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.