Article 4, 6 and 24 of India-Sri Lanka DTAA; section 90(3) of the Act – (i) on applying tiebreaker test, Taxpayer was resident in India as habitual abode and center of vital interests was in India (ii) Notification issued under section 90(3) being clarificatory in nature, has retrospective applicability (iii) having regard to Notification under section 90(3), capital gain on sale of immovable property in Sri Lanka is chargeable to tax in India.
Facts
The Taxpayer was a Sri Lankan national married to an Indian national. Post-marriage she was living in India. During the relevant year, she was resident of India in terms of the Act and, based on her fiscal domicile, was also a resident of Sri Lanka in terms of Sri Lankan domestic law. The Taxpayer owned immovable property in Sri Lanka, which she had sold during the year. She invested the sale proceeds in mutual funds and a property in India.
According to the Taxpayer, based on tie-breaker rule in India-Sri Lanka DTAA , she was resident of Sri Lanka. Based on certain decisions of Supreme Court, it was argued that the capital gains on sale of immovable property situated in Sri Lanka were to be taxed only in Sri Lanka.
According to the AO, the Taxpayer was resident in India and hence her global income was taxable in India. Since the Taxpayer had not paid any tax in Sri Lanka, no relief could be granted and capital gain arising in Sri Lanka was fully taxable in India. The AO relied on Notification No 91 of 2008 dated 28-08-2008 clarifying that where a DTAA uses the expression “may be taxed in the other country”, the income should be included in total income chargeable to tax in India and relief should be granted in accordance with the method for elimination or avoidance of double taxation provided in DTAA .
The issue before the Tribunal was whether the gains derived from sale of immovable property was taxable in India.
Held
(i) As regards applying tie-breaker rule for resolving dual residency
It is undisputed that the Taxpayer was a resident in India as per the Act, which was further confirmed by the Taxpayer who declared her status as being “resident in India” in the return of income.
Under the tie-breaker rule of India-Sri Lanka DTAA , the Taxpayer qualified as resident of India since:
• Post-marriage Taxpayer had a permanent home (home of her husband) available to her in India. The availability of a permanent home has nothing to do with ownership of a home in the country of residence, but refers to a place of abode or dwelling in the country of residence and an abode available to her at all times continuously and not occasionally for a short duration.
• The word “habitual abode” requires actual living habitually, consistently and regularly in a country. Mere ownership of an immovable property or living of parents of a married woman in Sri Lanka does not make Sri Lanka her habitual abode, unless it is demonstrated with cogent evidences that the Taxpayer was living both in India and in Sri Lanka permanently, regularly and consistently.
• Post-marriage with an Indian national, the Taxpayer’s economic and personal relations have close proximity to India. She has retained her centre of vital interest in India after her marriage by moving to India to stay with the Indian national permanently.
• The Taxpayer held lifelong, valid multiple visa issued by GoI to enable her to stay in India indefinitely with her husband. This also reflected her intention to stay or settle permanently in India.
• By utilizing the sale proceeds of Sri Lankan property for buying assets in India, the Taxpayer clearly reflected the strategic shift of vital economic interest to India from Sri Lanka.
• Accordingly, the Taxpayer was a treaty resident of India
(ii) As regards connotation of “may be taxed”
Under section 90(3) of the Act, GoI can assign meaning to any undefined term in the Act or DTAA provided the assigned meaning is not inconsistent with their provisions, or unless the context otherwise requires. Accordingly, GoI issued the Notification assigning meaning to the expression “may be taxed”.
Since the meaning assigned is with intent and objective as understood during the negotiations of DTAA , it should be read from the date when India– Sri Lanka DTAA came into force.
Plain language used in the Notification shows that it is merely procedural in nature and no additional liability is sought to be fastened on the Taxpayer. Hence, its retrospective applicability cannot be questioned.
(iii) As regards taxability of capital gains under DTAA
Right to tax capital gains from the sale of the immovable property situated in Sri Lanka is allocated to Sri Lanka under the DTAA . The fact that the tax liability on such gains is nil or zero does not impact the right of taxation allocated in terms of the DTAA .
However, having regard to the Notification, such capital gain should be included in the income of the Taxpayer chargeable to tax in India under the provisions of the Act. Double taxation relief may be granted as per the provisions of the DTAA which in the present case is Nil as no taxes were paid in Sri Lanka.
