POEM & GAAR Advisory

Place of Effective Management under Section 6(3) of the Income Tax Act deems a foreign company Indian-resident if its POEM is in India. CBDT Circular 8/2017 provides a "Active Business Outside India" (ABOI) safe harbour: if ≥50% of income is from business operations outside India, majority assets/employees/payroll are outside India, and Board meetings and key decisions are primarily held outside India, POEM is outside India. POEM-resident: worldwide income taxed at domestic rates.

General Anti-Avoidance Rule under Chapter X-A of the IT Act applies from AY 2018-19. GAAR can be invoked when an arrangement is an "Impermissible Avoidance Arrangement" (IAA): the main purpose is to obtain a tax benefit, and the arrangement lacks commercial substance (ignores legal form, lacks business purpose, uses circular transactions, or violates the object of the IT Act). GAAR cannot be invoked for arrangements with tax benefit below ₹3 crore per taxpayer per year (Rule 10U).

Pre-GAAR position: DTAA benefits were available as a right if conditions were met. Post-GAAR: the Principal Purpose Test (PPT) under the MLI (Multilateral Instrument) and domestic GAAR can deny DTAA benefits if obtaining the treaty benefit was the principal purpose of the arrangement. The Supreme Court in Vodafone (2012) was pre-GAAR. Today, substance requirements — real office, employees, independent decision-making at the treaty jurisdiction — are essential to sustain DTAA claims.

A POEM analysis report prepared by a CA firm typically covers: (a) where Board meetings are held and Board composition; (b) where strategic decisions are actually made; (c) where C-suite executives (CEO, CFO, CTO) are based; (d) review of meeting minutes, email trails, and org charts; (e) an opinion on the ABOI safe harbour applicability. Companies with MNE structures often commission this annually to support their POEM position.

Section 98 GAAR consequences: the tax authority may (a) disregard, combine, or recharacterise any step in the arrangement; (b) treat connected persons as one entity; (c) reallocate income/deductions between parties; (d) deny treaty benefits. Section 99 allows a "prima facie" question to be raised on the arrangement. Interest under Section 234A/B/C and penalty under Section 270A (up to 200% on misreported income) can apply on GAAR-triggered adjustments.