Residential Status and its

impact on Tax Liability

Types of Residents

Resident
Non-resident

Not
Ordinarily Resident Ordinaril
y
 Resident

Individuals
I. Resident(Ordinarily Resident)
Basic conditions: [sec. 6(1)]
(1) He is in India in the previous year for a period of 182
days or more, or
P.Y. 2020-2021 - 182 Days
(2) he has been in India for at least 365 days during the four
years preceding the previous year and is in India for at least
60 days during the previous year.
 Exceptions to the rules of 60 days’ stay in India
(i) An individual who is a citizen of India and leaves
India in any previous year for the purpose of
employment or
(ii) as a member of the crew of an Indian ship must
have stayed in India for at least 182 days during the
previous year instead of 60 days;
(iii) If any citizen of India or a person of Indian origin,
who is living outside India, comes on a visit to India
in the previous year, he must have stayed in India
for at least 182 days during the previous year
instead of 60 days.
• The period of 60 days is substituted by 120 days in case of an
individual being an Indian citizen or a person of Indian origin, who being
outside India, comes on a visit to India in the previous year(P.Y.), having total
 income, other than the income from foreign sources, exceeding Rs. 15 lakh
during the P.Y.

“Income from foreign sources” mean income which accrues or arises outside
India(except income derived from a business controlled in or a profession set
up in India) and which is not deemed to accrue or arise in India.
[ Amended by Finance Act, 2020 & Taxation and Other Laws(Relaxation and
Amendment of Certain Provisions) Act, 2020 w.e.f. 01-04-2021 i.e. A.Y.
202122]
Deemed resident in India[ 6(1A)][Inserted by
Finance Act, 2020 w.e.f. 01-04-2021, A.Y 2021-22]
An Individual shall deemed to be resident in India if he fulfils the following
conditions:
(1) He must be citizen of India;
(2) His total income , other than income from foreign sources, must exceed Rs. 15
lakh during the previous year and
(3) He is not liable to tax in any other country or territory by reason of his domicile
or residence or any other criteria of similar nature.
If these conditions are satisfied he is deemed to Not Ordinarily resident in India as
per section 6(1)(d).
“Income from foreign sources” mean income which accrues or arises outside
India(except income derived from a business controlled in or a profession set up in
India) and which is not deemed to accrue or arise in India.
[ Amended by Finance Act, 2020 & Taxation and Other Laws(Relaxation and
Amendment of Certain Provisions) Act, 2020 w.e.f. 01-04-2021 i.e. A.Y. 2021-22]

• Not Ordinarily resident

• A person is said to be “not ordinarily resident” in India in any P.Y. if such
person has been-
(a) A non-resident in India in any 9 years out of the total 10 years
preceding the previous years; or
(b) In India for a period of 729 days or less during the 7 years preceding
the previous year; or
(c) A citizen of India, or a person of Indian origin , having total income
from foreign sources, exceeding Rs. 15 lakhs during the previous year ,
who has been in India for a period or periods amounting in all to 120 days
or more but less than 182 days(w.e.f. A.Y. 2021-22), or
(d) A citizen of India who is classified as deemed to resident u/s 6(1A),
(w.e.f. A.Y. 2021-22
III. Non- resident
Fail to satisfy any of the basic condition
Forced stay ?
The High Court of Delhi in CIT v. Suresh Nanda
where the assessee was forced to stay in India against his will due to
impounding of passport, the period of forced stay cannot be counted
for determining residential status

HUF [sec. 6(2)]

