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In this article
we will discuss issues relating to taxation of salary income in hands
of a non resident. Attempt is being made to cover important issues which
are specially applicable in case of non residents, and leaving other issues
which are common to residents.
1. Salary
income
We will concentrate on few important
issues viz.
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Accrual of salary income section
9(1)(ii)
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Pension income
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Reimbursement of expenditure and
living allowances
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Exchange compensation allowance
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Applicability of dependent personal
services article, under treaty.
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Exemptions under other provisions
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Accrual of salary income, section
9(1)(ii)
The golden rule is that it accrues
where the service is rendered. The salary income earned in India would
be deemed as accrued in India and taxable in India. Explanation to
section 9(1)(ii) clarifies that salary payable for services rendered
in India is regarded as income earned in India, and specifically provide
that any salary payable for rest period or leave period which is both
proceeded or succeeded by service in India, and forms part of the
service contract of employment will also be regarded as income earned
in India and hence taxable. Also salary paid by the Government to
a citizen of India for services outside India is also deemed to accrue
in India.
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Position prior to amendment
to section 9(1)(ii), w.e.f. 1-4-1979
The term earned in India is very relevant to determine
whether salary accrues in India.
Apex Court in E. D. Sassoon
and Co. Ltd. vs. CIT [1954] 26 ITR 27, examined the meaning
of the term "earned". It has two meanings. One meaning is the
narrower meaning in the sense of rendering of services, etc.,
and another wider meaning in the sense of equating it with "accrued"
and treating only that income as earned by the assessee by which
he created a debt in his favour. Hence unless there is a debt
in favour of the assessee by reason of his rendering services,
it cannot be said to be "income earned" by the assessee. The absence
of the words "service rendered in India" in section 9(1)(ii) was
held to indicate that the Legislature wanted to give a wider meaning
to the word "earned".
Supreme Court in case of Goslino
Mario (241 ITR 312} upheld the view expressed in E.D. Sassoon’s
case. In CIT vs. Ahmedbhai Umarbhai and Co. [1950] 18 ITR 472,
the word "earning" was equated by the Supreme Court with "accrual"
or "arising".
The Gujarat High Court decision
in CIT vs. S. G. Pgnatale [1980] 124 ITR 391, lead to an
amendment in section with retrospective effect. The Gujarat High
Court in this case held that the word ‘earned’ was used in a wide
sense, meant as income earned only if the assessee has contributed
to its accrual or arising by rendering services and in respect
of which a debt is created in his favour. Unless there is a debt
in favour of the assessee by reason of his rendering services
it cannot be said to be ‘income earned’ in the wide sense. In
order to know whether the liability to pay arose out of India
or in India the wording used in some of the clauses of the agreements
may be of major help.
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Position after 1-4-1979
Explanation to section 9(i)(ii)
was added with retrospective effect from 1-4-1979, which added
the words ‘service rendered in India’. As seen earlier the word
earned in India has two meanings, one is that an employee is physically
on India or right to salary accrues or arise in India.
For better understanding let
us take an example.
Doctor Mehta, resident in UK
comes to India for surgery. If Doctor Mehta is employed by Indian
hospital on secondment basis, whether salary paid to him outside
India is taxable in India, or if he continues to be employed by
London Hospital whether salary paid to him in London is taxable
in India? It seems that after the amendment, physical presence
in India would attract the deeming provision of 9(i)(ii).
Question which needs to be examined
is what is relevant, the physical presence of employee in India
or use of services in India or where the employer is resident
or where the right to salary accrues.
In this light let us analyse
the situation further. If Dr. Mehta, does not come to India, and
provides consultancy for major surgery carried in India vide video
conferencing, whether salary payable to Dr. Mehta would be considered
as ‘salary earned in India’. Applying the physical presence test
salary paid to Dr. Mehta could not be considered as earned in
India. Whether the employer is a U.K. hospital or Indian hospital
will not make difference in situation and provision of section
9(i)(ii) may not be attracted since it does not accrue in India.
Most cases employees who are
deputed to India receive a larger proportion of their salary in
their home country from the foreign company. Expatriates require
this to meet their family expenses and other obligations in their
home country. Accordingly, such salary received by the expatriate
employee outside India would be also taxable in India under the
provisions of the Act, if the same pertains to the services rendered
in India.
