Salary Earned Abroad Not Taxable in India Even if Received in India !

For quite long time , the tax department was confused about the taxation of salary of non-resident Indians who went abroad either to join an employment or on deputation by the Indian company outside India. The basic reason for jumping to joy by an income tax officer on the “bright” prospect of taxing the salary earned by a non-resident Intaxworrytaxworrydian are following :

1. Yea , you are non-resident during the year, but your salary was received in India
2. Yea, yo were on deputation out side India and NRI , but your company paid you salary in India and deducted tax
3. Yea, you are NRI and carrying employment outside India, but the foreign company pays directly to Indian bank accounts.

If you ask reason for confidence , one common answer is ” any income received in India ” is taxable in India for non-resident also as per section 5(2) of the Income Tax Act. Fortunately, the courts and tribunals were not impressed with such half heartedly quick fix way of assessing salary earned outside India by an NRI , but received in India. So, time an again they have clarified that the salary earned outside India is not taxable in India under Income Tax Act even if the same is received in India.

Most Fundmental to Salary Taxation

An income is taxable under Income Tax Act if it falls under the definition of “Total Income”  given in section 5 and no expemtion is available elsewhere. If a person is non-resident , total income defintion given u/s 5(2) applies in his case . Let us see what the defnition is

(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 ; or

(b)  accrues or arises or is deemed to accrue or arise to him in India during such year.

So, salary as income is required to be included in total income of a non-resident , if

• Salary as income is received or deemed to be received in India
• Salary income arise or accrues or deemed to accrue or arise in India

If the aforesaid definition is literally interpretated , it would seem that if the salary is paid or credied in an account in India , it satisfies the condition of ” being received in India” , therefore salary of such non-resident is taxable under Income Tax Act. That is what the income tax department has done till today and tried to tax such salaries of non-resident Indians .

What Decides Salary Taxation ?

 Following are the most important points that decides whether the salary income is taxable

1.  Section 5 that defines Total Income is subject to the other prAny non resident Indian who was on deputation or worked outside India will get exemption in tax on salaryovisions of the Act and cannot tax an amount which is otherwise outside the ambit of taxation.
2. As per section 15, salary is not taxable on receipt basis except in case of advance salary or arrears salary. Regular salary under section 15(1)(a) is taxable on accrual basis.
3. Salary is considered to be accrued in the State where the employee exercises the employment

Extra : Application of DTAA

While the income from salary for employment outside India is not taxable under Income Tax Act , there are an extra layer of restriction on tax in India on account DTAA with many countries . For the article purpose , the DTAA of USA is considered . Artcile 16 of DTA between India and USA decides the rule of taxation of salary and wages . The said article is as under :

ARTICLE 16

DEPENDENT PERSONAL SERVICES

1. Subject to the provisions of Articles 17 (Directors’ Fees), 18 (Income Earned by Entertainers and Athletes), 19 (Remuneration and Pensions in respect of Government Service), 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (Payments received by Students and Apprentices) and 22 (Payments received by Professors, Teachers and Research Scholars), 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.

2. Notwithstanding the provisions of paragraph 1, 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 relevant taxable year ;
(b)		the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State ; and
(c)		the remuneration is not borne by a permanent establishment or a fixed base or a trade or business which the employer has in the other State.

3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operating in international traffic by an enterprise of a Contracting State may be taxed in that State.

Please note that in most of DTAA , the tax residency is defined to say that a person shall be considered tax resident of a country if he is physically present in that country for more than 182 days.

To simplify the aforesaid Artcile 16 , in context of an employee who stayed in USA for 183 days, then he/she becomes tax resident of USA as per Internal Revenue Code  and non-resident of India as per Income Tax Act . So, as per Article 16(1), only USA can tax income from employment as the employment is excercised in USA .

UK (Artcile 16), Germany (Article 15) , Japan (Article 15) and other countries have almost same wording for taxation of salary or wages

Recent Case Laws on Taxation of Salary of NRI

A number of decisions have come on the issue of taxation of salary . Thease are:

1.Neeraj Badya vs ADIT(International Taxation), Jaipur  [2016] 67 taxmann.com 240 (Jaipur – Trib.)

The facts involved in the case was that the assessee was transferred from Indian company to its American sister concern  to act as a lead software engineer and, accordingly, he left India on 30-5-2007 in connection with his US employment. His salary for relevant period was paid by Indian company in India.The assessee was non-resident and in his return claimed his salary income as exempt from tax in view of article 16(1) of the DTAA between India and USA .

The Assessing Officer did not agree and held that his salary was taxable in India for two reasonm- his salary was paid in India and TDS was also deducted thereon in India. In view of A.O , salary recived by the assessee is  taxable in India irrespective of his residential status, in accordance with section 5 and the claim of exemption on the basis of article 16(1) by the assessee was not correct.
The Commissioner (Appeals) confirmed the order of the Assessing Officer .

Assessee challenged the order of A.O and CIT(A) before tribunal which held that salary is not taxable in India and agreed with the view of assessee that his salary is also not taxable by virtue of Article 16(1) of DTAA. Here is relevant extract :

6. ,,,,,,,,,,,,,,,, The applicability of article 16(1) of Indo-USA DTAA depends on the country where services are rendered which in this case is undisputedly USA. The application of article 16(1) of Indo-USA DTAA cannot be denied to assessee merely because the salary check was paid by an Indian entity and the undisputed fact that no service was rendered by assessee for the impugned period in India. The Hon’ble Supreme Court in the case of Kedar Nath Jute Mfg. Co. Ltd. v. CIT (Central) [1971] 82 ITR 363 has held that actual and legal nature of the transaction will decided the taxability and not mere book entries or assumptions. In view thereof, judgments in the case of Nippon Yusen Kaisha Tokyo, Japan (supra), Khambaty (supra) and Ranjit Kumar Bose (supra), I hold that the nonresident assessee is not liable for tax in India on the impugned amount.
7. In the result, the appeal of the assessee is allowed.

2. Karanataka High Court order in DIT(International) vs Dylan George Smith 

[2011] 11 taxmann.com 348 (Kar.)

The fact was that the assessee ,an Indian, at relevant point of time he was a non-resident. He was employee of a Hong Kong based ship management company . For services rendered in international waters outside country he was paid salary which was received by him on board of ship .As per his instructions, a portion of his salary, in form of ‘allocation’, had been remitted to NRE account of assessee in India . The question before Karanataka High Court was

Whether merely because a portion of assessee’s salary was credited to his account in India, that would not render him liable to tax in India when services were rendered outside India, salary was paid outside India and his employer was a foreign employer

Karnataka High Court held in favour of assessee , holding as under :

3. In the instant case, though the assessee was an Indian, at the relevant point of time he was a non-resident. He was working for a foreign company. For the services rendered in the international waters outside the country he was paid salary. He received the salary on board the ship. A particular amount was allocated to be transferred to his NRE account in India. Merely because a portion of his salary was credited to his account in India, that would not render him liable to tax in India when the services was rendered outside India, salary was paid outside India and his employer was a foreign employer. The provisions of the Act were not attracted to the salary of the assessee. Therefore, the Tribunal was justified in upholding the order passed by the Appellate Tribunal and in setting-aside the order passed by the Assessing Officer. Hence, there was not any merit in the instant appeal. Accordingly, the appeal was to be dismissed.

3. ITAT, Hyderabad decision in N. Sriniwas vs ITO  [2014] 45 taxmann.com 421 (Hyderabad – Trib.)

The facts involved wwere that the assessee, a Software Engineer working for Motorola India . He was non resident during the year under consideration as a non-resident on the ground that he was in USA on job assignment for 306 days, He claimed that his salary income was exempt from tax under Article 16(1) of the (DTAA) between India and the USA.

The Assessing Officer found that the certificate issued by US company merely certified that the amount paid in India was considered for taxation in USA and nowhere mentioned that the said amount was brought to tax by US tax authorities and that the said amount was not taxed by both US and Indian Authorities, i.e. not taxed twice.

The Commissioner (Appeals) confirmed the order passed by Assessing Officer.
On second appeal, Hyderabad Bench of ITAT held in favour of assessee by holding that not only the salary for employment on which tax was paid in USA is not taxable , but even per- diem allowance is not taxable

4.  Delhi High Court in CIT vs Anant Jain  [2012] 21 taxmann.com 19 (Delhi)

The fact involved was that the assessee was an employee of an American-company from 1991 till November, 1999 . He was  a non-resident Indian during those period. He received certain amount as leave encashment from the erstwhile employer of the assessee in USA for services rendered outside India.

The assessee claimed that this amount was not taxable in India under provisions of section 5(1)(c) read with section 9(1)(ii). The Assessing Officer held that said amount was received by the assessee as his profit in lieu of salary which was payable by the employer under the employer-employee relationship and, therefore, was taxable under section 17(3)(ii).

On appeal, the Commissioner (Appeals) held that the receipt of the impugned amount was on account of the past services rendered by the assessee to his previous foreign employer outside India at a time when he was a non-resident and this could not be deemed to have accrued or arisen in India and would not come under the purview of section 9(1)(ii). The Tribunal upheld the order of the Commissioner (Appeals).

On appeal to the High Court :

HELD

It is clear from the factual findings recorded by both the Commissioner (Appeals) and the Tribunal, that the payment in question was received towards retirement benefit/severance/vacation engagement from the erstwhile employer on termination of employment in November, 1999. The erstwhile employer was based in USA and services were rendered to the erstwhile employer in USA. In view of the aforesaid factual position, elucidated and accepted by both, the Commissioner (Appeals) and the Tribunal, the said amount cannot be taxed in India, as the status of the assessee during the year in question was that of ‘not ordinary resident’. The said income did not accrue or arise in India. The Tribunal has rightly held that in terms of section 6 and section 9(1)(ii ), the amount/income had not accrued/deemed to be accrued/paid in India. [Para 8]

5. ITO(International Taxation) vs Sunil Chitaranjan Muncif  [2013] 35 taxmann.com 142 (Ahmedabad – Trib.) , the ITAT upheld the order of CIT(A)

10. After hearing both the parties and perusing the record, we find that there is no dispute about the fact that assessee is a NRI and the salary income received by him in India for employment exercised in U.K. has been offered by him for taxation in U.K in pursuance of Article 16 of DTAA with U.K. On these facts Ld. CIT(A) by following the advance ruling in the case of British Gas India (P.) Ltd. In re [2006] 287 ITR 462/157 Taxman 225 (AAR – New Delhi) has rightly held that the salary received by the assessee was not taxable in India in pursuance of DTAA between India and U.K. therefore the order passed by him is hereby upheld.

6. ITAT Banglore bench in Bholanath Pal vs ITO Ward  [2012] 23 taxmann.com 177 (Bangalore) 

The fact involved was that the assessee was a former employee of one Motorola India [a company incorporated and situated in India]. The assessee joined and worked as Managing Director of Motorola Japan which was incorporated and situated in Japan until April, 2006.

During the previous year 2005-06, the assessee had aggregate stay in India for 83 days including the days of arrival and of departure. The assessee’s visits to India were in connection with business and not for rendering employment services for any Indian entity. However, M India on behalf of M Japan, for administrative convenience, paid salary to the assessee. In the return of income, the assessee declared his status as non-resident and claimed that the entire salary income was not taxable in India.

The Assessing Officer disallowed the claim of the assessee and brought to tax (a ) the salary income for the days the assessee was in India between 1-4-2005 and 31-12-2005, i.e., 45 days, and (b) the entire salary income for the period between 1-1-2006 and 31-3-2006, i.e., 90 days.

On appeal, the Commissioner (Appeals) held that (i) 15 days salary for the period between 1-4-2005 and 31-12-2005, and (ii) the entire salary for the period between 1-1-2006 and 31-3-2006, was taxable in India. He, therefore, partly allowed the appeal of the assessee.

When assessee appealed before tribunal , the appeal of the assessee was allowed on following grounds :

• Admittedly, the assessee is a non-resident of India for the entire previous year 2005-06 and was a tax resident of Japan. The assessee, therefore, entitled to the benefits of the DTAA between India and Japan as a tax resident of Japan (and non-resident of India). [Para 12.1]
• As per Article 15(1) of the DTAA between India and Japan, the tax resident of Japan can be taxed in India only if he is present in India for more than 183 days. The assessee was present in India only for 83 days and, hence, the assessee cannot be taxed in India for any part of salary for services rendered to M Japan.
• Salary is accrued where the employment services are rendered. In the instant case, for the assessee, the normal place where the employment services rendered is in Japan and not in India. His visits to India are in connection with business and not for rendering employment services for any Indian entity. There is no employment agreement for having rendered any services for Indian entity. In the instant case, the salary accrues to the assessee in Japan and the accrued salary is partly delivered by M India in India. Hence, there is no accrual of salary in India. [Para 12.7]
• In terms of section 9(1)(ii ) income chargeable under the head ‘salaries’ under section 15 shall be deemed to accrue or arise in India if it is earned in India, i.e., if the services under the agreement of employment are or were rendered in India. In the instant case, the employment services were entirely rendered outside India. Hence, the salary is not earned for rendering services in India. Therefore, salary for the entire year is not taxable. [Para 12.8]
• Therefore, the salary which was received by the assessee for the services rendered in Japan for the period 1-4-2005 to 31-3-2006 was not liable to tax in India. [Para 12.9]

Conclusion

In following circumstances , salary of person getting salary for employment not taxable

1. He is Non-Resident in India during the period of service outside India.
2. He has received salary from his employer for service outside India
3. Whether DTA is there or not it does not matter. But in most cases of DTA , the articles that cover salary is either 16 or 15 . That is an added restriction for taxation in India