society grow 3. Which of the following is a common form of tax evasion? 58 a. Illegal means to avoid paying taxes b. False entry in books of accounts c. Claiming of false expenditure CU IDOL SELF LEARNING MATERIAL (SLM)

d. All of these 4. The objective of __________ is to comply with the provisions of law. a. Tax evasion b. Tax management c. Tax avoidance d. None of these 5. In order to reduce tax, Mr. Anand reported high expenses which was not actually incurred by him. This is a case of ___________. a. Tax avoidance b. Tax management c. Tax evasion d. Tax planning Answers 1-c 2-c 3-d 4-b 5-c 3.9 REFERENCES • Prasad, Bhagabati: Direct Tax Law & Practice, New Age Publ., N. Delhi. • H.C. Mehrotra –Income Tax Law & Practice • H.P. Ranina: Corporate Taxation: A Hand Book (Tax Mann). • V.S. Datey: Indirect Taxes – Law and Practice (Tax Mann Publications Limited) • Ahuja, Girish & Gupta, Ravi: Systematic Approach to Income Tax; Central Sales Tax, Bharat Law House, N. Delhi. 59 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 4: METHODS OF TAX PLANNING Structure 4.0 Learning Objectives 4.1 Introduction 4.2 System and methods of tax planning 4.3 Tax planning in the context of administrative legislation 4.4 Successful tax planning – tests to be satisfied 4.5 Summary 4.6 Keywords 4.7 Learning Activity 4.8 Unit End Questions 4.9 References 4.0 LEARNING OBJECTIVES After studying this unit, you will be able to: • Explain the methods of tax planning • Appreciate the suitability of short-term and long-term planning • State the concept of tax planning in the context of administrative legislation • Explain the tests to be satisfied for successful tax planning 4.1 INTRODUCTION We discussed elaborately about the meaning of tax planning, objectives of tax planning and the differences between tax planning, tax evasion and tax avoidance in the previous unit. In this chapter we will try to understand the various methods of tax planning and related concepts. 4.2 SYSTEM AND METHODS OF TAX PLANNING The systems and methods of tax-planning in any case will depend upon the result sought to be achieved. Types of tax planning • Short-range tax planning • Long-range tax planning Short-range tax planning 60 CU IDOL SELF LEARNING MATERIAL (SLM)

The short-range tax planning has limited objective. An assessee whose income is likely to register unusual growth in a particular year on account of say, sale of capital asset like house property, as compared to the preceding year might plan to invest the same in notified bonds, bonds of National Highway Authority of India or Rural Electrification Corporation Limited to claim exemption under section 54EC. This has a lock-in period of 5 years. Such a plan does not involve any permanent or long-term commitment and yet it results in substantial tax saving. This is an example of short-range tax planning. Long-range tax planning The long-range tax planning, on the other hand, may not even confer immediate tax benefits. However, it may pay-off in none too distant a future. For instance, in a case where an assessee transfers certain shares to his spouse, the income arising from the shares will, of course, be clubbed with the transferor’s income. However, if the company subsequently issues bonus shares in respect of those shares, the income arising from the bonus shares will not be clubbed with the transferor’s income. Similarly, the income arising out of the investment of the income from the transferred assets will not also be clubbed with the transferor’s income. Long range tax planning may be resorted to even for domestic or family reasons. In relation to income-tax, the following may be noted as illustrative instances of tax-planning measures: (a) Varying the residential status taking into consideration the number of days of stay in India to be a resident, in case of an individual. (b) Choosing the suitable form of assessable entity (individual, HUF, Firm, Co-operative society, Association of persons, Company, Trust, etc. to obtain optimal tax concessions) (c) Choosing suitable forms of investment (share capital, loan capital, lease, mortgages, tax exempt investments, priority sector, etc.), considering deductions available in respect of interest or dividend etc. (d) Programmed replacement of assets to take advantage of the provisions governing depreciation. (e) Programmed sale of capital assets depending upon the period of holding and deductions specifically available for assets held for long term. (f) Diversification of the business activities (hotel industry, agro-based industry etc.) considering the various profit-linked and investment-linked benefits available under the provisions of the Act. (g) The use of the concept of commercial expediency to claim deduction in respect of expenditure, in computing business income. 61 CU IDOL SELF LEARNING MATERIAL (SLM)

4.3 TAX PLANNING IN THE CONTEXT OF ADMINISTRATIVE LEGISLATION It is a common feature of modern legislative enactment to lay down in the section of the Act, the principles and the policy of the Legislature leaving out details to be filled in or worked out by rules or regulations made either by the Government or by some other authority as may be empowered in the legislation. This kind of subordinate or administrative legislation is justified and even necessitated by the fact that the Legislature has neither the time nor the material to consider and enact rules relating to various details as they may not be acquainted fully with the facts and circumstances relating to the subject matter and may have no time to consider such details. Section 295(1) of the Income-tax Act, 1961 vests with the CBDT, the power to make rules for carrying out the requirements of the Act. This power also enables the Board to give retrospective effect to any of the rules in such a way as not to prejudicially affect the interests of any taxpayer. The various matters in respect of which the rules may be framed are specified in the relevant sections. Rules are made by the appropriate authority in exercise of the powers conferred on it under the provisions of the Act. Therefore, they have statutory force and fall within the scope of the law made by the Legislature itself. Thus, they are a part of the enactment which imposes the tax. Since the Rules are meant only for the purpose of carrying out the provisions of the Act, they cannot take away what is conferred by the Act nor whittle down its effect. Therefore, rules can only be made in consonance with the provisions of the Act. They must be interpreted in the light of the section under which they are made. If there is an irreconcilable conflict between a rule and a provision in the Act, the provision in the Act is to prevail and the rule which is subordinate to the Act must give way. Similarly, notifications are also issued in exercise of a valid authority bestowed under the statutes. Such notifications, when validly made in exercise of the authority provided for in the law, are binding on all concerned and may be enforced. The following principles emerging from various rulings are relevant in this context. 1. The rule making authority cannot frame a rule which is contrary to the object and provisions of the Act from which its rule making power is derived. 2. A rule cannot over-reach the subject-matter relevant to the particular provision in the Act. 3. A rule cannot whittle down, negate or take away (directly or by implication or causation) the right, privilege, advantage or benefit granted by the section or the enactment relevant to it. 4. A rule cannot create any disability, limitation or other condition not sanctioned by the Act to which it is relevant or not consistent with the Act. 5. A subordinate authority cannot seek to sit in judgement over the rights of the subject nor decide questions of law and fact or otherwise usurp the functions of a Court. 62 CU IDOL SELF LEARNING MATERIAL (SLM)

6. No rule can be framed nor regulation promulgated contrary to the rules of natural justice. 7. A rule cannot seek to impose a tax which the Legislature has not thought it fit or expedient to impose. 8. A rule has to strictly confine itself to the subject-matter for which the rule-making authority has been empowered by the enactment. 9. In providing for a rule-making power, however wide the terms of that power be, as long as the Legislature has laid down the necessary guidelines for exercise of such rule-making power of the subordinate authority and as long as the Legislature has clearly laid down in the enactment the legislative object and policy and has retained in itself the ultimate legislative power, the enactment delegating power to a subordinate authority cannot be said to be ultra vires the Legislature or the enactment. 10. Both a rule and a provision of law are equally bound to respect the constitutional protection and fundamental right of the citizen enshrined in Article 14 of the Constitution. 11. Merely because a rule is subsequently laid before the Parliament, it cannot be given the status of a law of Parliament. 12. As in the case of an enactment, if a rule classifies persons and objects into identifiable classes and such classification is relevant to the purpose of the enactment and for carrying out the provisions of the Act, it cannot be called in question. 13. A rule has no retrospective operation unless the Act to which it is relevant specifically provides for the making of rules having retrospective operation. 14. The power to notify or to exempt also carries with it necessarily the power to de-notify, rescind or withdraw the notification or exemption. The above principles may be kept in mind while deciding about embarking on tax-planning. 4.4 SUCCESSFUL TAX PLANNING — TESTS TO BE SATISFIED: Tax planning in any case will entirely depend on the individual facts and circumstances. It is a tool in the hands of the taxpayer and tax practitioners for selective use. It is essential to comprehend (a) that the facts bearing on the issue are evidenced by proof; (b) that the associated legal consequences, both under the personal and under the tax laws, are fully borne in mind; and (c) that the situation warrants implementation of “tax planning”. Successful tax planning must conform to two outstanding tests viz, (a) Conformity with the current law and (b) Flexibility. In order to satisfy the first test, the essential requisite is a comprehensive knowledge of the law, rules and regulations on the part of the tax planner. This knowledge of law extends not 63 CU IDOL SELF LEARNING MATERIAL (SLM)

