Purport

This is the third Shloka on the complex subject of interrelation between God and the universe. In earlier two Shlokas Bhagvan Shri Krishna explained how the material universe and living beings originated and sustained by the self potency of Bhagvan Shri Krishna.

In this Shloka Bhagvan Shri Krishna describes how all living exists in the space of cosmic space of life potency of Bhagvan Shri Krishna. A perfect analogy of sky and air is given. Living souls are to Super soul(Parmatma) as air is to sky. The sky is not a container nor is air contained in it, yet air always exists in the sky.
Taking this argument on scientific ground, one should know that the sky is a field, which is named ether. Sky exists everywhere, inside and outside of every element. In fact a large volume of every atom is nothing but sky. Therefore Sky is not a container which holds elements but is part of every element and holds the very existence of every atom in this universe. Yet the sky is independent of elements in all situations.
The life potency of Bhagvan Shri Krishna is like the ether field that is the sky. It holds every living soul. It exists inside the soul and outside soul. But in all situations that life potency still remains independent.

One more point to add to this discussion is that the life potency of Bhagvan Shri Krishna is nothing but the Bramhan. The same Bramhan which is the core subject of Shrutis(Vedas and Upnishads). This Bramhan is the life potency of Bhagvan Shri Krishna which sustains all lives in this universe(Ch14: Sh3).

Three Shlokas 4,5 6 of Chapter this chapter 9 explains one of the most important concepts of Santan Dharma and gives an answer to many questions related to the same, including how God is situated in every element and living soul.