Objectives & Agenda : To know when income will be taxable in India and to understand the determination of residential status for individuals, HUF, Firms, AOP/BOI and Companies. To analyse the concept of POEM in relation to determination of residential status of Company.

1. Scope of Total Income and
Residential Status
CA. Divakar Vijayasarathy

2. Schema
• Scope of Total Income – Sec 5
• Residential Status- Sec 6
• Concept of POEM – Sec 6(3)

3. Scope of Total
Income – Sec 5

4. Determinants
• Scope of total income refers to the types of income which are liable for taxation in India
under specific circumstances. Scope of total income is determined based on the following:
• Place of accrual of income
• Place of receipt of income
• Residential status of the assessee

5. Categories
Based on where income is earned or received (place of accrual or receipt), it can be classified into:
• Indian income:
• Income earned and received or deemed to be earned and received in India
• Income earned or deemed to be earned outside India but received in India
• Income earned or deemed to be earned in India but received outside India.
• Foreign income:
• Income earned and received or deemed to be earned and received outside India from a business controlled
from India
• Income earned and received or deemed to be earned and received outside India from a business controlled
from outside India.
• Non-Business Income earned and received or deemed to be earned and received outside India

6. Taxability
Source of Income Resident and ordinarily
resident
Resident but not
ordinarily resident
Non resident
Indian Income Taxable Taxable Taxable
Foreign Income
1. Income earned and received or deemed to be
earned and received outside India from a business
controlled from or profession setup in India.
Taxable Taxable Not Taxable
2. Income earned and received or deemed to be
earned and received outside India from a business
controlled from or profession setup outside India.
Taxable Not Taxable Not Taxable
3. Non-Business Income earned and received or
deemed to be earned and received outside India
Taxable Not Taxable Not Taxable

7. Relevant Points
Income accruing or arising outside India shall not be deemed to be received in India only for the fact that it is taken into
account in balance sheet prepared in India
Income which has been included in the total income of a person on the basis of accrual or arising shall not be again be
included on the basis of receipt

8. Residential
Status – Sec 6

9. Basics
• Residential status refers to the
classification of a person for the
purposes of taxation based on:
• the period of stay
• place of control and
management
• Citizenship
• Type of person
• The various types of residential
status applicable for different
persons are given below:
TYPE OF PERSON TYPE OF RESIDENTIAL STATUS
POSSIBLE
Individual and HUF - Resident and ordinarily resident
- Resident but not ordinarily resident
- Non Resident
Any other person (firm,
company, AoP, BoI etc)
- Resident
- Non resident

10. Individuals – Sec 6(1) rw 6(6)
Residential status of an individual assessee can be broadly classified as:
• Resident assessee
• Non resident assessee
A resident assessee can be further classified as:
• Resident and ordinarily resident
• Resident but not ordinarily resident.

11. Resident or
Non Resident
Basic Conditions – Sec 6(1):
An individual who fulfils either of the following conditions will
be a resident in India.
• If he has stayed in India for 182 days or more during
the relevant previous year
Or
• If he has stayed in India for 60 days or more during
the relevant previous year and 365 days or more
during the 4 preceding previous years.
Exceptions: However in the following cases, only the first
condition is applicable to determine the residential status:
• Indian citizen, leaving India for employment outside
India
• Indian citizen being a crew member of an Indian ship
leaving India
• Indian citizen or Person of Indian origin visiting India.
In other words, these individuals will be treated as a resident
only if they have stayed in India for 182 days or more.

