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


 Introduced by Income Tax Act, 1961 (hereinafter said as “Act”) through Section 6(3) : 

“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.”

  Loop Whole

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.

 Amended By Finance Act, 2015 W.e.f April 01, 2016; Amendment

 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 

Amended by Finance Act, 2016 W.e.f. April 01, 2017

 Reason For Amendment :

 The purpose is to bring within India Income tax ambit overseas shell companies setup to retain income outside india, even as real control and management of such companies is from india. 


üPlace of Effective Management (POEM)ü  Internationally Recognised

ü  For Residential Status of Company incorporated in foreign Jurisdiction

ü  Tie Breaker rule for Tax treaties entered in India for avoidance of Double Taxation

For Example XYZ Inc., Based in US has its POEM in India, It will pay tax in India on its entire income.


A company is said to be “Active Business Outside India

ü  Not More than 50% of Total Income is Passive Income1 and;

ü  Not More than 50% of total assets are situated in India and;

ü  Not More than 50% of total Employees are situated in India Or Resident of India and;

ü  Not more than 50% of Total Payroll Expenditure on above employee incurred as payroll expense.

(Passive Income is an income received on regular basis without any efforts and it’s usually taxable)

For the purpose of above words :

Income – As computed for tax purpose in country of incorporation or As per books where laws of country doesn’t require such computation

Valuation of Assets –

Individual/Pool of Depreciable Asset- Average of its value for tax purpose in the country of incorporation at Beginning and end of year

In Other Case – Book Value

 No. of Employees -  Average at the beginning and end of month employees including those who perform the same tasks as of employees but not employed directly by company.

 Payroll Expense/Expenditure – Cost of Salaries+Wages+Bonus+Other Compensation borne by employer

 Head Office

 Companies senior management and direct support staff are located If more than one place, where these are Primarily or predominantly located. Not necessary where majority of employees are working or where boards typically meets.

 Passive Income Includes: 

Income from associated enterprise either in case of transactions of purchase or sales

Income by way of royalty, dividend, capital gains, interest or rental income

 Note: No Interest income is passive income if business is of Banking or public financial institution.

 Senior Management Includes:

  Person responsible for developing and formulating key strategies and policies for company, Overseeing the execution of those strategies, Implementation of strategies

 May Include

ü  Managing director or CEO

ü  Financial director or CFO

ü  Chief Operating Officer

ü  Departmental Heads

Concept of Substance over Form

 ü  Company may have one and more management place but has only one POEM at a point of time

ü  Decided on Year to Year Basis

ü  Based On primarily fact whether the company is engaged in active business outside india

ü  If BOD Powers are handled by Holding company or other person(s) resident in india then POEM is india

ü  For Active business data of previous year and 2 years prior to that shall be taken into account (In case of existence is of shorter period than that data).

(Accounting Year for the purpose of this is accounting period for the company in which country it is incorporated)


 1.    Identification or ascertaining the persons who actually make the key management and commercial decision for the conduct of company’s business as a whole

 2.    Determination of place where these decisions are in fact being made.

Key Takeaways from The CBDT Circular

 1.    The intent is not to target indian multinationals which are engaged in business activity outside india

2.    The guidelines are not intended to cover foreign companies or to tax their global income, merely on the ground of preence of Permanent Establishment or business connection in india

3.    If a company is engaged in active business outside india, a POEM in india will not be triggered if majority of the board meetings are held outside india

4.    Not Applicable on companies having turnover of . 50 Crore or less in an financial year  (Although the circular is silent in this point)

5.    I.T. Officer before initiating inquiries has to seek approval from his superiors He is also required to obtain approval from a three member collegium of high ranking officials before taking a stand that an overseas company has a POEM in india and is thus liable to tax in india on its income. The collegium will give an opportunity to overseas company of being heard

6.    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.

7.    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.

8.    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.

9.    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.

10. 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

Words of Renowned Professionals on PoEM

1.       “They attempt to differentiate between shareholder control, management control and routine decisions. Whilst the guidelines are comprehensive, they are subjective on substance and can be challenged for interpretation in many places”

-                                      -Girish Vanvari, National Head of Tax, KPMG.

2.      “The intent of PoEM provisions is to target shell companies/companies that are created to retain income outside India and not Indian MNCs engaged in business overseas.”

                                      ---Hitesh Sawhney, Partner — Direct Tax, PwC

3.      “The finalised guidance relies on substance over form and that routine operational decisions shall not be relevant for PoEM determination.”

                                          --- Aseem Chawla, Managing Partner, ASC Legal

4.      In this context, one of the important clarifications is that even if all the directors of the overseas company are resident in India, but majority of the board meetings are outside India and the board is actually exercising its management powers, the company will not have a POEM in India. This will provide relief to large Indian group companies having overseas operations, as many directors on board the Indian parent and overseas subsidiaries are common,"

                                 --- Punit Shah, partner, Dhruva Advisors.


 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.


 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.

 2      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.


 Merely because the Place of effective Management of an intermediate holding company is in India the poem of its subsidiaries shall not be taken to be in India Each Subsidiary has to be examined in separately as indicated the facts since companies B Co., C CO., and D Co. are independently engaged in active business outside India and majority of board meetings of these companies are also held outside India . The Poem of B Co., C Co. and D Co. shall be presumed to be out of India.