Residency Under Act And DTAA


The concept of residence assumes importance under the Income-tax Act (‘the Act’) as well as Double Taxation Avoidance Agreement (‘DTAA’). Under the Act, the scope of income chargeable to tax u/s 5 depends upon the residential status.

  1. Residence under the Act

The scope of total income u/s 5 depends upon the residential status. In order to decide, the chargeability of the income under the Act, the residential status needs to be determined first.

Scope of total income

Particulars ROR R & NOR NR
1.         Income received or deemed to be received in India Taxable Section 5(1)(a) Taxable Section 5(1)(a) Taxable Section 5(2)(a)
2.         Income accruing or arising or deemed to accrue or arise in India Taxable Section 5(1)(b) Taxable Section 5(1)(b) Taxable Section 5(2)(b)
3.         Income accruing or arising outside India from—      
(a)       Business controlled in India or Profession set up in India Taxable Section 5(1)(c) Taxable Section 5(1)(c) Not taxable
(b)       Any other source Taxable Section 5(1)(c) Not taxable Proviso. to Section 5(1) Not taxable
CONDITIONS RESIDENT & ORDINARY RESIDENT (ROR) RESIDENT BUT NOT ORDINARY RESIDENT (RNOR) NON-RESIDENT(NR)
Basic Conditions  Yes Yes  No 
Additional Conditions  YesNo                       No 

The detailed discussion on the various issues surrounding the residence under the Act and the concept of POEM would be dealt in the subsequent articles.

  • Residence under DTAA

2.1 The concept of residence assumes importance under the DTAA for the following reasons:

  1. To determine the applicability of the treaty

Article 1 provides that Convention shall apply to persons who are residents of one or both of the Contracting States. Therefore, in order to be eligible to claim treaty benefit 2 conditions needs to be fulfilled:

i) One should be qualified as person as per Article 3 and

ii) The person should be liable to tax by virtue of it being resident of the Contracting State as per Article 4

2.To determine in which jurisdiction the residency lies in case of dual residency/ prevent double taxation arising out of dual residenc

Elucidating through an example say, an individual is a green card holder of US and thus, by virtue of that becomes US Resident[1] and he comes down to India for some professional work for more than 182 days. Therefore, he becomes resident in India as well. Therefore, US as well as India would tax that individual on the global income. To resolve this deadlock, Article 4(2) provides tie-breaker rules to determine which country can be considered as ultimate resident country.

The text of OECD/UN Model Convention is covered as under:

2.2 Article 4(1)

OECD Model Convention UN Model Convention
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, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof as well as a recognised pension fund of that State. This term, however, does not include any person who  is liable to tax in that State in respect only of income from sources in that State or capital situated therein. 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, place of incorporation, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.

2.3 The term resident under DTAA is defined as:

  • person
  • who is liable to tax
  • by reason of his domicile, residence, place of management or any other criterion of a similar nature
  • includes that State and any political subdivision or local authority thereof as well as a recognised pension fund of that State.
  • Does not include any person who  is liable to tax in that State in respect only of income from sources in that State or capital situated therein.

2.4 The term person is defined under Article  3 of DTAA to include an individual, an estate, a trust, a partnership, a company, any other body of persons, or other taxable entity.

2.5 If we notice, while defining the term ‘resident’ under Article 4, the term ‘residence’ is used.

“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, place of management…”

So the first term ‘resident of contracting state’ is meant for the purpose of DTAA i.e. who qualifies as resident as per DTAA. The second term ‘residence’ means resident as per domestic tax law of the Contracting State. Therefore, DTAA provides that resident as per DTAA would mean a person who is liable to tax as a resident under the domestic law of any or both of the Contracting States. Therefore, the residency is to be determined by the domestic tax law which could be based on number of days of stay or by the citizenship, place of management, place of incorporation or any other similar criteria.

2.6 Liable to tax

Generally, under the domestic tax law, global income of the residents is liable to taxation i.e. to say that ‘full tax liability’ is imposed on the residents based on the taxpayers’ personal attachment to the state of Residence. Paragraph 1 refers to persons ‘liable to tax’ in a contracting state by reason of their global income being taxable since they are resident of that state. [2]

However, there are certain issues which needs to be addressed as to when do we say that person is ‘liable to tax’. Does it mean he should be paying taxes in the country?

a) What if the person is taxable, but his income is exempt?/ What if the person is taxable, but due to losses, he is not paying taxes?

b) What if the entity is exempt entity in that country?

c) What if the profits of the entity are taxable in the hands of the partners/beneficiaries?

These issues have been a matter of debate in the Indian Courts and Authority for Advance Ruling. These issues would be dealt in the ensuing article.

a) What if the person is taxable, but his income is exempt?/ What if the person is taxable, but due to losses, he is not paying taxes?

Consider two illustrations: (i) An Indian resident (present in India for more than 182 days) has income below Rs. 2,00,000. (ii) Another Indian resident as per ITA has income of Rs. 5,00,000. However, entire income is from agricultural activities and hence exempt under section 10 of the ITA. Both are Residents under the ITA. However, under the DTA, will they be treated as Residents of India?  They are not liable to pay any tax in India. Assume that they have some foreign income, will they get the benefit of DTA between India & the COS?

Both these persons are liable to tax in India- if they had taxable income. The fact that – they do not have taxable income results into their ‘Nil’ liability to tax. There are two pillars of Income-tax: “Assessee” and “Income” and when both factors are covered within the ITA, there will be a tax liability. Therefore, if such a person has a foreign income, he should get the DTA benefit. The term ‘liable to tax’ is different from term ‘subject to tax’ and does not mean actual payment of tax. Therefore, if the income is below taxable limits, or if it is exempt from tax, it does not mean that the person is not resident of India. He is liable to tax if he has a taxable income.

b) What if the entity is exempt entity in that country?

In Dubai, the Government collects Income tax only from foreign banks & oil companies. The Income-tax decree is not applied to all other persons. Hence other residents of Dubai are not liable to tax in Dubai. However, they hold valid tax residency certificate of Dubai. Therefore, in that case, can it be said, that they are not residents as per DTAA and hence, not entitled to treaty relief.

There were many judgments for and against the assessee.

AAR in Cyril Pereira’s[3] elaborated on the issue of “liable to tax” in the matter of India-UAE DTA. The Authority held that there was no Income-tax Act in Dubai applicable to individuals. Only certain kinds of companies were paying taxes. Therefore as there was no double tax, there was no question of application of DTA. This principle has been followed in Abdul RazakMeman’s Advance Ruling[4] by holding that Article 4(1) postulates existence of the tax liability in praesenti by reason of domicile etc. on the date of making the claim. However, Mumbai ITAT in the case of Green Emirate Shipping and Travels[5] held that the India – UAE DTA will apply by concluding that though Dubai Government was not imposing tax on its residents but it could do so in future. ITAT held that term ‘liable to tax’ could include potential liability to tax and held that the assessee was entitled to DTA relief.

Finally, to avoid all controversies India signed a protocol with UAE and provided for a different definition.  Now, if an individual is physically present in the UAE for more than 182 days, he will be considered to be a resident of UAE irrespective of whether he is liable to any tax in the UAE or not.  It also accepts the broad proposition that taxability in one of the Contracting States is not a sine qua non to avail treaty benefits in the other contracting state. [6]

Further, SC in AzadiBachaoAndolan’s case[7], held that if the Mauritian authority has issued a Tax Residency Certificate, the person is a resident of Mauritius, though the person may not be taxable in Mauritius.  

As per Sec.90 a tax payer can claim a treaty benefit only if he provides a Tax Residency Certificate (TRC) of that country and Form 10F.

c) What if the profits of the entity are taxable in the hands of the partners/beneficiaries?

In India, the partnership firm are taxable on the profits and the partners are exempt. However, under laws of many countries, partnership firms are treated as fiscally transparent entity i.e. the profits of the firm are taxable in the hands of the partner.

Therefore, in that particular case, can it be said that entity is not liable to tax. If the treaty benefits are denied to the entity then the situation would arise is that tax is deducted on payments made to partnership firm (incorporated in UK) at higher rate than DTAA and in the resident country, since, the profits are taxable in the hands of the partner, tax credit of taxes paid in India would be denied since the tax was not as per DTAA and taxes were deducted in the name of the firm. Therefore, it result in unintended consequences.

Mumbai ITAT in Linklaters LLP[8] case and recently Calcutta HC in P&O Nedloyld & Ors. allowed the treaty relied under India-UK DTAA to fiscally transparent firm. Mumbai ITAT in Linklaters LLP held that partnership firm is eligible to claim treaty benefits in source country if : i) its worldwide income is subjected to tax in the resident country, whether in the hands of the partnership firm (though the taxable income is determined on the personal characteristics of the partners) or directly in the hands of the partners, ii) Resident state has the right to tax the entire income of partnership firm irrespective of whether such right is exercised.

Further, the technical explanation with reference to the India-USA DTAA states that to the extent the partners of the US partnership are subject to tax in USA as US residents, the income received by such US partnership will be eligible for India-USA DTAA.

Further, issues on the fiscally transparent entity and residency would be covered in the ensuing articles.


[1] In US, residency is determined by citizenship and green card holder is considered as citizen of US.

[2] OECD Model Commentary 2017

[3] 239 ITR 650

[4]276 ITR 306

[5] 286 ITR 60

[6] Meera Bhatia v ITO (2010) 38 SOT 95 (Mum)

[7] 263 ITR 706

[8] 2010 132 TTJ 20 (Mum)

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