October 2018

Decoding The Consequences of POEM in India

Mayur B. Nayak
Tarunkumar G. Singhal
Anil D. Doshi
Chartered Accountants

The Finance Act, 2016 substituted section 6(3) of the Income-tax Act, 1961 (the Act), w.e.f. 1st April 2017. The “Place of Effective Management” (POEM) was introduced as one of the tests for determination of the residential status of a company. Various stakeholders raised concerns that a foreign company which is treated as a “POEM resident” in India may not be able to comply with the provisions of the Act applicable to a resident as the determination of POEM transpires during the assessment proceedings that are usually years after the relevant tax year for which the foreign company is treated as “POEM resident” in India. To mitigate such concerns, the Finance Act, 2016 introduced section 115JH which gave the Central Government power to notify exceptions, modifications and adaptations. Therefore, laws and regulations applicable to an Indian company for computing the tax liability would apply to a foreign company, which is a “POEM resident” in India subject to such exceptions, modifications and adaptations notified by the Central Government. On 15th June 2017, the CBDT issued a draft notification for implementing the provisions of the section 115JH of the Act. The Central Government has now published the final notification u/s. 115JH of the Act on 22nd June 2018, specifying the consequences in respect of a foreign company treated as “POEM resident” in India for the first time. This write-up dissects and decodes the transitory consequences for a foreign company.

 

1.  Backdrop:

Prior to the introduction of Place of Effective Management (POEM), a company was considered as a resident of India only if its control and management were “wholly situated in India”. An absolute threshold meant that companies could avoid being classified as a resident by merely holding one key board meeting outside India.

 

Therefore, to protect India’s tax base and to align provisions of the Income-tax Act, 1961 (‘the Act’) with the Double Taxation Avoidance Agreements (DTAAs) entered into by India with other countries1, India introduced the concept of POEM2 vide amendment3 to section 6(3)(ii) of the Act:

 

Section 6(3): For the purpose of the Act, a company is said to be a resident in India in any previous year, if—

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