Circular No. 25/2017

What this is

Circular No. 25/2017 was issued by the Central Board of Direct Taxes on 23 October 2017. Its subject is Clarification related to guidelines for establishing place of effective management poem in INDIA.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Protects a regional headquarter in India from creating a place of effective management for the group's foreign companies. The concept was introduced for deciding the residence of a company other than an Indian company and took effect from 1 April 2017, that is assessment year 2017-18, with guiding principles in Circular No. 6 of 2017 dated 24 January 2017, and Circular No. 8 of 2017 dated 23 February 2017 keeping companies with turnover or gross receipts of Rs 50 crore or less in a financial year outside it. Para 7 of the guidelines presumes the place of effective management of a company in active business outside India to be outside India where the majority of board meetings are held outside India, and para 7.1 displaces that where the board stands aside and its powers are exercised by the holding company or another person resident in India. The circular clarifies that so long as the regional headquarter operates for the subsidiaries or group companies of a region within the general and objective principles of the group's global policy laid down by the parent — in payroll functions, accounting, human resource functions, IT infrastructure and network platforms, supply chain functions and routine banking operational procedures, and not specific to any entity or group of entities — that alone is not a case of the board standing aside and will not by itself establish a place of effective management for those companies in India.

Why it was issued

Stakeholders represented that the guidelines could trigger a place of effective management for multinational companies with a regional headquarter structure merely because employees with multi-country responsibility or oversight over operations elsewhere in the region worked from India, so that income from operations outside India might be taxed here.

Who it reaches

• Multinational groups with a regional headquarter in India
• Foreign subsidiaries and group companies served by that headquarter
• Companies in active business outside India holding the majority of board meetings abroad
• Companies below the Rs 50 crore turnover threshold, who are outside the regime altogether

The instrument, as the Board published it

F No 142/11/2015-TPL (Part-I)
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
••••••
Circular No 25 of 2017
New Delhi, 23rd October, 2017
Subject: Clarification related to guidelines for establishing 'Piace of Effective
Management' (PoEM) in India-reg.

The concept of 'Place of Effective Management' (PoEM) for deciding residency
status of a company. other than an Indian company. was introduced in the Incometax Act. 1961 (the Act) which has become effective from 1,1 April. 2017, i.e .•
Assessment Year 2017-18 onwards.

2. Guiding Principles for determination of PoEM of a company were issued on 241h
January. 2017 vide Circular No 06 of 2017. Further. vide Circular No 08 of 2017 dated
23rd February, 2017. it has been clarified that the PoEM provisions shall not apply to a
company having turnover or gross receipts of Rs 50 crore or less in a financial year.

3. Representations have been received from the stakeholders wherein concerns
have been raised that as per the extant guidelines. PoEM may be triggered in cases
of certain multinational companies with regional headquarter structure merely on the
ground that certain employees having mUlti-country responsibility or oversight over
the operations in other countries of the region are working from India. and
consequently. their income from operations outside India may be taxed in India.

4. In this regard. it may be mentioned that Para 7 of the guidelines provides that
the place of effective management in case of a company engaged in active
business outside India (ABOI) shall be presumed to be outside India if the majority
meetings of the board of directors (BoD) of the company are held outside India.

4.1 However, Para 7.1 of the guidelines provides that if on the basis of facts and
circumstances it is established that the Board of directors of the company are
standing aside and not exercising their powers of management and such powers are
being exercised by either the holding company or any other person (s) resident in
India. then the PoEM shall be considered to be in India.

4.2 It has also been provided that for this purpose. merely because the BoD follows
general and objective principles of global policy of the group laid down by the
parent entity which may be in the field of Pay roll functions. Accounting. Human
resource (HR) functions. IT infrastructure and network platforms. Supply chain
functions. Routine banking operational procedures. and not being specific to any
entity or group of entities per se; would not constitute a case of BoD of companies
standing aside.

5. In view of the above. it is clarified that so long as the Regional Headquarter
operates for subsidiaries/ group companies in a region within the general and
objective principles of global policy of the group laid down by the parent entity in the

F No 142/11 /2015-TPL (Pt. I)

field of Pay roll functions, Accounting, HR functions, IT infrastructure and network
platforms, Supply chain functions, Routine banking operational procedures, and not
being specific to any entity or group of entities per se; it would, in itself, not constitute
a case of BoD of companies standing aside and such activities of Regional
Headquarter in India alone will not be a basis for establishment of PoEM for such
subsidiaries/ group companies.

6. It may be mentioned that the provisions of General Anti-Avoidance Rule
contained in Chapter X-A of the Income-tax Act, 1961 may get triggered in such
cases where the above clarification is found to be used for abusive/ aggressive tax
planning.

Copy to:-
~ ~ (Niraj Kumar)
Under Secretary to the Govemment of India
Tel: 011-23095468
Email: ustpll@nic.in

1. PS to Finance Minister/ OSD to Finance Minister/ OSD to Minister of State for
Finance.
2. PS to Secretary (Revenue).
3. The Chairperson, Members and all other officers in CBDT of the rank of Under
Secretary and above.
4. All Pro Chief Commissioners/ Pr. Director General of Income-tax - with a request
to circulate amongst all officers in their regions/ charges.
5. Pr. DGIT (Systems)/ Pro DGIT (Vigilance)/ Pro DGIT (Admn.)/ Pro DG (NADT)/ Pr.
DGIT
(L&R).
6. CIT (M&TP), CBDT.
7. Web manager for posting on the departmental website
8. Data Base Cell for uploading on www.irsofficersonline.gov.in
9. Guard File

What to watch

• The protection is limited to the listed support functions applied as general and objective group policy — anything specific to a particular entity or group of entities falls outside it.
• Para 7.1 still governs: if the board in fact stands aside and the powers are exercised from India, the place of effective management is in India whatever the headquarter's functions.
• The Board expressly reserves Chapter X-A, so the anti-avoidance rules may be invoked where the clarification is used for abusive or aggressive tax planning.
• The presumption in para 7 works only for a company in active business outside India, and the majority of board meetings must be held outside India.

Where you meet it

When residence of a foreign group company is asserted on the strength of activities carried on from an Indian regional headquarter, in that company's assessment or in a withholding dispute.

What it names

It mentions. Circular No. 06/2017, Circular No. 08/2017, Circular No. 25/2017

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