12. Clarifications
• Where an employee of a multinational company in India, is sent on deputation
abroad, has stayed in India for less than 182 days during the previous year – he
shall be regarded as a non resident.
• It is not mandatory for a person to be unemployed at the time of leaving India
for the purpose of employment outside India to fall within the ambit of the
exceptions u/s 6(1)
• Indian shipping company need not deduct tax at source with respect to
payments to its crew for days on which ship was outside territorial waters of
India and number of such days exceeded 182 in any particular year.
• Date of arrival and date of departure shall be included for period of stay if the
time of entry and departure is not available
• “Employment” includes self employment like business or profession taken up by
assessee abroad
• Stay in territorial waters of India shall be treated as stay in India
• If both the basic conditions (or 1st condition in case of the 3 exceptions) are not
fulfilled then the assessee shall be deemed to be Non resident.
• Stay need not be continuous and can be split across different visits.
• Foreign tour on behalf of an Indian employer shall not be considered as
employment outside India.
• An Individual is said to be a Person of Indian Origin if he or either of his parents
or any of his grandparents were born in undivided India – Sec 115C.
Grandparents include both maternal and paternal grand parents.
• Undivided India refers to India prior to partition (partition of India and Pakistan).
Indo- Pakistan partition happened on 14th of August 1947

13. Ordinarily
Resident or Not
Once an individual is considered as a resident based on the
above mentioned criteria, the next step is to determine
whether he is an ordinarily or not ordinarily resident.
The following 2 additional conditions have been specified for
the purpose:
• should have been a resident u/s 6(1) for at least 2 out of 10
preceding previous years
• should have been in India for a period of 730 days or more
in the 7 preceding previous years.
Conclusion:
• If both the above conditions are fulfilled - Resident and
Ordinarily resident.
• Else - Resident but not Ordinarily resident.

14. Firm/ AoP/ BoI and other persons - Sec 6(2)
and 6(4)
Situation Status
Whole or part of the control and management is in
India
Resident
Whole of the control and management is outside
India
Non Resident

15. Residential Status of an HUF 6(2)
Similar to an individual, a HUF also has three residential status namely:
• Resident and ordinarily resident
• Resident but not ordinarily resident
• Non resident

16. Resident or Non Resident HUF
Situation Status
Whole or part of the control and management is in
India
Resident
Whole of the control and management is outside
India
Non Resident

17. Ordinarily
Resident or Not
- HUF
Once an HUF is considered as a resident based on the above
mentioned criteria, the next step is to determine whether it is
an ordinarily or not ordinarily resident of India. The
conditions are similar to that of an individual, however these
conditions are to be applied on the Karta of the HUF.
• Karta should have been a resident u/s 6(1) for at least 2 out
of 10 preceding previous years
• Karta should have been in India for a period of 730 days or
more in the 7 preceding previous years.
Conclusion:
• If both the above conditions are fulfilled - Resident and
Ordinarily resident HUF.
• Else - Resident but not Ordinarily resident HUF.

18. Residential Status of a Company - Sec 6(3)
Type of Company Situation Status
Indian Company All cases Resident
Any other Company
Place of effective management
(POEM) is in India in that year
Resident
Any other case Non Resident
Let us understand the provisions of POEM in detail

19. POEM
POEM – Place of Effective Management
Finance Bill, 2015 introduced the concept of POEM
POEM is an internationally recognised concept for determination of residence of
company incorporated in a foreign jurisdiction
Concept of POEM is recognised and accepted by OECD

20. Residency Test – Sec 6 of Income Tax Act, 1961
Prior to Finance Bill, 2015 Current Provision
A company is said to be resident in India in
any previous year, if-
(i) it is an Indian company; or
(ii) during that year, the control and
management of its affairs is situated wholly
in India
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
POEM 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

21. Drawback before Amendment
Due to the requirement that whole of control and management should be situated in
India and for whole of the year, the condition was rendered to be practically
inapplicable
Allowed tax avoidance opportunities to artificially escape the residential status by
shifting insignificant or isolated events related with control and management
outside India
Facilitated creation of shell companies which were incorporated outside but
controlled from India
The concept of POEM brings such companies into the ambit of taxation

22. Need for POEM
To align the provisions of the Act with the Double Taxation Avoidance Agreements (DTAAs) entered into
by India with other countries, for determination of residence of a company as a tie-breaker rule for
avoidance of double taxation
To be in line with international standards
To curb the ill-practice of tax evasion and ensure right share of tax for actual economic activities being
conducted
Many countries, across the globe, prefer the POEM test to be appropriate test for determination of
residence of a company

