All-About the Residential Status in Income Tax

4. Residential status of a Hindu undivided family [Sec. 6(2)]

A Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident.

4.1 When a Hindu undivided family is resident or non-resident

A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India.

The table given below highlights the same proposition —

Note – In order to determine whether a Hindu undivided family is resident or non-resident, the residential status of the karta of the family during the previous year is not relevant. Residential status of the karta during the preceding years is considered for determining whether a resident family is “ordinarily resident”.

4.1.1 What is “control and management”

Different courts have defined the term “control and management” as follows —

• De facto control – Control and management means de facto control and management and not merely the right to control or manage—CIT v. Nandlal Gandalal [1960] 40 ITR 1 (SC).
• Place of control and management – Control and management is situated at a place where the head, the seat and the directing power are situated. The head and brain is situated where vital decisions concerning the policies of the business, such as, raising finance and its appropriation for specific purposes, appointment and removal of staff, expansion, extension, or diversification of business, etc., are taken—San Paulo (Brazilian) Railway Co. v. Carter [1886] AC 31 (HL).
• Residence of HUF in India – The mere fact that the family has a house in India, where some of its members reside or the karta is in India in the previous year, does not constitute that place as the seat of control and management of the affairs of the family, unless the decisions concerning the affairs of the family are taken at that place. The mere fact of the absence of karta from India does not make the family non-resident—Annamalai Chettiar v. ITO [1958] 34 ITR 88 (Mad.).
• Broad propositions – The following propositions can be stated on the basis of the rulings given in Subbayya Chettiar v. CIT [1951] 19 ITR 163 (SC) and Narasimha Rao Bahadur v. CIT [1950] 18 ITR 181 (Mad.)—

1. Generally, HUF shall be taken to be resident in India unless control and management of its affairs is situated wholly outside India.

2. HUF may be residing in one place and doing a great deal of business in other place.

3. Occasional visit of a non-resident karta to the place of HUF’s business in India would be insufficient to make HUF ordinarily resident in India.

4.2 When a resident Hindu undivided family is ordinarily resident in India

A resident Hindu undivided family is ordinarily resident in India if the karta or manager of the family (including successive karta) satisfies the following two additional conditions as laid down by section 6(6)(b) :

If the karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.

5. Residential status of the firm and association of persons [Sec. 6(2)]

A partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident in India if control and management of their affairs are situated wholly outside India.

The above rule may be summarised as follows —

Note – A firm/an association of persons cannot be “ordinarily” or “not ordinarily resident”. The residential status of the partners/members of the firm/association is not relevant in determining the status of the firm/association.

5.1 What is “control and management”

While in the case of a firm, control and management is vested in partners, in case of an association of persons it is vested in the principal officer. Control and management means de facto control and management and not merely the right to control or manage. Control and management is usually situated at a place where the head, the seat and the directing power are situated. Where the partners of a firm are resident in India the normal presumption is that the firm is resident in India. This presumption can, however, be effectively rebutted by showing that the control and management of the affairs of the firm is situated wholly outside India. The onus of rebutting the presumption is on the assessee.

6. Residential status of a company [Sec. 6(3)]

Residential status of a company is determined as follows –

Notes –

1. An Indian company is always resident in India. Even if an Indian company is controlled from a place located outside India (or even if shareholders of an Indian company controlling more than 51 per cent voting power are non-resident and/or located outside India), the Indian company is resident in India. An Indian company can never be non-resident.

2. A foreign company (with effect from the assessment year 2017-18) is resident in India if its place of effective management (POEM), during the relevant previous year, is in India. For this purpose, the place of effective management means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made. For this purpose, a set of guiding principles (to be followed in determination of POEM) have been issued by the Board in Circular No. 6/2017, dated January 24, 2017.

3. Provisions of section 6(3)(ii) shall not apply to a foreign company having turnover or gross receipts of Rs. 50 crore or less in a financial year – Circular No. 8/2017, dated February 23, 2017. In other words, a foreign company (whose annual turnover/gross receipts is Rs. 50 crore or less) cannot be resident in India from the assessment year 2017-18 onwards.

6.1 Place of effective management (POEM) as per Circular No. 6/2017

“Place of effective management” (POEM) is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Any determination of the POEM will depend upon the facts and circumstances of a given case. The POEM concept is one of substance over form. 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. Since “residence” is to be determined for each year, POEM will also be required to be determined on year to year basis. 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.

6.2 Company engaged in active business outside India

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.

• Active business outside India – A company shall be said to be engaged in “active business outside India” if –

a. the passive income is not more than 50 per cent of its total income;

b. less than 50 per cent of its total assets are situated in India;

c. less than 50 per cent of total number of employees are situated in India or are resident in India; and

d. the payroll expenses incurred on such employees is less than 50 per cent of its total payroll expenditure.

• Passive income – “Passive income” of a company shall be aggregate of, —

a. income from the transactions where both the purchase and sale of goods is from/to its associated enterprises; and

b. 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.

