A foreign company in my client's group is run largely from India. From when can it be treated as resident here, and what test does the department actually apply?
From assessment year 2017-18, a company is resident in India if it is an Indian company or if its place of effective management in that year is in India — 'the 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'. CBDT Circular No. 6 of 2017 dated 24 January 2017 lays down the guidelines: a company 'engaged in active business outside India' is presumed to have its POEM outside India if the majority of its board meetings are held outside India, and only a company failing that test goes through the two-stage enquiry of identifying who actually makes the key management and commercial decisions and then where those decisions are in fact made.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2017-04-01, reported as CBDT Circular No. 6 of 2017 dated 24 January 2017, F. No. 142/11/2015-TPL; Income-tax Act, 1961, section 6(3)(ii). It bears on section 6(3), section 6(3)(ii), section 6, section 90, section 90A, section 4, section 5, section 2(24) of the Income Tax Act 1961, in Residence & Treaty Benefit and How Tax Law Is Read matters.
The active-business-outside-India test is the whole of the practical answer for most groups, and it is cumulative, not alternative: passive income not more than 50 per cent of total income, AND less than 50 per cent of total assets in India, AND less than 50 per cent of employees situated in or resident in India, AND payroll expense on such employees less than 50 per cent of total payroll expenditure. Circular 6/2017 para 7.2 requires the average of the previous year and the two preceding years, so a single bad year does not decide it and a single good year does not save it. 'Passive income' is defined as income from transactions where both purchase and sale are with associated enterprises, plus royalty, dividend, capital gains, interest and rental income — with interest excluded for a banking company or public financial institution regulated as such in its country of incorporation. Two features of the circular are worth more than the definitions. First, the presumption in para 7 is rebuttable in one direction only, by showing that the board is standing aside and its powers are being exercised by the holding company or another person resident in India; but para 7.1 expressly says that following the parent's general and objective global policies on payroll, accounting, HR, IT, supply chain and routine banking is not standing aside. Second, para 9 lists five facts that are not conclusive on their own — complete ownership by an Indian company, the existence of an Indian permanent establishment, some directors residing in India, local Indian management of Indian activities, and preparatory or auxiliary support functions in India. The safeguards in para 11 and 11.1 are the practitioner's first line of defence: the Assessing Officer must obtain the prior approval of the Principal Commissioner or Commissioner before even initiating POEM proceedings against a foreign-incorporated company, and any finding of POEM in India requires the prior approval of a three-member collegium of Principal Commissioners or Commissioners constituted by the Principal Chief Commissioner of the region, which must give the company an opportunity of being heard.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 6(3) as amended provides that 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; the Explanation defines 'place of effective management' as a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance, made. Circular 6/2017 records at paras 1 to 3 that section 6(3) before the Finance Act 2015 turned on control and management being situated wholly in India, that the Finance Act 2015 substituted the POEM test with effect from 1 April 2016, and that the Finance Act 2016 changed the effectivity so that the amended provision is effective from 1 April 2017 and applies to assessment year 2017-18 and subsequent years. Para 5(a) defines a company 'engaged in active business outside India' as one whose passive income is not more than 50 per cent of its total income and which has less than 50 per cent of its total assets in India, less than 50 per cent of its total number of employees situated in India or resident in India, and payroll expenses on such employees of less than 50 per cent of its total payroll expenditure, with an Explanation on how income, asset value, employee numbers and payroll are measured. Para 5(b) defines 'Head Office', para 5(c) 'passive income' and para 5(d) 'senior management'. Para 6 states that POEM is a concept of substance over form, that an entity may have more than one place of management but only one place of effective management at any point of time, and that determination is year by year. Para 7 provides that the POEM of a company engaged in active business outside India shall be presumed to be outside India if the majority of its board meetings are held outside India; para 7.1 qualifies that presumption where the board is standing aside and powers are exercised by the holding company or another person resident in India, while excluding adherence to general and objective global group policies from that qualification; para 7.2 requires the active-business test to be applied on a three-year average. Para 8 sets out the two-stage process for other companies, paras 8.1 to 8.3 the guiding and secondary factors. Para 9 lists five facts that are not conclusive. Para 10 forbids a 'snapshot' approach and provides that where POEM is both in and outside India during the year it shall be presumed to be in India if it has been mainly or predominantly in India. Paras 11 and 11.1 require prior approval of the Principal Commissioner or Commissioner before initiating POEM proceedings, and prior approval of a three-member collegium of Principal Commissioners or Commissioners, after hearing the company, before any finding of POEM in India.
