Arunachal Pradesh aka North East Frontier Agency (NEFA) aka Southern Tibet is in lime light because of the ongoing visit of the 14th Dalai Lama to that place and ruckus being created by China on that issue. To most of us, that is a far off place not worth bothering about and that is the biggest mistake we commit due to ignorance.
Arunachal Pradesh (called South Tibet in China) is presently a full-fledged state of Union of India. India's sovereignty over the area is internationally recognized and its residents have shown no inclination to leave India. The majority of the international maps put the area in India. China has some historical claims through its ownership of Tibet, but the geography primarily favours India. The primary controversy is over the ownership of the Tawang Tract (northern part of the state) where India's biggest monastery and an ancient trading town lies.
Arunachal bordering Assam has few old temples and is influenced by Tibetan, Burmese and Bhutanese cultures. Tawang Monastery, most important heritage of the state, was built in 16th century where 6th Dalai Lama was borne. This is one of the most important sites for the Tibetan Buddhists. The area is assumed to have been populated by the Tibetans at that point.
In ancient times, Indian empires and Tibetan empires were in harmony and the exact border was neither drawn nor enforced.
Until 1912, the border between Tibet and India was not quite delineated. Very few people lived there for it to matter. Neither the Mughals nor the British were controlling the region. Even the Tibetans were not that interested. For instance, India's map of 1909 (on Left) puts it in Tibet. However, map of China and Tibet in 1892 (on right) puts the state in India/Burma.
India and Tibet were confused where the borders lied. British initially didn't bother but eventually, they discovered the Tawang Monastery and it was time to draw the borders. In 1914, the representatives of Tibet, China and British India sat together to draw the borders. That was the origin of Mac Mahon Line. According to India, most of the state had ancient Indian influence from Assam and in 1914 Tibetans signed an agreement to give the state to India. Also, from an Indian perspective, keeping the Tawang monastery within India was the best way to protect whatever is remaining of Tibetan culture, specially to ward of effects of China in future.
For a long time, Tibet was an independent region. However, under Yuan dynasty Tibet came under China in 1200 BC. Since then China claims Tibet. In 18th century, due to decay of Qing dynasty, China started losing its grip and in 1860s, Tibet proclaimed its sovereignty.
A map of 1864 shows Tibet as a separate country (map below on left). By 1913, Qing dynasty collapsed completely and Tibet expelled all remaining Chinese from Tibet. In 1914, Tibet was an independent, but weak country. British India negotiated hard and got Tibet to accept that the region of Tawang and the area south of it belonged to India. Everyone agreed except China. Chinese representative in the meeting withdrew without signing the treaty and since then China refused to accept the Mac Mahon Accord. Despite the border treaty, the border was not fully enforced. Except for Tawang, there was not much interesting in the state.
In 1935, a British administrative officer, went back to the convention ruling and unearthed the finding. Soon, India would start using the region in her maps. China never recognized Tibet's independence or the 1914 Shimla convention. In 1950 China completely took over Tibet and put forward the claim that Tawang region belonged to her. China especially wanted to hold on to the monastery as that is a leading centre of Tibetan Buddhism in India.
In 1962, India and China went to war over the region. But, since the geography clearly favoured India, China had to pull back from Tawang. Since then India has established complete control over the region. The international borders of the state roughly coincide with the high altitude (as shown in map above on right). India will not part away with Tawang Tract at any cost due to its strategic importance.