PLACE OF EFFECTIVE MANAGEMENT (POEM)

Whenever a group of people are discussing about taxation, the first question that comes to our mind about any Income Tax section is “whether is it applicable on me?” This article will be beneficial for you in case you want information on taxation on foreign companies. The Finance Act 2015 amended the test of residence of companies by inserting a concept called “Place of Effective Management (POEM)”. Let us first find out what the section tells us and then let’s interpret it.

Section 6(3) of Income Tax Act, 1961 – Prior to Finance Act, 2015

‘A company is said to be resident in India in any previous year, if

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

Section 6(3) of Income Tax Act, 1961 – As per Finance Act, 2015

‘A company is said to be resident in India in any previous year, if

  • It is an Indian company; or
  • It’s place of effective management, at any time in that year, is in India.

Why was this required?

  1. The erstwhile provision required to have a company to have its entire control and management in India. This meant that the companies could avoid being classified as resident if one of its board meetings are held outside India. Thus, it provided an opportunity for the companies to avoid tax by shifting or organising some of its events outside India.
  2. The initial provision facilitated the creation of shell companies outside India which in reality were controlled from India. The amendment brought such shell companies into the tax bracket using the concept of ‘POEM’.
  3. This tax evasion was pretty much seen in the decision of Delhi Tribunal in the case of Radha Rani Holdings v ACIT.

Meaning and Determination of POEM

“Place of effective management” (POEM) has been defined 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.

POEM has to be determined on year to year basis. It can be determined on the basis of the below mentioned categories Readmore

This article is also published in Taxguru :https://taxguru.in/income-tax/place-effective-management-poem-meaning-determination.html

Author: Yashish Sharma



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