only to the provisions of the taxing statutes and the case law that has developed on those statutes, but also to other branches of law, both civil and personal, so that the tax planner’s device does not get defeated by the universal principles of jurisprudence. The second test of flexibility seeks to ensure that the success of the tax planning device is not nullified by statutory negation. Though the tax planner may be successful in seeking out a device which in his opinion is in conformity with law, the subsequent statutory negation may nullify his success. In order to counter this exigency, his tax plan must be flexible. Flexibility essentially means that the device provides for suitable changes in accepted forms. Flexibility is a practical concept. Its introduction and utilisation depend upon the circumstances of the case. Under certain circumstances, flexibility may be of no avail. As a matter of fact, flexibility may invalidate the tax plan. But when flexibility is permissible, the tax planner will do well to remember to keep this test in mind to counter the measures of statutory negation. In view of this position wherever possible, tax planning schemes should be flexible, designed so as to avoid irretrievable situations. The tax planner should, therefore, be watchful of all significant developments related to his field. In order to be a successful venture, efforts at tax planning should not ignore the legislative intent; they should be directed in every case to see that not only the tax benefits are obtained but also the tax obligations are discharged without fail so that the penal provisions are not attracted. 4.5 SUMMARY • The systems and methods of tax-planning in any case will depend upon the result sought to be achieved. • Types of tax planning a. Short-range tax planning b. Long-range tax planning • The short-range tax planning has limited objective. • An Assessee whose income is likely to register unusual growth in a particular year can opt for such short-range tax planning. • The long-range tax planning, on the other hand, may not even confer immediate tax benefits. • Section 295(1) of the Income-tax Act, 1961 vests with the CBDT, the power to make rules for carrying out the requirements of the Act. • This power also enables the Board to give retrospective effect to any of the rules in such a way as not to prejudicially affect the interests of any taxpayer. 4.6 KEYWORDS • CBDT – Central Board of Direct Taxes 64 CU IDOL SELF LEARNING MATERIAL (SLM)

• HUF – Hindu Undivided Family • Diversification - the process of a business enlarging or varying its range of products or field of operation. 4.7 LEARNING ACTIVITY 1. Make a comparative study of Section 54, Section 24, Section 10, Section of income tax act for different heads of income. ___________________________________________________________________________ _____________________________________________________________________ 4.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. List out a few illustrative instances of tax planning measures. 2. Briefly explain the tests to be satisfied for a successful tax planning. 3. Explain briefly about Long range tax planning 4. Describe briefly about Short range tax planning Long Questions 1. Explain the methods of tax planning. 2. Explain the concept of tax planning in the context of administrative legislation and its principles. B. Multiple Choice Questions 1. __________ may not confer immediate tax benefits. a. Short range tax planning b. Long range tax planning c. Both (a) and (b) d. None of these 2. Choosing the suitable form of organization is a measure of ________. a. Long range tax planning b. Short range tax planning c. Both (a) and (b) d. None of these 3. Which of the following is not a measure of Long-range tax planning? 65 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Choosing suitable forms of investment b. Diversification of the business activities c. Programmed sale of capital assets d. None of these 4. Which of the following tests must be satisfied for a successful tax planning? a. Conformity with the current law b. Flexibility c. Both (a) and (b) d. None of these Answers 1-b 2-a 3-d 4-c 4.9 REFERENCES • Prasad, Bhagabati: Direct Tax Law & Practice, New Age Publ., N. Delhi. • H.C. Mehrotra –Income Tax Law & Practice • H.P. Ranina: Corporate Taxation: A Hand Book (Tax Mann). • V.S. Datey: Indirect Taxes – Law and Practice (Tax Mann Publications Limited) • Ahuja, Girish & Gupta, Ravi: Systematic Approach to Income Tax; Central Sales Tax, Bharat Law House, N. Delhi. 66 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 5: COMPANIES AND TAXES Structure 5.0 Learning Objectives 5.1 Introduction 5.2 Private Company 5.3 Public Company 5.4 One Person Company 5.5 Meaning of Company under IT Act 5.6 Residential status of Companies 5.7 Summary 5.8 Keywords 5.9 Learning Activity 5.10 Unit End Questions 5.11 References 5.0 LEARNING OBJECTIVES After studying this unit, you will be able to: • State the various kinds of companies • Explain the characteristics of various kinds of companies • Outline the concept of OPC • Appreciate the meaning of Company under IT Act • Discuss the concept of POEM 5.1 INTRODUCTION The Companies Act, 2013 provides for the kinds of companies that can be promoted and registered under the Act. The three basic types of companies which may be registered under the Act are: Private Companies. Public Companies; and One Person Company (to be formed as Private Limited Company) Section 3 of the Companies Act 2013 read with the Companies (Incorporation) Rules, 2014, states that: A company may be formed for any lawful purpose by– seven or more persons, where the company to be formed is a public company. Two or more persons, where the company to be formed is a private company; or one person, where the company to be formed is a One Person 67 CU IDOL SELF LEARNING MATERIAL (SLM)

Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of the act in respect of registration. A company formed under sub-section (1) may be either– • a company limited by shares; or • a company limited by guarantee; or • an unlimited company CLASSIFICATION OF COMPANIES a) Classification on the basis of Incorporation: Companies may be Incorporated under the following categories: i) Statutory Companies: These are constituted by a special Act of Parliament or State Legislature. The provisions of the Companies Act, 2013 do not apply to them. Examples of these types of companies are Reserve Bank of India, Life Insurance Corporation of India, etc. ii) Registered Companies: The companies which are incorporated under the Companies Act, 2013 or under any previous company law and registered with the Registrar of Companies, fall under this category. b) Classification on the basis of Liability: Under this category there are three types of companies: - i) Unlimited Companies: In this type of company, the liability of members of the company is unlimited, Section 2(92) of the Companies Act, 2013 provides that unlimited company means a company not having any limit on the liability of its members, such companies may or may not have share capital. They may be either a public company or a private company. The members are liable to the company and to any other person. ii) Companies limited by guarantee: Section 2(21) of the Companies Act, 2013 provides that a company that has the liability of its members limited to such amount as the members may respectively undertake, by the memorandum, to contribute to the assets of the company in the event of its being wound-up, is known as a company limited by guarantee. The members of a guarantee company are, in effect, placed in the position of guarantors of the company’s debts up to the agreed amount. The members are liable to the company and to any other person. iii) Companies limited by shares: A company that has the liability of its members limited by the liability clause in the memorandum to the amount, if any, unpaid on 68 CU IDOL SELF LEARNING MATERIAL (SLM)

the shares respectively held by them is termed as a company limited by shares. Section 2(22) of the Companies Act, 2013 provides that “company limited by shares” means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them. For example, a shareholder who has paid Rs. 75 on a share of face value Rupees 100 can be called upon to pay the balance of Rupees.25 only’. Companies limited by shares are by far the most common and it may be either public or private. c) Other Forms of Companies i) Section 8 Companies: A person or an association of persons proposed to be registered under this Act as a limited company and proved to the satisfaction of the Central Government that the company – A) has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object; B) intends to apply its profits, if any, or other income in promoting its objects; and C) intends to prohibit the payment of any dividend to its members, such person or association of person may be allowed to be registered as a limited company without addition to its name of the word “limited” or private limited by the Central government by issuing a license and by prescribing specified condition. The association proposed to be registered under section 8 shall not be proposed to be an unlimited company. However, the same may be company limited by guarantee or a Company limited by shares. ii) Government Companies: As per section 2(45) of the Companies Act, 2013 the Government company” means any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary company of such a Government company. Explanation - For the purposes of this clause, the “paid up share capital” shall be construed as “total voting power”, where shares with differential voting rights have been issued. iii) Foreign Companies: As per section 2(42) of the Companies Act, 2013 the “foreign company” means any company or body corporate incorporated outside India which, - 69 CU IDOL SELF LEARNING MATERIAL (SLM)

A) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and B) conducts any business activity in India in any other manner. iv) Holding and Subsidiary Companies: As per section 2(46) of the Companies Act, 2013 46) the “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies, and the expression “company” includes any bodycorporate. As per section 2(87) of the Companies Act, 2013 “subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company – A) controls the composition of the Board of Directors; or B) exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies: Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. Explanation. - For the purposes of this clause, – (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company. (b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors; (c) the expression “company” includes anybody corporate; (d) “layer” in relation to a holding company means its subsidiary or subsidiaries; As per section 2(11) of the Companies Act, 2013, the “body corporate” or “corporation” includes a company incorporated outside India, but does not include – (i) a co-operative society registered under any law relating to co-operative societies; and (ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf. v) Associate Companies/ Joint Venture Company: As per section 2(6) of the Companies Act, 2013 the “associate company”, in relation to another company, means a company in which that other company has a significant influence, but which 70 CU IDOL SELF LEARNING MATERIAL (SLM)

is not a subsidiary company of the company having such influence and includes a joint venture company. Explanation. - For the purpose of this clause, – (a) the expression “significant influence” means control of at least twenty per cent. of total voting power, or control of or participation in business decisions under an agreement; (b) the expression “joint venture” means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement; vi) Investment Companies: the term investment company” includes a company whose principal business is the acquisition of shares, debentures or other securities and a company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities, if its assets in the form of investment in shares, debentures or other securities constitute not less than fifty per cent. of its total assets, or if its income derived from investment business constitutes not less than fifty per cent. as a proportion of its gross income. vii) Producer Companies: Producer Company means a body corporate having objects or activities specified in section 581B of the Companies Act, 1956 and registered as Producer Company under the Companies Act. The objects of the Producer Company shall relate to all or any of the following matters, namely: i. production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the Members or import of goods or services for their benefit: Provided that the Producer Company may carry on any of the activities specified in this clause either by itself or through other institution. ii. processing including preserving, drying, distilling, brewing, vinting, canning and packaging of produce of its Members; iii. manufacture, sale or supply of machinery, equipment or consumables mainly to its Members. iv. providing education on the mutual assistance principles to its Members and others. v. rendering technical services, consultancy services, training, research and development and all other activities for the promotion of the interests of its Members; 71 CU IDOL SELF LEARNING MATERIAL (SLM)

vi. generation, transmission and distribution of power, revitalisation of land and water resources, their use, conservation and communications relatable to primary produce. vii. insurance of producers or their primary produce; viii. promoting techniques of mutuality and mutual assistance; ix. welfare measures or facilities for the benefit of Members as may be decided by the Board; x. any other activity, ancillary or incidental to any of the activities referred above or other activities which may promote the principles of mutuality and mutual assistance amongst the Members in any other manner; xi. financing of procurement, processing, marketing or other activities specified above which include extending of credit facilities or any other financial services to its Members. The Companies Amendment Bill, 2020 as introduced in the Lok Sabha on 17th March, 2020 provides for introduction of separate Chapter (Section 378A to 378ZU) relating to Producer Companies under the Companies Act, 2013 viii) Nidhi Companies: A Nidhi company is a type of company in the Indian non-banking finance sector, recognized under section 406 of the Companies Act, 2013 their core business is borrowing and lending money between their members. They are also known as Permanent Fund, Benefit Funds, Mutual Benefit Funds and Mutual Benefit Company. These companies are regulated under the Nidhi Rules, 2014 issued by the Ministry of Corporate affairs. ix) Dormant Companies covered under Section 455 of the Companies Act. 2013 and includes a company which is formed and registered under the Act for a future project or to hold an asset or intellectual property and which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years. x) Non-banking Financial Companies: A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 / 2013 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/ purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or 72 CU IDOL SELF LEARNING MATERIAL (SLM)

arrangement in one lump sum or in instalments by way of contributions or in any other manner, is also a non-banking financial company. xi) Listed Company: “listed company” means a company which has any of its securities listed on any recognised stock exchange; xii) “small company” means a company, other than a public company, — (i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and (ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees: Provided that nothing in this clause shall apply to - (A) a holding company or a subsidiary company; (B) a company registered under section 8; or (C) a company or body corporate governed by any special Act; 5.2 PRIVATE COMPANY As per Section 2(68) of the Companies Act, 2013, “private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles, – (i) restricts the right to transfer its shares; (ii) except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that – (A) persons who are in the employment of the company; and (B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and (iii) prohibits any invitation to the public to subscribe for any securities of the company; It must be noted that it is only the number of members that is limited to two hundred. A private company may issue debentures to any number of persons, the only condition being that an invitation to the public to subscribe for debentures is prohibited. 73 CU IDOL SELF LEARNING MATERIAL (SLM)

The aforesaid definition of private limited company specifies the restrictions, limitations and prohibitions, which must be expressly provided in the articles of association of a private limited company. As per proviso to Section 14 (1) of the Act, if a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, such company shall, as from the date of such alteration, cease to be a private company. The words ‘Private Limited’ must be added at the end of its name by a private limited company. As per section 3(1), a private company may be formed for any lawful purpose by two or more persons, by subscribing their names to a memorandum and complying with the requirements of this Act in respect of registration. Section 149(1) further lays down that a private company shall have a minimum number of two directors. The only two members may also be the two directors of the private company. Characteristics of Private Limited Company Members – To start a company, minimum number of 2 members is required and a maximum number of 200 members as per the provisions of the Companies Act, 2013. Limited Liability – The liability of each member or shareholders is limited. It means that if a company faces loss under any circumstances, then its shareholders are not liable to sell their own assets for payment. Thus, the personal, individual assets of the shareholders are not at risk. Perpetual succession – The Company keeps on existing in the eyes of law even in the case of death, insolvency, the bankruptcy of any of its members. This leads to perpetual succession of the company. The life of the company keeps on existing forever. Index of members – An index of the names entered in the respective registers of members and the index shall, in respect of each folio, contain sufficient indication to enable the entries relating to that folio in the register to be readily found. The maintenance of index of members is not necessary in case the number of members of the company is less than fifty. Which is a privilege to a private company wherein number of members is less than fifty. Number of directors – When it comes to directors, a private company needs to have minimum two directors. With the existence of 2 directors, a private company can come into existence and can start with its operations. Paid up capital – There is no minimum capital requirement. Prospectus – Prospectus is a detailed statement of the company affairs which is issued by a company for its public. However, in the case of private limited company, the act prohibits any invitation to the public to subscribe for any securities of the company; there is no such 74 CU IDOL SELF LEARNING MATERIAL (SLM)

need to issue a prospectus because in this type of companies, public is not invited to subscribe for the shares of the company. Commencement of Business – A company incorporated after the commencement of the Companies (Amendment) Act, 2019 and having a share capital cannot commence any business or exercise any borrowing powers unless – (a) A declaration is filed by a director within a period of one hundred and eighty days of the date of incorporation of the company, with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration; and (b) The company has filed with the Registrar a verification of its registered office. Name – It is mandatory for all the private companies to use the word “private limited” after its name. 5.3 PUBLIC COMPANY By virtue of Section 2(71), a public company means a company which: (a) is not a private company; and (b) has a minimum paid-up share capital, as may be prescribed Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles. As per section 3(1)(a), a public company may be formed for any lawful purpose by seven or more persons, by subscribing their names or his name to a memorandum and complying with the requirements of this act in respect of registration. A public company may be said to be an association consisting of not less than 7 members, which is registered under the Act. In principle, any member of the public who is willing to pay the price may acquire shares in or debentures of it. The securities of a public company may be quoted on a Stock Exchange. The number of members is not limited to two hundred. As per section 58(2), the securities or other interest of any member in a public company shall be freely transferable. However, any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. The concept of free transferability of shares in public and private companies is very succinctly discussed in the case of Western Maharashtra Development Corpn. Ltd. v. Bajaj Auto Ltd. [2010] 154 Com Cases 593 (Bom). It was held that the Companies Act, makes a clear distinction in regard to the transferability of shares relating to private and public companies. By definition, a “private company” is a company which restricts the right to 75 CU IDOL SELF LEARNING MATERIAL (SLM)

transfer its shares. In the case of a public company, the Act provides that the shares or debentures and any interest therein, of a company, shall be freely transferable. The provision contained in the law for the free transferability of shares in a public company is founded on the principle that members of the public must have the freedom to purchase and, every shareholder should have the freedom to transfer. The incorporation of a company in the public, as distinguished from the private, realm leads to specific consequences and the imposition of obligations envisaged in law. Those who promote and manage public companies assume those obligations. Corresponding to those obligations there are some rights, which the law recognizes as inherent in the members of the public who subscribe to shares of the company. Characteristics of Public Company Board of Directors The board of the Public company comprises of a minimum number of three members and a maximum of 15. The company may appoint more than 15 directors after passing a special resolution. These are elected by the shareholders during the annual general meeting. They act as the representatives of the shareholders in the management of the company. Public limited companies are headed by a board of directors and Key Managerial Personnel of the Company. Composition of the board of directors is set out in the company’s articles of association and the applicable rules and regulations. Limited Liability Shareholder liability for the losses of the company is limited to their share contribution only. This is what makes it a separate legal entity from its shareholders. The business can be sued on its own and not involve its shareholders. The company does not belong to any person since one person can own only a part of it. Number of Members A public limited company has a minimum number of seven shareholders or members and a limitless number of members. It can have as many shareholders as its share capital can accommodate. Transferable shares Shares of a public limited company are bought and sold by the shareholders, however in case of listed company the shares were traded on a stock exchange where the shares of the company are listed. They are freely transferable between its members and people trading in the stock exchange. Life Span A public limited company is not affected by death of one of its shareholders, but the shares are transferred to the next kin or legal heir of such deceased shareholder and the company 76 CU IDOL SELF LEARNING MATERIAL (SLM)

continues to run its business as usual. In the case of a director’s death, the Board is empowered to fill the resulting casual vacancy may be filled by Board of Directors at Board meeting which shall be subsequently approved by members in the immediate next general meeting. Financial Privacy Public limited companies are strictly regulated and are required by law to publish their complete financial statements annually. This ensures that they reveal their true financial position to their owners and to potential investors so that they can determine the true worth of its shares. Capital Public limited companies enjoy an increased ability to raise capital since they can issue shares to the public through the stock market. They can also raise additional capital by issuing debentures and bonds through the same market from the public. Debentures and bonds are in the form of secured or unsecured debts issued to a company on the strength of its integrity and financial performance by the general public or its members etc. 5.4 ONE PERSON COMPANY (OPC) Background of OPC The Companies Act, 2013 provides for a new type of entity in the form of One Person Company (OPC), the introduction of OPC in the legal system is a move that would encourage corporatization of micro businesses and entrepreneurships. In India, in the year 2005, the JJ Irani Expert Committee recommended the formation of OPC. It had suggested that such an entity may be provided with a simpler legal regime through exemptions so that the small entrepreneur is not compelled to devote considerable time, energy and resources on complex legal compliances. OPC is a one shareholder corporate entity, where legal and financial liability is limited to the company only. Status of OPC in other countries Even in other countries like UK, Australia, Singapore, Pakistan, etc; a single person can form a company. Various countries permit this kind of a corporate entity (China introduced it in October 2005) in which the promoting individual is both the director and the shareholder. The amended company law of Pakistan permits one person to form a single-member company by filing with the registrar, at the time of incorporation, a nomination in the 77 CU IDOL SELF LEARNING MATERIAL (SLM)

prescribed form indicating at least two individuals to act as nominee director and alternate nominee director. In US, several states permit the formation and operation of a single-member Limited Liability Company (LLC). In China, one person is allowed to apply for opening a limited company with a minimum capital of 1,00,000 Yuan. The amended law of China prescribes that the owner should pay the investment capital at one time and bars him from opening a second company of the same kind. In most countries, the law governing companies enables a single-member company to have more than one director and grants exemptions to such companies from holding AGMs, though records and documents are to be maintained. 5.5 MEANING OF COMPANY UNDER IT ACT As per Sec 2(17) of the Income Tax Act, 1961, \"company\" means— (i) any Indian company, or (ii) anybody corporate incorporated by or under the laws of a country outside India, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922) or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company: Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971 or on or after that date) as may be specified in the declaration; 5.6 RESIDENTIAL STATUS OF COMPANIES AND TAX 78 IMPLICATIONS A company would be resident in India in any previous year, if- (i) it is an Indian company; or (ii) its place of effective management, in that year, is in India. Place of effective management CU IDOL SELF LEARNING MATERIAL (SLM)

“Place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made [Explanation to section 6(3)] Guiding Principles for determination of Place of Effective management (‘POEM’) of a Company, other than an Indian company – [Circular No. 6/2017, dated 24.01.2017 & Circular No. 8/2017, dated 23-02-2017]: Place of effective management' (POEM) is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognises the concept of 'place of effective management' for determination of residence of a company as a tie-breaker rule for avoidance of double taxation. The CBDT has laid down the following guiding principles to be followed for determination of POEM. Concept of Substance over form Any determination of the POEM will depend upon the facts and circumstances of a given case. The POEM concept is one of substance over form. It may be noted that an entity may have more than one place of management, but it can have only one place of effective management at any point of time. Since “residence” is to be determined for each year, POEM will also be required to be determined on year-to-year basis. Whether the company is engaged in active business outside India? - An important criterion for determination of POEM. The process of determination of POEM would be primarily based on the fact as to whether or not the company is engaged in active business outside India. A company shall be said to be engaged in 'active business outside India' - if • passive income is not more than 50% of its total income, and • less than 50% of its total asset are situated in India; and • less than 50% of total number of employees are situated in India or are resident in India; and • the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure. Meaning of certain terms: Term Meaning 79 CU IDOL SELF LEARNING MATERIAL (SLM)

Income (a) As computed for tax purpose in accordance with the laws of the Value of Assets country of incorporation; or Number of (b) As per books of account, where the laws of the country of employees incorporation does not require such a computation. Payroll Passive Income (a) In case of an The average of its value for tax individually depreciable purposes in the country of asset incorporation of the company at the beginning and at end of the previous year; and (b) In case of pool of fixed The average of its value for tax asset, being treated as a purposes in the country of block for depreciation incorporation of the company at the beginning and at end of the year; (c) In case of any other asset Value as per books of account The average of the number of employees as at the beginning and at the end of the year and shall include persons, who though not employed directly by the company, perform tasks similar to those performed by the employees. This term includes the cost of salaries, wages, bonus, and all other employee compensation including related pension and social costs borne by the employer. It is the aggregate of, - (i) income from the transactions where both the purchase and sale of goods is from/to its associated enterprises; and (ii) income by way of royalty, dividend, capital gains, interest, or rental income; However, any income by way of interest shall not be considered 80 CU IDOL SELF LEARNING MATERIAL (SLM)

to be passive income in case of a company which is engaged in the business of banking or is a public financial institution, and its activities are regulated as such under the applicable laws of the country of incorporation. Place of Effective Management: (i) In case of Companies engaged in Active Business outside India POEM of a company engaged in active business shall be presumed to be outside India if the majority of the board meeting are held outside India. However, in case the Board is not exercising its powers of management and such powers are being exercised by either the holding company or any other person, resident in India, then POEM shall be considered to be in India. For this purpose, merely because the Board of Directors (BOD) follows general and objective principles of global policy of the group laid down by the parent entity which may be in the field of Payroll functions, Accounting, Human resource (HR) functions, IT infrastructure and network platforms, Supply chain functions, Routine banking operational procedures, and not being specific to any entity or group of entities per se; would not constitute a case of BoD of companies standing aside. CBDT Circular No. 25/2017, dated 23.10.2017 clarifies that so long as the Regional Headquarter operates for subsidiaries/ group companies in a region within the general and objective principles of global policy of the group laid down by the parent entity in the field of Payroll functions, Accounting, HR functions, IT infrastructure and network platforms, Supply chain functions, Routine banking operational procedures, and not being specific to any entity or group of entities per se; it would, in itself, not constitute a case of BoD of companies standing aside and such activities of Regional Headquarter in India alone will not be a basis for establishment of POEM for such subsidiaries/ group companies. It is further mentioned in the said Circular that the provisions of General Anti-Avoidance Rule contained in Chapter X-A of the Income-tax Act, 1961 may get triggered in such cases where the above clarification is found to be used for abusive/ aggressive tax planning. For the purpose of determining whether the company is engaged in active business outside India, the average of the data of the previous year and two years prior to that shall be considered. In case the company has been in existence for a shorter period, then, data of such period shall be considered. Where the accounting year for tax purposes, in accordance with laws of country of incorporation of the company, is different from the previous year, then, data of the accounting year that ends during the relevant previous year and two accounting years preceding it shall be considered. 81 CU IDOL SELF LEARNING MATERIAL (SLM)

