Previously we discussed the parameters of determining a company to be considered as engaged in “active business outside India” and the POEM guidance associated with it. Today we talk about the guidelines for those companies that are not engaged in active business outside India.
POEM Guidance for companies not engaged in active business outside India
For companies not engaged in active business outside India, a two-stage process for the determination of Place of Effective Management is provided as follows:
1) Identifying or ascertaining the person or persons who actually make the key management and commercial decisions for the conduct of the company’s business as a whole.
2) Determination of the place where these decisions are being taken.
The following guiding principles are provided in this context, none of which could unilaterally decide the POEM but will have to be
considered on a holistic basis.
Location of meeting of the company’s board
The place where the company’s board regularly meets and makes decisions can be considered as the Place of Effective Management, provided that the company’s board:
1) retains and exercises its authority to govern the company; and
2) does, in substance, make the key management and commercial decisions necessary for the conduct of the company’s business as a whole.
If the key decisions by the directors are being taken in a place other than the place where the formal meetings are being held, then such other place would be relevant for the determination of POEM.
If the board has de facto delegated the authority to make key management and commercial decisions for the company to the senior management or any other person, including a shareholder, promoter, strategic/ legal/ financial advisor, and does nothing more than ratify such decisions, then the POEM would be the place where such senior management or other persons make those decisions. The term ‘senior management’ has been defined and it includes key managerial personnel such as managing directors, CEOs, CFOs and heads of various divisions/ departments, such as sales or marketing.
If the company’s board has delegated (de jure or de facto) some or all authority to an executive committee consisting of members of the senior management, the location where the members of such committees are based, and where that committee develops and formulates the key strategies and policies for approval of the board, will be considered as the POEM.
Location of the head office of a company
A company’s head office would be a very important factor in the determination of its POEM. The head office of a company has been defined as “The place where the company’s senior management and their direct support staff are located or, if they are located at more than one location, the place where they are primarily or predominantly located. A company’s head office is not necessarily the same as the place where the majority of its employees work or where its board typically meets.”
In this connection, the following points have been provided for determining the location of the head office of the company.
|Situation||Head office location|
|The company’s senior management and their support staff are based in a single location, which is held out to the public as the company’s principal place of business or headquarters.||Such principal place of business or headquarters.|
|The company is more decentralised, and hence, the senior management operates from time to time from offices in various countries.||The location where these senior managers are primarily or predominantly based; or
normally return to, following travel to other locations; or
meet when formulating or deciding key strategies and policies for the company as a whole.
|The members of the senior management operate from different locations on a more or less permanent basis, and participate in various meetings via telephone/ video conferencing.||The location, if any, where the highest level of management (e.g., managing director and financial director) and their direct support staff is located.|
|Where the senior management is so decentralised that it is not possible to determine the company’s head office with reasonable certainty.||The location of the head office would not have much relevance in determining the POEM.|
Use of modern technology
If, due to the use of modern technology, it is determined that the physical location of the board meetings or executive committee meetings may not be where the key decisions are, in substance, made, then the place where the directors or persons taking decisions or where the majority of them usually reside may also be a relevant factor.
The final guidelines provide that in case of circular resolution or round robin voting, factors such as its frequency of use, the type of decisions made in that manner, and the location of the parties involved in those decisions, etc. are to be considered. It would be required to determine the person who has authority, and who exercises such authority to take decisions. The place of location of such person would be more important.
The final guidelines have clarified that the decisions made by shareholders on matters that are reserved for shareholder decisions under the company laws are not relevant for the determination of POEM. Those decisions typically affect the existence of the company itself, or the rights of the shareholders as such, rather than the conduct of the company’s business from a management or commercial perspective, and hence, are generally not relevant for the determination of POEM.
The shareholders’ involvement can, in certain situations, turn into that of effective management through a formal arrangement by way of shareholders’ agreement, etc., or by way of actual conduct. For instance, if the shareholders limit the authority of board and senior managers of a company, and thereby, remove the company’s real authority to make decisions, the shareholder guidance transforms into usurpation, and such undue influence may result in effective management being exercised by the shareholder.
It has to be determined on case-to-case basis if shareholder involvement is crossing the line into that of effective management.
If the above factors do not lead to a clear identification of the POEM, the following secondary factors can be considered.
– place where the main and substantial activities of the company are carried out; or
– place where the accounting records of the company are kept.
Factors that do not by itself establish POEM
The determination of POEM is to be based on all relevant facts related to the management and control of the company and not on the basis of isolated facts, which do not establish effective management, as illustrated below.
- A foreign company is completely owned by an Indian company.
- Foreign company has a permanent establishment in India.
- One or some of the directors of a foreign company reside in India.
- Local management being situated in India, in respect of activities carried out by a foreign company in India.
- The existence in India of support functions that are preparatory and auxiliary in character.
- The above principles are for guidance only and no single principle will be decisive in itself.
- The principles have to be seen with reference to activities performed over a period of time and no “snapshot” approach is to be adopted.
- If, based on facts and circumstances, it is determined that during the previous year, the POEM is in India and also outside India, the POEM shall be presumed to be in India if it has been mainly/ predominantly in India.
- The final guidelines provide that the Assessing Officer shall seek the prior approval of the Principal Commissioner or the Commissioner, as the case may be, before initiating any proceedings for POEM determination.
- An Assessing Officer can hold a company incorporated outside India, on the basis of its POEM, as being resident in India only after seeking the prior approval of a collegium of three members consisting of the Principal Commissioners or the Commissioners, as the case may be, to be constituted by the Principal Chief Commissioner of the region concerned. The Collegium so constituted shall provide an opportunity to the company of being heard before deciding the matter.
These final guidelines have been long awaited, and are broadly on the same lines as the draft guidelines, with bifurcation for companies engaged in active business outside India and other companies. To know more about Place of Effective Management and have a deeper understanding of how this issue might affect your business, talk to our experts at IntegraBooks today.