Statutory position — no holding is asserted; this entry reproduces statutory text and the text of a CBDT circular. From assessment year 2017-18 a foreign company is resident in India if its place of effective management is in India; a company engaged in active business outside India, measured on the four cumulative tests in Circular 6/2017 para 5(a) averaged over three years, is presumed to have its POEM outside India where the majority of its board meetings are held outside India, and only where that presumption is unavailable does the two-stage enquiry in para 8 arise.
The circular is structured as a filter rather than as a list of factors. Para 6 states that the process of determination 'would be primarily based on the fact as to whether or not the company is engaged in active business outside India', which is why paras 5(a) and 7.2 do the heavy lifting: a company that passes the four cumulative limbs on a three-year average and holds the majority of its board meetings abroad reaches a presumption and never enters the substance enquiry. The presumption is displaced only by the standing-aside finding in para 7.1, and para 7.1 itself narrows that by excluding the ordinary features of group life — global policies on payroll, accounting, HR, IT, supply chain and routine banking — from what counts as standing aside. For companies that fail the filter, para 8 separates the question 'who decides' from 'where', para 8.1 gives primacy to the place where decisions are taken over the place where they are implemented, and para 8.2 works through the board, delegated executive committees, the head office, technology and remote decision-making, circular resolutions, shareholder decisions and the operational-versus-key distinction. Para 8.3 supplies secondary factors only if the primary ones do not identify POEM. Para 10 makes the enquiry an activities-over-time enquiry, not a moment-in-time one. The safeguards in paras 11 and 11.1 sit outside the substantive test and are addressed to the Assessing Officer, so their breach is a procedural point available before the merits are reached.
The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.
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Handle my notice → Ask a CA on WhatsAppFrom assessment year 2017-18, a company is resident in India if it is an Indian company or if its place of effective management in that year is in India — 'the 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'. CBDT Circular No. 6 of 2017 dated 24 January 2017 lays down the guidelines: a company 'engaged in active business outside India' is presumed to have its POEM outside India if the majority of its board meetings are held outside India, and only a company failing that test goes through the two-stage enquiry of identifying who actually makes the key management and commercial decisions and then where those decisions are in fact made. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 6(3), section 6(3)(ii), section 6, section 90, section 90A, section 4, section 5, section 2(24) of the Income Tax Act 1961. It is reported as CBDT Circular No. 6 of 2017 dated 24 January 2017, F. No. 142/11/2015-TPL; Income-tax Act, 1961, section 6(3)(ii). The active-business-outside-India test is the whole of the practical answer for most groups, and it is cumulative, not alternative: passive income not more than 50 per cent of total income, AND less than 50 per cent of total assets in India, AND less than 50 per cent of employees situated in or resident in India, AND payroll expense on such employees less than 50 per cent of total payroll expenditure. Circular 6/2017 para 7.2 requires the average of the previous year and the two preceding years, so a single bad year does not decide it and a single good year does not save it. 'Passive income' is defined as income from transactions where both purchase and sale are with associated enterprises, plus royalty, dividend, capital gains, interest and rental income — with interest excluded for a banking company or public financial institution regulated as such in its country of incorporation. Two features of the circular are worth more than the definitions. First, the presumption in para 7 is rebuttable in one direction only, by showing that the board is standing aside and its powers are being exercised by the holding company or another person resident in India; but para 7.1 expressly says that following the parent's general and objective global policies on payroll, accounting, HR, IT, supply chain and routine banking is not standing aside. Second, para 9 lists five facts that are not conclusive on their own — complete ownership by an Indian company, the existence of an Indian permanent establishment, some directors residing in India, local Indian management of Indian activities, and preparatory or auxiliary support functions in India. The safeguards in para 11 and 11.1 are the practitioner's first line of defence: the Assessing Officer must obtain the prior approval of the Principal Commissioner or Commissioner before even initiating POEM proceedings against a foreign-incorporated company, and any finding of POEM in India requires the prior approval of a three-member collegium of Principal Commissioners or Commissioners constituted by the Principal Chief Commissioner of the region, which must give the company an opportunity of being heard. If it applies to you, the first step is this: Fix the assessment year: the POEM test applies from AY 2017-18 and subsequent years, the Finance Act 2016 having moved the Finance Act 2015 amendment's effectivity to 1 April 2017 (Circular 6/2017, paras 1 to 3).
Section 6(3) as amended provides that 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; the Explanation defines 'place of effective management' as a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance, made. Circular 6/2017 records at paras 1 to 3 that section 6(3) before the Finance Act 2015 turned on control and management being situated wholly in India, that the Finance Act 2015 substituted the POEM test with effect from 1 April 2016, and that the Finance Act 2016 changed the effectivity so that the amended provision is effective from 1 April 2017 and applies to assessment year 2017-18 and subsequent years. Para 5(a) defines a company 'engaged in active business outside India' as one whose passive income is not more than 50 per cent of its total income and which has less than 50 per cent of its total assets in India, less than 50 per cent of its total number of employees situated in India or resident in India, and payroll expenses on such employees of less than 50 per cent of its total payroll expenditure, with an Explanation on how income, asset value, employee numbers and payroll are measured. Para 5(b) defines 'Head Office', para 5(c) 'passive income' and para 5(d) 'senior management'. Para 6 states that POEM is a concept of substance over form, that an entity may have more than one place of management but only one place of effective management at any point of time, and that determination is year by year. Para 7 provides that the POEM of a company engaged in active business outside India shall be presumed to be outside India if the majority of its board meetings are held outside India; para 7.1 qualifies that presumption where the board is standing aside and powers are exercised by the holding company or another person resident in India, while excluding adherence to general and objective global group policies from that qualification; para 7.2 requires the active-business test to be applied on a three-year average. Para 8 sets out the two-stage process for other companies, paras 8.1 to 8.3 the guiding and secondary factors. Para 9 lists five facts that are not conclusive. Para 10 forbids a 'snapshot' approach and provides that where POEM is both in and outside India during the year it shall be presumed to be in India if it has been mainly or predominantly in India. Paras 11 and 11.1 require prior approval of the Principal Commissioner or Commissioner before initiating POEM proceedings, and prior approval of a three-member collegium of Principal Commissioners or Commissioners, after hearing the company, before any finding of POEM in India. The matter was decided on 2017-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Statutory position — no holding is asserted; this entry reproduces statutory text and the text of a CBDT circular. From assessment year 2017-18 a foreign company is resident in India if its place of effective management is in India; a company engaged in active business outside India, measured on the four cumulative tests in Circular 6/2017 para 5(a) averaged over three years, is presumed to have its POEM outside India where the majority of its board meetings are held outside India, and only where that presumption is unavailable does the two-stage enquiry in para 8 arise.
The circular is structured as a filter rather than as a list of factors. Para 6 states that the process of determination 'would be primarily based on the fact as to whether or not the company is engaged in active business outside India', which is why paras 5(a) and 7.2 do the heavy lifting: a company that passes the four cumulative limbs on a three-year average and holds the majority of its board meetings abroad reaches a presumption and never enters the substance enquiry. The presumption is displaced only by the standing-aside finding in para 7.1, and para 7.1 itself narrows that by excluding the ordinary features of group life — global policies on payroll, accounting, HR, IT, supply chain and routine banking — from what counts as standing aside. For companies that fail the filter, para 8 separates the question 'who decides' from 'where', para 8.1 gives primacy to the place where decisions are taken over the place where they are implemented, and para 8.2 works through the board, delegated executive committees, the head office, technology and remote decision-making, circular resolutions, shareholder decisions and the operational-versus-key distinction. Para 8.3 supplies secondary factors only if the primary ones do not identify POEM. Para 10 makes the enquiry an activities-over-time enquiry, not a moment-in-time one. The safeguards in paras 11 and 11.1 sit outside the substantive test and are addressed to the Assessing Officer, so their breach is a procedural point available before the merits are reached. In the words reproduced by the source cited on this page: "The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India."