• Resident- If the control and management of its
affairs is situated wholly or partly in India during
the relevant previous year.
• Not ordinarily resident- On the basis of
residential status of Karta or manager during
the previous year.
• Non- resident - If the control and management
of its affairs is situated wholly outside India.
Firm or AOP
• Resident- If the control and management of its
affairs is situated wholly or partly in India
during the relevant previous year
• Non-resident- If the control and management
of its affairs is situated wholly outside India.
 Test of de facto control
Where all partners of a firm were residing in India and they
appointed a power of attorney in Sri Lanka who was entirely in
charge of the business and the partners did not play any role in
control and management, it was held that the firm was not tax
resident in India.
CIT v. PL. M. TT. Firm held that as per the terms of the deed de
jure control remained with the principal but de facto control or
actual control was with the agent. Thus, rather than mere proof of
power or capacity to control and manage, the actual power or
control was relevant.
Interpretation of phrase ‘control and management of affairs’
Saraswati Holding Corpn. Inc v. Dy. DIT the ITAT held that control and
management of affairs do not mean the control and management of
the day-to-day affairs of the business. The fact that discretion to
conduct operations of business is given to some person in India
would not be sufficient. The words ‘control and management of
affairs’ refer to head and brain, which directs the affairs of policy,
finance, disposal of profits and such other vital things consisting the
general and corporate affairs of the company. Thus, where
decisions on investments were taken by directors outside India, the
income from investments made in India could not be taxed in the
hands of the company only because a few persons had been given
authority to conduct the affairs.
 Companies[sec.6(3)]
• Resident.
(i) It is an Indian company; or
(ii) During that year, the control and management of its affairs
is situated wholly in India.
W.e.f. A.Y. 2017-18 point (ii) will be as under
Its place of effective management, in that year, is in
India.
Expln: POEM means a place where key management
and commercial decisions that are necessary for the
conduct the business of an entity as a whole are, in
substance made .
 Place of Effective Management (PoEM)
• “Place of effective management” means 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.
• The condition of PoEM was introduced in the IT Act by Finance Act 2016 with
effect from 1st April, 2017. It replaced the earlier condition of control and
management of affairs being wholly situated in India.
• Initially the condition of PoEM referred to control being situated in India ‘at
any time’ during the year. Given that prior to introduction of PoEM it was
possible to contend that since the control was not situated wholly in India
during that year – for instance if one of the meetings of Board of Directors
was outside India, the condition of ‘wholly’ would not be satisfied and the
company would be a non-resident, the use of words ‘at any time’ was
understandable.
 Certain rulings prior to insertion of PoEM
• In Radha Rani Holdings (P.) v. Asstt. DIT it was held that even if a
partial control and management is exercised
from outside India, it would not fall within ambit of Section 6(3)(ii)
and the company would be treated as a non-resident.
• Presently PoEM is part of the statutory provisions and Circular No.6
of 2017 dated 21-1-2017 and Circular No.25 of 2017 dated 23-
102017 have been issued by the CBDT in this regard. By Circular
No.8 of 2017 dated 23-2-2017, it has been clarified that the PoEM
provisions shall not apply to a company having turnover or gross
receipts of INR 50 crore or less in a financial year.
 PoEM Guidelines
• As per Circular No. 6/2017 (“PoEM guidelines”) the process of
determination of POEM would be primarily based on the fact as to
whether or not the company is engaged in active business outside
India. The PoEM concept is one of substance over form and since
“residence” is to be determined for each year, POEM will also be
required to be determined on year to year basis. An entity may
have more than one place of management, but it can have only
one place of effective management at any point of time.
The test of PoEM is based on whether the entity is earning only
passive income and its operations are so structured that it is
present or active in a country without paying applicable taxes. Thus,
 a company having key managerial people stationed in India with
substantial asset base in India and selling goods through a subsidiary
may yet claim that it has no PE in India and being incorporated
outside India, it could end up paying very little tax. The concept of
PoEM thus examines whether the company is in fact a tax resident of
a foreign state with substantial operations outside India or whether
the incorporation or having different places of business is only a
device to evade tax by being a non-resident.
As per the PoEM guidelines, a company shall be said to be engaged in
“active business outside India” if the passive income is not more
than 50% of its total income and
• (i) less than 50% of its total assets are situated in India; and
• (ii) less than 50% of total number of employees are situated in
India or are resident in India; and
• (iii) the payroll expenses incurred on such employees is less than
50% of its total payroll expenditure.
Test of passive income and presence
In order to determine whether a company is engaged in active business the
average of the data of the previous year and two years prior to that shall be
taken into account unless the company has been in existence only for a shorter
period. The conditions of having earned passive income of less than 50% and
having less than 50% or assets, employees and payroll expenses have to be
satisfied cumulatively. Thus, merely because say 95% of the income of a
company is from royalty but 90% of its assets are outside India, it need not be
scrutinised for PoEM since other conditions are not met. The company would
be engaged in active business outside India. The idea is to identify such
companies who may be trying to evade taxes by merely having incorporation
or a set of directors operating from outside India while in substance it is
carrying out activity in India and earning incomes which should be subject to tax
in India.
• The income and value of depreciable assets would be computed as
per the laws in the country of incorporation, or for tax purposes, in
case of other asset, value would be as per books of account. The
number of employees shall be the average of the number of
employees as at the beginning and at the end of the year and shall
include persons, who though not employed directly by the
company, perform tasks similar to those performed by the
employees.
Passive income” of a company shall be aggregate of:
• income from the transactions where both the purchase and sale of
goods is from/to its associated enterprises; and
• income by way of royalty, dividend, capital gains, interest or rental
income.
However, any income by way of interest shall not be considered to be
passive income in case of a company which is engaged in the business
of banking or is a public financial institution, and its activities are
regulated as such under the applicable laws of the country of
incorporation.
• As per PoEM guidelines, 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.
• However, if it is established that the 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 place of effective
management shall be considered to be in India.
Thus, to determine PoEM, first the persons who are making the key
management decisions are identified and then second stage would be
determination of place where these decisions are in fact being made.
The guidelines do recognise that place of decision may be a less
reliable test given the advent of modern technology. Thus, it has been
stated that in such cases the place where the directors or the persons
taking the decisions or majority of them usually reside may also be a
relevant factor.
Examples of PoEM
• (i) The location where the Board meets and takes decisions provided it retains
the authority and makes key management and commercial decisions
necessary for the conduct of the company’s business as a whole. If it merely
ratifies decision, such place would not be PoEM.
• (ii) The place where the Executive Committee members are based and where
that committee develops and formulates the key strategies and policies for
mere formal approval by the full board.
• (iii) The location of the head office if company’s senior management and their
support staff are based in a single location and that location is held out to the
public as the company’s principal place of business or headquarters then that
 location is the place where head office is located. In case the senior
management operates from multiple places then the place from where they
are primarily based or normally return from travel would be a relevant factor.
• (iv) The place where the person actually having authority to decide is present in case of
decisions by circular resolution.
• (v) The place where shareholder decides where in fact the shareholder involvement results
in effective management. Generally, the decisions made by shareholders on matters which
are reserved for shareholders decision under the company laws are not relevant for
determination of a company’s place of effective management. This is because such
decisions typically affect the existence of the company itself or the rights of the
shareholders as such, rather than the conduct of the company’s business from a
management or commercial perspective and are therefore, generally not relevant for the
determination of a company’s place of effective management.
• (vi) The place where day to day, operational decisions are taken would not be PoEM.
• The Circular lists two additional factors as secondary factors; namely place where main
and substantial activity of the company is carried out or place where the accounting
records of the company are kept.
• The existence of a PE, or permanent residence of a director in India, etc., are not relevant
if they do not meet the test of key decision making.
Determination of PoEM
• The Assessing Officer (AO) shall, before initiating any proceedings
for holding a company incorporated outside India, on the basis of
its PoEM, as being resident in India, seek prior approval of the
Principal
Commissioner or the Commissioner. On determining that PoEM is in
India, the AO should seek prior approval of the collegium of three
members consisting of the Principal Commissioners or the
Commissioners, to be constituted by the Principal Chief
Commissioner of the region concerned. The collegium so
constituted shall provide an opportunity of being heard to the
company before issuing any directions in the matter.
Every other person[sec. 6(4)]
• Resident- If the control and management of its
affairs is situated wholly in India during the
relevant previous year
• Non- resident- If the control and management
of its affairs is situated wholly outside India.
 Incidence of tax on the basis of residence

(1) Incidence of tax in case of resident (ordinary)

The total income of any of a person who is a resident includes all income from
whatever source derived which:
(a) Is received or deemed to received in India in such year by or on behalf person,
whether accrued or arisen anywhere or,
(b) Accrues or arise or deemed to accrue or arise in India during such year, whether
received any where.
(c) Accrues or arises to him outside India during such year.
(2) Incidence of tax in case of not ordinarily resident.
The total income of any of a person who is a not ordinarily
resident includes all income from whatever source derived
which:
(a) Is received or deemed to received in India in such year by or
on behalf person, whether accrued or arisen anywhere or,
(b) Accrues or arise or deemed to accrue or arise in India during
such year, whether received any where.
(c) Accrues or arises to him outside India from a business
controlled in or profession set up in India.
(3) Incidence of tax in case of non resident.
The total income of any of a person who is a non resident
includes all income from whatever source derived which:
(a) Is received or deemed to received in India in such year by or
on behalf person, whether accrued or arisen anywhere or,
(b) Accrues or arise or deemed to accrue or arise in India during
such year, whether received any where.