India: Split Residency – ITAT Upholds The Taxpayer's Claim For Treaty Exemption, Applies Centre Of Vital Interest Test

Last Updated: 6 June 2019
Article by SKP  

Dual Residency gets attracted when an expat in the year of move qualifies as a resident of the host country (i.e., the country in which he is deputed) as well as home country (i.e., the country of his residence). On account of dual residency, an expat can be doubly taxed on the same income, i.e., the country where he has been deputed would stake a claim of their taxes on his worldwide income, and the home country would also stake a claim by virtue of his citizenship or him being a national of that country. However, an expat can take the benefit of the provisions of the Income-tax Act (Áct) or the provisions of the Double Tax Avoidance Agreement (DTAA), whichever is more beneficial to avoid double taxation. In the case of dual residency, the DTAA is relied upon for determining the Country of Residence based on certain criteria tests like availability of the permanent home, the centre of vital interest, habitual abode, nationality, etc.

Recently, the Bangalore Tribunal, in the case of Shri Kumar Sanjeev Ranjan[i], had an occasion to rule upon the taxability in relation to an expat facing dual residency. This decision throws more insights into the factors that could be considered for determining the centre of vital interest in India. The said case is discussed in the next section.

FACTS OF THE CASE

The taxpayer,Mr A, was a citizen of the USA and had been working in there since 1986. He was deputed to India temporarily for six years, i.e., from June 2006 to August 2012. During the fiscal year 2012-13, he moved back to the USA in the middle of the year, precisely on 10 August 2012. Mr A was qualifying as a tax resident of India by virtue of his stay in India during the fiscal year 2012-13 and in the preceding financial years.  He was also regarded as the tax resident of USA as per the respective local tax laws of the USA.

In India,Mr A's residential status was that of a Resident and Ordinarily resident (R & OR). As a result, his worldwide income was taxable in India. In the return of income, Mr A claimed that as per Article 4 of the DTAA between India and USA, he qualified to be a resident of the USA as his 'centre of vital interest' was closer to the USA; accordingly, the salary earned in the USA, during the period 11 August 2012 to 31 March 2013, was not taxable in India.

But the Tax Officer (TO) was of the view that since Mr A was regarded a resident under the Act, his entire global income, including the income earned in the USA, was liable to be taxed in India. With regard to the tie-breaker test, the TO concluded that the vital interest needed to be considered based on a holistic approach, and according to him, the vital interest of Mr A was lying closer to India than the USA. The TO argued that there was no concept of split residency recognized under the provisions of both DTAA and the Act. Furthermore, the TO was of the view that Mr A was ineligible to claim the benefit of the tax treaty, in respect of the salary income earned in USA, in India under the DTAA between India and the USA, as he had not produced the Tax Residency Certificate. Based on the above, the AO was of the view that the salary income earned by Mr A in the USA was taxable in India. Not only the salary income, but the dividend and interest income earned after he returned to the USA were also taxable in India basis the residential status in India.

Appellate Proceedings and Decision of the Tribunal:

The first appellate authority, the Commissioner of Income Tax (Appeals) (CIT (A)) ruled in favor of Mr A based on the following:

  • Mr A was a tax resident of the USA based on the Tax Residency certificate produced before CIT (A) and was, therefore, eligible to claim the benefit of the DTAA between India and the USA.
  • Mr A, based on his physical presence, not only qualified as a tax resident of India but also qualified as a resident of the USA as per the US domestic tax laws. When a person qualifies as a tax resident of two countries, he becomes a 'dual resident.' Under these circumstances, the question that arises is which country has the right to tax the person's global income.
  • Article 4 of the India-USA DTAA provides for a tie-breaker provision based on certain criteria viz. the availability of a permanent home, the centre of vital interest, habitual abode and nationality. 
  •  In the present case, Mr A had a permanent residence in both states. So, the next test was to determine the country to which his centre of vital interest was closer.
  • The centre of vital interest of Mr A, during the tax year 2012-2013, was determined by considering the following criteria. 
Dependent Members The taxpayer's spouse and two children were citizens of the US and were living with him.
Personal Belongings The taxpayer had a house property along with all his personal belongings in the US.
Voting Rights The taxpayer was a citizen of the US and exercised his voting rights in the US.
Driving License The taxpayer holds a driving license in the US. When he was in India, he had kept his car in the US and was using the same whenever he visited the US. The car property tax receipt for the year 2011 was filed.
Country of Residence The taxpayer's designated country of residence was the US. He had filed his tax returns in the US during the period of his deputation in India.
Better Social Ties The taxpayer had been living in the US for 26 years, and hence his social ties were closer to the US.  
Investments The taxpayer had all his investments in shares, mutual funds, 401K plans and insurance policies in the US, which together constituted a significant portion of his total investment.
Settlement The taxpayer had settled down in the US with his spouse and two children, and plans to stay there for the rest of his lifespan.
Social Security The taxpayer had been contributing towards social security in the US since 1988 and to pension plan since 1998.

Based on the above criteria, it was held that Mr A had a closer vital interest to the USA compared to India.

In light of the above, the CIT (A) held that as Mr A qualified under the Treaty to be a resident of the USA, the income earned in the USA was not taxable in India. 

FINDINGS OF THE INCOME TAX APPELLATE TRIBUNAL (ITAT)

The revenue department, being aggrieved against the order of CIT (A), filed a second appeal before the Tribunal. The Tribunal, relying on the CIT (A) order, ruled in favor of the taxpayer and held that the salary income and the other income earned by Mr A in the USA, post his return to the USA, were not taxable in India. The Tribunal held that once the test of residency is based on Article 4 of the Tax Treaty, the provisions of the Act for determining resident status do not assume any importance. 

[1] ITA No. 1655/Bang/2017 (Bangalore ITAT)

SKP's Comments

This decision is a welcome one on dual residency, and for determining the tax liability of the assessee. As there is no specific guidance under the provisions of the Act relating to dual residency, the matter is prone to litigation. This decision could help determine the taxability in case of dual residency. This decision also provides guidelines on the parameters/factors that could be relevant for determining the centre of vital interest under the tiebreaker test in the DTAA, and one could support its claim based on these parameters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions