Place of Effective Management

Introduction: As per the Income-tax Act, 1961 (hereinafter referred to as “the Act”), global income of the person resident in India is chargeable to tax in India . Further, all income of the non-resident person is chargeable to tax in India if the income is received or deemed to be received in India or accrues or deemed to accrue or arise in India . Determination of residential status of company is governed by Section 6(3) of the Act. Determination of residential status of the person defines the scope of taxpayer’s taxable income. Under the Act, a person resident in India is taxed on income derived from both domestic and foreign sources, whereas a person non-resident in India is only taxed on the Income that has its source in India (i.e. received or deemed to be received in India or accrues or deemed to accrue or arise in India). Each country has its own local taxation law to determine the residential status of the person for their country.

Such law could be different from Indian taxation law governed by the Act. There have been instances that the same income has been subject to double taxation on the principle of taxing an income based on the residency rule as well as source of the Income. There have been instances that the person is resident in two different countries based on the local taxation law. In order to curb inconvenience caused to taxpayers on account of difference in tax law of different countries, countries enter into Double taxation Avoidance Agreement (hereinafter referred to as “DTAA” or “treaty”). The main purpose of DTAA is to avoid such double taxation.