January 10, 2023
Delhi ITAT Breaks The Tie In Taxpayer’s Favour
Recently, the Delhi Income Tax Appellate Tribunal (“ITAT”) in Sameer Malhotra v. ACIT1, held that Sameer Malhotra’s (“Taxpayer”) income earned in Singapore in the financial year (“FY”) 2014-15 cannot be subject to tax in India in accordance with the India-Singapore Double Taxation Avoidance Agreement (“DTAA”), as the Taxpayer is considered to be a resident of Singapore for the relevant FY.
The Taxpayer is an individual who declared a total income of Rs.1,59,36,999/- from DBOI Global Services Pvt. Ltd. in India between April 1, 2014 to November 25, 2014 (“Earlier Period”) and from J.P. Morgan Chase & Co. (“JPMC”) in Singapore during December 15, 2014 to March 31, 2015 (“Latter Period”). The Taxpayer thereafter field a revised return and declared his total income to be Rs.47,82,630/-, claiming that he was not an Indian resident for the relevant FY and accordingly, the income earned in Singapore via JPMC was not subject to tax in India.
In the resultant scrutiny assessment, the assessing officer (“AO”) rejected the claim of the Taxpayer in the revised return. The AO held that the Taxpayer is a resident of India for the purpose of the Income-tax Act, 1961 (“ITA”) as he was physically present in India for 182 days or more in the relevant FY. For the purpose of the DTAA, the AO relied upon the tie breaker questionnaire and held that the Taxpayer should be considered as tax resident of India. The Commissioner of Income Tax (Appeals) (“CIT(A)”) agreed with the AO’s order, and further observed that the Taxpayer is an Indian resident in the terms of Article 4 of the DTAA, as his permanent home was available to him in India. Additionally, it was observed that Taxpayer’s centre for vital interest rested in India in light of his majority investments and bank accounts being present in India. Thereby, Taxpayer was held to be an Indian resident even in the terms of the tie breaker test under Article 4 of the India-Singapore DTAA.
Aggrieved by the order, the Taxpayer preferred an appeal before the ITAT.
ITAT Delhi Proceedings
The ITAT had to determine the sole issue of taxability of Taxpayer’s income earned in the Latter Period, thereby prompting the determination of tax residence of Taxpayer for the relevant FY.
Arguments of Taxpayer
Arguments of Revenue
Ruling of ITAT
The ITAT held that the Taxpayer qualified as a tax resident of Singapore for the relevant FY in terms of Article 4 of the DTAA. In coming to the decision, the Tribunal observed the following:
The issue of dual residency is becoming common with the increase in frequent travels and work in cross border locations. The ITA provides that the global income of a resident is subject to tax in India. Therefore, from an individuals’ perspective, determination of residency (which is a factual exercise) is important prior to filing of income-tax returns.
In cases where an individual becomes a tax resident of two countries, tax treaties provide for a tie-breaker test on basis of which preference of residency of one country is established over the other. Tie-breaker test is applied in a hierarchal manner. While determination of tax residency under the domestic law is purely based on number of days an individual stays in India, in case of applicability of tie-breaker test under a tax treaty, a number of facts are taken into consideration to determine the tax residency. Hence, it is important that the taxpayers arrange their affairs as per sound advice and keep the relevant documentation in place. The ITAT’s ruling was guided by following favourable facts for the Taxpayer:
The OECD commentary (“Commentary”) notes that permanent home test under the tax treaty will frequently be sufficient to solve the tie breaker test.2 Further, the Commentary also notes that a house owned by an individual cannot be considered to be available to him if it has been rented out to an unrelated party i.e. the individual no longer has the possession of the house and the possibility to stay there3. The Tribunal also takes note of the UN Model Commentary to elaborate the concept of home. The Tribunal noted that the house owned by the Taxpayer in India was rented out by him once he moved outside India. As per the Commentary, on basis of the aforesaid fact the permanent home test would have broken in favour of the Taxpayer. However, the Tribunal has not given a specific finding with respect to the permanence home test but has determined the residency on basis of the centre of vital interest test and habitual abode test.
On basis of the above, it is amply clear that the Tribunal closely looked at the facts of the case while holding in favour of the Taxpayer. Further, the Tribunal also made a reference to the UN Model Commentary noting that special rules under the tie-breaker test should apply to the period where the residence of the taxpayer affects tax liability, and not necessarily the entire taxable period. Hence, even though the favourable facts for the Taxpayer were applicable for the Latter Period only, there were sufficient to break tie in his favour.
(The authors would like to acknowledge and thank Anirudh Srinivasan (student, Nirma University, Ahmedabad) for his contribution to this hotline.)
You can direct your queries or comments to the authors
1 ITA No. 4040/Del/2019.
2 Para 11 of Article 4 of the OECD Model Commentary, 2017.
3 Para 13 of Article 4 of the OECD Model Commentary, 2017.
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