It was decided by the CBDT Circulars & Instructions on 2017-04-01 and is reported as CBDT Circular No. 6 of 2017 dated 24 January 2017, F. No. 142/11/2015-TPL; Income-tax Act, 1961, section 6(3)(ii). Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 6(3), section 6(3)(ii), section 6, section 90, section 90A, section 4, section 5, section 2(24), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Statutory position — no holding is asserted; this entry reproduces statutory text and the text of a CBDT circular. From assessment year 2017-18 a foreign company is resident in India if its place of effective management is in India; a company engaged in active business outside India, measured on the four cumulative tests in Circular 6/2017 para 5(a) averaged over three years, is presumed to have its POEM outside India where the majority of its board meetings are held outside India, and only where that presumption is unavailable does the two-stage enquiry in para 8 arise. It arises in Residence & Treaty Benefit and How Tax Law Is Read matters, on section 6(3), section 6(3)(ii), section 6, section 90, section 90A, section 4, section 5, section 2(24) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Run the active-business-outside-India test in Circular 6/2017 para 5(a) on all four limbs, and compute each on the average of the previous year and the two years before it as para 7.2 requires — or the shorter period of existence, or the accounting years ending in the relevant previous year where the foreign accounting year differs. Compute passive income under para 5(c): income from transactions where both purchase and sale are with associated enterprises, plus royalty, dividend, capital gains, interest and rental income, excluding interest for a banking company or public financial institution regulated as such under the law of its country of incorporation. If the test is satisfied, document that the majority of board meetings were held outside India and rely on the para 7 presumption; keep the board minutes and the meeting locations on file for all three years. Meet any 'standing aside' allegation with para 7.1: adherence to the parent's general and objective global policies on payroll, accounting, HR, IT infrastructure, supply chain and routine banking, not specific to any entity, does not amount to the board standing aside. If the company is not engaged in active business outside India, address the two-stage enquiry in para 8 head-on — who in substance makes the key management and commercial decisions, and where — and distinguish those decisions from day-to-day operational decisions of junior and middle management under para 8.2(g). Deploy para 9 against the department's usual facts: Indian ownership, an Indian permanent establishment, some Indian-resident directors, local Indian management of Indian activities, and preparatory or auxiliary Indian support functions are each expressly not conclusive. Demand the procedural safeguards in paras 11 and 11.1: the Assessing Officer's prior approval of the Principal Commissioner or Commissioner before initiating, and the prior approval of a three-member collegium, which must hear the company, before any finding of POEM in India.
Still good law. This is the text of a CBDT circular and of the section it explains, not a decision about either. The circular was read in full from the PDF hosted on incometaxindia.gov.in, whose landing page independently confirms the number, date and subject; its transcription ended part-way through Example 5 in paragraph 12, so the closing illustrations were not reached. Later treatment was NOT systematically checked; the Madras High Court applied Circular No. 8 of 2017, which supplies a turnover threshold on top of these guidelines, in W.P.No.19206 of 2023 decided 25 June 2026. No decision doubting Circular 6/2017 was searched for. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
What was and was not read. Circular No. 6 of 2017 was read in full from the PDF on incometaxindia.gov.in — header, paragraphs 1 to 12 including the five definitional clauses in para 5, the presumption in paras 7, 7.1 and 7.2, the two-stage process and guiding principles in paras 8, 8.1, 8.2 and 8.3, the five non-conclusive facts in para 9, the 'no snapshot' direction in para 10, the two safeguards in paras 11 and 11.1, and the illustrations in para 12; the document's transcription ended part-way through Example 5, so the closing illustrations were NOT reached and nothing is stated from them. This entry states the Rs 50 crore threshold NOT from Circular No. 8 of 2017 itself, whose PDF this pass could not locate on the departmental site, but as reproduced by the Madras High Court in W.P.No.19206 of 2023 — see the separate entry on that judgment; a later pass should try to open the circular itself before the threshold is restated. The statutory text of section 6(3) is taken from the Madras High Court's reproduction of it in that judgment rather than from a departmental section page, because no current-vintage /w/ page for section 6 was located on this pass; the Explanation as reproduced there reads 'conduct of business of an entity as a whole', while Circular 6/2017 para 2 renders the same definition as 'the conduct of the business of an entity as a whole'. A second and independent judicial route for the Rs 50 crore threshold has since been located: the Nagpur Tribunal, in Ajay Maheshwari v ACIT, Circle 2(1), Nagpur, order dated 19 May 2026, records that by 'CBDT Circular No. 08 of 2017 dated 23.02.2017' the 'CBDT itself clarified that POEM provisions shall not apply to a foreign company having turnover or gross receipts of Rs. 50 crores or less in a financial year', and treats an assessment made 'in defiance of Circular No. 8 of 2017 dated 23.02.2017' accordingly. The threshold therefore rests on two unrelated benches reproducing the circular, not one. The circular itself still could not be opened at source: the /w/circular-no.-8/2017-… landing-page slugs and the /w/circular-no.-15/2017-… slugs rebuilt from the exact subject line the Chennai Tribunal reproduces all returned 404. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Statutory position — no holding is asserted; this entry reproduces statutory text and the text of a CBDT circular. From assessment year 2017-18 a foreign company is resident in India if its place of effective management is in India; a company engaged in active business outside India, measured on the four cumulative tests in Circular 6/2017 para 5(a) averaged over three years, is presumed to have its POEM outside India where the majority of its board meetings are held outside India, and only where that presumption is unavailable does the two-stage enquiry in para 8 arise.
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