However, where the expatriate
employee is not only required to render services in India but
also in other neighboring countries, the question that arises
is how should one determine the proportion of the salary income
which is attributable to the services rendered in India. The salary
income of the expatriate employee which is attributable to services
rendered in India can be determined on the basis of either number
of days spent in India or the value of the services rendered by
the expatriate employee in India.
The expatriate employee would
require to substantiate the basis of determining the salary income
which is attributable to the services rendered by him in India.
Recently Uttaranchal High Court
in case of Sedco Forex International Drilling Co. Ltd. 134
Taxman 109 dealt with section 9(1)(ii). A U.K. resident entered
into contract with foreign company which was rendering services
to Indian company on Bombay High oil rigs. Under the contract
he was required to work on oil rigs in Bombay High as per alternating
time schedule of 35/28 days, i.e., 35 days on-period followed
by 28 days of off-period in the U.K. The contract was composite,
it was not possible to give separate treatment for both periods.
Court held that payment during the off period was also taxable
in India as training abroad during off period was directly connected
to work on rigs in India, it made the assessee mentally and physically
fit.
While we discuss accrual a question
which may arise is whether accrual is affected by who makes the
salary payment. The fact that a resident employer in India pays
the salary and such salary payment is shown as debit in his books,
does not make the salary for services rendered abroad taxable
in India. The taxability will depend on the period of stay abroad.
This view was affirmed by Delhi High Court in Ashok Jain’s case.
It implies that where salary is paid by an Indian employer to
a non-resident for service rendered abroad, such income should
not be treated as Indian income so that even provision relating
to withholding tax should have no application, unless the recipient
happens to be a resident and ordinarily resident.
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Salary paid to person working
on Indian ship
Question arises as to salary paid to a person who is working
on Indian ship outside India in Indian waters whether deemed to
accrue in India. For this purpose provision of section 2(25A)
of the Income-tax Act, 1961 which defines the term India needs
to be considered. Under section 2(25A) the term India does not
cover foreign going Indian ships hence the salary earned by employees
of such a ship may not be considered as salary earned in India.
This view is supported by Bombay High Court in cases of Autar
Singh Wadhawan 247 ITR 260, and Indo Oceanic Shipping Co.
Ltd. 247 ITR 247.
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Leave salary
The leave salary preceded or succeeded by service in India
is specifically included by the amendment. However this does not
lead to a conclusion that in all cases where salary is considered
as accruing in India, leave salary shall also be considered as
accruing in India. In a recent case [N. Beaman vs. ITD 52 ITD
83] decided by Delhi Tribunal, leave salary payable by foreign
company to its technician employees who were eligible to a lay
off for 28 days after 28 days of continuous work on Oil rigs.
The Tribunal arrived at a conclusion considering a) technician
employees were in direct supervision and control of foreign company
and not of Indian company b) salary for lay off period was payable
outside India. c) only salary paid in India was claimed as deduction
and not lay off period salary against the contractual amount received
by foreign company. On this grounds salary paid outside India
during lay off period was held not taxable in India. This position
would still be unaffected even after judgment in Sedco’s case
refer to hereinabove in view of the different facts.
- Pension income
Pension received in India from abroad
by pensioners residing in India, for past services rendered in the
foreign countries, will be income accruing abroad, and will not, therefore,
be liable to tax in India on the basis of accrual. In hands of pensioner
or his relatives the pension income will also not be liable to tax
in India on receipt basis, if it is drawn and received abroad in the
first instance, and thereafter remitted or brought to India.
While the pension earned and received
abroad will not be chargeable to tax in India if the residential status
of the pensioner is either ‘non-resident’ or ‘resident but not ordinary
resident’, it will be so chargeable if the residential status is ‘resident
and ordinarily resident’ – [CBDT Circular No. 4 [F.No.73A/2/69-IT
(A-II)], dated 20-2-1969].
Pension for services rendered outside
India received by a non resident cannot be deemed to accrue or arise
in India. Pension may accrue to a person as per the contractual terms
of employment, say on continuous service period of five years a person
is entitled to pension. If such a person had spent say on an average
one month in India for all five years, the question is whether pension
received after five years would be considered as salary earned in
India.
Technically one may take a view that
pension earned can be related to services rendered in India. However
the pension would not have accrued unless the five years of continuous
service, eleven months of service outside India every year play dominant
role. Pension should be considered as outcome of entire period of
service rather than portion of service and therefore in my view even
proportionate pension cannot be said to accrue or arise in India in
such a case.
Social security contributions made
by foreign employer in home country may not be considered as accruing
in India on the basis of presence of employee in India. Social security
was not considered as part of income at all by Mumbai Tribunal in
case of Galotti Raoul 61 ITD 253. This because the expatriate
does not have any right to the application of this income and hence
it may be regarded as diversion of income by overriding title and
cannot therefore be taxed in India. A similar analogy may also be
applied in case of pension also.
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Reimbursement of expenditure and living
allowances
Taxability of reimbursement of expenditure
and living allowances was also dealt with by the Gujarat High Court
in S. G. Pgnatale’s case 124 ITR 391. The foreign technicians
were paid daily allowance as they were required to stay away from
their homes, Court held that the daily allowance was relatable to
the extra expenditure the assessees were required to undergo expenditure
on food, etc., which was wholly, necessarily and exclusively for the
purpose of duties, and as such the allowance was in the nature of
reimbursement which would exclude the same from the net cast by the
Act.
But rent free accommodation was considered
as perquisite within the meaning of section 17(2)(i) of the Act. Section
10(14) does not cover perquisites within the meaning of section 17(2)
of the Act. Regarding the "living allowance" paid to the foreign technicians,
was considered as reimbursement to the assessee for the money that
he would be required to spend for his stay in India.
In other words, there should be nexus
between the special allowance paid and the performance of the duties
of an office or employment of profit. Payment of daily fees and living
allowance and provision of living accommodation with air conditioner,
refrigerator and electricity and water, and free transport from place
of residence to work site and back daily, whether a perquisite or
eligible for exemption under section 10(14)? We need to analyse the
agreement and verify the performance of the duties of an office or
employment for profit. Unless it is paid for the purpose of performance
of duties it will not be eligible to exemption u/s 10(14).
At this stage, we may also refer
to the judgment of the Andhra Pradesh High Court in Zdziz law Skakuz
vs. CIT [1986] 158 ITR 420, wherein it was held (headnote) : ".
. . that the outstation allowance and hotel charges were merely allowance
granted to the assessee to meet his personal expenses at the place
where the duties of his office were ordinarily performed by him.
However city compensatory allowance
is an allowance granted to meet the personal expenditure necessitated
by the high cost of living in big cities. The allowance is not granted
with reference to the nature of duties but exclusively with reference
to the place of posting. Such an allowance will, therefore, fall within
the Explanation to section 10(14) and is not exempt from tax.
In CIT vs. Arthur Fuchs [1993]
202 ITR 656, the Patna High Court held :
"A plain reading of section 10(14)
of the Income-tax Act, 1961, makes it clear that one of the preconditions
for the claim of exemption is that the allowance in question should
have been specifically granted to meet expenses wholly incurred in
the performance of duties of office and the exemption is only to the
extent such expenses were actually incurred."
The exemption depends on the facts
and circumstances in each case, if it is in nature of reimbursement
of expenditure which is necessary for performance of duties it would
be exempt. What necessary expenditure would depend on nature of duty,
may differ in each case. A provision of facility for staying away
from normal place of work, would normally be exempt.
The nature of duty requires stay
away from normal place, the reimbursement expenditure may be exempted.
If foreign technician employed by a Mumbai company, requires to attend
project work at various sites all over the country, he might be exempted
from tax in respect of living allowance or provision of facilities
provided at various sites.
In Alessandro Constantini’s case
226 ITR 883, pocket allowance paid to employees of foreign
collaborator by its employer a foreign company was examined. Foreign
collaborator deputed its employees to work on Indian project salary
was payable by foreign collaborator outside India. Question arose
whether Pocket allowance was a special allowance grant to meet expenses
wholly, necessarily and exclusively incurred in the performance of
duties. The agreement with employees stipulated that in case the furnished
accommodation for stay in India was provided then the daily allowance
was to be reduced. Court applying decision in case of S.G. Pgnatale’s
case concluded that it was reimbursement of expenses and not by way
of any personal advantage to the assessee.
The Supreme Court in CIT vs. Goslino
Mario (2000) 241 ITR 312 (SC), held that the living allowance
of technicians in employment during their assignment in India, in
the nature of reimbursement of expenses for work outside their normal
place of duty and therefore exempt under section 10(14) of the Income-tax
Act.
An issue arises in case of expatriates
employed by foreign employer and where the local expenses mainly housing,
taxes are being paid by the Indian entity. There is no employer employee
relationship between Indian entity and expatriate employees. In such
a case, the Revenue authorities may take a view that the entire expenditure
by the Indian entity is income from other sources, as held by Supreme
Court in the case of Emile Webber (200 ITR 483). Alternatively,
the Revenue authorities could take a view that the DTAA benefits are
not applicable as the second condition is not fulfilled and the salary
for services rendered in India is fully taxable, since the expenses
on his accommodation are being paid by an Indian entity.
There is a view that after the substitution
of Section 10(14) with effect from 1-4-1989 and the insertion of the
words "as may be prescribed" in clauses (i) and (ii) the effect of
the judgments cited above is reduced substantially. I however believe
that the above judgments are still a good guide for the interpretation
of the terms in clauses (i) and (ii) of section 10(14) and proviso
thereto.
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Exchange compensation allowance
The salary and allowances of the
officers posted abroad are fixed in Indian currency, the exchange
compensation allowance granted to cover the loss in exchange relating
to pay and that relating to foreign allowance should be regarded as
forming part of the pay and the foreign allowance respectively. Such
an allowance will be exempt from tax as is actually expended for the
purpose for which the foreign allowance is given. This allowance is
exempt subject to condition that foreign allowance is specifically
granted to meet expenses wholly and necessarily incurred in the performance
of duties of the office. (Departmental Circular – Circular No. 3 (XXXVII-4)
of 1956, dated the 27th January, 1956).
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Applicability of Treaty Article Dependent
personal services
India has a very vast network of
treaties with various countries. A treaty ensures allocation of income
and tax arising out of it between taxing jurisdiction of countries.
Naturally primary right of salary taxation remains with the country
where the employee is resident. The salary income may also be taxed
in the source country, where the services are rendered. In such a
case the salary income may become taxable in both countries, the resident
country would grant credit for the taxes paid in source country and
double taxation to an extent may be eliminated.
Most of the treaties which India
has signed contain a provision for expatriate employees who may be
exempt in source country, if certain conditions are satisfied. These
conditions are :– 1) the employer is present in the source country
for a period not exceeding 183 days during the relevant tax year 2)
the remuneration is paid by or on behalf of employer who is not resident
in the Source country 3) The remuneration is not borne/ deducted/deductible
by a permanent establishment or a fixed base which the employer has
in Source country.
Let us consider the example of Dr.
Mehta which we have discussed earlier Dr. Mehta, is a person resident
in U.K., therefore eligible to get relief under India U.K. treaty.
If he is present in India for a period not exceeding 183 days in a
fiscal year; i.e., between 1st April and 31st March, and the
remuneration is paid by or on behalf of UK employer and remuneration
is not deductible in computing profits of his UK employer, then salary
which he earns for a period during which he exercises employment in
India shall not be taxable in India.
The treaty provision normally provides
that employment exercised abroad a ship or aircraft in international
traffic shall be taxed in a country in which the person deriving profits
from the operation of ship or aircraft (employee) is a resident. An
employee of British Airways, a person resident in U.K. shall be taxable
only in U.K. and not in India, in respect of remuneration payable
in exercise of employment abroad in international traffic. He not
will be required to fulfil the earlier conditions of 183 days stay
and payment by non-resident etc. applicable to employees of other
enterprises.
Treaty with UK, USA, France, Germany,
Finland and other treaties contain the similar provision. India Belgium
treaty contains one more condition, that the remuneration must be
subjected to tax in resident country to get the exemption. Under Mauritius
treaty, the period of 183 days irrelevant previous year, is to be
considered rather than fiscal year.
Under treaty with Belgium also 183
days in a relevant taxable year is to be considered, which means the
person has to apply the tax year relevant in his home country.
Treaty with Sri Lanka contain provision
which is little different than other treaties. The period of 183 days
within any 12 months period and not within fiscal year or taxable
year is to be applied. This may narrow down the scope of exemption
in certain circumstances. If a Sri Lankan person stays in India for
say 135 days, in first fiscal year 2002-03 and continue staying for
another 135 days in fiscal year 2003-2004, may be eligible for exemption,
normally under other treaties as his stay would not exceed 183 days
in any fiscal year. However under Sri Lankan treaty 183 days has to
be considered in any twelve months which would restrict the scope
of exemption.
Most of the treaties do not define
the term salary or remuneration and the domestic meaning of the term
needs to be applied.
India USA treaty contains special
provision for teachers and student apprentices and entertainer and
athletes. India UK treaty also contains special provisions for artistes
and athletes, students and trainees and teachers. Salary payable to
Government employees is taxed in that country, and exempt in Source
country except where government is exercising any trade or commerce
in other country in such a case normal provision will be applicable.
Under article 16(1) of the Double
Taxation Avoidance Agreement between India and France, the remuneration
received by the employees for the services rendered in France cannot
be subjected to tax in India. Bombay High Court in case of Estienne
Andre held that the State where service is rendered is entitled to
tax the same in view of the treaty provision.
Under the domestic law pension is
taxable under the head ‘Salary’, however under treaties a different
treatment is given for pension and salary income. Under most treaties
the pension may be taxed only in the country where the person is resident.
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Exemptions under other provisions
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Remuneration of officials
of embassies etc. [Sec. 10(6)(ii)]
Remuneration as officials or as member of the staff of
embassy, high commission, legation, commission, consulate or trade
representatives of a foreign state is exempt from tax. For members
of staff to enjoy exemption, it is necessary that they are the
subjects of such foreign state and are not engaged in any business
or profession or employment in India. Remuneration as Trade Commissioner
or other official representative is exempt on reciprocal basis;
i.e., only if their Indian counter-parts enjoy similar benefits
in that country.
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Remuneration of employees
of foreign enterprises [Sec. 10(6)(vi)]
Such remuneration for services rendered during stay in
India is exempt if:–
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the foreign enterprise is
not engaged in any trade or business in India;
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his stay in the aggregate
does not exceed ninety days in that previous year; and
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such remuneration is not
liable to be deducted from the employer’s income chargeable
to tax in India.
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Remuneration
for employment on a foreign ship [Sec. 10(6)(viii)]
Remuneration of a non-resident for services rendered in
connection with his employment on a foreign ship is exempt from
tax if his total stay in India does not exceed ninety days in
the previous year.
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Training
Stipend [Sec. 10(6)(xi)]
Remuneration received by an employee of foreign government
in connection wit h his training in any undertaking owned by the
Government or government owned company or its subsidiary or a
corporation or a government financed registered society, is exempt
from tax.
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Remuneration
under co-operative technical assistance programmes or technical
assistance grant [Secs. 10(8), 10(8A), 10(8B) and 10(9)]
Remuneration of a person assigned to duties in India in
connection with any co-operative technical assistance programmes
and projects in accordance with an agreement between India and
foreign government is exempt if such remuneration is received
directly or indirectly from that foreign government and if the
terms of the agreement between the two governments provide for
such exemption. Any other income of such person which accrues
outside India is also exempt from tax if such income has suffered
tax in the country of accrual.
Remuneration of a consultant
engaged under a technical assistance programmes which is paid
out of funds made available to an international organisation under
a technical assistance grant agreement between such organisation
and the foreign government is exempt from tax if the consultant
is either not a citizen of India or is not ordinarily resident
in India or is a non-resident and the technical assistance is
in accordance with an agreement between the Government of India
and that foreign organisation. It is necessary that the engagement
of such consultant is approved by the prescribed authority. If
such consultant employs any other person in connection with such
technical assistance programmes and pays remuneration to him,
such remuneration is also exempt if the person employed by the
consultant is either not a citizen of India or is not ordinarily
resident in India. The contract of service of such individual
should be also approved by the prescribed authority.
Any other income (apart from
remuneration) of the consultant or the person employed by him
or any income of their family members which accrues to them outside
India is also exempt from tax if such income suffers tax in the
country where it accrues.
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The exemption granted to technician
under section 10(5B) is withdrawn w.e.f. 1-4-2003 and remuneration
for shooting any Cinematographic film under section 10(5A) was
also withdrawn w.e.f. 1-4-1999.
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Leave Travel Concession: Section
10(5) value of any travel concession or assistance received and
actually spent by an employee from his employer (or former employer)
for himself and his family in connection with his proceeding on
leave to any place in India, or to any place in India after retirement
from service; or to any place in India after termination of service.
This exemption has been extended to non residents from A.Y. 1989-90.
Exemption is limited to the amount actually spent.
A non-resident employee or a
non-citizen, if he receives arrears of salary, he will be eligible
for the same treatment as a resident or a citizen-employee. Where
there are arrears received it can be spread over the period to
which the amount relates at the option of the employee under section
89(1) of the Income-tax Act.
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