WEEK 2 Part 1 E TEXT

RESIDENTIAL STATUS AND TAX INCIDENCE

We have already discussed some basic concepts of income tax
and clear understanding of these concepts are necessary for
discussion of all the subsequent discussions.
Income tax Act, 1961 mentions that tax incidence on a person
depends on his/her/its residential status during the previous year.
Let us clear the concept that residential status has nothing to do
with citizenship. An Indian citizen may be ‘non-resident’ while a
foreigner may be ‘resident in India’. Moreover, a person may be
resident in one previous year while he/she may be ‘non-resident, in
another previous year. Whether a person will be ‘resident’ or ‘non-
resident’ , it entirely depends on the rule as discussed under Section
6 of the Income tax Act. As per Section 6, a person may be (i)
Resident in India or (ii) Non-resident subject to fulfilment of the basic
conditions given under Section 6(1) of the Income tax Act. Further,
a resident individual may be ‘ordinarily resident’ or ‘not ordinarily
resident’ subject to fulfilment of additional conditions provided
under Section 6(6) of the Act. Following diagram will clear the
concept of the rules for residential status of persons.

Residential Status

Resident Non Resident

Rules for Residential Status of INDIVIDUAL

An individual is said to be resident in India in any previous year, if
he/ she fulfils any of the basic conditions provided under Sec 6(1)
(a) He/she has been residing in India for 182 or more days in
the previous year

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 (b) He/she has been in India for a total period of 365 or more
days in the last 4 years preceding the previous year and has
been in India for at least 60 days in the previous year.

Exceptions to the rule:

Following categories of individuals are treated as ‘Resident in India”
only if they had been in India for 182 or more days in the previous
year. It does not matter if the person had been in India for 365 or
more days in 4 year preceding the previous year and for 60 or more
days in the previous, they will be treated as non-resident if they had
not been in India for 182 or more days in the previous year.
1. Indian citizen who leave the country in any previous year as a
member of a crew of an Indian ship or went outside India for
employment.
2. Indian citizen or person of Indian origin (a person whose
parents or grandparents were born undivided India) who is
engaged in employment or business or profession or any other
vocation outside India, comes to visit India in any previous
year.

Method for Determination of period of stay in India for an Indian

citizen, being a crew member
Explanation 2 to Sec 6(1) provides that 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,
in respect of such voyage, be determined in the prescribed manner
and subject to the prescribed condition.
Accordingly, the CBDT has, vide notification No.70/2015 dated
17.8.2015, inserted Rule 126 in the income-tax rules, 1962 to
compute the period of stay in such cases.
Accordingly, to rule 126, for the purposes of section 6(1), in case of
an individual, being a citizen of Indian and a member of the crew
of a ship, the period or periods of stay in India shall, in respect of an
eligible voyage, not include the following period:

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 (a) The date entered into the continuous Discharge Certificate
in respect of joining the ship by the said individual.
(b) The date entered into the continuous Discharge Certificate
in respect of signing off by that individual from the ship in
respect of such voyage.

Not Ordinarily Resident in India

A resident individual/Hindu Undivided Family (HUF) may be
Ordinarily Resident or Not Ordinarily Resident in India

Resident in India

Resident and Ordinarily Resident Resident but Not Ordinarily Resident

Only individuals and Hindu Undivided Family (HUF) can be resident

but not ordinarily resident of India. All other categories of assesses
can either be resident or non-resident. Both the following conditions
needs to be satisfied for an individual/Karta of HUF to be ordinarily
resident in India under sec 6(6)
(1) If the individual has been resident in India for at least 2 years
out 10 previous years preceding the relevant previous year,
and
(2) If the individual has been in India for 730 days or more in the
7 previous years preceding the relevant previous year.
The individual should satisfy both the additional conditions to
become Resident and Ordinarily Resident in India during the
relevant previous year.
In summary, we can say that an Individual who satisfies any of the
basic conditions will be ‘Resident in India’ for that particular

