Circular No.

06 of 2017

F. No. 142/11/2015-TPL
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
******

Dated: 24th January, 2017

Subject: Guiding Principles for determination of Place of Effective

Management (POEM) of a Company.

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
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, -

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(a) 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.
Explanation: For the aforesaid purpose, -
(A) the income shall be, -
(a) as computed for tax purpose in accordance with the laws of the
country of incorporation; or
(b) as per books of account, where the laws of the country of
incorporation does not require such a computation.
(B) the value of assets, -
(a) In case of an individually depreciable asset, shall be the
average of its value for tax purposes in the country of
incorporation of the company at the beginning and at end of the
previous year; and
(b) In case of pool of a fixed assets being treated as a block for
depreciation, shall be the average of its value for tax purposes
in the country of incorporation of the company at the beginning
and at end of the year;
(c) In case of any other asset, shall be its value as per books of
account;
(C) the number of employees shall be the average of the number of
employees as at the beginning and at the end of the year and shall
include persons, who though not employed directly by the company,
perform tasks similar to those performed by the employees;
(D) the term “pay roll” shall include the cost of salaries, wages, bonus and
all other employee compensation including related pension and social
costs borne by the employer.

(b) “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;

(c) “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;

However, any income by way of interest shall not be considered to

be passive income in case of a company which is engaged in the business

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 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
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.

7. The place of effective management in case of a company engaged in active

business outside India shall be presumed to be outside India if the majority meetings of
the board of directors of the company are held outside India.

7.1 However, if on the basis of facts and circumstances it is established that the
Board of directors of the company are standing aside and not exercising their powers of
management and such powers are being exercised by either the holding company or
any other person (s) resident in India, then the place of effective management shall be
considered to be in India. For this purpose, merely because the Board of Directors
(BOD) follows general and objective principles of global policy of the group laid down by
the parent entity which may be in the field of Pay roll functions, Accounting, Human
resource (HR) functions, IT infrastructure and network platforms, Supply chain
functions, Routine banking operational procedures, and not being specific to any entity
or group of entities per se; would not constitute a case of BoD of companies standing
aside.

7.2 For the purpose of determining whether the company is engaged in active
business outside India, the average of the data of the previous year and two years prior
to that shall be taken into account. In case the company has been in existence for a
shorter period, then data of such period shall be considered. Where the accounting year
for tax purposes, in accordance with laws of country of incorporation of the company, is
different from the previous year, then, data of the accounting year that ends during the
relevant previous year and two accounting years preceding it shall be considered.

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8. In cases of companies other than those that are engaged in active business
outside India referred to in para 7, the determination of POEM would be a two stage
process, namely:-

(i) First stage would be identification or ascertaining the person or persons

who actually make the key management and commercial decision for
conduct of the company’s business as a whole.
(ii) Second stage would be determination of place where these decisions are
in fact being made.

8.1 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 located or such
location is unconnected with the place where the predominant activity of
the company is being carried out.

If a board has de facto delegated the authority to make the key

management and commercial decisions for the company to the senior
management or any other person including a shareholder, promoter,
strategic or legal or financial advisor etc. and does nothing more than
routinely ratifying the decisions that have been made, the company’s
place of effective management will ordinarily be the place where these
senior managers or the other person make those decisions.

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(b) A company’s board may delegate some or all of its authority to one or more
committees such as an executive committee consisting of key members of senior
management. In these situations, 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 full
board will often be considered to be the company’s place of effective
management.

The delegation of authority may be either de jure (by means of a formal

resolution or Shareholder Agreement) or de facto (based upon the actual conduct
of the board and the executive committee).

(c) The location of a company’s head office will be a very important factor in the
determination of the company’s place of effective management because it often
represents the place where key company decisions are made. The following
points need to be considered for determining the location of the head office of the
company:-

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.
If the company is more decentralized (for example where various
members of senior management may operate, from time to time, at offices
located in the various countries) then the company’s head office would be
the location where these senior managers,-

(i) are primarily or predominantly based; or

(ii) normally return to following travel to other locations; or
(iii) meet when formulating or deciding key strategies and policies
for the company as a whole.

