Don't mix business with tourist visas, affirms tax tribunal ruling

Mumbai: The perils of travelling on a tourist visa for business purposes may not be confined to run-ins with foreign authorities. Sometimes it could even spell trouble with the local taxman.

Indian businessmen who spend months abroad to look after overseas interests and carefully preserve their NRI status, may even find themselves in a spot if the tax authorities question their 'residency' status due to the type of visas approved by countries they travelled to.

Recently, a tribunal has upheld the Income Tax (I-T) department's decision to tax the 'global income' of the bakery chain Hot Breads founder M.Mahadevan who, according to the tax office was a 'resident' for certain years, and not an NRI as claimed by the Chennai-based entrepreneur.

The relaxation on the period of stay given to someone who was abroad for employment or business was denied to Mahadevan as he had travelled on tourist visas. His argument that the visits were purely in connection with his businesses in multiple countries was rejected by the Chennai bench of the I-T Appellate Authority, a quasi-judicial authority.

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Mahadevan to Move Court

When contacted, a family member speaking on behalf of Mahadevan, said, "We are currently reviewing the order of the Hon'ble ITAT in detail. While we are disappointed with the outcome, we believe we have a strong case on merits and are considering all available legal options. We remain committed to full compliance with all applicable laws and regulations and will continue to cooperate with the authorities as required."



The residency status of an individual is determined by the rules on the number of days spent. If someone stays for 182 days or more in India, he is considered as a resident whose global income (along with local earnings) for that year may be taxed in India. Alternatively, if a person spends at least 60 days in a year and a total of 365 days in the previous four years, he too is treated as a tax resident.

However, the second rule extends a partial exemption to those travelling overseas for jobs or self-employment. For them, the minimum period of stay is 182 days instead of 60. This relief was not given to Mahadevan.

The number of days are typically counted on the basis of the timing-stamp on passports. The tax office, however, obtained the information from the Foreigners Regional Registration Office (FRRO)-a practice that was upheld by the Tribunal. Based on the FRRO data, the I-T department claimed that Mahadevan had spent 182 days or more in the assessment years 2013-14, 2014-15, and 2019-20.

Even if the duration of stay were less than 182 days, Mahadevan's overseas travels would not have been considered to treat him as a resident-thanks to his tourist visas and despite his argument that a person would not travel a country frequently for tourism. The tribunal held that every country restricts visas for specific purposes.

"The decision underscores the importance of holding the correct visa category, as an inappropriate visa can jeopardize an individual's residential status and complicate the taxation of the global income in India. Nevertheless, if it can be factually established that the individual left India for the purpose of conducting business and genuine business activities were indeed undertaken abroad (though under an inappropriate visa), then the benefit of extending the 60-day period to 182 days under Explanation 1(a) to Section 6(1) of the I-T Act should be granted. However, it is important to note that such a benefit is available only when the individual 'leaves' India for the purpose of employment or business and not 'visiting' abroad in connection with business," said Ashish Karundia, founder of the CA firm Ashish Karundia.

According to Rajesh Shah, partner of Jayantilal Thakkar & Co, "A resident Indian becomes non-resident only if they go abroad for employment, including self-employment. Simply staying outside India for 182 days does not make anyone a non-resident. The type of visa is equally important. But this is ignored-either due to ignorance or for convenience." The ruing implied that an assessee cannot avoid tax on global earnings merely because he runs businesses abroad.

Countering ITAT's decision to disregard the tax residency certificate issued by the UAE to Mahadevan, Harshal Bhuta, partner at the CA firm PR Bhuta & Co, said "An individual staying in the UAE for over 183 days in a calendar year qualifies as a resident of UAE under the India-UAE DTAA (tax treaty), irrespective of the purpose of stay. In cases of dual residency, the treaty's tie-breaker rules must apply and the treaty-based residency cannot be summarily disregarded."