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Mumbai Tribunal applies center of vital interest test under treaty residency tie breaker rule to resolve residency in India
In the case of Ashok Kumar Pandey [1] (Taxpayer), the issue before the Mumbai Tribunal was whether the Taxpayer is a treaty resident of USA or India under Article 4 of India–USA Double Taxation Avoidance Agreement (DTAA).
The Taxpayer was a resident in India for tax year 2012-13. During the relevant tax year, the Taxpayer earned dividend, interest and rental income from USA (US sourced income). He claimed himself to be a resident in India as well as in USA under their respective domestic laws, thereby a dual resident. Since it was a case of dual residency, the residential status of the Taxpayer was required to be determined in accordance with the tie-breaker rules under Article 4(2) of India-US DTAA[2] . The Taxpayer had permanent homes in India as well as in USA. Therefore, his residential status was required to be determined as per Article 4(2)(b)- Center of vital interest (i.e., whether personal and economic relations have closer nexus with India or USA). The Taxpayer claimed that his center of vital interest was in USA and hence US sourced incomes are not taxable in India under the treaty. On the other hand, the Tax Authority held that the Taxpayer has closer personal and economic interest in India. Accordingly, Tax Authority asserted that US sourced income was taxable in India.
Based on the detailed factual study, the Mumbai Tribunal noted that in terms of personal interest, 1) The Taxpayer and his entire family are US citizens holding US passport and Overseas Citizens of India (OCIs). 2) The Taxpayer’s immediate family stays in India except for one daughter residing in US for study purposes. 3) His extended family – father, mother and siblings are US nationals residing at US. In terms of economic interest, the Taxpayer had passive investments in both US and India. But he was actively engaged in film production activity in India through an Indian private company owned jointly with his wife with substantial investment through interest free loans provided by him.
After a study of personal and economic ties, the Tribunal held that the determination of center of vital interest is a highly factual analysis and is a vexed issue. The Tribunal ruled the following tests/ guidelines for determining the center of vital interest:
- For determining personal relationship, only those facts with some impact needs to be considered for analysis such as connect with the nucleus family is more important than extended family.
- For determination of economic relationship, more weightage should be given to active involvement in the commercial activities then passive investments such as mutual funds and bank accounts. Place of business, place of administration of property and place of earning wages (remuneration) (profit) is of importance.
- Investments in securities, mutual funds, banks move not necessarily with residence of the assessee but on the basis of rate of return in particular state.
- Ambiguous factors need to be avoided.
In the light of the above guiding principles and after comprehensive appraisal of facts of the Taxpayer, the Tribunal concluded that the Taxpayer does not have any active involvement in USA for earning wages remuneration and profit and hence, tilt is in more favor of his personal and economic ties being closer to India. Accordingly, it was held that the Taxpayer is a treaty resident of India. Consequently, all US sourced income are subject to tax in India. Since no tax has been paid in USA as evidenced by US tax returns filed by the Taxpayer, no foreign tax credit can be availed against tax payable in India.