Treaty residence under the centre of vital interests test favoured India because personal and economic ties were stronger there.

Where an individual has a permanent home in both contracting states, treaty residence is determined by the centre of vital interests, assessed by the closer personal and economic relations. On the facts, the assessee's prolonged stay in India, family residence there, and active involvement in an Indian company outweighed largely passive U.S. rental and investment links. The assessee was therefore treated as a resident of India under the India-USA DTAA, and the U.S.-derived income was taxable in India.

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Issues: Whether the assessee was to be treated as a resident of India or of the United States under the tie-breaker rule in Article 4(2)(a) of the India-USA DTAA, and consequently whether the income arising in the United States was taxable in India.

Analysis: The assessee had a permanent home in both jurisdictions, so the decisive test was the centre of vital interests, i.e. the place where personal and economic relations were closer. The facts showed that the assessee stayed in India for more than 183 days, lived in India with spouse and children, and had active participation in an Indian company in which he and his spouse held substantial interests. The United States links were found to be largely passive, consisting of rental and investment income, without comparable active commercial involvement. On a comprehensive appraisal, the personal and economic connections were held to be closer to India.

Conclusion: The assessee was held to be a resident of India under Article 4(2)(a) of the India-USA DTAA, and the income derived from the United States was held taxable in India under section 5 of the Income-tax Act, 1961.

Ratio Decidendi: Where an individual has a permanent home in both contracting states, residence under the treaty is determined by the state with which personal and economic relations are closer, assessed on the basis of overall active and substantive connections rather than passive investments alone.

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