RELAXATION OF RESIDENCY RULES FOR NRIs & FOREIGN VISITORS

1. Background

Section 6 of the Income Tax Act, 1961 (‘the Act’) provides for ascertaining an individual’s residential status based on their stay in India during a financial year. Once a person is classified as a resident, the person’s global income becomes liable to tax in India.

On account of the ongoing COVID-19 the pandemic situation, several individuals including NRIs or Foreign nationals who had traveled to India for different reasons have been compelled to stay in India on account of the lockdown announced by various countries including India.

In this regard, there were several apprehensions that individuals who are forced to stay in India may exceed the specified days criteria which may lead to change in their non-residential status in India to that of a resident Indian and thereby could trigger taxability of his Global income in India.

2. CBDT Circular

To address the concern, the CBDT has issued Circular No 11 2020 dated 8 May 2020 which provides for excluding a specified period of stay for ascertaining residential status for the FY 2019-20. Have summarized the specified period of stay for ready reference:

1.      Individuals who came to India before 22 March 2020 and were unable to leave India on or before 31 March - Period of stay in India from 22 March to 31 March will not be taken into account

2.     Individuals who have been quarantined in India on or after 1 March and departed on an evacuation flight on or before 31 March or have been unable to leave India on or before 31 March - Period of stay from the beginning of quarantine to the date of departure or 31 March, as the case may be

3.     Individuals who have departed on an evacuation the flight on or before 31 March - Period of stay in India from 22 March till the date of departure

The aforesaid move is a welcome move and the same is in line with the guidance provided by the OECD. However, it is pertinent to note that the aforesaid relaxation would be applicable only for Individuals who have been forced to stay in India due to this extreme situation and not otherwise and hence, it would be advisable to document their position to avail of the relaxation and submit it at the time of scrutiny.

3. Other issues and Possible defenses

Further, important to note that the aforesaid relaxation is only for Individuals and not for any other class of persons. CBDT should also consider providing guidance for the following cases in order to avoid triggering Residency in India:

• A Company's residential status depends on their Place of Effective Management (POEM) ie a Place from where its key managerial personnel resides or takes keys decisions. In a situation, CEO of a Foreign company has come on a visit and been living in India due to forced lockdown condition and has been taking all its important decisions from India, Foreign company may trigger residency in India and its Global Income may be taxable and even recourse to the Tax Treaty also may not be available in certain situations.

• Firm or LLP is said to be an Indian resident in every case except where during that year the control and management is situated wholly outside India. Accordingly, even a single decision taken in India could trigger residency of these Firms or LLPs in India which could attract severe consequences of tax liability in India.

While the circular is only with respect to Individual’s residence status, one can draw a parallel analogy and also apply this beneficial treatment to POEM of a Company, Control and Management of Firm/ LLP and PE.

Further, one may take defense relying on the decision of the Delhi High Court in the case of CIT v Suresh Nanda (2015) 375 ITR 172 where the court relied on the principle of equity and observed that the taxpayer has gained residency status in India due to the unauthorized impounding of his passport which had led to him being stranded in India for over 182 days in a financial year. The High Court had reversed the determination of residency made by the tax authorities because the individual’s presence in India was not by his own choice or volition. Further, the case has attended finality as the special leave petition against it was dismissed by the apex court. Given the same, one could take the defense relying on the said case in case their residency has been triggered in India.

4. Conclusion

Individuals and Corporates should be mindful of maintaining a proper record of the facts and circumstances of the relevant presence, particularly in the case of involuntary stay in the country, or outside the country. This would be useful for production to the tax department if evidence that such presence resulted from COVID-19 related travel restrictions are requested.  Do reach out to us in case you require any clarification or assistance in this regard.  You can reach out to us on 7600008550 or taxvisory.blogspot@gmail.com