The final guidelines have clarified that mere following of global policies laid down by the Indian holding company would not constitute that Board is standing aside. (ii) In case of Companies not engaged in active business outside India The guidelines provide a two-stage process for determination of POEM in case of companies not engaged in active business. (a) First stage: Identifying the person(s) who actually make the key management and commercial decisions for the conduct of the company as a whole. (b) Second stage: Determine the place where these decisions are, in fact, being made. Some of the guiding principles which may be taken into account for determining the POEM are as follows: (a) Location where the Board of Directors meet and makes decisions: This location may be the place of effective management of a company provided, the Board – (i) retains and exercises its authority to govern the company; and (ii) does, in substance, make the key management and commercial decisions necessary for the conduct of the company’s ‘business as a whole’. It may be mentioned that mere formal holding of board meetings at a place would by itself is not conclusive for determination of POEM being located at that place. If the key decisions by the directors are in fact being taken in a place other than the place where the formal meetings are held then such other place would be relevant for POEM. As an example, this may be the case where the board meetings are held in a location distinct from the place where head office of the company is located, or such location is unconnected with the place where the predominant activity of the company is being carried out. If a Board has de facto delegated the authority to make the key management and commercial decisions for the company to the senior management or any other person including a shareholder, promoter, strategic or legal or financial advisor etc. and does nothing more than routinely ratifying the decisions that have been made, the company’s place of effective management will ordinarily be the place where these senior managers or the other person make those decisions. Note: “Senior Management” in respect of a company means the person or persons who are generally responsible for developing and formulating key strategies and policies for the company and for ensuring or overseeing the execution and implementation of those strategies on a regular and on-going basis. While designation may vary, these persons may include: (i) Managing Director or Chief Executive Officer. 82 CU IDOL SELF LEARNING MATERIAL (SLM)

(ii) Financial Director or Chief Financial Officer. (iii) Chief Operating Officer; and (iv) The heads of various divisions or departments (for example, Chief Information or Technology Officer, Director for Sales or Marketing). (b) Location of Executive Committee in case powers are delegated by the Board: A company’s board may delegate some or all of its authority to one or more committees such as an executive committee consisting of key members of senior management. In these situations, the location where the members of the executive committee are based and where that committee develops and formulates the key strategies and policies for mere formal approval by the full board will often be considered to be the company’s place of effective management. The delegation of authority may be either de jure (by means of a formal resolution or Shareholder Agreement) or de facto (based upon the actual conduct of the board and the executive committee). (c) Location of Head Office: The location of a company’s head office will be a very important factor in the determination of the company’s place of effective management because it often represents the place where key company decisions are made. The following points need to be considered for determining the location of the head office of the company: - If the company’s senior management and their support staff are based in a single location and that location is held out to the public as the company’s principal place of business or headquarters then that location is the place where head office is located. If the company is more decentralized (for example where various members of senior management may operate, from time to time, at offices located in the various countries) then the company’s head office would be the location where these senior managers, - (i) are primarily or predominantly based; or (ii) normally return to following travel to other locations; or (iii) meet when formulating or deciding key strategies and policies for the company as a whole. Members of the senior management may operate from different locations on a more or less permanent basis and the members may participate in various meetings via telephone or video conferencing rather than by being physically present at meetings in a particular location. In such situation the head office would normally be the location, if any, where the highest level 83 CU IDOL SELF LEARNING MATERIAL (SLM)

of management (for example, the Managing Director and Financial Director) and their direct support staff are located. In situations where the senior management is so decentralized that it is not possible to determine the company’s head office with a reasonable degree of certainty, the location of a company’s head office would not be of much relevance in determining that company’s place of effective management. Note: “Head Office” of a company would be the place where the company's senior management and their direct support staff are located or, if they are located at more than one location, the place where they are primarily or predominantly located. A company’s head office is not necessarily the same as the place where the majority of its employees work or where its board typically meets. (d) Use of modern technology: The use of modern technology impacts the place of effective management in many ways. It is no longer necessary for the persons taking decision to be physically present at a particular location. Therefore, physical location of board meeting or executive committee meeting or meeting of senior management may not be where the key decisions are in substance being made. In such cases the place where the directors or the persons taking the decisions or majority of them usually reside may also be a relevant factor. (e) Decision via circular resolution or round robin voting: In case of circular resolution or round robin voting the factors like, the frequency with which it is used, the type of decisions made in that manner and where the parties involved in those decisions are located etc. are to be considered. It cannot be said that proposer of decision alone would be relevant but based on past practices and general conduct; it would be required to determine the person who has the authority and who exercises the authority to take decisions. The place of location of such person would be more important. (f) Decisions made by Shareholders are not relevant factor in determination of POEM: The decisions made by shareholder on matters which are reserved for shareholder decision under the company laws are not relevant for determination of a company’s place of effective management. Such decisions may include sale of all or substantially all of the company’s assets, the dissolution, liquidation or deregistration of the company, the modification of the rights attaching to various classes of shares or the issue of a new class of shares etc. These decisions typically affect the existence of the company itself or the rights of the shareholders 84 CU IDOL SELF LEARNING MATERIAL (SLM)

as such, rather than the conduct of the company’s business from a management or commercial perspective and are therefore, generally not relevant for the determination of a company’s place of effective management. However, the shareholder’s involvement can, in certain situations, turn into that of effective management. This may happen through a formal arrangement by way of shareholder agreement etc. or may also happen by way of actual conduct. As an example, if the shareholders limit the authority of board and senior managers of a company and thereby remove the company’s real authority to make decision then the shareholder guidance transforms into usurpation and such undue influence may result in effective management being exercised by the shareholder. Therefore, whether the shareholder involvement is crossing the line into that of effective management is one of fact and has to be determined on case-to-case basis only. (g) Day to day routine operational decisions are not relevant for determination of POEM: It may be clarified that day-to-day routine operational decisions undertaken by junior and middle management shall not be relevant for the purpose of determination of POEM. The operational decisions relate to the oversight of the day-to-day business operations and activities of a company whereas the key management and commercial decision are concerned with broader strategic and policy decision. For example, a decision to open a major new manufacturing facility or to discontinue a major product line would be examples of key commercial decisions affecting the company’s business as a whole. By contrast, decisions by the plant manager appointed by senior management to run that facility, concerning repairs and maintenance, the implementation of company-wide quality controls and human resources policies, would be examples of routine operational decisions. In certain situations, it may happen that person responsible for operational decision is the same person who is responsible for the key management and commercial decision. In such cases it will be necessary to distinguish the two type of decisions and thereafter assess the location where the key management and commercial decisions are taken. If the above factors do not lead to clear identification of POEM, then the final guidelines provide that following secondary factors may be considered: • Place where main and substantial activity of the company is carried out; or • Place where the accounting records of the company are kept. It needs to be emphasized that the determination of POEM is to be based on all relevant facts related to the management and control of the company, and is not to be determined on the basis of isolated facts that by itself do not establish effective management, as illustrated by the following examples: 85 CU IDOL SELF LEARNING MATERIAL (SLM)

i) The fact that a foreign company is completely owned by an Indian company will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied. ii) The fact that there exists a Permanent Establishment of a foreign entity in India would itself not be conclusive evidence that the conditions for establishing POEM in India have been satisfied. iii) The fact that one or some of the Directors of a foreign company reside in India will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied. iv) The fact of, local management being situated in India in respect of activities carried out by a foreign company in India will not, by itself, be conclusive evidence that the conditions for establishing POEM have been satisfied. v) The existence in India of support functions that are preparatory and auxiliary in character will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied. It is reiterated that the above principles for determining the POEM are for guidance only. No single principle will be decisive in itself. The above principles are not to be seen with reference to any particular moment in time rather activities performed over a period of time, during the previous year, need to be considered. In other words, a “snapshot” approach is not to be adopted. Further, based on the facts and circumstances if it is determined that during the previous year the POEM is in India and also outside India then POEM shall be presumed to be in India if it has been mainly /predominantly in India. The CBDT also clarified that the Assessing Officer (AO) shall, before initiating any proceedings for holding a company incorporated outside India, on the basis of its POEM, as being resident in India, seek prior approval of the Principal Commissioner or the Commissioner, as the case may be. Further, in case the AO proposes to hold a company incorporated outside India, on the basis of its POEM, as being resident in India then any such finding shall be given by the AO after seeking prior approval of the collegium of three members consisting of the Principal Commissioners or the Commissioners, as the case may be, to be constituted by the Principal Chief Commissioner of the region concerned, in this regard. The collegium so constituted shall provide an opportunity of being heard to the company before issuing any directions in the matter. Non-applicability 86 CU IDOL SELF LEARNING MATERIAL (SLM)

