Direct Tax Alert: 

BACKGROUND

The extent of income taxable in India is determined by residential status under the Income-tax Act, 1961 (“the Act”). Section 6(1)(c) of the Act provides that an individual shall be considered resident in India if he has been in India for 60 days or more in the current year and 365 days or more in the preceding 4 years. Explanation to section 6 grants ‘non-resident’ status to individuals leaving India for employment, as well as to individuals who are outside India but coming to India for visit(s). Further, if an individual is considered resident in 2 or more countries simultaneously, the tie-breaker test as per the relevant Double Taxation Avoidance Agreement (“tax treaty”) shall be applied to determine his residential status. In a landmark decision¹, the Bangalore Bench of Income Tax Appellate Tribunal (“the Tribunal”) rejected the ‘non-resident’ status claimed by the taxpayer, a citizen/person of Indian origin, who had visited India for less than 182 days and held that the taxpayer is ‘resident’ in the year under consideration. Accordingly, his global income would be taxable in India.

We, at BDO India, have analysed and summarised the key aspects of this decision and provided our comments on its impact hereunder:

FACTS OF THE CASE

• The taxpayer, an Indian citizen and former co-founder of an online e-commerce platform, stayed in India for 141 days in the year 2019-20 (“relevant year”) and 365 days over the preceding 4 years.
• He had resigned from his Indian employment and relocated to Singapore in February 2019 for the purpose of employment. His family relocated to Singapore in March 2019.
• The taxpayer resigned from his employment in Singapore and joined another company in September 2019. He was in India before his employment with the new company in Singapore.
• He claimed the status of ‘non-resident’ for the relevant year while filing an income-tax return in India on the ground that his period of stay in India during the relevant year was less than 182 days.
• He sold shares of F Pvt. Ltd. in multiple tranches during the relevant year and claimed exemption from capital gains under Article 13(5) of the India-Singapore tax treaty.
• The tax authority held the taxpayer to be ‘resident’ in India on the ground that the condition ‘being outside India’ applies only to non-residents. Since the taxpayer was resident in earlier years, the threshold of 182 days is not available. Thus, the treaty benefits were denied to him, attracting tax on his global income.

ISSUES UNDER CONSIDERATION

• Whether the taxpayer qualifies as i) A person leaving for employment abroad or ii) An Indian citizen visiting India as per the explanation to section 6
• Whether the taxpayer qualifies as a resident of Singapore as per the tie breaker test under the India-Singapore tax treaty
• Whether capital gains from the sale of shares of F Pvt. Ltd. were taxable in India

TRIBUNAL DECISION

• The legislative intent behind Explanation 1(b) to section 6 was specifically to extend relief to persons who were already non-residents, enabling them to visit India for longer periods to supervise and control their investments without losing their non-resident status.

• The phrase ‘being outside India’ refers to a state of being, not merely a physical location at a point in time. A person who has been resident in India for the preceding four years and who travels abroad for employment cannot be said to be ‘being outside India’ in terms of Explanation 1(b). Such a person can be regarded as a resident of India who is temporarily abroad.

• If every person who leaves India for employment could claim the benefit of the 182-day threshold, the distinction between Explanation 1(a) and Explanation 1(b) would collapse. The provision would apply only to persons who are leaving India and not to persons who are visiting India.

• Explanation 1(a) applies only to the previous year in which the individual leaves India for employment purposes. The taxpayer had already taken up employment in Singapore and was working there when he visited India. His resignation from employment in Singapore and subsequent employment with a new company occurred while he was already based in Singapore. Therefore, the alternative argument of the taxpayer that he has again left India for employment purposes during the year 2019-20 and Explanation 1(a) to section 6 would be applicable cannot be accepted.

• The taxpayer had a permanent home available to him in both countries. During the COVID-19 pandemic, the taxpayer chose to stay in India. A person would naturally prefer to stay at the place of permanent residence and with loved ones during the most difficult times of the pandemic.

• The fact that the family was in Singapore while the taxpayer frequently visited India suggested that while his personal relations remained significant in Singapore, were substantially connected to India as well.

• The centre of vital interest should be examined throughout the relevant period, not merely at the year-end or post-migration. The wide variety and diversity of investments in India compared to the more concentrated nature of foreign investments suggests a deeper, more established economic engagement with India.

• All three entities where the taxpayer was employed operated from the same Singapore address, and the taxpayer was a promoter, employee, and major shareholder in all these entities. The employment arrangements lacked commercial substance and were structured primarily to create an appearance of Singapore residence.

• The taxpayer was resident in India under the Act as well as under the India-Singapore tax treaty during the relevant year. Therefore, his global income, including capital gains on the sale of shares, would be taxable in India.

BDO INDIA COMMENTS

This decision throws light on the manner in which Revenue now scrutinises cross-border transactions, the chronology of events while examining tax treaty-related claims. These findings are specifically relevant for promoters/ high-net-worth individuals while structuring relocations/ and exit transactions.

It suggests that the current residential status cannot be decided by ignoring the past residential status. Mere employment outside India does not confer ‘non-resident’ status to the taxpayer. The Tribunal delved into the taxpayer’s presence as well as intent of being in India, specifying that a taxpayer cannot avail the benefit of ‘left for employment purposes’ and ‘visiting India’ simultaneously.

The Tribunal curtailed artificial reliance on the explanation to section 6 and emphasised the principle of substance over form while deciding on the tie-breaker test.