Lot of NRIs based out of USA return back to India after some years. As a result of this, in the year of return, they might have worked in USA for some months & at the same time, lived in India for more than 182 days in the year.
Since the person has lived >182 days in India, general perception is that he will be counted as a “resident” and hence his global income (including the USA salary income) will be taxed in India as well.
However, recently in my research I came across a decision by the Delhi Bench of Income Tax viz. Raman Chopra v. Deputy Commissioner of Income-tax [2016] 69 taxmann.com 452 (Delhi – Trib.) which has held that even if assessee qualifies as a resident as per Indian tax rules, he need not report USA salary in Indian tax returns if he qualifies as a resident of USA for that period as per Article 16(1) of India USA DTAA.
Facts of the case
- The assessee, derived income from salary and income from other sources.
- During year 2010-11, the assessee was working in USA from 1-4-2010 to 1-7-2010 and the assessee claimed exemption as per article 16(1) of DTAA between India and US.
- Contention of Income Tax Department (ITD) was that since the period of assessee’s stay in India was more than 183 days, his entire global income should be taxed in India and as such assessee’s claim for exemption under article 16(1) was disallowed and said sum was added back to the total income of the assessee.
- Based on above disallowance, the Assessing Officer (AO) also initiated penalty proceeding under section 271(1)(c) and levied penalty.
Extract of relevant portions of India USA DTAA
For better understanding of this case, I have copied the extract of the relevant portions (Article 4 and 16) of India USA DTAA:
ARTICLE 4: RESIDENCE
1. For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that
(a) this term does not include any person who is liable to tax in that State in respect only of income from sources in that State; and
(b) in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries.
(2) Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his status shall be determined as follows :
(a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests);
(b) if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national;
(d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
ARTICLE 16: DEPENDENT PERSONAL SERVICES
1. Subject to the provisions of Articles 17 (Directors’ Fees), 18 (Income Earned by Entertainers and Athletes), 19 (Remuneration and Pensions in respect of Government Service), 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (Payments received by Students and Apprentices) and 22 (Payments received by Professors, Teachers and Research Scholars), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first mentioned State, if:
(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the relevant taxable year;
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State ; and
(c) the remuneration is not borne by a permanent establishment or a fixed base or a trade or business which the employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operating in international traffic by an enterprise of a Contracting State may be taxed in that State.
Decision of ITAT in the case
Following are main points of the order of ITAT in the case:
- As the assessee may be considered liable to tax both in India and US as per the tax laws in each jurisdiction, a determination of the residential status as per the India – USA DTAA has to be done based on the tie breaker analysis as contained in Article 4(2) of the DTAA.
- Based on the tie breaker analysis, the assessee is tie-breaking to USA for the period 1-4-2010 to 30-6-2010. Accordingly, the assessee shall be considered as a resident of USA for the period 1-4-2010 to 30-6-2010 as per the Treaty.
- Since the assessee was a resident of USA for the period 1-4-2010 to 30-6-2010 and had exercised his employment in USA during the above period, he was entitled to claim exemption of salary in India as per article 16(1).
- Section 271(1)(c) postulates imposition of penalty for furnishing of inaccurate particulars and concealment of income. On the facts and circumstances of this case, assessee’s conduct cannot be said to be contumacious so as to warrant levy of penalty.
Learning points from this case
This judgement gives following helpful pointers for taxation of such incomes:
- ITD cannot blindly hold the view that since the assessee has stayed in India for a period => 182 days in India, entire global income will be taxed. It has to also consider assessee’s contention of any DTAA benefit claimed, because the DTAA overrides the tax provisions of tax laws of contracting states.
- ITD cannot blindly impose a penalty on assessee if he has duly disclosed the incomes, claimed exemptions based on logic AND co-operated during assessment proceedings.
- As a returning NRI, you have the right to take benefit of the DTAA however given the complexities in interpretation of this document, it is advisable to take a second opinion of a qualified tax adviser.
- If you’re claiming DTAA benefit for a particular year in India, it is advisable to file tax return (even if income in India is below exemption limit) and clearly disclose the income and article of DTAA under which benefit is claimed so that later in assessment stage, the AO cannot accuse you of concealment of income & cannot initiate penalty proceedings against you.
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