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previous year. Otherwise, his/her status will be ‘Non-resident in
India’ subject to two exceptions narrated earlier.
A Resident Individual satisfying both the additional conditions will
be ‘Resident and Ordinarily Resident in India’ and an individual who
does not satisfy both the additional conditions, his/her status will be
‘Resident but not ordinarily resident in India’

❖ RESIDENTIAL STATUS OF HINDU UNDIVIDED FAMILY (HUF)

RESIDENT: A HUF can be a resident in India only if it is controlled and
managed wholly or partly in India.
NON-RESIDENT: If the control and management of its affairs are
wholly outside India, then an HUF would be considered as non-
resident.
RESIDENT AND ORDINARILY RESIDENT/RESIDENT BUT NOT ORDINARILY
RESIDENT: If the HUF is resident, then the status of the Karta
determines whether it is resident and ordinarily resident.
• If the Karta is resident but not ordinarily resident, the HUF is
resident and not ordinarily resident.
• If the Karta is a resident and ordinarily resident than the HUF is
also resident and ordinarily resident.

❖ RESIDENTIAL STATUS OF FIRMS AND ASSOCIATION OF PERSONS

RESIDENT- A firm or association of persons would be considered as
a resident if its affairs of control and management is wholly or partly
in India.
NON-RESIDENT- A firm or association of person is said to be non-
resident if its affairs of control and management is situated wholly
outside India.

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 ❖ RESIDENTIAL STATUS OF A COMPANY
A company is said to be resident in any previous, if-
• It is an Indian company. An Indian company is a company
which have been registered in India under Companies Act
1956 or Companies Act 2013.
• If its place of effective management (POEM) is in India.

❖ PLACE OF EFFECTIVE MANAGEMENT (POEM)

Place of Effective Management (POEM) means a place where
key management and commercial decisions that are necessary
for the conduct of business of an entity are, in substance, made.
The process of determination of POEM would be primarily based
on the fact as to whether the company is engaged in active
business outside India.

❖ GUIDELINES FOR POEM

DETERMINING PLACE OF EFFECTIVE MANAGEMENT
As per the principles, the company shall be said to be engaged in
‘active business outside India’, if the following factors are satisfied:

• Passive income of the company is not more than 50% of its

total income, and
• Out of the total assets of the company, less than 50% are
situated in India, and
• Out of the total number of employees, less than 50% are
situated in India or less than 50% are resident in India, and
• Out of the total payroll expenses incurred by the company less
than 50% of payroll expenditure is incurred for such employee.

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Passive Income
Passive Income is the aggregate of the following –

• Income from the transactions, wherein, purchase and sale is

from an associated enterprise of the company, and
• Income from 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.
In cases of companies, the determination of POEM would be a
two stage process, namely –
- First stage would be the identification or ascertaining the person
or persons who actually makes or 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,

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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.

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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 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.

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 - 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.
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.

❖ Example
Mr. A is a foreign citizen, not being a person of Indian origin.
Determine his residential status for the assessment year 2019-20 on
the assumption that during financial years 2004-05 to 2018-19 he
was present in India as follows-
YEAR NO. OF DAYS YEAR NO. OF DAYS
2004-05 221 2011-12 160
2005-06 22 2012-13 96
2006-07 50 2013-14 286
2007-08 72 2014-15 100
2008-09 130 2015-16 182
2009-10 340 2016-17 85
2010-11 30 2017-18 280
2018-19 86

SOLUTION-
For the assessment year 2019-20, Mr. A is a resident and ordinarily
resident because-
Mr. A is a resident in India because it can be seen that that Mr. A
had been in India for more than 365 days in the previous four years.

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Mr. A is ordinarily resident because he has been resident in India for
9 years in the last 10 years as for being an ordinarily resident a
person needs to be a resident in India for at least 2 years in the last
10 years, but Mr. A has been resident for 9 out of 10 years.
Mr. A also satisfies the condition that an individual need to be in
India for at least 730 days in the last 7 years. Mr. A has been in India
for 1189 days in the last 7 years.
Therefore, Mr. A is a resident and ordinarily resident for the
assessment year 2019-20.