Members of the senior management may operate from different locations

on a 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.

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(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 may also be a relevant factor.

(e) In case of circular resolution or round robin voting the factors like, the
frequency with which it is used, the type of decisions made in that manner and
where the parties involved in those decisions are located etc. are to be
considered. It cannot be said that proposer of decision alone would be relevant
but based on past practices and general conduct; it would be required to
determine the person who has the authority and who exercises the authority to
take decisions. The place of location of such person would be more important

(f) 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 place of effective management. Such decisions may include sale
of all or substantially all of the company’s assets, the dissolution, liquidation or
deregistration of the company, the modification of the rights attaching to various
classes of shares or the issue of a new class of shares etc. These decisions
typically affect the existence of the company itself or the rights of the
shareholders as such, rather than the conduct of the company’s business from a
management or commercial perspective and are therefore, generally not relevant
for the determination of a company’s place of effective management.

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.
As an example if the shareholders limit the authority of board and senior
managers of a company and thereby remove the company’s real authority to
make decision then the shareholder guidance transforms into usurpation and
such undue influence may result in effective management being exercised by the
shareholder.

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.

(g) It may be clarified that day to day routine operational decisions undertaken by
junior and middle management shall not be relevant for the purpose of
determination of POEM. The operational decisions relate to the oversight of the
day-to-day business operations and activities of a company whereas the key
management and 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,

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 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 that the determination of POEM is to be based on all

relevant facts related to the management and control of the company, and is not to be
determined on the basis of isolated facts that by itself do not establish effective
management, as illustrated by the following examples:

(i) 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.
(ii) 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.
(iii) 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.
(iv) The fact of, 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.
(v) 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.

10. It is reiterated that the above principles for determining the POEM are for
guidance only. No single principle will be decisive in itself. The above 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. In other words a
“snapshot” approach is not to be adopted. Further, 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

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11. The Assessing Officer (AO) shall, before initiating any proceedings for holding a
company incorporated outside India, on the basis of its POEM, as being resident in
India, seek prior approval of the Principal Commissioner or the Commissioner, as the
case may be.
11.1 Further, in case the AO proposes to hold a company incorporated outside India,
on the basis of its POEM, as being resident in India then any such finding shall be given
by the AO after seeking prior approval 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 to associated enterprises;
(ii). 30% of income is from transaction where purchases are made from associated
enterprises and sold to associated enterprises;
(iii). 30% of income is from transaction where purchases are made from associated
enterprises and sold to non-associated enterprises; and
(iv). 10% of the income is by way of interest.

Interpretation: In this case passive income is 40% of the total income of the company.
The passive income consists of, -
(i). 30% income from the transaction where both purchase and sale is from/to
associated enterprises; and
(ii). 10% income from interest.
The A Co. satisfies the first requirement of the test of active business outside
India. Since no assets or employees of A Co. are in India the other requirements
of the test is also satisfied. Therefore company is engaged in active business
outside India.

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Example 2: The other facts remain same as that in Example 1 with the variation that A
Co. has a total of 50 employees. 47 employees, managing the warehouse, storekeeping
and accounts of the company, are located in country X. 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.

Interpretation: Although the first limb of active business test is satisfied by A Co. as only
40% of its total income is passive in nature. Further, more than 50% of the employees
are also situated outside India. 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.

Example 3: The basic facts are same as in Example 1. Further facts are that 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.

Interpretation: The A Co. is engaged in active business outside India as the facts
indicated in Example 1 establish. The majority of board meetings have been held
outside India. Therefore, the POEM of A Co. shall be presumed to be 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 Rs. 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 Rs. 10 lakh and
over past years also the same trend in respect of value contribution of contracts above
Rs. 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 of Effective Management of A Co.
is in India and is exercised by ultimate parent company of the group. The subsidiaries
B, C and D are engaged in active business outside India. The meetings of Board of
Director of B Co., C Co. and D Co. are held in country X and Y respectively.

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