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Presented By:Amitabh Srivastava

LL.M(Business Laws)

RESIDENCE AS PER INCOME TAX

ACT(Including POEM and DTAA’s)

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• Income Tax in India is concerned with only the residential status of the assessee not with the citizenship or domicile.

• In USA citizenship of the assessee plays an important role while determining his tax liability but in India , it is nothing to with citizenship.

• In India an Indian may be non-resident and a foreigner may be resident for income tax purpose.

• A person can be resident of more than one country in any previous year but he cannot be citizen of two countries.

Why Study Residential Status?

• Tax incidence on an assessee depends on his residential status. For instance, whether an income, accrued to an individual outside India, is taxable in India depends upon the residential status of the individual in India.

• Similarly, whether an income earned by a foreign national in India or outside India is taxable in India depends on the residential status of the individual, rather than on his citizenship.

• Therefore, the determination of the residential status of a person is very significant in order to find out his tax liability.

Contd…..

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A taxable entity can be (under sec 2(31) of the IT Act 1961 )◦ An Individual, ◦ A Hindu Undivided Family, ◦ A firm,◦ A company◦ An Association of Persons,◦ Body of Individuals◦ Local Authority and ◦ any other artificial judicial entity.

Taxable Entity

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The following table explains how these are subcategorized with respect to their residential status.

How to find out Resi. Status:-

INDIVIDUAL /HUF

RESIDENT

ORDINARY

NON-ORDINARY

NON-RESIDENT

Others included in definition of “person”

RESIDENT NON-RESIDENT

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Section 6(1): This section applies to individuals. If an individual is to qualify as resident of India, he has to fulfill at least one of the following two conditions:

Determining the Residential Status of An Individual

Condition Explanation

1 He is in India in the previous year for a period of 182 days or more

2 He is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year

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Section 6(6): This section applies to individuals. If an individual is to qualify as an ordinary resident of India, he has to fulfill both of the following two conditions in addition to fulfilling the criteria as provided in section 6(1):

Determining if a resident is an ordinary resident

Condition

Explanation

1 He has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year.

2 He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

Individuals satisfying conditions of Sec 6(1) but not Sec 6(6) will be classified as Resident Non ordinary individuals.

Resident and ordinarily resident : Must satisfy at least one

of the basic conditions and both of the additional conditions.

Resident and not ordinarily resident: Must satisfy at least

one of the basic conditions and one or none of the additional

conditions.

Non-resident : Must satisfy none of the basic conditions.

Rules of Residence status:

Section 6(2): This section applies to Hindu Undivided Family. The distinction under this section is made as:

“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.”

Control and management is situated at a place where the head, the seat and the directing power are situated.

Determining the Residential Status of HUF:

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Section 6(6)(b): A resident Hindu undivided family is an ordinarily resident in India if the karta or manager of the family business satisfies the following two additional conditions:

Condition

Explanation

1 Karta has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year.

2 Karta has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

If Conditions stipulated in Section 6(6)(b) are not satisfied by a HUF fulfilling conditions stipulated in Section 6(b), then it is classified as a resident non-ordinary HUF.

Control and management of the affairs of a HUF is-

◦ Wholly in India- resident and ordinarily resident.

◦ Wholly out of India : non-resident.

◦ Partly in India and partly outside India: if Karta does not

satisfy the additional conditions, a resident HUF is treated as

resident but not ordinarily resident in india.

Rules :

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As per section 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.

Residential Status of Firm/Association of Persons

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As per section 6(3), an Indian company is always resident in

India.

A foreign company is resident in India only if, during the

previous year, control and management of its affairs is situated

wholly in India.

However, a foreign company is treated as non-resident if,

during the previous year, control and management of its affairs

is either wholly or partly situated out of India.

