Finance Act 2015 made an amendment in the provisions of section 6, in determining the residential status of the company. The amendment was made to obstruct the companies in their way to tax avoidance. Companies were avoiding the residential status under the income tax by shifting insignificant and isolated event related to the management and control outside India.
Section 6(3) in its new incarnation, through the Finance Act 2015, provides that, 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 in that year is in India.
Place of effective management means a place where a key management and commercial decisions that are necessary for the conduct of the business of an entity are, in substance made.
It was further stipulated vide Finance Act 2016 that the amendment in section 6(3) would be effective from 1st April,2017 and will apply from A.Y 2017-18.
Place of effective management
When a company incorporated in the foreign jurisdiction, operates from multiple locations, it may face different tax implications in different tax jurisdictions. ‘Place of effective management’ is the new concept which has been recognized well in various direct tax avoidance agreements (DTTA). This is the recognized principle which finds place in most of the tax treaties to determine the tax residency of the company.
Whether the company holds a POEM in India or not is a question which is to be judged after observing the fact and circumstances of each particular case
The determination of place of effective management must be done for each financial year on year to year basis for a company which is incorporated in the foreign jurisdiction. Company may have a POEM in one year or may not have in any other.
In most of double taxation avoidance agreements POEM is adopted as a Tie-breaker rule to determine the residence of the company to avoid double taxation.
Determination of POEM
While reaching to the question whether the POEM exists or not one has to look into the substance and not the legal form. The companies place of management may be scattered geographically at different places ,but at a given point of time it can only have one place as a ‘’Place of effective management”
The process of determination of “POEM’’ primarily based on the fact whether the company is engaged in active business outside India.
Place of effective management in case of company engaged in the active business outside India shall be presumed to be outside India if the majority of the meeting of the board of directors are out of India
The following points may be considered while deciding about the ‘place of effective management’ of the company;
- The location where company boards generally meet and make decisions can be taken as may be taken as POEM, provided board retains and exercise its authority to govern the company. In actual terms board enjoys a power to take key management commercial decisions necessary for company’s business.
- In cases where board have delegated the substantial power to some committee of directors or officers the location from such committee exercises its power may be treated as POEM.
- The location of the company’s head office is a considerable point in determination of its ‘POEM’.
- The place where director or persons who takes decisions reside or majority of them reside could be a determinative factor in deciding the POEM in view of the fact that meetings of the board for taking substantially important decisions can be held through video conferencing.
- The decision which should kept for the consideration of the shareholders under the company law are not relevant for deciding the POEM.
- Place where main and substantial activity of the company are carried out and place where books of account are kept and maintained may be relevant but not conclusive in deciding the POEM.
The fact that a foreign company is completely owned by an Indian company, or there exists a permanent establishment of a foreign entity in India, or the fact that one or some of the directors of a foreign company reside in India, is not conclusive evidence that the conditions for establishing POEM in India is satisfied.
For determining POEM all the points shall be considered. No one principle alone could be applied as yardstick for determining the POEM. The determination of POEM would definitely open a new area of litigation.