Executive summary
In a globalization scenario
many Indians are deputed by the employers in India. They are paid salaries in
India (They receive salaries in India) and are paid overseas allowances abroad.
Question arises whether the salary paid by the employer in India is taxable in
India, though they are “non resident” in India during the relevant financial
year. Question of taxability of allowances paid by the overseas allowances also
arises. These aspects were clarified by the Authority for Advance Rulings in a
recent decision in the matter of British Gas (P) Ltd. India, 287 ITR, 462.
Taxability of salary
received in India by Non-Residents
British Gas India (P) Ltd.
(287 ITR – 462) (2006)
References :
Sections : Sections 5(2),
6(1), 90, 192, (1) (2)
Articles of India, UK DTAA :
Article 4 and Article 16
Cases :
Al Nisar Publishing in re
(1999) 239 ITR, 879 (AAR)
British Gas India (P) Ltd. in
re (2006) 285, ITR, 218 (AAR)
CIT vs. Cooper Engineering Ltd.
(1968) 68, ITR, 457 (Bom)
-
Facts
Nipun Pradhan (N) and Manish
Gupta (M) are employees of British Gas India (P) Ltd. They were deputed to UK,
N, from January 19, 2004 and M, from July 1,2005. N will be in UK till January
2007, M, will continue to be in UK for some more time.
1.1 Both will continue
to be on the payrolls of the applicant in India and would receive salary in
India from the applicant. The applicant would recover the same from British
Gas UK, by raising a debit note. Both will exercise employment in the UK for
British Gas UK. Both would receive various allowances in the UK by British Gas
UK.
1.2 For A.Y. 2004-05
(Financial Year ended 31-3-2004) N has filed his return in the UK after
including the salary received in India during his stay in India.
During the A.Y. 2006-07, N’s
stay in India did not exceed 60 days. It is contended that N is Non-Resident
for the A.Y. 2006-07 as per section 6 (1) of the Act. Under the UK law he is
Resident but not ordinarily resident.
1.3 With effect from
1-7-2005 M, was deputed to British Gas UK for two years. For the Financial
Year 2005-06 (Assessment Year 2006-07) his total stay in India did not exceed
182 days. Though deputed to U.K. he received salary in India from British Gas
India (P) Ltd. M, has to file his tax return in the U.K. before 31st Jan, 2007
(For Tax Year 2005–06 – From April 6, 2005 to April 5, 2006)
-
Applicant’s contention
It was contended by the
applicant that both N and M had exercised the employment in U.K. and no
services are rendered in India to the applicant
As per U.K. Law M is resident
but not ordinarily resident in the U.K. Both ‘N’ and ‘M’ are non resident
under the Indian Tax Laws vide section 6(1) of the Act. Hence not liable to
tax in India.
-
Contention of the department
3.1 Though both N and
M are non resident in India in terms of section 6 (1) of the Act they would be
liable to tax in India by virtue of the provisions contained in sub-section 2
of section 5 of the Act as they received salary in India. The said section
reads as under :
“5. (1) . .
.
(2) Subject to the
provisions of this Act, the total income of any previous year of a person
who is a non-resident includes all income from whatever source derived
which—
(a) is received or is
deemed to be received in India in such year by or on behalf of such person ;
. . . “
3.2. Moreover the
following express clause was contained in the letter of assignment
“For the period of the
overseas assignment, you will be employed according to the terms and
conditions of employment as specified in your contract of employment and the
international assignments documents, which is subject to periodic review.
While on assignment, your terms and conditions will be governed by the law
of India”.
This would show that N is resident in India during the Financial Year
2005-06. As a result Article 16 (1) of the DTAA with U.K. is not applicable
in this case.
3.3 M was in India for
a period of 88 days during financial year 2005-06 (Assessment year 2006-07).
But prior to that in all the other four previous years, he was present in
India for all the 365 days. And as such he would be regarded as resident in
India in view of Explanation (b) for sub-section 1 of section 6 of the Act.
-
Response from the applicant
4.1 The provision of
section 4 (creating charge on total income) and section 5 (specifying the
scope of total income) are subject to the provisions of section 90 of the Act
under which the provisions of DTAA override the provisions of the Act. This
was so held by the Hon'ble Supreme Court in the cases of Union of India vs.
Azadi Bachao
Andolan (2003) 263 ITR 706
(SC) and CIT P.V.A.L Kulandagan Chettiar (2004) 267 ITR 654 (SC).
4.1.1 The tax could
be deducted at source only when the income is chargeable to tax in India. If
income itself is not chargeable to tax Chapter XVII dealing with the
deduction of tax at source would not apply. Chargeability to tax is a
condition precedent and where the tax itself was not chargeable there was no
question of collection and recovery of tax.
