Facts of the case
The taxpayer, a New Zealand national, was on assignment in India from 1 August 2007 to 6 August 2017. After completion of his assignment in India, he was sent on an assignment to Kazakhstan from 7 August 2017.
He was in India for more than 59 days during the FY 2017–18 and more than 364 days in the immediately preceding four FYs, and accordingly, qualified as a tax resident of India for FY 2017-18 under section 6 of the 1961 Act.
Kazakhstan law defines a “tax year” as the calendar year. From January 2018, the residential status of the taxpayer in Kazakhstan was determined to be a “resident” for the tax/calendar year 2018.
Thus, for the overlapping period of 1 January 2018 to 31 March 2018, he was a resident of both India and Kazakhstan.
The taxpayer argued that as per the tie-breaker rule under Article 4(2) of the India-Kazakhstan Treaty, he was a tax resident of Kazakhstan for the overlapping period, and accordingly, the following income earned outside India during such period was not taxable in India:
- Salary earned for services rendered in Kazakhstan during January–March 2018 (while the taxpayer moved to Kazakhstan in August 2017, the salary income till December 2017 was offered to tax in India)
- Rental income from house property situated in London, UK for the period January–March 2018
- Dividend from investments in the Netherlands received on 26 March 2018
The Indian Revenue, however, rejected the taxpayer’s claim and held that because the taxpayer was a tax resident in India for the entire FY 2017–18 (i.e., until 31 March 2018), his global income (including the aforesaid income) was taxable in India.
During the overlapping period, the taxpayer also earned interest income arising in India, which was offered to tax at the beneficial rate of 10 percent under the India-Kazakhstan Treaty.2 The Revenue, however, taxed the aforesaid interest income at the applicable slab rate of tax for individuals.
Relevant provisions
India-Kazakhstan Treaty
Article 4 of the India-Kazakhstan Treaty prescribes rules for determination of residential status of a person for the purpose of the said treaty. As per paragraph 2 of the article, the tie-breaker rule for determining an individual’s residential status in the case of dual residency is applied in the following order: permanent home, close personal and economic relations (centre of vital interests), habitual abode, and nationality (in the same sequence).
As per Article 15(1) of the India-Kazakhstan Treaty, salary earned by a resident of one contracting state is taxable only in that state, unless the employment is exercised in the other contracting state. If the employment is exercised in the other state, such remuneration may be taxable in the other state.
Article 15(2) provides that notwithstanding the provisions of Article 15(1), income 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:
- the recipient is present in the other state for a period(s) not exceeding in the aggregate 183 days in any 12-month period; and
- the remuneration is paid by, or on behalf of, an employer who is not a resident of the other state; and
- the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other state.
India-UK Treaty
Article 6(1) deals with taxation of income from immovable property and provides that income from immovable property situated in the UK “may be” taxed in the UK.
Tribunal’s decision
The Bangalore Bench of the Tribunal held that applying the tie-breaker rule under the India-Kazakhstan Treaty, the taxpayer was a tax resident of Kazakhstan during the overlapping period and accordingly, the salary earned from employment in Kazakhstan was not taxable in India.
With regard to taxability of rental income (earned from the UK property) and dividend income (earned from investments in the Netherlands) during the overlapping period, the Tribunal concluded that the India-Kazakhstan Treaty was not applicable in relation to these receipts. Considering the provisions of India-UK Treaty, the rental income for the overlapping period was not taxable in India. The taxation rights relating to the dividend income are allocated between India and the Netherlands under the India-Netherlands Treaty – in the absence of relevant facts, the matter was remanded to the Revenue for fresh adjudication.
The Tribunal rejected the taxation of interest income by the Revenue at the normal slab rate of tax applicable to individuals and held that since the taxpayer was a tax resident of Kazakhstan, interest income arising in India during the overlapping period was taxable in India at the beneficial tax rate of 10 percent as per the India-Kazakhstan Treaty.
Key observations of the Tribunal included:
Residential status under the 1961 Act versus tax treaties
The 1961 Act does not recognise split residential status for a part of a FY and the residential status is determined for the entire FY. In cases of dual residency, the tie-breaker rule prescribed under tax treaties can determine residential status to allocate taxing rights between the two contracting states.
While residential status is central to determining taxable income under the 1961 Act, its role under tax treaties is limited to allocating taxing rights. Thus, while the taxpayer may be resident of India for the entire FY, yet for the purposes of beneficial treaty provisions, he may be regarded as a resident of the other contracting state.
Tie-breaker rule
After August 2017, the taxpayer did not maintain a permanent home in India and resided in Kazakhstan. His payroll was also shifted to Kazakhstan, indicating his closer personal and economic ties with Kazakhstan.
Applying the tie-breaker rule under the India-Kazakhstan Treaty, the taxpayer was a tax resident of Kazakhstan during the overlapping period for the purposes of the India-Kazakhstan Treaty.
Taxability of salary
During the overlapping period, as the employment was exercised in Kazakhstan and taxpayer was a tax resident of Kazakhstan, the salary income for such period shall be taxable only in Kazakhstan.
The Tribunal observed that even if the taxpayer is considered to be a tax resident of India, the Revenue has not taken the argument that the salary should be taxed in India in terms of Article 15(2) of the India-Kazakhstan Treaty.
Taxability of rental income
The taxability of rental income, earned from the house property located in the UK, was governed by the India-UK Treaty, and not the India-Kazakhstan Treaty.
Because the taxpayer was not a tax resident of UK, he was treated as a tax resident of India for the purposes of the India-UK Treaty. Accordingly, the rental income pertaining to the overlapping period from the property located in the UK was not taxable in India as per the India-UK Treaty.
Taxability of dividend
In respect of dividend income from shares held in the Netherlands, the applicable tax treaty was India-Netherlands Treaty and not India-Kazakhstan Treaty.
Because the taxpayer was not a tax resident of the Netherlands, he was treated as a tax resident of India for the purposes of the India-Netherlands Treaty. Taxation right related to dividend income is allocated between the two contracting states under the India-Netherlands Treaty.3 As necessary facts were not available on record, this issue was remanded to the Revenue for fresh adjudication. If dividend income is held to be taxable in India, the Revenue is directed to grant credit of tax paid by the taxpayer in the Netherlands.