SKP Tax Alert
17 April 2019
Split Residency – ITAT upholds the Taxpayer’s Claim for Treaty Exemption, applies Centre of Vital Interest Test

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.
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