s.6(3) — Residence of a company and place of effective management
A company is resident in India if it is an Indian company or its place of effective management in the year is in India, the second limb replacing the old control and management test from assessment year 2017-18.
Income-tax Act, 1961
s.6(3)
Income-tax Act, 2025
s.6(10)
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 6(10) of the Income-tax Act, 2025, which governs tax year 2026-27 onwards, makes a company resident in India in a tax year if (i) it is an Indian company (section 2(53)) or (ii) its place of effective management is in India in that year, and defines place of effective management as a place where key management and commercial decisions necessary for the conduct of business of the company as a whole are, in substance, made. For years up to 2025-26 the rule is section 6(3) of the Income-tax Act, 1961, whose Explanation speaks of the business of an entity as a whole; that clause was substituted by section 4 of the Finance Act, 2015 with effect from 1 April 2016 and again by section 4 of the Finance Act, 2016 with effect from 1 April 2017, so the test applies from assessment year 2017-18 (Circular No. 6 of 2017, para 3). Before that a foreign company was resident only if during the year the control and management of its affairs was situated wholly in India. Circular No. 6 of 2017 of 24 January 2017 sets out the Department's guiding principles: a company engaged in active business outside India, tested by passive income of not more than 50 per cent of total income and less than 50 per cent of assets, employees and payroll in India, averaged over the year and the two preceding years, is presumed to have its place of effective management outside India if the majority of its board meetings are held outside India, unless the board stands aside; other companies are examined in two stages, who makes the key decisions and where; and the Assessing Officer must take prior approval of the Principal Commissioner or Commissioner before initiating proceedings, and of a collegium of three Principal Commissioners or Commissioners, which must hear the company, before any finding. Circular No. 8 of 2017 of 23 February 2017 says clause (ii) of section 6(3) shall not apply to a company having turnover or gross receipts of Rs 50 crore or less in a financial year, and Circular No. 25 of 2017 of 23 October 2017 says a regional headquarters in India working within group-wide policies is not by itself a basis for place of effective management. Section 115JH of the 1961 Act and Notification No. 29/2018 of 22 June 2018 adapt the computation for a foreign company resident for the first time; section 220 is the 2025 Act counterpart of section 115JH.
What the provision does
Makes every Indian company resident, and a foreign company resident for any year in which the key management and commercial decisions for its business as a whole are in substance made in India. It does not make a foreign company resident because it is wholly owned by an Indian company, has a permanent establishment in India, has some directors resident in India, or has local management of its Indian activities or preparatory and auxiliary support functions in India, none of which is conclusive under the Board's guidelines; and a company cannot be not ordinarily resident.
Threshold questions
- Is the company an Indian company under section 2(53) of the 2025 Act or section 2(26) of the 1961 Act
- Is the year tax year 2026-27 or later (section 6(10)), assessment year 2017-18 to 2026-27 (section 6(3)), or an earlier year governed by the control and management test
- Is the company's turnover or gross receipts Rs 50 crore or less in the financial year
- Is the company engaged in active business outside India on the averaged tests of passive income, assets, employees and payroll
- Where were the board meetings held, and did the board in substance take the key decisions or stand aside
- Did the Assessing Officer obtain the prior approvals and the collegium's direction after a hearing
In practice
The recurring disputes.
Whether Circular 8/2017 can take a small company outside the statute
The Revenue's officers are bound by the circular, which says clause (ii) shall not apply to a company with turnover or gross receipts of Rs 50 crore or less. The company relies on Azadi Bachao Andolan, which upheld a circular under section 119 as a valid direction to officers, and on section 239(3)(a)(i) of the 2025 Act and section 119(2)(a) of the 1961 Act, which contemplate directions not prejudicial to assessees; it says a direction not to apply clause (ii) to small companies is of that kind. The argument against it is that the Board's power under section 239 of the 2025 Act (section 119 of the 1961 Act) is to direct its officers, not to amend a residence rule that Parliament made universal, and that the Supreme Court in Tiger Global (15 January 2026) said earlier circulars cannot override subsequent statutory amendments, though that was said of circulars that preceded the amendment. Whether the circular continues under the 2025 Act through section 536(2)(j), so far as not inconsistent with it, is also open: the Revenue says a circular that disapplies section 6(10)(a)(ii) is inconsistent with a sub-section that has no threshold, and the company that it limits the cases in which the Department applies the definition without contradicting it. Our view is that the circular binds the Department, so that the Assessing Officer cannot hold such a company resident on place of effective management for a year to which it applies; whether a court would uphold it if its validity were squarely in issue is open; and under the 2025 Act we think it continues by section 536(2)(j), though the inconsistency argument is not frivolous.
Who must prove that the place of effective management is in India
The Department invokes the clause to make a foreign company resident and, the company argues, must prove it, as the Delhi Tribunal held of the old test in Radha Rani Holdings (31 May 2007), an order the Revenue has appealed to the Delhi High Court. The Revenue answers that the evidence of where decisions were taken is with the company. The presumption for a company in active business outside India binds the Assessing Officer; whether it binds the Commissioner (Appeals) is arguable: he is an income-tax authority bound by section 239(1) of the 2025 Act (section 119(1) of the 1961 Act) to follow the Board's instructions, but section 239(2)(b) of the 2025 Act (clause (b) of the proviso to section 119(1) of the 1961 Act) bars instructions that interfere with his appellate discretion, and it does not bind the Tribunal or a court, which apply the statute. Our view is that the legal burden lies on the Department, though a company that does not produce board papers it alone holds risks the finding standing on the material before the Assessing Officer.
Place of effective management in India for part of the year
The Revenue says a company whose place of effective management was in India during the year satisfies the words in that year, and that section 6 has no split year. The company answers that there is only one place of effective management at a time, and that the circular, which says a snapshot approach is not to be adopted and that where the place was in India and outside India during the year it is presumed to be in India if it was mainly or predominantly in India, binds the Department not to hold it resident unless it was. Our view is that the Department is held to that predominance test, and a finding that does not weigh the two periods against each other is open to challenge; whether a court construing the statute without the circular would adopt the same test or a stricter one is open.
Whether a tax residency certificate prevents an enquiry into place of effective management
Where the treaty tie-breaker for a dual resident company still turns on place of effective management, as with Singapore, the UAE and Mauritius, which reserved against Article 4 of the Multilateral Instrument, the company relies on its certificate. Under the India-UAE treaty a company is a UAE resident only if it is incorporated and managed and controlled wholly in the UAE, so a company managed partly from India is not a UAE resident for the treaty and never reaches the tie-breaker. The Supreme Court in Tiger Global held the certificate an eligibility condition and not sufficient evidence (para 37), and that holding one does not by itself prevent an enquiry where the entity is shown to be a device to avoid tax (para 43). The Delhi High Court held in Blackstone (30 January 2023) that the Revenue cannot go behind a certificate; on 12 January 2024 the Supreme Court granted the Revenue leave to appeal, stayed that judgment and directed that the Revenue should not in the meanwhile collect the amount assessed. Our view is that after Tiger Global a certificate does not close the enquiry, and Blackstone cannot be relied on for the proposition that it does; but where the Department's case is simply that the company's place of effective management is in India, it must prove that case on the evidence of where key decisions were taken and with the safeguards of Circular No. 6 of 2017. How far the enquiry extends where tax avoidance is not alleged is open.