S Ltd. is a company incorporated in Canada and 65% of its shares are held by G (P) Ltd., an Indian company. S Ltd. has its presence in India also.…

The residential status of a foreign company is determined on the basis of place of effective management (POEM) of the company. For determining the POEM of a foreign company, the important criteria is whether the company is engaged in active business outside India or not. A company shall be said to be engaged in “Active Business Outside India” (ABOI) for POEM, if less than 50% of its total assets are situated in India; and less than 50% of total number of employees are situated in India or are resident in India; and the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure. S Ltd. shall be regarded as a company engaged in active business outside India for P.Y.2025-26 for POEM purpose only if it satisfies all the four conditions cumulatively. Condition 1: The passive income of S Ltd. should not be more than 50% of its total income Total income of S Ltd. during the P.Y. 2025-26 is ₹ 110 crores [(₹ 25 crores + ₹ 50 crores) + (₹ 20 crores + ₹ 15 crores)] Passive income is the aggregate of, - (i) income from the transactions where both the purchase and sale of goods is from/to its associated enterprises; and (ii) income by way of royalty, dividend, capital gains, interest or rental income; Passive Income of S Ltd. is ₹50 crores, being sum total of: (i) ₹ 15 crores, income from transactions where both purchases and sales are from/to associated enterprises (₹ 5 crores in India and ₹ 10 crores in Canada) (ii) ₹ 35 crores, being interest and dividend from investment (₹ 20 crores in India and ₹ 15 crores in Canada) Percentage of passive income to total income = ₹ 50 crore/₹ 110 crore x 100 = 45.45% Since passive income of S Ltd. is 45.45%, which is not more than 50% of its total income, the first condition is satisfied. Condition 2: S Ltd. should have less than 50% of its total assets situated in India Value of total assets of S Ltd. during the P.Y. 2025-26 is ₹ 610 crores [₹ 210 crores, in India + ₹400 crores, in Canada] Value of total assets of S Ltd. in India during the P.Y. 2025-26 is ₹ 210 crores Percentage of assets situated in India to total assets = ₹210 crores/₹ 610 crores x100 = 34.43% Since the value of assets of S Ltd. situated in India is less than 50% of its total assets, the second condition for ABOI test is satisfied. Condition 3: Less than 50% of the total number of employees of S Ltd. should be situated in India or should be resident in India Number of employees situated in India or are resident in India is 70 Total number of employees of S Ltd. is 160 [70 + 90] Percentage of employees situated in India or are resident in India to total number of employees is 70/160 x 100 = 43.75% Since employees situated in India or are residents in India of S Ltd. are less than 50% of its total employees, the third condition for ABOI test is satisfied. Condition 4: The payroll expenses incurred on employees situated in India or resident in India should be less than 50% of its total payroll expenditure Payroll expenses on employees employed in and resident of India = ₹ 8 crores. Total payroll expenses = ₹20 crores (₹ 8 crores + ₹ 12 crores) Percentage of payroll expenses of employees situated in India or are resident in India to the total payroll expenses = 8 x 100/20 = 40% Since the payroll expenses incurred on employees situated in India or resident in India is less than 50% of its total payroll expenditure, the fourth condition for ABOI test is also satisfied. Thus, since S Ltd. has satisfied all the four conditions, the company would be said to be engaged in “active business outside India” during the P.Y. 2025-26. POEM of a company engaged in active business outside India shall be presumed to be outside India, if the majority of the board meetings are held outside India. Since S Ltd. is engaged in active business outside India in the P.Y. 2025-26 and majority of its board meetings i.e., 5 out of 8, were held outside India, POEM of S Ltd. would be outside India. Therefore, S Ltd. would be non-resident in India for the P.Y. 2025-26.