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Indian tribunal grants DTA exemption to dual resident on the basis of the center of vital interests test for part of the fiscal year

Executive summary

An Indian tax tribunal has confirmed a ruling of the Commissioner Appeals and allowed an individual to split the tax year into treaty resident and treaty non-resident parts, and exempt from tax in India income that was received in the US during the period the individual was a treaty resident of the US.

In their analysis, the tribunal applied the tie breaker test under the India-USA double taxation agreement (the DTA) for determining the residential status of a taxpayer who was a dual resident in both India and the United States under the domestic tax laws of both countries for the fiscal year in question. Under the center of vital interests test, the Tribunal split the fiscal year based on the actual presence of the taxpayer and allowed an exemption from Indian tax for the period of US residence. Taxpayers seeking to benefit from this ruling should ensure that they maintain sufficient documentation to support their claim.

Background

The taxpayer, a US citizen, came to India on a temporary cross-border assignment from the US in June 2006. This assignment was subject to multiple extensions before 10 August 2012 when the individual returned permanently to the US. Based on his stay in India, he qualified as a resident of India for the 2012-13 fiscal year. As a US citizen, he also qualified as a resident of the US for the 2012 and 2013 calendar years.

Accordingly, while filing his income tax return, the taxpayer applied the tiebreaker test under the DTA. He qualified as a resident of India under the DTA for the period of 1 April 2012 to 10 August 2012 (when on assignment to India) under the permanent home test and as a resident of the US during the period 11 August 2012 to 31 March 2013, under the center of vital interests test, as these were closer to the US.

The concept of a split residence was not accepted by the lower level tax authorities, on the grounds that personal and economic relations (the center of vital interests) are a long and continuous relationship that an individual has with a place and cannot simply change overnight. Therefore, the taxpayer was resident under the DTA in India for the entirety of the 2012-13 fiscal year and the salary earned during the period 11 August 2012 to 31 March 2013 was taxable in India.

The taxpayer filed an appeal with the Commissioner Appeals. During the appellate proceedings before the Commissioner, the taxpayer provided further evidence in the form of a tax residency certificate (TRC) issued by the US tax authorities, the receipt for tax paid on a car he maintained in the US (while on assignment to India), state tax returns filed in the US, and a university’s admission letter for his son’s education, to establish that his social and economic ties were always closer to the US. The taxpayer further claimed that he has been contributing to US social security plans and repatriated to the US on the completion of his Indian assignment, where he intends to stay permanently.

Based on this evidence, the commissioner accepted the split residency position of the taxpayer. The tax authorities appealed this decision before the Tribunal, contending that the fresh evidence in the form of the TRC could not be accepted during the appellate proceedings, since this was not produced before them during the assessment procedure.

Tribunal ruling

The Tribunal upheld the order of the Commissioner that the individual was a tax resident of the US for the period 11 August 2012 to 31 March 2013. The Tribunal further noted that the Commissioner has applied the test of social and economic ties /center of vital interests in determining the residential status of the taxpayer and has not merely relied on the TRC in concluding that taxpayer tie breaks to the US. Accordingly, the salary earned in relation to services performed in the US, during the part of the year in which the taxpayer was a resident of the US, was not taxable in India under the DTA.

Next steps

The Tribunal ruling comes as a positive news as it accepts the tie breaker rules and the concept of split residency. It also details the importance of maintaining sufficient documentation in order to substantiate the position. Individuals seeking to rely on split year treatment under a DTA should ensure that they maintain appropriate documentary evidence to support any such claim, in particular obtaining a tax residence certificate from the country of treaty residence.

EYG no. 05800-193Gbl

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