Place of Effective Management under Income Tax Act, 1961

Section 6 (3) of the Income Tax Act 1961 (“act”) states that a company would be considered a resident of India if it is incorporated in India or its place of effective management in that particular year is India.[1]Previously, the term Place of Effective Management (POEM) did not exist, it was brought forth in the Finance Bill of 2015, replacing Control and Management from the said section of the act. 

Control and Management of a company is properly described by the case of Radha Rani vs. Additional Tax of Income Tax[2]. In this case, the company showed itself to be a non-resident of India while, 99% shares of the company were owned by Indian residents and 1% was owned by residents of Singapore. Further, all investments were routed from India and no employee of this Singapore entity was in Singapore. Moreover, the company was a part of a group which was also headquartered in India. It simply had a Tax Residency Certificate obtained from Singapore. Yet, the court held that the company would not be resident of India in accordance with Section 6 (3) of the Income Tax Act. It went on to clarify that since some of the control and management remained outside India, therefore it would be said to be a non-resident company. It further stated that control and management meant core control and not mere daily activities of the company. 

This ruling by the court reflected on the stance of the section prior to 2015. Before the 2015 Finance Bill, the control and management of the company’s affairs had to be wholly in India for it to be a resident. However, this clearly led to immense tax evasion as seen in the aforementioned case. Therefore, the 2015 amendment to the Finance Bill introduced POEM. 

According to its explanation, the term meant a place where ‘key management and commercial decisions’ of the company were taken. The concept of the management being wholly in India for it to be a resident was eradicated to avoid tax evasion. The Central Board of Direct Taxes (CBDT) laid down the guidelines for determination of POEM of businesses.[3] Among other things, it stated that companies which haven’t engaged in POEM need to first determine who the primary person is who is responsible for key managerial decisions and further establish the place where these decision are taken. Accordingly, the residency of the company would be determined. It further provided the criteria for determination of Active Business Outside India (ABOI) and stated that such businesses would be considered to be Non-residents of India.

Therefore, practises of immense tax evasion would now be avoided and economic nexus would be the central point of concern under the amended section. 


[1] Income Tax Act [1961], s. 6 (3). 

[2] Radha Rani vs. Additional Tax of Income Tax [2006] 101 TTJ JP 1017.

[3] Central Board of Direct Taxes, Guiding Principles for Determination of Place of Effective Management (POEM) of a Company, F.No 142/11/2015-TPL [Issued on January 24,2017].

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

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