The CBDT vide Circular no. 8/2017 dated 23.02.2017 also clarified that POEM guidelines shall not apply to a company having turnover or gross receipts of ₹ 50 crores or less in a financial year. Example 1: Company A Co. is a sourcing entity, for an Indian multinational group, incorporated in country X and is 100% subsidiary of Indian company (B Co.). The warehouses and stock in them are the only assets of the company and are located in country X. All the employees of the company are also in country X. The average income wise breakup of the company’s total income for three years is, - a) 30% of income is from transaction where purchases are made from parties which are non-associated enterprises and sold to associated enterprises. b) 30% of income is from transaction where purchases are made from associated enterprises and sold to associated enterprises. c) 30% of income is from transaction where purchases are made from associated enterprises and sold to non-associated enterprises. and d) 10% of the income is by way of interest. Interpretation: In this case, passive income is 40% of the total income of the company. The passive income consists of, - i) 30% income from the transaction where both purchase and sale is from/to associated enterprises; and ii) 10% income from interest. The A Co. satisfies the first requirement of the test of active business outside India. Since no assets or employees of A Co. are in India the other requirements of the test is also satisfied. Therefore, company is engaged in active business outside India. Example 2: The other facts remain same as that in Example 1 with the variation that A Co. has a total of 50 employees. 47 employees, managing the warehouse, storekeeping, and accounts of the company, are located in country X. The Managing Director (MD), Chief Executive Officer (CEO) and sales head are resident in India. The total annual payroll expenditure on these 50 employees is of ₹ 5 crore. The annual payroll expenditure in respect of MD, CEO and sales head is of ₹ 3 crore. Interpretation: Although the first limb of active business test is satisfied by A Co. as only 40% of its total income is passive in nature. Further, more than 50% of the employees are also situated outside India. All the assets are situated outside India. However, the payroll expenditure in respect of the MD, the CEO and the sales head being employee’s resident in 87 CU IDOL SELF LEARNING MATERIAL (SLM)

India exceeds 50% of the total payroll expenditure. Therefore, A Co. is not engaged in active business outside India. Example 3: The basic facts are same as in Example 1. Further facts are that all the directors of the A Co. are Indian residents. During the relevant previous year 5 meetings of the Board of Directors is held of which two were held in India and 3 outside India with two in country X and one in country Y. Interpretation: The A Co. is engaged in active business outside India as the facts indicated in Example 1 establish. The majority of board meetings have been held outside India. Therefore, the POEM of A Co. shall be presumed to be outside India. Example 4: The facts are same as in Example 3 but it is established by the Assessing Officer that although A Co.’s senior management team signs all the contracts, for all the contracts above ₹ 10 lakh the A Co. must submit its recommendation to B Co. and B Co. makes the decision whether or not the contract may be accepted. It is also seen that during the previous year more than 99% of the contracts are above ₹ 10 lakh and over past years also the same trend in respect of value contribution of contracts above ₹ 10 lakh is seen. Interpretation: These facts suggest that the effective management of the A Co. may have been usurped by the parent company B Co. Therefore, POEM of A Co. may in such cases be not presumed to be outside India even though A Co. is engaged in active business outside India and majority of board meeting are held outside India. Example 5: An Indian multinational group has a local holding company A Co. in country X. The A Co. also has 100% downstream subsidiaries B Co. and C Co. in country X and D Co. in country Y. The A Co. has income only by way of dividend and interest from investments made in its subsidiaries. The Place of Effective Management of A Co. is in India and is exercised by ultimate parent company of the group. The subsidiaries B, C and D are engaged in active business outside India. The meetings of Board of Director of B Co., C Co. and D Co. are held in country X and Y respectively. Interpretation: Merely because the POEM of an intermediate holding company is in India, the POEM of its subsidiaries shall not be taken to be in India. Each subsidiary has to be examined separately. As indicated in the facts since B Co., C Co., and D Co. are independently engaged in active business outside India and majority of Board meetings of these companies are also held outside India. The POEM of B Co., C Co., and D Co. shall be presumed to be outside India. 88 CU IDOL SELF LEARNING MATERIAL (SLM)

Problem 1 ABC Inc., a Swedish company headquartered at Stockholm, not having a permanent establishment in India, has set up a liaison office in Mumbai in April, 2020 in compliance with RBI guidelines to look after its day-to-day business operations in India, spread awareness about the company’s products and explore further opportunities. The liaison office takes decisions relating to day-to-day routine operations and performs support functions that are preparatory and auxiliary in nature. The significant management and commercial decisions are, however, in substance made by the Board of Directors at Sweden. Determine the residential status of ABC Inc. for A.Y. 2021-22. SOLUTION Section 6(3) provides that a company would be resident in India in any previous year, if- i) it is an Indian company; or ii) its place of effective management, in that year, is in India. In this case, ABC Inc. is a foreign company. Therefore, it would be resident in India for P.Y.2020-21 only if its place of effective management, in that year, is in India. Explanation to section 6(3) defines “place of effective management” to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made. In the case of ABC Inc., its place of effective management for P.Y.2020-21 is not in India, since the significant management and commercial decisions are, in substance, made by the Board of Directors outside India in Sweden. ABC Inc. has only a liaison office in India through which it looks after its routine day to day business operations in India. The place where decisions relating to day-to-day routine operations are taken and support functions that are preparatory or auxiliary in nature are performed are not relevant in determining the place of effective management. Hence, ABC Inc., being a foreign company is a non-resident for A.Y.2021-22, since its place of effective management is outside India in the P.Y.2020-21. TAX IMPLICATIONS The income-tax rate on foreign companies is higher at 40% plus surcharge @2% (if total income exceeds ₹ 1 crore but does not exceed ₹ 10 crore) and @ 5%, (if the total income exceeds ₹ 10 crore) The Income tax rate on domestic companies is 30% (plus surcharge @7%, if total income exceeds ₹ 1 crore but does not exceed ₹ 10 crore and @12%, if total income exceeds ₹ 10 crore). 89 CU IDOL SELF LEARNING MATERIAL (SLM)

