This document summarizes key points from a presentation on amendments made to Section 6(3) of the Indian Income Tax Act regarding the determination of a company's residential status. The amendment introduced the concept of Place of Effective Management (POEM) to determine residency for tax purposes. The presentation outlines the draft guiding principles proposed for determining a company's POEM, including factors like where board meetings are held, senior management is located, and key business decisions are made. It also provides definitions, illustrations, and discusses some issues and missing elements in the draft principles.

1. POEM – Yet to be tuned
6th
February, 2016
presented by
Shashi Kumar, Deputy Manager
ASA and Associates LLP, Bangalore

2. Setting the tone
• Section 6(3) before amendment stood as below:
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
• As whole of control & management should be in India for whole of the PY, condition
was practically inapplicable
• Simple board meeting outside India could avoid the provision
• This resulted in creation of shell companies outside but controlled from India
• Finance Act, 2015 amended Section 6(3) dealing with determination of residential status
of companies

3. Setting the tone …
• Inclusion of concept of effective management was intended to align the provisions of the
Act with DTAA and to be in line with International standards
• Also intended to deal with creation of shell companies outside India
• Concept of POEM is present in countries like China, Russia etc
• It was proposed to amend Section 6 as below:
A person being a company shall be said to be resident in India in any previous year if –
(i) it is an Indian company; or
(ii) its place of effective management, at any time in that year, is in India
• Also proposed to issue a set of guiding principles to be followed in determination of
POEM for the benefit of taxpayers and administrators
• As per Sec.5, in case of companies being resident in India, its global income shall be
taxable in India

4. POEM in Jugalbandhi
Article 4 of DTAA of India with Germany

5. Draft Guiding principles for determination of POEM

6. Sa ri ga ma of POEM
• Determination of POEM is a fact based exercise
• It is based on substance over form
• Entity may have more than one place of management, but it can have only one place of
effective management at any point of time
• Residence and POEM to be determined year to year basis
• Process of determination of POEM to be followed whether or not company is engaged in
active business outside India
• POEM is internationally recognized concept for determination of residence of company
incorporated in foreign jurisdiction
• Most of the tax treaties entered into by India recognize POEM for determination of
residence of company as tie-breaker rule for avoiding double taxation
• Accepted and recognized by OECD also
• Amended Section 6(3) is effective from AY 2016-17

7. • Day to day routine operational decisions undertaken by junior and middle management
shall not be relevant
• No single principle will be decisive in itself
• Principles are not to be seen with reference to any particular moment in time rather
activities performed over a period of time, during the previous year, need to be
considered
Pa da ni saa

8. Definitions
• 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 above purpose, data of PY along with 2 prior PYs shall be used. If company in
existence for shorter period, then data of such period shall be used
• “Head Office” of a company would be the place where the company's senior management
and their direct support staff are located or, if they are located at more than one location,
the place where they are primarily or predominantly located. A company’s head office is
not necessarily the same as the place where the majority of its employees work or where
its board typically meets

9. Definitions Contd…
• “Passive income” of a company shall be 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 (profit
shifting)
• “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 for ensuring or overseeing the execution and implementation of those
strategies on a regular and on-going basis. While designation may vary, these persons
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)

10. Test of POEM - Company engaged in active business outside India
• POEM shall be presumed to be outside India, if the majority of board meetings are held
outside India
• If proved based on the facts that, Board is not exercising powers of management & power
is exercised by Holding Company / any persons resident in India, then, POEM is in India

11. Test of POEM – Companies other than those engaged in active business
outside India
• Process is two stage:
(i) identification / ascertaining the 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 of decision making is more important than the place where such decisions are
implemented

12. Companies other than those engaged in active business outside India -
Board meetings criteria
• Location where company’s board regularly meets & makes decisions may be its POEM
provided, the board-
(i) retains and exercises its authority to govern the company; and
(ii) does, in substance, make the key management and commercial decisions necessary
for the conduct of the company’s business as a whole
• Mere formal holding of board meetings at a place would by itself not be conclusive
• If the key decisions by the board are taken in a place other than the place of holding
formal board meetings then such other place would be relevant for POEM
• This may be the case where the board meetings are held in a location distinct from the
place where head office of the company is located or such location is unconnected with
the place where the predominant activity of the company is being carried out

