Concept of POEM

Concept of POEM

This is purely related to residential status of Companies in Income Tax Act, 1961. POEM means Place Of Effective Management and nothing to do with Poetry..!!!

So, getting into the topic, as mentioned, it is related to residential status of Companies dealt under Section – 6(3) of Income Tax Act, 1961.

Earlier Section– 6(3) of Income Tax Act, 1961 is :-

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

 (i)  it is an Indian company ; or

 (ii)  during that year, the control and management of its affairs is situated wholly in India.

But with effect from 1-4-2015, Section– 6(3) of Income Tax Act, 1961 is :-

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.

This topic is all about the underlined words in Section-6(3)(ii) replaced from

control and management of its affairs is situated wholly in India to

place of effective management, in that year, is in India.

1.       Control and management of its affairs is situated wholly in India, means if any company’s Control and management is wholly conducted from India, then such company is said to be Resident in India.

(i)          It means that, if a company incorporated outside India (Foreign Company) and its directors are situated in India and their Board meetings are held in India(for taking decisions of the affairs of the company), then it is said to be resident in India and its income from all over the world is taxed@ 40% rate.

(ii)           Even if small portion of affairs is managed from outside India, then it is a Non-Resident and only income from India will be taxed.

(iii)         So, many Indian residents started Joint ventures outside India and escaped Income tax on foreign income based on the point (ii) above by conducting small portion of affairs outside India.

2.       Place of effective management, in that year, is in India,

Has been defined in the finance bill, 2015.

At a macro level, it says that it is not necessary to have the whole of its Control & Management from India and follows substance over form kind of concept. If its effective management is situated in India, the foreign company will be treated as Indian resident

This makes that even as mentioned at point (iii) above, Income tax is to be paid not only on Indian income but on all the incomes.

For determining the POEM, the office where the Key Management actually functions is the most important factor to consider.

There are rules prescribed in for determination of POEM.Shall be shared shortly in my coming articles….!!

Please do share your comments after reading..