Residential Status of Company

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INCIDENCE OF TAXResidential Status Indian Source

Income (ISI)Foreign Source Income(FSI)

Ordinary Resident Tax Tax

Not Ordinary Resident Tax No tax unless FSI is getting from a profession or business set up in India

Not Resident Tax No tax

“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.” -OECD ,Model Tax Convention

OECD, in its commentary on Article 4 of the Model Tax

Convention on Income and Capital recognises POEM as an

internationally recognized concept as a tie breaker rule for

determining residential status.

Place of Effective Management (POEM)

where the board meeting are usually held;

where the chief executive officer and other senior executives

usually carry on their activities;

where the senior day-to-day management of the person is

usually carried on;

where the person’s headquarters are located;

which country’s law govern the legal status of the person;

where its accounting records are kept;

Factors while determining POEM

Foreign companies were considered as tax resident in India if

during and throughout the year under consideration, their control

and management was “wholly” situated in India.

Accordingly, if control and management of a foreign company

was even partly situated outside India, it was regarded as non-

resident.

The definition of residence was thus considered as too high a

threshold compared to the definition of residence in tax treaties

POEM in Indian Context

Therefore, a need to revise the same was envisaged under the DTC and

accordingly the concept of POEM for determination of residential status was

introduced in Direct Taxes Code Bill (DTC) released on 15 June 2010. The

principle survived with modifications in DTC revised draft circulated in 2013.

Recognising that, the requirement of “whole” of control and management in

India for the entire year as a criteria to determine residential status was a very

restricted definition and avoidance of residence became easy by even holding

a single board meeting outside India, the Finance Bill 2015 proposed the

amendment.

Contd…..

The Finance Act 2015 has introduced a major change to the definition of residential status of companies vide amendment to Section 6(3) of the Income Tax Act, 1961 (‘Act’) which is likely to have significant impact with respect to foreign companies.

The new POEM rule states that a person being a company shall be said to be resident in India in any previous year, if

(i) it is an Indian company; or (ii) its place of effective management, at any time in that year,

is in India.

2015’s Amendment

Double taxation may arise when the jurisdictional connections, used by different countries, overlap or it may arise when the taxpayer has connections with more than one country.

A person earning any income has to pay tax in the country in which the income is earned (as source Country) as well as in the country in which the person is resident. As such, the said income is liable to tax in both the countries.

To avoid this hardship of double taxation, Government of India has entered into Double Taxation Avoidance Agreements (DTAAs) with various countries. (about 85 countries)

Double Taxation Avoidance Agreement (DTAA’s) in India

DTAAs provide for the reduced rates of tax on dividend,

interest, royalties, technical service fees, etc., received by

residents of one country from those in the other.

The Double Tax Avoidance Agreement (DTAA) is essentially a

bilateral agreement entered into between two countries.

The basic objective is to promote and foster economic trade and

investment between two Countries by avoiding double taxation

Contd….

A typical DTA Agreement between India and another country

usually covers persons, who are residents of India or the other

contracting country, which has entered into the agreement

with India.

A person, who is not resident either of India or of the other

contracting country, would not be entitled to benefits under

DTA Agreements.

Subjects of DTAA’s

In such a case, the two countries have an Agreement for

Double Tax Avoidance, in which case the possibilities are:

1. The income is taxed only in one country.

2. The income is exempt in both countries.

3. The income is taxed in both countries, but credit for tax paid

in one country is given against tax payable in the other

country.

Benefits of DTAA’s

In India, Under Section 90 and 91 of the Income Tax Act,

relief against double taxation is provided in two ways:

Bilateral Relief

Under Section 90, the Indian government offers protection

against double taxation by entering into a DTAA with another

country, based on mutually acceptable terms.

Indian Law

Unilateral Relief Under Section 91, an individual can be relieved from double

taxation by Indian Government irrespective of whether there is a DTAA between India and the other country concerned. Unilateral relief to a tax payer may be offered if:

• The person or company has been a resident of India in the previous year.

• In India and in another country with which there is no tax treaty, the income should have been taxed.

• The tax has been paid by the person or company under the laws of the foreign country in question.

Contd….

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