13. Companies other than those engaged in active business outside India -
Committees’ meeting criteria
• If board has delegated the authority to make key management and commercial decisions
for the company to senior management or any other person including a shareholder and
does nothing more than routinely ratifying the decisions that have been made, the
company’s POEM will be the place where these senior managers or the other person
make those decisions
• Where Board has delegated some or all of its authority to one or more committees such
as an executive committee consisting of key members of senior management, the location
where the members of the executive committee are based and where that committee
develops and formulates the key strategies and policies for mere formal approval by the
board will be POEM
• The delegation of authority may be either formal or based upon the actual conduct

14. Companies other than those engaged in active business outside India -
Location of Head Office / senior management meeting criteria
• Location of company’s head office will be important in determination of company’s POEM
as it often represents the place where key company decisions are made
• Points to be considered for determining the location of the head office;
 If the company’s senior management and their support staff are based in a single location
and that 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
 Where various members of senior management operate from various countries, then head
office would be the location where these senior managers
(i) are predominantly based; or
(ii) normally return to following travel to other locations; or
(ii) meet when formulating or deciding key strategies and policies for the company as
a whole

15. • Where members of senior management are operating & participating in various meetings
from different locations on a more or less permanent basis via telephone or video
conferencing, the head office would be the location where the highest level of
management (eg, the Managing Director and Financial Director) and their direct support
staff are located
• Where the senior management is so decentralized that it is not possible to determine the
company’s head office with a reasonable certainty, head office would not be of much
relevance in determining POEM
Companies other than those engaged in active business outside India -
Location of Head Office / senior management meeting criteria Contd…

16. • Due to use of technology, physical location of meetings of board / executive committee /
senior management may not be where the key decisions are in substance being made. In
such cases, place where directors or persons taking the decisions or majority of them
usually reside may also be a relevant factor
• If the above factors do not lead to clear identification of POEM, then 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
• POEM is based on all relevant facts related to the management and control and not on the
basis of isolated facts
• If based on the facts, during the PY, POEM is in India and also outside India, then POEM
shall be presumed to be in India if it has been predominantly in India
Companies other than those engaged in active business outside India -
Residuary criteria

17. • Foreign company owned by an Indian company should not be concluded to have POEM in
India
• One or some of the Directors of a foreign company residing in India will not result in such
company to have POEM in India
• 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 establish POEM in India
Illustrations on Determination of POEM

18. • Any finding by AO holding a company incorporated outside India as resident in India
based on POEM shall be given after seeking prior approval of Pr.CIT or CIT
• Pr.CIT or CIT shall provide an opportunity of being heard to the company before finalizing
the matter
Findings by the AO

19. • The term “control & management” refers to “head & brain” which directs the affairs of
policy, finance, disposal of profits & vital things concerning the management of company –
Unit Construction Co. Ltd vs. Bullock
• Documents to peep into:
 Books of account - Calculation of passive income, asset holding
 Payroll details – Employee number and cost
 Details of Fixed assets
 Board resolutions, minutes of the board meetings
 Details of committees and their meetings
 Details of directors, senior management, organization structure
 Shareholding pattern, group structure
 Communication details like mails
• Burden of proof is on assessee
Documents to be verified

20. • Guidelines not finalized though it is effective from AY 2016-17
• Discourage Multinationals from locating their headquarters / regional functions in India /
holding the board meetings in India
• Onerous compliance
• Impact on ease of doing business
• Disputes with the treaty partners in situations of double taxation
• May sway the global aspirations of the Indian businesses
• Largely subjective
• 115JB / 115-O not clear
• Treating the transactions b/w AE’s as passive income though the same is subjected to TP
regulations
• Location of maintenance of accounts should not be relevant as nowadays it is common to
maintain books of account at any place
Conclusion: Fine-tuning the draft principles can make POEM melodic
Missing Rhythms

21. Thank You