Section 6(3): The Rule That Decides Whether a Company Is an Indian Tax Resident

Every tax law starts with a simple question — who should be taxed & on what income?
In India, this answer depends on a person’s residential status under the Income Tax Act. Section 6 lays down the rules to determine whether an individual or a company is resident or non-resident. For individuals, residency is based on days of stay in India. For companies, however, the definition goes deeper — it looks at where the real control and management decisions are taken. That is exactly what Section 6(3) explains.

Section 6(3): The Core Definition

Residential status of a company [Sec. 6(3)] — According to the Income Tax Act, a company is considered a resident in India if:

1. It is an Indian company, or
2. Its Place of Effective Management (POEM) in that year is in India.

If neither of these conditions is met, the company is treated as a non-resident.

This distinction matters because a resident company is taxed on its global income, while a non-resident company is taxed only on its Indian-sourced income.

What Exactly Is “Place of Effective Management” (POEM)?

POEM is a term that can sound complicated, but it has a very practical meaning — it’s the place where key management and commercial decisions are actually made. In other words, if the real decision-making brain of a company is in India, even if its registration is elsewhere, the tax department can treat it as a resident. This prevents companies from setting up paper offices abroad just to avoid tax in India.

For example, if the board of directors regularly meets in Mumbai & major business decisions are taken there, the POEM is in India — making the company resident under Section 6(3).

Also Read: The Residency Test That Decides If Your Global Income Gets Taxed

The Two Simple Tests Under Section 6(3)

If both conditions are absent — say the company is registered in Singapore and all management decisions are taken there — it remains a non-resident for Indian tax purposes.

Why Section 6(3) Was Updated

Before 2017, the law said a company was resident if its “control and management was wholly situated in India.” This led to ambiguity — companies could claim they were controlled partly outside India & escape tax."

The Finance Act 2015 introduced the concept of POEM to align India with global tax standards & the OECD framework. Now, even partial decision-making in India can make a foreign company liable for tax here.

Residential Status for Individuals – Quick Reference

While Section 6(3) deals with companies, Section 6(1) & 6(2) cover individuals and HUFs.
An individual is said to be resident in India in any previous year if they satisfy either of the following:

1. Stay in India for 182 days or more in that year; or
2. Stay in India for 60 days in that year & 365 days during the 4 preceding years.

These rules help determine how their income is taxed — whether only Indian income or global income too.

How Residential Status Affects Taxation

Once the residential status is decided, the scope of tax liability is clear:

This classification prevents double taxation and helps the Income Tax Department identify cross-border transactions that must be reported.

Also Read: 100% Deduction on Capital Expenditure for Specified Businesses

Practical Example – A Case of POEM

Imagine an IT consulting firm registered in Dubai but owned & operated by directors residing in India. All contracts, pricing decisions, and vendor approvals happen from its Delhi office.

Even though the company is registered abroad, its effective management is in India. Under Section 6(3), it becomes a resident & must pay tax on its entire global income in India.

Impact on Global Tax Planning

Section 6(3) plays a crucial role in international tax structuring. Businesses with subsidiaries abroad must carefully document where board meetings are held, how strategic decisions are taken, and who has authority over operations. If your management team is mostly in India, and your foreign entity is run from here, the tax department can treat you as resident — leading to double tax exposure.

Using Double Tax Avoidance Agreements (DTAA) & expert structuring can help avoid such risks.

Key Takeaways

• Section 6(3) decides whether a company is resident or non-resident.
• Residency is based on registration or the Place of Effective Management.
• Resident companies are taxed on global income.
• Non-residents are taxed only on income earned in India.
• The definition prevents tax avoidance through offshore shell entities.

Common Mistake Businesses Make

• Many entrepreneurs believe that setting up a foreign subsidiary automatically makes it non-resident. That’s not always true.
• If the strategic brain of that subsidiary sits in India, Section 6(3) can still pull it back under Indian tax residency."
• It’s vital to maintain clear proof of where board decisions are taken, minutes are recorded, & directors operate.

Also Read: The Golden Rule — Why Selling SGBs Doesn’t Trigger Capital Gains Tax

Final Words

The residential status of a company isn’t just a technical term — it’s the foundation of how you get taxed in India.
Whether you’re running a domestic business or an international entity, understanding Section 6(3) can save you from huge litigation & penalties.

If you’re unsure about where your company stands, it’s worth getting a professional residency review. At CallMyCA.com, our experts can help analyze your company’s documentation, and structure to keep you fully compliant with the Income Tax Act. Tax residency isn’t about where you’re registered — it’s about where you really operate from.