What is the circumstance of thisphrase Lakum deenukum waliya deen?
The verse referred to in the question is from Chapter109 and is as follows:
You have your religion and I have mine (Quran 109:6)
This verse was revealed towards the end of the Makkan phase of Islam, which lasted for 13 years. Several Islamic scholars believe that this verse served as a last admonition to the Prophet’s opponents (the Quraysh tribe). It means that the verse came down at a point when the Prophet had fulfilled his responsibility of dawah (conveying the message of God) with respect to the Quraysh.
It is commonly held by scholars that if a community persists in its denial of the messenger, it shall suffer consequences. However, in my opinion, this verse of the Quran was in the language of ‘divine hammering.’ Its purpose is to invoke in the reader a sense of seriousness towards the message and to make him ponder over its meaning. As we learn from the history of Islam, the Makkans who had become dire opponents of the Prophet (and also the immediate reference of this verse) eventually embraced Islam.
I derive an extended meaning from the words of the above verse, which pertains to peaceful co-existence. The verse means that a believer must follow one and respect all religions.
Source: The Seekers Guide