Nestled in the Eastern Himalayas, Sikkim isn't just a haven for tourists, but people of the Norst East Indian state are also exempt from paying income tax. This has also resulted in the use of the territory for scams, including tax avoidance by commodity market traders registered in Sikkim.
Now the Supreme Court has ruled that a firm should be taxed based on the place it is being controlled from, instead of the location of its registration.
The case in focus
In a case involving assessees incorporated under Sikkim's company law, the apex court ruled that it should be taxed under the Indian Income Tax Act 1961, since an auditor in New Delhi controlled their business.
So far native-residents of Sikkim are taxed under the Sikkim Tax Manual, 1948 but the court found that the assessees are resident Indian companies.
After search operations on the premises of the company Mansarovar Commercial, it was served notices for assessment years from 1987 to 1990.
Based on its observation, the Supreme Court held its income before 1990 as taxable under Indian tax laws.
Wider implications
The court added that it doesn't matter where the theoretical control of power lies, but the location of the head and seat that directs power, is more important.
Although the case deals with a company registered in Sikkim, the court also mentioned that to for a non-Indian company to become resident in the country, it needs to manage all its affairs from a location in India.