23. Applicability
Applicable to a company having turnover or gross receipts exceeding Rs. 50 crores in a
financial year
Effective from 01.04.2017 and will apply from A Y 17-18 and subsequent assessment years
Both the above conditions are alternate conditions; thus, if one of the above doesn’t gets
satisfied, provisions of POEM cannot be invoked

24. Overview
Any determination of the POEM will depend upon the facts and circumstances of a given case
POEM guidelines are only for guidance and not decisive
The POEM concept is one of substance over form
Since “residence” is to be determined for each year, POEM will also be required to be determined on year to year
basis
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
The principles for determining POEM are not to be seen with reference to any particular moment in time, rather the
activities performed over a period of time, during the previous year, need to be considered
Further, where 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

25. Active Business Outside India (ABOI)
Passive income is <= 50% of its total income
Assets situated in India is < 50% of total
assets
Payroll expenses incurred on such employees is < 50% of its total payroll expenditure
Employees situated in India or are resident in India < 50% of total number of employees
And
And
And
A Company shall be said to be engaged in “ABOI” if
Passive income shall be aggregate of
1. Income from the transactions where both the
purchase and sale of goods is from / to its
associated enterprises and
2. Income by way of royalty, dividend, capital
gains, interest or rental income
Note: Passive income will not include interest of
a company which is engaged in the business of
banking or is a public financial institution ,
regulated by applicable laws
Average of the data of the previous years and two years prior to that will be considered

26. Identification of POEM
Identification of POEM
Active Business Outside India (ABOI)
Yes
1. POEM is considered to be outside India if majority of
the meetings of the Board of Directors (BOD) are held
outside India
2. If it is established that powers of management of BOD
are being excersied by either holding Company or any
other person resident in India, then POEM shall be
considered to be in India
No
Stage 1
Identification of persons who
actually make the key
management and commercial
decisions for conduct of the
company’s business as a whole
Stage 2
Determination of place
where these decisions
are in fact being made,
not where these
decisions are being
implemented

27. Guiding Principles to Determine Substance Over
Form
• Location of Board of Directors
• Location of Committees or Senior Managers to whom the powers of management are
delegated
• Location of Company’s Head Office
• Use of modern technology
• Shareholder’s involvement
• Day to day routine operational decisions
Primary factors
• Place where main/substantial activity of the company is carried out (or) Place where
accounting records of company are kept
Secondary
factors

28. Location of BOD
BOD regularly meets and in substance,
makes key decisions
Yes
Such formal place
of meeting of BOD
is relevant for
determining POEM
No
Where meetings are held in a
location, unconnected with the
head office or place of
predominant activity
Place where decisions are
actually taken is relevant for
determining POEM

29. Delegation of Authority
BOD delegates authority to make
decisions
To Senior management or
shareholders where BOD
routinely ratifies decisions
Then the place where such
person makes decisions
would be relevant
To one or
more
committees
Then the place where such
committee develops key
strategies for approval by the
BOD
Such delegation may be de-
jure (formal) or de-facto
(based on actual conduct)

30. Senior Management
Includes
(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)
For ensuring or overseeing the execution and implementation of those strategies on a regular and on-going basis
“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

31. 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 POEM because
it often represents the place where key company decisions are made
• Place where senior management and direct support staff are located and
• Such 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
Single location
• Location where the highest level of management (for example, the Managing Director and
Financial Director) and their direct support staff are located will be the head office
Multiple
location
• Head office would be the location where these senior managers,
• are primarily or predominantly based or
• normally return to following travel to other locations or
• meet when formulating or deciding key strategies and policies for the company as a whole
Decentralised
Where 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 relevant
Regional Headquarter, operating for group companies in a region within the general and objective principles of global policy of the
group for certain functions would alone not be a basis for establishment of POEM - Provisions of GAAR applicable if only for tax planning

32. Use of Modern Technology
Use - Use of
modern
technology
impacts POEM in
many ways
No physical presence
- It is no longer
necessary for the
persons taking
decision to be
physically present at a
particular location
Physical Location Irrelevant -
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
Determination of POEM -
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 for
determining POEM

33. Shareholders Involvement
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 POEM
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
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

34. Routine Operational Decisions
Day to day routine operational decisions undertaken by junior and middle management shall not be relevant for the purpose
of determination of POEM
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

