Place of Effective Management rule were notified by the CBDT in order to determine the residential status of company . Lets understand the provisions on residential status of the company .
RESIDENTIAL STATUS OF A COMPANY – UP-TO ASSESSMENT YEAR 2016-17
PRE – AMENDED PROVISIONS – SECTION 6
- Section 6(3) of the Income Tax Act, 1961 (“IT Act”) provided that a company is said to be resident in India in any previous year, if –
- it is an Indian company ; or
- during that year, the control and management of its affairs is situated wholly in India.
RESIDENTIAL STATUS OF A COMPANY – FROM ASSESSMENT YEAR 2017-18 AND ONWARDS
A company is said to 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.
MEANING – PLACE OF EFFECTIVE MANAGEMENT (“POEM”)
“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.
NON APPLICABILITY OF PLACE OF EFFECTIVE MANAGEMENT (POEM)
As per the Circular No. 8/2017 issued by the CBDT, provisions of Place of Effective Management are not applicable when the turnover of the company is less than or equal to Rs 50 crores during the year .
IMPORTANCE OF PLACE OF EFFECTIVE MANAGEMENT [POEM]
- Place of Effective Management, is an internationally acceptable test to determine, whether a company incorporated in a foreign jurisdiction, is a tax resident of another country.
- Most of the Indian tax treaties recognize the Place of Effective Management concept as a tie-breaker rule (applied where by application of “Article 4 – Residence” of a Tax Treaty, a person could be a Resident of both the Treaty partner countries) to determine residence of a company, for avoidance of double taxation.
GUIDING PRINCIPLE FOR DETERMINATION OF POEM
There are different set of conditions, to ascertain Place of Effective Management applicability for : –
- Companies engaged in “Active Business Outside India”, and
- Companies not engaged in “Active Business Outside India”.
POEM FOR COMPANIES ENGAGED IN “ACTIVE BUSINESS OUTSIDE INDIA”
POEM of companies engaged in “Active Business Outside India” (ABOI) shall be presumed to be outside India if the majority of the Board meeting are held outside India.
EXCEPTION : –
In case the Board of Directors are not exercising their powers of management, and such powers are being exercised by either –
- the Holding company (i.e., Indian holding company) or
- any other person, resident in India,
then POEM shall be considered to be in India.