Also, certain tax incentives available to domestic companies are not available to foreign companies like amortisation of preliminary expenses. It is advantageous, from tax angle, for foreign corporations intending to do business in India to do so through a subsidiary instead of directly through a branch. Note – The Taxation Laws (Amendment) Act, 2019 has inserted two sections, section 115BAA and 115BAB, in the Income-tax Act, 1961 with effect from A.Y.2020-21. Section 115BAA provides for concessional rate of tax @22% (plus surcharge@10% and HEC@4%) for domestic companies, subject to certain conditions, like non-availability of profit-linked deductions and investment-linked tax deduction under the Act, non-availability of deduction for contribution to research and development, additional depreciation etc. Section 115BAB provides for concessional rate of tax @15% (plus surcharge@10% plus HEC@4%) to new manufacturing or electricity generating domestic companies set up and registered on or after 1.10.2019, and commences manufacturing on or before 31.3.2023, subject to certain conditions, like non-availability of profit-linked deductions and investment-linked tax deduction under the Act, non-availability of deduction for contribution to research and development, additional depreciation etc. Domestic Companies have to exercise the option to be governed by these special provisions of the Act. The option for section 115BAB has to be exercised in the very first year in which the eligible company is set up, failing which it cannot exercise such option in the future years. However, a company eligible to exercise option u/s 115BAA can defer exercise of such option to a future year, if it is availing sizable profit- linked or additional depreciation in the previous year. However, once the company exercises such option under section 115BAA or 115BAB, as the case may be, in a year, it would continue to be governed by the special provisions u/s 115BAA or 115BAB, as the case may be, thereafter and cannot opt for regular provisions in any subsequent year. It may be noted that companies exercising option under section 115BAA or section 115BAB are not liable to minimum alternate tax under section 115JB. 5.7 SUMMARY • The Companies Act, 2013 provides for the kinds of companies that can be promoted and registered under the Act. • Sec 2(17) of the Income Tax Act, 1961 defines the term company under IT Act. • A company would be resident in India in any previous year, if- a. it is an Indian company; or b. its place of effective management, in that year, is in India • Place of effective management (POEM) means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity are, in substance made. 90 CU IDOL SELF LEARNING MATERIAL (SLM)

• Place of effective management' (POEM) is an internationally recognized test for determination of residence of a company incorporated in a foreign jurisdiction. • The POEM concept is one of substance over form. It may be noted that an entity may have more than one place of management, but it can have only one place of effective management at any point of time. • The income-tax rate on foreign companies is higher at 40% plus surcharge @2%. • Certain tax incentives available to domestic companies are not available to foreign companies like amortization of preliminary expenses. 5.8 KEYWORDS • OPC – One Person Company • POEM – Place of Effective Management • MD – Managing Director • CFO – Chief Financial Officer • AO – Assessing Officer 5.9 LEARNING ACTIVITY 1. Learn more about producer companies and Taxation provisions for such companies. ___________________________________________________________________________ _____________________________________________________________________ 2. Compare between Foreign Subsidiaries and Foreign Branches. Discuss merits and Demerits of the same from taxation perspective. ___________________________________________________________________________ ___________________________________________________________________________ 5.10 UNIT END QUESTIONS A. Descriptive Type Questions Short Questions 1. Explain the meaning of passive income. 2. How to determine POEM in case of Company engaged in active business outside India? 3. Decisions made by shareholders – Not a relevant factor. Explain. 4. Compare the tax implications between a resident company and a non-resident company. 5. The total income of a Company is ₹ 4,50,000. Compute the tax payable including cess if any, if a. The company is a domestic Company 91 CU IDOL SELF LEARNING MATERIAL (SLM)

b. The Company is a Foreign Company 6. Mind Technologies INC is a sourcing entity, for an Indian multinational group, incorporated in US and is 100% subsidiary of Indian company (Mindtech Technologies Ltd). The warehouses and stock in them are the only assets of the company and are located in US. All the employees of the company are also in US. The average income wise breakup of the company’s total income for three years is, - a) 30% of income is from transaction where purchases are made from parties which are non-associated enterprises and sold to associated enterprises. b) 30% of income is from transaction where purchases are made from associated enterprises and sold to associated enterprises. c) 30% of income is from transaction where purchases are made from associated enterprises and sold to non-associated enterprises. and d) 10% of the income is by way of interest. Further facts are that all the directors of the US Company are Indian residents. During the relevant previous year 5 meetings of the Board of Directors is held of which two were held in India and 3 outside India with two in US and one in Japan. Find out and explain with reasons whether the POEM of Mind Technologies is in India or Outside India. Long Questions 92 1. What is private company? Explain its characteristics. 2. Write short notes on public company and explain its characteristics. 3. What is OPC? What is the status of OPC in other countries? 4. Discuss the meaning of Company as per Income Tax Act, 1961. 5. Explain the concept of POEM. B. Multiple Choice Questions 1. ____________ restricts the rights to transfer its shares. a. Public Company b. Private Company c. Both (a) and (b) d. None of these 2. Which of the following is a characteristic of a private company? a. Maximum 200 members b. Minimum 2 directors c. Prohibits invitation to the public to subscribe for securities of the company. CU IDOL SELF LEARNING MATERIAL (SLM)

d. All of these 3. Minimum member requirement for a public company is a. 2 b. 3 c. 5 d. 7 4. __________ is a one shareholder corporate entity a. Private Company b. One person Company c. Public company d. None of these 5. A Company would be resident in India a. Only if it is an Indian Company b. Only if POEM is in India c. Either (a) or (b) d. Neither (a) nor (b) 6. The basic income tax rate applicable for a foreign company is a. 30% b. 25% c. 40% d. None of these Answers 1-b 2-d 3-d 4-b 5-c 6-c 5.11 REFERENCES • Prasad, Bhagabati: Direct Tax Law & Practice, New Age Publ., N. Delhi. • H.C. Mehrotra –Income Tax Law & Practice • H.P. Ranina: Corporate Taxation: A Hand Book (Tax Mann). • V.S. Datey: Indirect Taxes – Law and Practice (Tax Mann Publications Limited) • Ahuja, Girish & Gupta, Ravi: Systematic Approach to Income Tax; Central Sales Tax, Bharat Law House, N. Delhi. 93 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 6: COMPANIES AND TAXES Structure 6.0 Learning Objectives 6.1 Introduction 6.2 Classes of Companies and Assessment of Companies 6.3 Carry forward and set off of business losses 6.4 Summary 6.5 Keywords 6.6 Learning Activity 6.7 Unit End Questions 6.8 References 6.0 LEARNING OBJECTIVES After studying this unit, you will be able to: • State the various classes of companies • Appreciate the concessional rates applicable under various conditions • Outline the concept of additional income tax on distribution of income • Comprehend the concept of carry forward and set off of business losses • Explain the concept of carry forward and set off of losses in case of amalgamation/demerger etc. 6.1 INTRODUCTION Under the Income-tax Act, 1961, the term “Company” has a much wider meaning than what has been given to it under the Companies Act. The company is considered as a ‘person’ for all purposes of assessment proceedings [Section 2(31)(iii)]. We have already discussed the meaning of Company under the Income Tax Act in the Previous unit. 6.2 CLASSES OF COMPANIES AND ASSESSMENT OF COMPANIES Domestic and Foreign Company: Companies can be classified into two groups, viz. i) Domestic company and ii) Foreign company. 94 CU IDOL SELF LEARNING MATERIAL (SLM)

(i) Domestic company means - an Indian company or - any other company, which, in respect of its income liable to tax, has made the prescribed arrangements for the declaration and payment of the dividends (including dividends on preferential shares) within India, payable out of such income [Section 2(22A)]. Indian Company [Section 2(26)] - A company has to satisfy the following two conditions so that it can be regarded as an Indian company – (a) the company should have been formed and registered under Companies Act, 19561 (b) the registered office or the principal office of the company should be in India. The expression ‘Indian Company’ also includes the following provided their registered or principal office is in India: 1. a company formed and registered under any law relating to companies formerly in force in any part of India [except Jammu and Kashmir, Goa, Dadra and Nagar Haveli, Daman and Diu and Pondicherry, wherein companies formed and registered under any law for the time being in force in the respective union territories are included in the definition]; 2. a corporation established by or under a Central, State or Provincial Act (like Financial Corporation or a State Road Transport Corporation); 3. an institution or association or body which is declared by the Board (CBDT) to be a company under section 2(17)(iv); Prescribed arrangements for the declaration and payment of dividends within India [Rule 27]: The arrangements referred to in sections 194 and 236 to be made by a company for declaration and payment of dividends (including dividends on preference shares) within India are as follows: i) The share register of the company concerned for all its shareholders shall be maintained regularly at its principal place of business within India in respect of any assessment year from a date not later than 1st April of such year. ii) The general meeting for passing the accounts of the previous year relevant to the assessment year and for declaring any dividends in respect thereof shall be held only at a place within India. iii)The dividends declared, if any, shall be made payable only within India to all the shareholders. It is obligatory for Indian companies to make the prescribed arrangements stated above; non- Indian companies will be treated as domestic companies only if they make the prescribed arrangements for the declaration and payment of dividends in India. 95 CU IDOL SELF LEARNING MATERIAL (SLM)

