Section 6 of the Income tax Act, 1961 provide for conditions in which residence in India is determined in case of different category of persons. Section 6(3) deals with conditions to be satisfied for a Company to be treated as resident in India in any previous year. Prior to the introduction of the concept of POEM, a Company was said to be resident in India in any previous year if it was an Indian company or during that year, the control and management of its affairs was situated wholly in India. The Finance Act, 2015 amended the above provision so as to provide that a Company would be resident in India in any previous year if it is an Indian company or its Place of Effective Management (POEM) in that year is in India. The POEM was defined 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 order to bring clarity about the applicability criteria of certain Income tax provisions, the concept of POEM has been deferred for one year the same has been made applicable w.e.f. previous year 2016-17.
The concept of POEM is important to determine the residential status of a foreign company operating in India. For Example, a foreign company fulfilling the conditions of POEM will be deemed as Indian Resident and the global income of such foreign company is taxable in India.
B. Residential Status of Companies under the Income tax Act, 1961:
Section 6(3) of the Income tax Act, 1961 provides that a Company is said to be resident in India in any previous year if:
Place of Effective Management (POEM) means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.
C. Guidelines determining POEM (whether in India):
The POEM in case of a Company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.
A Company is said to be active business outside India if its passive income is not more than 50% of the total income of such Company and:
♦ Assets in India are < 50% of the total assets
(Assets will be taken as average of opening and closing);
♦ Employees in India < 50% of the total employees
(No. of employees will be taken as average of opening and closing);
♦ Payroll Expenses in India < 50% of the total payroll expenses.
Passive Income means Income in relation to transactions of purchase and sale with Associated Enterprises (AEs) or Income generated from Royalty, Dividend, Interest, Rental or Capital Gains.
The Guidance further provides that in cases of Companies other than those that are engaged in active business outside India referred to in above, the determination of POEM would be a two stage process, namely:
Stage 1: First stage would be identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company’s business as a whole (WHO TAKE THE DECISIONS).
Stage 2: Second stage would be determination of place where these decisions are in fact being made (WHERE THE DECISIONS ARE IMPLEMENTED).
IN CASE THE DECISIONS UNDERTAKEN BY THE COMPANY ARE IN INDIA (NOT SUCH DECISIONS WHICH ARE OF ROUTINE NATURE TAKEN BY MIDDLE OR LOWER LEVEL MANAGEMENT) AND SUCH DECISIONS TAKEN BY THE BOD OR SENIOR MANAGEMENT HAVE ACTUALLY BEEN IMPLEMENTED IN INDIA, THEN THE POEM SHALL BE CONSIDERED AS IN INDIA AND THE COMPANY WILL BE DEEMED AS INDIAN RESIDENT.
Example: 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,
Solution: Since passive Income of the Company is less than 50% i.e. 40% of the total income of such entity and both the assets and employees are working in country X, therefore the Company is deemed to have active business outside India.
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