CBDT Notification on Guiding Principles for determination of “Place of Effective Management (POEM)” of a Company
A. CBDT’s Final Guidelines/ Principles for Determination of POEM of a Comapny
The CBDT has issued final guidelines for determination of “Place of Effective Management (POEM)/ residential status” of a company incorporated in a foreign jurisdiction, applicable w.e.f. 1 Apr. 2017 (AY 2017-18), as under:
1. Section 6(3) of the Income-tax Act, 1961 (the Act), prior to its amendment by the Finance Act, 2015, 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 or isolated events related with control and management outside India. To address these concerns, the existing provisions of section 6(3) of the Act were amended vide Finance Act, 2015, with effect from 1st April, 2016 to provide 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
2. “Place of effective management” is defined in the Act 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.
3. The Finance Act, 2016 has changed the effectivity of the said amendment to section 6(3) of the Act. Therefore, the amended provision would now be effective from 1 st April 2017 and will apply to Assessment Year 2017-18 and subsequent assessment years.
4. ‘Place of effective management’ (POEM) is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognises the concept of ‘place of effective management’ for determination of residence of a company as a tie-breaker rule for avoidance of double taxation. The guiding principles to be followed for determination of POEM are enumerated in the following paragraphs. ..contd… (please refer attachment)
The concept of POEM for deciding the residential status of a company was introduced by the Finance Act, 2015. It is effective from 01.04.2016 and accordingly shall apply from assessment year 2017-18 onwards. The guidelines for determining the POEM has been uploaded on website of the Income-tax Department (www.incometaxindia.gov.in). These guidelines of POEM have been finalised, after placing draft guidelines in public domain for seeking comments from stakeholders and general public, and with extensive consultations thereafter.
The final guidelines on POEM contain some unique features. Active Business Outside India (ABOI) test has been provided, so as not to cover companies outside India which are engaged in active business. The intent is not to target Indian Multi Nationals which are engaged in business activity outside India. The intent is to target shell companies and companies which are created for retaining income outside India although real control and management of affairs is located in India. It is emphasised that these guidelines are not intended to cover foreign companies or to tax their global income, merely on the ground of presence of Permanent Establishment or Business connection in India
Adequate administrative safeguards have been incorporated in the guidelines by mandating that the Assessing officer (AO), before initiating inquiry for POEM in a case of a taxpayer, will seek approval from Principal Commissioner of Income Tax/ Commissioner of Income-tax. The AO shall also obtain approval from Collegium of Principal Commissioners of Income-tax before holding that POEM of a non-resident company is in India.
It has been further decided that the POEM guidelines shall not apply to companies having turnover or gross receipts of Rs. Fifty crore or less in a financial year.
The guidelines also contain illustrations to clarify the situations whether POEM shall or shall not apply.
Also, CBDT has issued clarification on determination of POEM of a company other than an Indian company, as under:
Further, the CBDT has recently issued a draft Notification (on 15 June 2017), as under:
B. CBDT’s Draft Guiding Principles for POEM of a Comapny
CBDT had invited comments/ suggestions from stakeholders on “Draft Guiding Principles for determination of Place of Effective Management (POEM) of a Company”, latest by 2 Jan., 2016, as under: