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The AAR recently reiterated the principles of an earlier ruling in British Gas Ltd [AAR/725/2006] on taxability of salaries received in India by Non-Resident Indians. In [1]Hewlett Packard [AAR 1217 of 2011, Jan 2018], the issue before the Authority was whether salary paid in India to Indian employees deputed abroad for services to a foreign company, was chargeable to tax in India; and whether in the year of their return to India, the Indian employer could grant credit of taxes paid abroad in computing the withholding tax u/s 192 of the Income Tax Act.
The facts of the case briefly are that the employees of the Indian
company were deputed to group companies in USA / Germany and over time they acquired
status as Tax Residents of US / Germany owing to their presence in the
said countries. The employees were paid
salaries in India besides certain allowances that were paid abroad by the foreign
companies. The
employees did their work exclusively in US / Germany and no part of the
employment was exercised in India, their salaries being paid out of India. Finally, by virtue of their
residential status in US/Germany, the entire world-wide income including
salaries paid by the Indian employer was taxed in US / Germany. The main question
before the Authority was whether the payments made by the Indian company was also
taxable in India and withholding tax was to be applied.
The Authority had no difficulty in applying the Dependent Services
Article of relevant DTAAs (Article 16 of the Indo-US and Article 15 of the Indo-Germany
Treaty) to hold that India did not have a right to tax the salary for the following
reasons:
- . Since Sec 5 dealing with scope of Total Income is subject to the other provisions of the Act, Sec 90 dealing with Double Tax Avoidance Agreements has to be taken into account.
- In terms of Article 15/16 of DTAA, where remuneration is received by a resident of a contracting state, such remuneration shall be taxable only in the State where the employment is exercised ( which may also be where the employee is resident).
- The State of Residence – and not the State where employment is exercised -- acquires the right to tax only in limited circumstance including when the employee spends less than 183 days in the State where the employment is exercised.
In the instant case, the Authority found that both employees had
acquired a status of tax resident of US/Germany owing to the duration of their
presence. It was noted that the employment
was also exercised in the said States of residence. The exceptions under limited circumstances were not relevant as the State of residence and State of exercise of employment were identical. Applying Article 15/16, the Authority found
that salary paid in India for exercise of employment in US/Germany, is not
taxable in India. Consequently, the
Authority also ruled that there was no requirement to withhold taxes on income
that was no taxable in India provided it was satisfied that the amounts were taxed in the relevant countries.
On another note, the Authority ruled that in the year of return when the
employees turn out to be residents of both US/Germany (till their departure) as
well as India, Sec 192(2) allows the employer to grant credit of taxes paid in
US/Germany in computing the withholding tax on payments made after return to
India.
Comments and Analysis:
The Key take-aways from this decision from the DTAA perspective are:
1.
The entering into of
an employment-agreement in India does not lead to an inference that the
employment is always exercised in India.
2. Employer-employee
relationship in India does not mean that employment is exercised in India.
3.
Salary accrues where
services are rendered and the source of payment is irrelevant.
4. As per paragraph 1 of
the OECD commentary to Article 15, the place where the employee is physically
present when performing the activities for which the employment income is paid
is relevant for ascertaining where the employment is exercised.
Some references have been made and support drawn from the Bombay High
Court judgement in Avtar Singh Wardhwan [2001] 247 ITR 260 and Karnataka High
Court judgement in DIT (Intl Taxation) v Prahlad Vijendra Rao [ITA 838/2009]as
well as that of the Calcutta High Court in Utanka Roy v DIT (Intl Taxation)
[2016] 390 ITR 109.
The first two judgements deal with situations where payments were
received by the employee outside
India during the course of exercise of employment aboard a ship outside Indian
waters. The only contention was whether
the income should be deemed to accrue or arise in India – for various reasons
as place of execution of employment agreement, provisions of Merchant Shipping
Act etc - which were put down by the
Courts invoking Sec 9(1)(ii) which provided that Salary is earned in India only
when it is rendered in India and in so far as the services were not rendered in
India, the income cannot be deemed to accrue or arise in India. Conspicuously, both cases did not involve
payment of salary in India. Both cases
also did not involve application of DTAA and were decided purely with reference
to domestic law, in particular explanation to Sec 9(1)((ii). The Calcutta High Court judgement was in pursuance
of a writ petition to set aside the revisionary order u/s 264 as it did not
grant appropriate relief in a case where it was admitted the assessee earned
the income from services rendered outside India for 286 days.
Thus, none of the above cases really addressed the moot question if
payments received in India in respect of employment exercised outside India was
taxable in India. In the circumstances, the
Authority’s own ruling in British Gas India Private Limited [ AAR 725 OF 2016] explaining
the overarching nature of Article 15/16 carried the day for the applicant.
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Article 15 – Indo German Treaty
“1.......salaries, wages and such other remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable in the other Contracting State only if the employment is exercised there.
2..... remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:
(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned,
(b)...............
(c)................”
Article 16 - Indo-US Treaty
“......salaries, wages and such other remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that state unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.”
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