35. Caveats
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
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
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
The fact that 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
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

36. Procedure for Invoking POEM
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 Assessing Officer (AO) should get prior approval shall of the Principal Commissioner or the Commissioner before
initiating any proceedings for holding a company incorporated outside India, on the basis of its POEM, as being resident in
India
Any findings relating to POEM shall be given by the AO after seeking prior approval of the collegium of 3 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

37. Special provisions relating to foreign company
said to be resident in india – Sec 115JH
• Where a foreign company is said to be resident in India in any previous year and
• such foreign company has not been resident in India in any of the previous years preceding the said previous
year,
• the provisions of this Act relating to the computation of total income, treatment of unabsorbed depreciation, set
off or carry forward and set off of losses, collection and recovery and special provisions relating to avoidance of
tax shall apply with such exceptions, modifications and adaptations as may be specified in that notification (shall
be laid before each House of Parliament) for the said previous year
• Provided that where the determination regarding foreign company to be resident in India has been made in the
assessment proceedings relevant to any previous year, then, the provisions of this sub-section shall also apply in
respect of any other previous year, succeeding such previous year, if the foreign company is resident in India in
that previous year and the previous year ends on or before the date on which such assessment proceeding is
completed.
For example- If A Inc is determined as a resident during the assessment of previous of year 2017-18,
which concluded on 01-06-2020, then the provisions of this section shall also apply to the succeeding
previous years 2018-19 and 2019-20 if the foreign company is resident in India during those years.

38. Withdrawal of
Benefits – Sec
115JH(2)
Where, in a previous year, any benefit, exemption or relief has
been claimed and granted to the foreign company u/s
115JH(1), and, subsequently, there is failure to comply with
any of the conditions specified in the notification issued
u/ss(1), then,—
(i) such benefit,
exemption or relief
shall be deemed to
have been wrongly
allowed;
(ii) the AO may,
notwithstanding anything
contained in this Act, re-
compute the total income
of the assessee for the
said previous year and
make the necessary
amendment as if the
exceptions, modifications
and adaptations referred
to u/ss (1) did not apply
(iii) the provisions of
section 154 shall, so far
as may be, apply thereto
and the period of four
years specified u/s 154(7)
shall be from the end of
the previous year in
which the failure to
comply with the
conditions referred to in
ss (1) takes place

39. Illustration
Company A & Co.
Incorporated in
Country X
Indian multinational
group
Sourcing entity
100% Subsidiary of
Indian Company (B Co.)
Passive income is 40% of the total income of the company. The passive
income consists of
30% income from the transaction where both purchase and sale is
from/to associated enterprises and 10% income from interest
The A Co. satisfies the first requirement of the test of active business
outside India
The average income wise breakup of the
company’s total income for three years is
60% of income is from transactions between
associated and non-associated enterprises
30% of income is from transaction where
purchases are made from associated
enterprises and sold to associated
enterprises
10% of the income is by way of interestSolution

40. ABOI Test
Scenario 1 Scenario 2 Scenario 3
1.The warehouses and stock
in them are the only assets
of the company and are
located in country X
2.All the employees of the
company are also in country
X
1.A Co. has a total of 50 employees. 47 employees,
managing the warehouse and storekeeping and
accounts of the company, are located in country X
2.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
Rs. 5 crore. The annual payroll expenditure in respect
of MD, CEO and sales head is of Rs. 3 crore
1.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 .
Assume ABOI conditions are
satisfied
 Passive income test is
satisfied
 Since no assets or
employees of A Co. are in
India the other
requirements of the test
is not satisfied
 Therefore company is
engaged in active
business outside India
 Passive income test is satisfied
 >50% of the employees are also situated outside
India and all the assets are situated outside India
 However, the payroll expenditure in respect of the
MD, the CEO and the sales head being employees
resident in India exceeds 50% of the total payroll
expenditure.
 Therefore, A Co. is not engaged in active business
outside India
 ABOI conditions are satisfied
 The majority of board
meetings have been held
outside India
 Therefore, the POEM of A Co.
shall be presumed to be
outside India

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