The global economy has opened up several avenues for the Indian talent which extends beyond our borders. Moreover, our economy relies on international connections of several individuals and enterprises that are spread across countries. These connections lead to an influx of foreign individuals in our country and an outflux of Indian nationals to other countries. This has resulted in countries framing rules to tax individuals whether they be Indian or Foreign nationals.
The principle of residency as enshrined under Section 6 of the Income Tax Act 1961 is the cornerstone of establishing the taxability of individuals in India. Owing to the transient nature of some employment opportunities and businesses, the legislation also includes a lenient test of residency. Section 6(1) of the Act read with the relevant explanation allows individuals being Indian citizens leaving the country to declare their residency considering 182 days instead of 60 days for the relevant year under sub-clause (c) of the above-mentioned section. The only criterion to claim this benefit is that the person being an Indian citizen should be leaving as a member of the crew for an Indian ship under the Merchant Shipping Act 1958 or they are leaving for employment outside India.
What is to be considered as Employment outside India?
The question of whether self-employment like business or profession was to be included within the ambit of the phrase ‘Employment outside India’ was examined in the case of CIT v. O. Abdul Razak (337 ITR 350). The Kerala High Court gave a wide interpretation and gave a positive conclusion to the above question. The reasoning given was that the word ‘employment’ used could not be assigned a technical meaning but it shall not include going outside India for tourism, medical treatment, studies and other similar purposes.
But in a recent case of ACIT v Nishant Kanodia (158 taxmann.com 262), the Assessing Officer used the provision in question to take adverse action against the tax payer who declared his residency to be non-resident. The tax payer had gone to Mauritius to work as an employee for Firstland Holdings Ltd. and was present in India for only 176 days, therefore he did not breach the condition of 182 days. The AO did not agree with this contention and held that the tax payer had left India on a business visa as an “investor”. The tax payer under the bona-fide belief of being a non-resident for the relevant year did not offer his global income for taxation. The Commissioner Appeals concurred with the findings of the tax payer.
The Revenue then approached the ITAT Mumbai bench for relief and the Appellate Tribunal held that the tax payer would be a non-resident by placing reliance on the judgment of CIT v. O. Abdul Razak and other judgments rendered by the co-ordinate bench of the Tribunal in:
(i) K. Sambasiva Rao v. ITO [2014] 42 taxmann.com 115 (Hyd - Trib.);
(ii) Asstt. CIT v. Jyotinder Singh Randhawa [2014] 46 taxmann.com 10 (Delhi - Trib.);
(iii) Asstt. CIT v. Col. Joginder Singh [2014] 45 taxmann.com 567 (Delhi - Trib.)
The Appellate Tribunal agreed with the view of Kerala High Court that given the fact that no technical meaning is assigned to the term “Employment,” the tax payer does not breach the criteria for claiming the benefit. Since self-employment like business or profession is to be included in the meaning of the term “employment” as used in the section, the real test in the given case was for the number of days which in any case would not breach the criteria of 182 days. Hence, the tax payer was eligible to claim the status of Non-Resident.
While the jurisprudence surrounding this carve-out of determining residency under section 6 has been well-defined by judicial interpretation, the Mumbai ITAT has reinforced the interpretation with this recent judgment. The clarity on this concept by this judgment will enable more Indians to undertake foreign activities on a clear footing concerning their tax liabilities back home and abroad.