Place of Effective Management in India-IT Act, 1961

The place of residence of a foreign company incorporated outside India is determined by its PLACE OF EFFECTIVE MANAGEMENT (POEM) under the Income Tax Act, 1961 (hereinafter referred to as Act). Let us understand the concept of POEM in terms of Indian Taxation Laws i.e. 

  1. Position before Finance Act, 2015

Before, the announcement of Finance Act, 2015, the provisions already existed under section 6 of the Act (providing conditions to be resident in India). As per section 6(3) of the Act a company is said to be resident in India in any previous year, if any of the following conditions existed:

  • it is an Indian company; or
  • during that year, the control and management of its affairs is situated wholly in India.

The condition was in respect of control and management wholly in India. However, when it was seen practically even if a single board meeting is held outside India, one could have claimed that the whole management is not in India, and residential status in India were being avoided despite being substantially controlled from India.

  1. Introduction of concept of (POEM) in India

It was in order to curb the above said practice in India, the concept of POEM was introduced in India, as explained by the memorandum to Finance Act, 2015 via amending the provisions of section 6 of the Act to provide that a person being a company shall be said to be resident in India in any previous year, if-

  • it is an Indian company; or
  • its place of effective management, at any time in that year, is in India

The principle of POEM is also recognized and accepted by the Organization of Economic Cooperation and Development (OECD) also. The term “Place of effective management” has been defined as follows:

“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.”

The above said definition was made in alignment with the provisions of the Act with the Double Taxation Avoidance Agreements (DTAAs) entered into by India with other countries and would also be in line with international standards.

Therefore, in term of above definition, despite of the fact that any company is incorporated outside India and also operating outside India, if the place where management decisions are taken is India, irrespective of the fact that it is implemented outside India, the residential status of such companies would be India.

However, the provisions of POEM was deferred to come effective only form 01-04-2018 i.e. A.Y 2018-19 and for P.Y. 2017-18

  1. Issue of Guiding Principle to determine POEM by the CBDT

In regard to clarification in determining POEM in India, CBDT had issued Circular No. 06-2017 dated 24-01-2017. Further, it was also clarified vide Circular No. 08-2017 that the above said POEM guidelines shall not be applicable for a company whose turnover or Gross Receipt in a F.Y is not exceeding Rs. 50 crore.

A brief of crux the said guideline is explained herein under as follows:

  1.  Active Business Outside India (ABOI) – Firstly, a company has to determine whether the company incorporated outside India, have ABOI or not. The process to determine ABOI is as follows:                                                       
  1. Passive Income– Passive income (like interest, dividend, rental income etc.) should not be more than 50% of the total income
  2. Assets situated in India– Assets situated in India should be less than 50% of the total asset
  3. No. of employees situated in India– No of employees situated in India should be less than 50% of total no. of employees
  4. Payroll expense to employees in India in India- total payroll expense paid to employees situated in India should be less than 50% of total payroll expense.

If all the four conditions stated above are satisfied, then it shall be concluded that the company incorporated outside India has Active Business Outside India.

Average of last three years to be considered

The above said calculation shall be made as per the average of result of last three years. If in case the company has been in existence for less than 3 years, the data for the period that the company has been in existence should be considered. If the accounting year for the tax purpose is different from the previous year, then the data for accounting year that ends during the relevant previous year and 2 accounting years preceding it shall be considered.

B. If the ABOI is determined to be outside India

If the ABOI is determined to be outside India, POEM shall be outside India provided the following condition is satisfied:

  1. Majority meetings of the board of directors of the company are held outside India and,
  2. Majority of decision takers are not residents of India

If both the conditions are satisfied POEM shall not be in India.

C. If the ABOI is not determined to be outside India

If any of the four conditions given in point A above is not fulfilled, then following has to be done:

  1. Identify the person taking key and commercial decisions
  2. Determine the place where this decision is made- location of head is important in determining the place where the key decision is taken. The place of head office shall be the place where the ‘senior management resides’ i.e. the person who is 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.

The location of the person taking the key decision, shall be POEM.

D. Even from the above the POEM is not determined

Place where substantial activity is done and books of accounts are kept shall be POEM. However, this is the last option, if practically the POEM is not possible to determine from the above method.


  1. Place of residence of the majority of the persons taking key and commercial decisions substantially should not be India. Even in cases where ABOI is determined outside India, the person taking the key decision should not be from India.
  2. Independent Board of Directors(BOD) of the foreign entityThe BOD of the foreign entity should be an Independent and autonomous body. The decisions of the BOD should be well informed and duly deliberated upon. The deliberations undertaken by the BOD should be documented and recorded appropriately in the minutes of the meeting.
  1. Place of BOD and Nature of DecisionsThe BOD meetings of the foreign entity should be held only in the foreign country. Strategic and major commercial decisions should be taken in such meetings held outside India. All the directors should attend these meetings outside India.
  1. No BOD meetings should be held in India and no strategic decisions should be taken from IndiaIn case the BOD meeting is conducted through video or teleconferencing, the host country’s corporate law is relevant for determining the place of meeting in such cases.
  1. Clarity on Key roles and activitiesThere should be absolute clarity on the key business role and activities of the foreign subsidiaries or JVs in foreign jurisdiction as evidenced in its Charter documents. Charter documents of the foreign subsidiary should adequately provide all powers to run the business activities on its own. Foreign corporate law compliances to be undertaken- minutes, quorum, registers, secretarial records, etc. should be maintained in the registered office of the foreign country.
  1. Extent of parent company support and stewardship functionEnsure that the parent company’s influence on the subsidiary is restricted to only to give visionary direction to its business and shall, at no time, extend to the actual steering of the subsidiary’s key activities. Regarding the Indian Parent company’s involvement in the foreign subsidiary, it must be noted that exercise of powers by the parent company must be in the capacity of majority shareholder to protect its interest and not to take control of the subsidiary and run it.

The role of the parent’s nominee (preferably non-resident Indian and not having any exceptional powers to run the subsidiary) acting on behalf of the parent company can only be limited to giving strategic direction and coordination to protect the shareholder’s interests.

The general meeting of the shareholders, where the parent company, being the majority shareholder, can decide on matters like declaration of dividend, sale of undertakings etc. should preferably be held in the country of incorporation.

The parent company shall not act in a steering role to carry out day to day management of the subsidiary.

The decision of the appointment of directors of the foreign subsidiary should not be taken in India; however a recommendation may be made by the representative directors of the parent company in India.

Any recommendations made by the parent company should be actively and independently discussed and decided by the subsidiary company.


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