Individual resident of India – Tribunal breaks tie in favour of India!

Recently, the Income Tax Appellate Tribunal (“Tribunal”) while dismissing an appeal filed by the taxpayer ruled that the taxpayer shall be considered to be an Indian resident since the tie-breaker under the India – US Tax Treaty (“Tax Treaty”) breaks in favour of India due to his closeness of personal and economic relations in India.

Background

The taxpayer is a resident of both India and the US and having permanent homes in both places. Some additional facts with respect to the taxpayer can be summarised as below:

• The taxpayer is an Overseas Citizen of India (“OCI”), US national holding US passport.

• The taxpayer was present in India for more than 183 days in the tax year in question.

• While the taxpayer was staying with his wife, son and daughter in Mumbai, his wife, son and daughter were also US nationals holding US passport.

• His father is a US national OCI, mother brother, sister are all US nationals holding US passport.

• He earned capital gains and dividend income in both places and earned rental income from house property and bank interest from bank deposits made in the US.

• He has also earned rental income from house property in US and bank interest from bank deposits made in US.

• One of his daughters is residing New York as she is studying there.

• He is the Managing Director (MD) of an Indian company where he and his wife are each holding 50% shareholding of the company

• The taxpayer has attended 5 board meetings as MD of the Indian company and has an active involvement in running of the company.

Considering the above facts, the Assessing Officer (“AO”) (based on the direction of the Joint Commissioner to whom the taxpayer has made a reference to under Section 144A of the Income Tax Act, 1961) ruled that the taxpayers center of vital interest is closer to India and rejected the claim of the taxpayer that he is a resident of the USA. The taxpayer appealed the decision of the AO before the Commissioner of Income Tax (Appeals) (“CIT (A)”). The CIT(A) dismissed the appeal by holding that the taxpayer is a resident of India as his stay exceeds 183 days and his entire global income is taxable in India.

Aggrieved by the order of the CIT(A), the taxpayer filed an appeal before the Tribunal.

Ruling

The Tribunal dismissing the appeal of the taxpayer ruled that the personal relationship and economic relationship of the taxpayer, tilt more in favour of being close to India then US and accordingly held that the taxpayer is a resident of India in terms of Article 4(2)(a) of the Tax Treaty. The Tribunal stated that in order to determine closeness of personal relationship connect with nucleus family is more important than with extended family. Similarly, for determination of economic relationship, more credential should be given to active involvement in the commercial activities then passive investments. Applying the above to the present facts, the Tribunal ruled that:

• The stay of the taxpayer with his wife, son and daughter in Mumbai should be considered to be relevant and the stay of his extended family including parents in the USA is not such relevant to decide whether his personal relationship is close to USA or not.

• Regarding his economic interest, the fact that he is actively involved in running an Indian company is to be given greater importance as he does not have any active involvement in the US and is deriving rental and dividend income.

• It also denoted that while determining economic relationship place of business, administration of property and place of earning wages is of importance and more weightage is to be given to active involvement in commercial activities than investments of a passive nature.

Analysis

The subjective criteria provided under the tie breaker rule under the Tax Treaty needs to be thought through in order to determine the substantial closeness of the taxpayer’s personal and economic relations. The Tribunal’s ruling gives perspective in determining what factors should be considered when determining the personal economic relationship of the taxpayer in order to be able to come to a conclusion with respect to the tie breaker test. It is important to consider these points when determining one’s residency under tax treaties.