6.3 Management power exercised in India

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 place of effective management shall be considered to be in India. For this purpose, merely because the Board of Directors follows general and objective principles of global policy of the group laid down by the parent entity which may be in the field of Payroll 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 Board of Directors of companies standing aside.

Moreover, the Board has clarified in its Circular No. 25/2017, dated October 23, 2017 that if 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 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 Board of Director 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†.

Other Cases – In cases of companies other than those discussed above, the determination of POEM would be a two stage process, namely –

• First stage would be identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company’s business as a whole.
• Second stage would be determination of place where these decisions are in fact being made.

The place where these management decisions are taken would be more important than the place where such decisions are implemented. For the purpose of determination of POEM it is the substance which would be conclusive rather than the form.

Guiding principles – Some of the guiding principles which may be taken into account for determining the POEM are as follows –

1. The location where a company’s Board regularly meets and makes decisions may be the company’s place of effective management provided, the Board –

a. retains and exercises its authority to govern the company; and

b. does, in substance, make the key management and commercial decisions necessary for the conduct of the company’s business as a whole.

2. If a board has de facto delegated the authority to make the key management and commercial decisions for the company to the senior management or any other person including a shareholder, promoter, strategic or legal or financial advisor, etc., and does nothing more than routinely ratifying the decisions that have been made, the company’s place of effective management will ordinarily be the place where these senior managers or the other person make those decisions.

3. A company’s board may delegate some or all of its authority to one or more committees such as an executive committee consisting of key members of senior management. In these situations, the location where the members of the executive committee are based and where that committee develops and formulates the key strategies and policies for mere formal approval by the full board will often be considered to be the company’s place of effective management.

4. The location of a company’s head office will be a very important factor in the determination of the company’s place of effective management because it often represents the place where key company decisions are made.

5. The use of modern technology impacts the place of effective management in many ways. It is no longer necessary for the persons taking decision to be physically present at a particular location. Therefore, physical location of board meeting or executive committee meeting or meeting of senior management may not be where the key decisions are in substance being made. 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.

6. The decisions made by shareholder on matters which are reserved for shareholder decision under the company laws are not relevant for determination of a company’s place of effective management. Such decisions may include sale of all or substantially all of the company’s assets, the dissolution, liquidation or deregistration of the company, the modification of the rights attaching to various classes of shares or the issue of a new class of shares etc. These 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.

7. Day to day routine operational decisions undertaken by junior and middle management shall not be relevant for the purpose of determination of POEM.

8. The determination of POEM is to be based on all relevant facts related to the management and control of the company, and is not to be determined on the basis of isolated facts that by itself do not establish effective management, as illustrated by the following examples –

• The fact that a foreign company is completely owned by an Indian company will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.
• The fact that there exists a Permanent Establishment of a foreign entity in India would itself not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.
• The fact that one or some of the directors of a foreign company reside in India will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.
• The fact of, local management being situated in India in respect of activities carried out by a foreign company in India will not, by itself, be conclusive evidence that the conditions for establishing POEM have been satisfied.
• The existence in India of support functions that are preparatory and auxiliary in character will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.

6.4 Prior approval of Principal CIT/CIT required

In case the Assessing Officer proposes to hold a foreign company, on the basis of its POEM, as being resident in India then any such finding shall be given by the Assessing Officer after seeking prior approval of the collegium of three members consisting of the Principal CITs or CITs, as the case may be, to be constituted by the Principal Chief Commissioner of the region concerned, in this regard. The collegium so constituted shall provide an opportunity of being heard to the foreign company before issuing any directions in the matter.

Special provisions pertaining to foreign company which becomes resident in India on the bases of POEM [Sec. 115JH] -In a case where a foreign company is said to be resident in India on account of its POEM being in India (and such foreign company has not been resident in India in any of the preceding years), then a few special provisions are applicable for the computation of total income, treatment of unabsorbed depreciation, set off or carry forward and set off of losses, collection and recovery, etc. Such modifications are given in section 115JH read with Notification No. SO 3039(E), dated June 22, 2018.

† Vide Circular No. 2/2021, dated March 3, 2021, CBDT has provided that if any individual is facing double taxation even after taking into account the relief provided by the relevant Double Taxation Avoidance Agreement (DTAA), he/she may furnish the specified information by March 31, 2021 in Form-NR annexed to the said Circular. This form is to be submitted electronically to the Principal Chief CIT (International Taxation).

‡In the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, not include the period given in rule 126. Under rule 126, the period beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the said individual for the eligible voyage and ending on the date entered into the Continuous Discharge Certificate in respect of signing off by that individual from the ship in respect of such voyage, shall not be included in the period of stay in India.

# This provision is subject to one exception. It is applicable from the assessment year 2021-22.

†According to basic conditions given

† For computing Rs. 15,00,000, only taxable income shall be considered. If income is exempt, it shall not be taken into consideration even if it is derived/received in India.

† However, this condition has been activated from the assessment year 2021-22, in a few cases.