Prior
to amendment to Section 6(3) by the Finance Act, 2015, a company was said to be
resident in India in any previous year only if it was an Indian Company or if
during that year, the control and management of its affairs was situated wholly
in India. A company can easily avoid becoming a resident by simply holding a
board meeting outside India. This encourages creation of shell companies which
are incorporated outside but are controlled from India. To address these
concerns, section 6(3) was amended vide the Finance Act, 2015 to provide that a
company is said to be resident in India, if it is an Indian company or its
place of effective management ('POEM') in that year is in India.
POEM
has been defined as 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.
Now the CBDT has issued draft guidelines for determination of
POEM.
The
process of determination of POEM would primarily depend on whether or not the company
is “engaged in active business outside India”. If company is engaged in “active
business outside India” then its POEM shall be presumed to be outside India if
majority of board meetings are held outside India.
A
company shall be deemed to be engaged in "active business outside
India" if following conditions are satisfied:
(i)
Passive income is not more than 50%
of its total income and,
(ii) less than 50% of its total assets are situated in India;
and
(iii) less than 50% of total number of
employees are situated in India or are resident in India; and
(iv) The payroll expenses incurred on such
employees is less than 50% of its total payroll expenditure.
For
the purpose of determining whether the company is engaged in active business
outside India the average of the data of the previous year and two years prior
to that year shall be taken into account. In case the company has been in
existence for a shorter period, data of such period shall be considered.
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