❖ RELATION BETWEEN RESIDENTIAL STATUS AND INCIDENCE OF

TAX SEC (5)
A tax incidence is an economic term for the division of a tax burden
between buyers and sellers. Tax incidence reveals which group,
consumers or producers, will pay the price of a new tax.
Under the Act, incidence of tax on a taxpayer depends on his
residential status and also on the place and time of accrual or
receipt of income.

❖ Indian income and foreign income

INDIAN INCOME- Any of the following three can be considered as
Indian income-
1. if income is received (or deemed to be received) in India during
the previous year and at the same time it accrues (or arises or is
deemed to accrue or arise) in India during previous year.
2. if income is received (or deemed to be received) in India during
the previous year but it accrues (or arises) outside India during the
previous year.
3. if income is received outside India during the previous year but it
accrues (or arises or is deemed to accrue or arise) in India during
the previous year.

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 ❖ FOREIGN INCOME
If the following conditions are satisfied, then income is said to be
foreign income-
1. income is not received (or deemed to be received) in India; and
2. income does not accrue or arise (or does not deem to accrue or
arise) in India

❖ INCIDENCE OF TAX FOR DIFFERENT TAXPAYERS-

Tax incidence of different tax payers are-

Individual and Hindu undivided family

Resident and Resident but Status income
ordinarily not ordinarily
resident in resident in
India India
Indian income Taxable in Taxable in Taxable in
India India India
Foreign Taxable in Only two types Not taxable in
income India of foreign India
incomes * are
taxable in
India
Any other
foreign
income is not
taxable in
India

* 1. Business income and business is controlled wholly or partly from

India.
2. income from profession which is set up in India

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 ❖ TAX PLANNING TIPS
The following should be kept in mind while planning for tax-
1. In order to enjoy non-resident status, individuals, who are
visiting India on a business trip or in some other connection,
should not stay in India for more than 181 days during one
previous year and their total stay in India during any four
previous years preceding the relevant previous year should in
no case exceed 364 days.
2. If any individual, have been staying in India for more than 365
days during four years preceding the relevant previous year,
wish to stay in India for more than 60 days, they should plan
their visit in India in such a manner that their stay in India falls
under two previous years.
3. An Indian citizen or a person of Indian origin (whether
rendering services outside India or not) can stay for a
maximum period of 181 days on a visit to India without losing
his non-resident status. If, however, such persons wish to stay
in India for more than 181 days, they should plan their visit in
such a manner that their maximum stay of 362 days falls under
two previous years, stay in each previous year not being more
than 181 days.
4. An Indian citizen, leaving India for the purpose of
employment, will not be treated as resident in India, unless he
has been in India in that year for 182 days or more. In other
words, Indian citizens going abroad for the purpose of
employment can stay in India for 181 days without becoming
resident in that year, even if they were in India for more than
365 days during the four preceding years.
5. A non-resident can escape tax liability in respect of income
earned out of India if he first receives it out of India and then
remits the whole or part of it to India, even though the business
is controlled from India.
6. A person who is not ordinarily resident, earning income outside
India from a business controlled outside India, can avoid tax
liability if he first receives such income in a foreign country and

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 then remits the whole or part of it to India, either in the same
year or in the following years.
7. Not ordinarily resident persons can claim set off losses
sustained in the business controlled outside India against their
income taxable in India, provided they shift their control of the
business to India.

REFERENCES
(1)

https://www.taxmann.com/bookstore/bookshop/bookfiles/sampl
echapterunit2lesson4.pdf
(2)

https://resource.cdn.icai.org/46234bos36354p4secAcp2.pdf
(3)

https://resource.cdn.icai.org/46234bos36354p4secAcp2.pdf

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