Analysing draft POEM guidelines- Will it hurt Make in India ?- Part II

January 08,2016
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Uday Ved (Practicing Chartered Accountant)

In Part I of the two article series, author exhaustively analysed key takeaways from various facets of the draft POEM guidelines

Some Comments and Suggestions

In order to make the guiding principles business friendly and non-adversarial (which is the objective and approach of Govt of India and Finance Minister), some comments and suggestions are given below.

1. Para 5 (a) covers situation when a company shall be said to be engaged in "active business outside India". There are 4 conditions specified and all need to be cumulatively satisfied for a company to be engaged in "active business outside India". This will be onerous on companies and unfair.

The better approach would be to define above as "either or" ie

- EITHER (a) dealing with passive income is satisfied; OR

- (i)+(ii)+(iii) are cumulatively satisfied. (i.e dealing with more than 50% assets, employees and payroll expense in India)

Thus it can be satisfied that if either of these conditions are satisfied, then a company will be said to be engaged in "active business outside India".

2. Para 5(c) defines "Passive income".

The sub-para (i) covers income from transactions where both purchase and sale of goods is from/to its associated enterprises.

As one can appreciate, the transactions between associated enterprises are like any other commercial transactions and are governed under Transfer pricing regulations. There is no need to cover these under POEM. It defeats the very purpose. It is for the TPO to determine arm's length price and it has nothing to do with POEM issue. Thus this may be deleted from scope of passive income.

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