Foreign Company: A company that is not a domestic company is a foreign company [Section 2(23A)]. Closely held and widely held Company: Domestic companies are again divided into broad groups, viz 1. companies in which public are substantially interested - ‘Widely-held companies’ 2. companies in which public are not substantially interested - ‘Closely held companies’ To determine whether a company is one in which the public are substantially interested, one has to apply the tests laid down in section 2(18). Briefly, the following companies fall under this category: i) A company owned by the Government (either Central or State but not Foreign) or the Reserve Bank of India (RBI) or in which not less than 40% of the shares are held by the Government or the RBI or corporation owned by that bank. ii) A company which is registered under section 25 of the Companies Act, 19563 (formed for promoting commerce, arts, science, religion, charity, or any other useful object and which prohibits payment of dividends to its members). iii) A company having no share capital which is declared by the CBDT for the specified assessment years to be a company in which the public are substantially interested. iv) A mutual benefit finance company which carries on its principal business of accepting deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, 19564 to be Nidhi or a Mutual Benefit Society. v) A company whose equity shares (not being shares entitled to a fixed rate of dividend) carrying at least 50% of the voting power have been allotted unconditionally to or acquired unconditionally by and were beneficially held throughout the relevant previous year by one or more co-operative societies. vi) A company which is not a private company as defined in the Companies Act, 1956 and which fulfils any of the following conditions: - its equity shares should have, as on the last day of the relevant previous year, been listed in a recognized stock exchange in India; or - its equity shares carrying at least 50% (40% in case of an Indian company in ship construction business or in the manufacture or processing of goods or in mining or in generation or distribution of electricity or any other form of power) voting power should have been unconditionally allotted to or acquired by and should have been beneficially held throughout the relevant previous year by 96 CU IDOL SELF LEARNING MATERIAL (SLM)

a) Government or b) a Statutory Corporation or c) a company in which public are substantially interested or d) any wholly owned subsidiary of company mentioned in (c). Thus, it should be noted that all public limited companies must automatically be treated as companies in which public are substantially interested, whereas all private limited companies will be treated as companies in which public are not substantially interested. Relevance of the above classification: 1. The distinction between domestic and foreign companies is significant owing to, inter alia, the rates of tax. Domestic companies are taxed at 30% but where the total turnover or gross receipt in the previous year 2018-19 does not exceed ₹ 400 crore, it shall be taxed at 25% of the total income. However, a foreign company will be taxed at 40%. In respect of specified royalties and fees for technical services received from Government or an Indian concern in pursuance of an agreement, approved by the Central Government, made by the foreign company with the Government or Indian concern between 1.4.1961 and 31.3.1976 (in case of royalties) and between 1.3.1964 and 31.3.1976 (in case of FTS), the rate of tax is 50%. Surcharge@7% of the tax payable is leviable in the case of domestic companies and @2% of tax payable in the case of foreign companies if the total income exceeds ₹ 1 crore but does not exceed ₹ 10 crore. Surcharge@ 12% of the tax payable is leviable in the case of domestic companies and @ 5% of tax payable in the case of foreign companies if the total income exceeds ₹ 10 crore. Note – The Taxation Laws (Amendment) Act, 2019 has inserted two new sections, section 115BAA and 115BAB, in the Income-tax Act, 1961 w.e.f. A.Y.2020-21. Section 115BAA provides for concessional rate of tax @22% (plus surcharge@10% and HEC@4%) for domestic companies, subject to certain conditions, like non-availability of profit-linked deductions and investment-linked tax deduction under the Act, non-availability of deduction for contribution to research and development, additional depreciation etc. Section 115BAB provides for concessional rate of tax @15% (plus surcharge@10% plus HEC@4%) to new manufacturing or electricity generating domestic companies set up and registered on or after 1.10.2019, and commences manufacturing or generating electricity on or before 31.3.2023, subject to certain conditions, like non-availability of profit-linked deductions and investment-linked tax deduction under the Act, non-availability of deduction for contribution to research and development, additional depreciation etc. 97 CU IDOL SELF LEARNING MATERIAL (SLM)

Domestic Companies have to exercise the option to be governed by these special provisions of the Act. The option for section 115BAB has to be exercised in the very first year in which the eligible company is set up, failing which it cannot exercise such option in the future years. However, a company eligible to exercise option u/s 115BAA can defer exercise of such option to a future year, if it is availing sizable profit-linked or investment-linked deductions or additional depreciation in the relevant previous year. However, once the company exercises such option under section 115BAA or 115BAB, as the case may be, in a year, it would continue to be governed by the special provisions u/s 115BAA or 115BAB, as the case may be, thereafter and cannot opt for regular provisions in any subsequent year. It may be noted that companies exercising option under section 115BAA or section 115BAB are not liable to minimum alternate tax under section 115JB. These two sections, namely sections 115BAA and 115BAB have been detailed in the upcoming paragraphs. 2. The question as to whether a company is one in which public are substantially interested or not is relevant for application of certain provisions which are applicable only to closely held company. There are certain special provisions which are applicable only to companies in which public are not substantially interested. Examples of such special provisions are as follows: S.No Section Provision 1 2(22)(e) Advance or loan by a closely held company - deemed dividend 2 56(2) (viib) Consideration received in excess of FMV of shares issued by a closely held company to be treated as income of such company, where shares are issued at a premium 3 68 Taxation of sum received by closely held company as share application money, share capital, share premium and the explanation offered by company is not satisfactory 4 79 Carry forward and set-off of losses in case of closely held companies 5 179 Liability of directors of private company in liquidation 3. 115BAB and 115BAA providing for concessional rate of tax in respect of certain domestic companies 98 CU IDOL SELF LEARNING MATERIAL (SLM)

As discussed above sections 115BAB and 115BAA have been inserted by the Taxation Laws (Amendment) Act, 2019, providing for concessional rates of tax and exemption from minimum alternate tax (MAT) in respect of certain domestic companies with effect from A.Y.2020-21. The provisions of these two new sections are tabulated hereunder - Particulars Sec 115BAB Sec 115BAA 1 Applicability Domestic manufacturing Any domestic company/Electricity company generation company 2 Rate of tax 15% 22% 3 Rate of surcharge 10% 10% 4 Effective rate of tax (including 17.16% 25.168% [Tax@22% (+) surcharge & HEC) [Tax@15% (+) Surcharge@10% (+) Surcharge@10% (+) HEC@4%] HEC@4%] 5 Applicability of MAT Not Applicable Not Applicable 6 Manner of computation of tax liability Income on which concessional The rate of tax (i.e., The rate of tax (i.e., rate of tax is applicable 17.16%) is applicable in 25.168%) is respect of income derived notwithstanding from or incidental to anything contained in manufacturing or the Income-tax Act, production of an article or 1961, but subject to thing or generation of the provisions of electricity Chapter XII, other [Read with point no.11 than section 115BA below, wherein the rate of and 115BAB. 99 CU IDOL SELF LEARNING MATERIAL (SLM)

34.32% (i.e., Tax@30% + surcharge@10% + HEC@4%) would be applicable in specified circumstance] Rate of tax on income covered Such income would be Such income would under Chapter XII [for subject to tax at the rates be subject to tax at example, long-term capital mentioned in the said the rates mentioned gains sections in Chapter XII. in the said sections in chargeable to tax u/s 112 and Surcharge @ 10% would be Chapter XII. 112A, short-term capital gains levied on tax computed on Surcharge@10% is chargeable to tax u/s 111A] such income. HEC@4% leviable on tax would be levied on the computed on such income-tax plus surcharge. income. HEC@4% would be levied on the income-tax plus surcharge. Rate of tax on other income in The applicable tax rate is The applicable tax respect of which no specific 25.168% (i.e., tax@22%, rate is 25.168% (i.e., rate of tax is provided in plus surcharge @10% plus tax@22% plus Chapter XII HEC@4%), if such income surcharge@10% plus has neither been derived HEC@4%). from nor is incidental to There is, however, no manufacturing or restriction regarding production of an article or claim of any thing or generating deduction or electricity (For example, allowance income from house permissible under the property and income from relevant provisions of other sources). the Act. In respect of such income, no deduction or allowance 100 CU IDOL SELF LEARNING MATERIAL (SLM)