Aman Mourya
Company Secretary, LLB

It is imperative to understand the sense behind introducing the concept of Place of Effective Management (hereinafter refereed as “POEM”) first, before embarking determination aspect of Place of Effective Management. POEM is not a new concept at all; it is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction.

Prior to this amendment (introduction of POEM) by the Finance Act, 2015, Section 6(3) of the Income-tax Act, 1961, provided that a company is said to be resident in India in any previous year, if it is an Indian company or if during that year, the control and management of its affairs is situated wholly in India. This allowed tax avoidance opportunities for companies to artificially escape the residential status under these provisions by shifting insignificant events related with control and management outside India.

To plug the loopholes and tighten the tax regime for corporate operating in India, the existing provisions of section 6(3) of the Income-tax Act, 1961 were amended vide Finance Act, 2015, with effect from 1st April, 2016 by introducing the concept of POEM., which provides that a company is said to 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.

The Words “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. 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. Factual determination based on ‘substance’ not the ‘form’, taking a holistic approach. These are the fundamental principles for determination of POEM. Tax Authorities are required to gather facts based on the ‘substance’ of the management and control structures and carry out this review on an annual basis for determination of POEM.

Key Management/ Senior Management may include: (i) Managing Director or Chief Executive Officer; (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). These are the official of the Company who are generally responsible for developing and formulating/implementing key strategies and policies for the company.

The Draft Guidelines as issued provide that where a company is engaged in ‘active business outside India’, the POEM shall be presumed to be outside India if the majority of the meetings of the Board of Directors of the company are held outside India.

As per draft guidelines a company shall be said to be engaged in “active business outside India” if the passive income is not more than 50% of its total income and, (i) less than 50% of its total assets are situated in India; and (ii) less than 50% of total number of employees are situated in India or are resident in India; and (iii) the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure;

For the purpose of determining whether the company is engaged in active business outside India the average of the data of three preceding year shall be taken into account.

Definition of Passive income: it is a 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;

What if the Board of directors of the company are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person (s) resident in India? In this case the place of effective management shall be considered to be in India. 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.

In case of other companies, the determination of POEM would be a two stage process: (i) 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. (ii) Determination of place where these decisions are in fact being made.

The place where these management decisions are taken would be more important than the place where such decisions are implemented.

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. 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 of management (for example, the Managing Director and Financial Director) and their direct support staff are located.

If the above factors do not lead to clear identification of POEM then the following secondary factors can be considered :-

(i) Place where main and substantial activity of the company is carried out; or

(ii) Place where the accounting records of the company are kept.

It needs to be emphasized that the determination of POEM 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 e.g. Isolated 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.

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.

iii. 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.

iv. 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.


The Draft Guidelines as issued are comprehensive and largely focus on ‘substance’ rather than on ‘form’. At the same time, the intention of the Draft Guidelines also seems to ensure that there is no harassment of the taxpayers in genuine cases and it also provides that before an Assessing Officer holds a foreign Company to have a POEM in India, he is required to take prior permission from the Principal Commissioner or Commissioner and an opportunity of being heard will be given to the concerned company before deciding the matter.

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October 2020