TMI BlogGuiding Principles for determination of Place of Effective Management (POEM) of a CompanyX X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1st 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. 5. For the purposes of these guidelines, - (a) A company shall be said to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve income in case of a company which is engaged in the business of banking or is a public financial institution, and its activities are regulated as such under the applicable laws of the country of incorporation. (d) 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). 6. Any determination of the POEM will depend upon the facts and circumstances of a given case. The POEM concept is one of substance over form. It may be noted that an entity may have more than one place of management, but it can have only one place of effective management at any point of time. Since residence is to be determined for ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The place where these management decisions are taken would be more important than the place where such decisions are implemented. For the purpose of determination of POEM it is the substance which would be conclusive rather than the form. 8.2 Some of the guiding principles which may be taken into account for determining the POEM are as follows: (a) The location where a company s Board regularly meets and makes decisions may be the company s place of effective management 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. It may be mentioned that mere formal holding of board meetings at a place would by itself not be conclusive for determination of POEM being located at that place. If the key decisions by the directors are in fact being taken in a place other than the place where the formal meetings are held then such other place would be relevant for POEM. As an example 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more or less permanent basis and the members may participate in various meetings via telephone or video conferencing rather than by being physically present at meetings in a particular location. In such situation the head office would normally be the location, if any, where the highest level of management (for example, the Managing Director and Financial Director) and their direct support staff are located. In situations where the senior management is so decentralised that 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 of much relevance in determining that company s place of effective management. (d) The use of modern technology impacts the place of effective management in many ways. It is no longer necessary for the persons taking decision to be physically present at a particular location. 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. In such cases the place where the directors or the persons taking the decisions or majority of them usually reside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial decision are concerned with broader strategic and policy decision. For example, a decision to open a major new manufacturing facility or to discontinue a major product line would be examples of key commercial decisions affecting the company s business as a whole. By contrast, decisions by the plant manager appointed by senior management to run that facility, concerning repairs and maintenance, the implementation of company-wide quality controls and human resources policies, would be examples of routine operational decisions. 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. 8.3 If the above factors do not lead to clear identification of POEM then the 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. 9. It needs to be emphasized t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of the collegium of three 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. 12. Illustrations: The following are certain illustrations intended to highlight applicability of certain principles enumerated in the foregoing paragraphs of the guidelines. The facts assumed have been simplified to highlight the principle. Actual determination of POEM of a company shall depend on all relevant facts. Example 1: Company A Co. is a sourcing entity, for an Indian multinational group, incorporated in country X and is 100% subsidiary of Indian company (B Co.). The warehouses and stock in them are the only assets of the company and are located in country X. All the employees of the company are also in country X. The average income wise breakup of the company s total income for three years is, - (i). 30% of income is from transaction where purchases are made from parties which are non-associated enterprises and sold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside India. Example 4: The facts are same as in Example 3 but it is established by the Assessing Officer that although A Co. s senior management team signs all the contracts, for all the contracts above ₹ 10 lakh the A Co. must submit its recommendation to B Co. and B Co. makes the decision whether or not the contract may be accepted. It is also seen that during the previous year more than 99% of the contracts are above ₹ 10 lakh and over past years also the same trend in respect of value contribution of contracts above ₹ 10 lakh is seen. Interpretation: These facts suggest that the effective management of the A Co. may have been usurped by the parent company B Co. Therefore, POEM of A Co. may in such cases be not presumed to be outside India even though A Co. is engaged in active business outside India and majority of board meeting are held outside India. Example 5: An Indian multinational group has a local holding company A Co. in country X. The A Co. also has 100% downstream subsidiaries B Co. and C Co. in country X and D Co. in country Y. The A Co. has income only by way of dividend and interest from investments made in its subsidiaries. The Place ..... X X X X Extracts X X X X X X X X Extracts X X X X
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