The Bangalore Bench of Income Tax Appellate Tribunal (ITAT) ruled that both the personal relationship as well as economic relationship must be considered together to determine the “centre of vital interest” of an individual close to a particular state. The Tribunal clarified that for determination of economic relationship, more credential be given to active involvement in the commercial activities then passive investments.
Generally, the ITAT explained that the investments in securities, mutual funds, banks move not necessarily with residence of the taxpayer but on the basis of rate of return in particular state. Thus, for determination of economic relationship, place of business, place of Administration of property and place of earning wages (remuneration) (profit) is of importance.
Therefore, while adjudicating the residential status under the Income Tax Act, the Tribunal reasoned that the appellant (taxpayer) satisfied the conditions of Section 6(1)(c) of the Income Tax Act, having stayed in India for 141 days in the relevant year and over 365 days in the four preceding years. The Tribunal, however, denied the benefit of Explanation 1(b) because the phrase “being outside India” was interpreted to apply only to individuals who are already non-residents, which the taxpayer was not.
The Tribunal also denied the benefit of Explanation 1(a) as the appellant had left India for employment in the financial year 2018-19, and the relaxation applies only for the specific year an individual leaves India for employment.
The Division Bench comprising Prashant Maharishi (Vice President) and Keshav Dubey (Judicial Member) applied the Double Taxation Avoidance Agreement (DTAA) Tie-Breaker Test under Article 4(2) sequentially, and found that the appellant had a permanent home available in both India (owned properties) and Singapore (rented accommodation).
In determining the “centre of vital interests”, the Bench observed that the appellant’s economic relations were closer to India, considering his substantial immovable assets, historical investments, and business ventures in India, which outweighed the recent shift of his family and new investments in Singapore. As the appellant is an Indian national, the cumulative effect of the tie-breaker tests resulted in him being deemed a resident of India.
The Bench explained that if the individual has a permanent home in both the contracting States, the issue of examining his centre of vital interest arises meaning thereby that it is to be ascertained with which of the two states his personal and economic relations are closer. One must have a regard to his family and social relationships, his occupation, his political, cultural or other activities, his place of business and the place from which he administers his property.
It is further attest that if a person who is a home in one state sets up a second in the other state while retaining the first, the fact that he retains the first in the environment very has always lived, where he has always worked and where he has his family and possessions, can, together with other elements go to demonstrate that he has retained his centre of vital interest in the first state, added the Bench.
The Bench also explained with respect to the habitual abode, that the appellant has stayed in India for 141 days in India and balance days in other countries. This is the first year that appellant went out of India for employment purposes. But he kept on visiting India for almost 141 days. Thus, for most part of his life, he was in India, he is having house in India.
Thus, the Bench concluded that the appellant worked only for the part of the year in Singapore and also lived in India for part of the year, and he will have a habitual abode in both India and Singapore. Essentially, the appellant is an Indian national.
On the procedural validity under Section 144C of the Income Tax Act, the Bench held that the phrase “in the first instance” in Section 144C(1) mandates the AO to decide the procedure based on the appellant’s declaration in the return of income. Since the appellant had claimed ‘non-resident’ status, he was an ‘eligible assessee’ at that initial stage, and the AO was duty-bound to issue a draft assessment order.
This procedure protects the taxpayer’s future right of appeal in case a higher judicial forum overturns the finding on residential status. Therefore, the AO’s action was not a procedural violation, and the final assessment order was not barred by limitation, added the Bench.
Briefly, the appellant, a co-founder of Flipkart, had filed his return claiming the status of a ‘non-resident Indian’. The appellant had resigned from his roles at the Flipkart group effective 13 November 2018, and subsequently left India to take up employment in Singapore with X Technologies PTE Ltd, commencing work from 22 February 2019. During the financial year 2019-20, the appellant sold shares of Flipkart Private Limited, a Singapore-incorporated company, to FIT Holdings SARL. He contended that since he was a resident of Singapore, the capital gains arising from this sale were not taxable in India under Article 13(5) of the India-Singapore Double Taxation Avoidance Agreement (DTAA). Despite this claim, the purchaser had deducted tax at source on the transaction.
The AO determined that the appellant was a ‘resident’ of India under Section 6(1)(c) of the Income Tax Act, based on the appellant’s stay in India for 141 days during the financial year 2019-20 and for more than 365 days in the four preceding years. The AO opined that the relaxation provided in Explanation 1(b) to Section 6(1)(c), which extends the 60-day stay period to 182 days for a “visit to India”, is applicable only to individuals who are already non-residents and not to those who were residents in prior years. Applying the ‘tie-breaker test’ in Article 4(2) of the DTAA, the AO concluded the appellant was a resident of India due to having a permanent home and his “centre of vital interests” in India, citing his properties in Bangalore and significant economic interests tied to India.
On appeal, the Dispute Resolution Panel (DRP) upheld the AO’s findings, rejecting the appellant’s objections regarding his residential status under both the Income Tax Act and the DTAA.
Appearances:
Senior Advocate Percy Pardiwala, for the Appellant/ Taxpayer
ASG Arvind Kamath, for the Respondent/ Revenue