The following cases were
cited in support of the said contention, namely CIT vs. Cooper Engineering
Ltd. (1968) 68, ITR 457 (Bom) and Al Nisar Publishing, in re (1999) 239, ITR,
879 (AAR)
4.1.2 Moreover both
‘N’ and ‘M’ were tax resident of U.K. in view of employment exercised in
U.K. Accordingly Article 16 (1) of India, U.K. DTAA applies according to
which salary derived as resident in the U.K. in respect of employment would
be taxed in the U.K., unless the employment was exercised in India. This
gave U.K. the right to tax the salaries of N and M received in India.
-
Analysis of the submissions
by AAR
5.1 Points at issue
-
Whether in the facts and
circumstances of the case and in law, salary income received in India by Mr.
Manish Gupta from British Gas India Private Limited for rendering services
outside India is taxable in India?
-
Whether in the facts and
circumstances of the case and in law, British Gas India Private Limited is
required to withhold taxes on salary paid in India to Mr. Nipun Pradhan and
Mr. Manish Gupta for rendering services outside India?
5.2 The applicant had
submitted that as per explanation (a) to section 6 (1), in the case of a
citizen of India who left India in the previous year for the purpose of
employment outside India the words “One hundred and eighty two days” would
substitute the words “sixty” days in sub-clause (c) of section 6 (1). As M has
spent only 88 days in India in the financial year 2005-06, which is less than
182 days, he would be non resident in India for the above period.
AAR had accepted the above
contention and had held that M was non resident vide order dated 31-7-2006 in
British India Gas (P) Ltd. reported in 285, ITR, 218 (AAR).
5.3 No dispute exists
as regards payment made by the U.K. company in U.K. to N and M towards various
allowances. Question is as regards salaries received in India and the relief
available under the DTAA.
5.4 Though the salary
received in India is taxable in India in terms of section 5 (2) of the Act,
there is relief under Article 4 of the DTAA between India and U.K. which reads
as under:
“For the purposes of this
Convention, the term ‘resident of a Contracting State’ means any person who,
under the law of that State, is liable to taxation therein by reason of his
domicile, residence, place of management or any other criterion of a similar
nature.”
5.4.1 By virtue of
this article because of their residence in U.K. both N and M are liable to
tax in the U.K., they are residents of U.K. for the purpose of taxation.
They have exercised their employment in the U.K. Hence the provisions of
clause (1) of Article 16 would be attracted which reads as under:
“Subject to the provision
of articles 17 (Directors’ fees), 18 (Artistes and athletes), 19 (Government
remuneration and pensions), 20 (Pensions and annuities), 21 (Students and
trainees) and 22 (Teachers) of this Convention, salaries, wages and other
similar 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.”
As a result they will be taxable in the U.K.
5.4.2 As regards
deduction of tax at source in India, the authority looked to the decision in
the case of CIT vs. Cooper Engineering Ltd. (1968) 68 ITR, 457 (Bom) where
in it was held that as interest payable to …………………… was not chargeable under
the Act, there was no obligation upon the assessee to deduct tax at source.
Similarly in the matter of
Al Nisar’s case (199) 239 ITR, 879 (AAR) it was held that the commission
received in India was not taxable in India in the hands of the applicant in
terms of Article 7 of the DTAA read with Article 5 of the DTAA between India
and the UAE. Hence there was no obligation to deduct tax at source from the
remittance of ‘commission’.
5.4.3 In this
connection the provisions of section 192 reads as under;
“192. (1) Any person
responsible for paying any income chargeable under the head ‘Salaries’
shall, at the time of payment, deduct income-tax on the amount payable at
the average rate of income-tax computed on the basis of the rates in force
for the financial year in which the payment is made, on the estimated income
of the assessee under this head for that financial year…
(2) Where, during the
financial year, an assessee is employed simultaneously under more than one
employer, or where he has held successively employment under more than one
employer, he may furnish to the person responsible for making the payment
referred to in sub-section (1) (being one of the said employers as the
assessee may, having regard to the circumstances of his case, choose), such
details of the income under the head ‘Salaries’ due or received by him from
the other employer or employers, the tax deducted at source therefrom and
such other particulars, in such form and verified in such manner as may be
prescribed, and thereupon the person responsible for making the payment
referred to above shall take into account the details so furnished for the
purposes of making the deduction under sub-section (1) . . . “
5.4.4 Both N and M
are permanent employees of the applicant though serving British Gas UK
temporarily and receiving payments from both. Therefore they are covered by
section 192 (2).
-
Decision
In view of the analysis made
by the AAR, the Authority held as under:
-
The salary paid by the
applicant to Mr. Manish Gupta shall not be taxable in India, if the same has
been offered for tax in the U.K. in pursuance of the Double Taxation
Avoidance Agreement.
-
The applicant shall not
deduct tax at source from salary paid to Mr. Nipun Pradhan and Mr. Manish
Gupta in India, provided it is satisfied from the details and particulars
furnished under section 191(2) that taxes have been paid on such payments in
the U.K.
