As the taxpayers and their tax advisors are regularly faced
with this issue and in view of conflicting judicial decisions in the matter,
this simple case study seeks to highlight the issues which arise in such a
situation and how, in an appropriate case, the affairs can be better
planned/managed from the tax perspective.
In this case study, we have not dealt with Articles 4 and 16
of Indo-German DTAA as they were not relevant in light of the facts of the case
study.
1 Facts of the case :
(a) Mr. A, working as a software engineer with an Indian
software development and services company (‘the assignee’), was deputed outside
India for the first time, for the purpose of working on a short-term assignment
with a group company in Germany. He was paid remuneration by the German company
during the period of his deputation with the German company.
(b) The assignee (the querist) left India on 25th March 2009
(F.Y. 2008-09) and returned to India after finishing the assignment on 5th
December, 2009 (F.Y. 2009-10). In between, he visited India for 9 days for
attending a social event in the family from 5th May 2009 to 13th May, 2009.
Thus, he was present in India for 126 days during the financial year 2009-10.
(c) The querist contends that Explanation (a) to S. 6(1)(c)
which extends the period of stay in India from 60 days to 182 days in the case
of a person who leaves India for the purposes of the employment outside India,
is applicable in his case as he left India on 25th March, 2009 for the purposes
of his deputation to Germany. Placing reliance on the decision of the Hon’ble
Authority for Advance Ruling in the case of British Gas India (P.) Ltd., In re
(2006) 285 ITR 218, where it was held that for the purposes of employment
outside India, covers the cases where an assessee is sent outside India on
deputation by an Indian employer, the querist contends that clause (a) of
Explanation to S. 6(1)(c) will be applicable and, therefore, he is to be treated
as a person being non-resident of India.
(d) The querist further contends that clause (b) of
Explanation to S. 6(1)(c) is also applicable in his case as he came on a
visit to India. The fact that he came to India permanently, is not relevant.
Since the querist has come on visits to India for less than 182 days during the
F.Y. 2009-10, as per S. 6(1)(c) read with Explanation (b), his status should be
taken as non-resident.
(e) The querist is of the view that once a citizen of India
or person of Indian origin, who is outside India and who comes on a visit to
India, Explanation (b) to S. 6(1)(c) of the Act gets
attracted and the 60 days’ period referred to in S. 6(1)(c) of the Act
gets extended to 182 days. The fact that the querist came back permanently to
India does not alter this position.
(f) The querist, relying upon favourable advance ruling in
the case of Shri Anurag Chaudhary (2010) 322 ITR 293, contends that he was
non-resident during the F.Y. 2009-10 and, therefore, the salary earned by him on
account of his deputation outside India, would not be taxable in India.
(g) However, his colleagues expressed doubts on his
contentions and also on the correctness of the advance ruling and hence, he has
approached for guidance in the matter.
(h) Mr. A has also raised a hypothetical question that
whether his tax situation would have been different if he could have planned to
be sent abroad on or after 1st day of April, 2009 or had managed to return to
India on completing the assignment on or after 1st day of February, 2010.
2 Provisions of S. 6 :
The residential status is to be determined as per the
provisions of S. 6(1) of the Act. S. 6(1) along with Explanation is reproduced
below for ready reference :
“1 An individual is said to be resident in India in any
previous year, if he :
(a) is in India in that year for a period or periods
amounting in all to one hundred and eighty-two days or more; or
(b) ** ** **
(c) having within the four years preceding that year been
in India for a period or periods amounting in all to three hundred and
sixty-five days or more, is in India for a period or periods amounting in
all to sixty days or more in that year.
Explanation — In the case of an individual, :
(a) being a citizen of India, who leaves India in any
previous year as a member of the crew of an Indian ship as defined in clause
(18) of S. 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the
purposes of employment outside India, the provisions of sub-clause (c) shall
apply in relation to that year as if for the words ‘sixty days’,
occurring therein, the
words ‘one hundred and eighty-two days’ had been substituted;
(b) being a citizen of India, or a person of Indian origin
within the meaning of Explanation to clause (e) of S. 115C, who, being
outside India, comes on a visit to India in any previous year, the
provisions of sub-clause (c) shall apply in relation to that year as if for the
words ‘sixty days’, occurring therein, the words ‘one hundred and eighty-two
days’ had been substituted.” (Emphasis supplied.)
3 Legislative history :
3.1 Explanations (a) and (b) were introduced by the Direct
Tax Laws (Second Amendment) Act, 1989. By the amendment effected by the 1989
Amendment Act, it was provided that the words ’60 days’ occurring in S. 6(1)(c)
will be read as ‘150 days’ in case a citizen of India comes on a visit to India
in the previous year. In the statement of objects and reasons, it was mentioned
as under :
“One of the prime needs of the country is to ensure proper balance of payment and encourage inflow of foreign exchange into the country. With a view to achieve this, it is proposed to amend S. 48 of the Income-tax Act in order to provide for computation of the capital gains in the case of non-resident Indians by calculating the cost price and the sale price in the foreign currency in which the investment was made instead of taking the value in Indian currency as at present. This will make investments in shares by non-resident Indians more attractive and thereby encourage inflow of foreign exchange into the country.
S. 6 of the Act is also being amended with the same objective. It will liberalise the criterion for detetmining the residential status so as to facilitate non-resident Indians to stay in India for a longer period in order to look after their investments without losing their ‘non-resident’ status. Besides, S. 195 of the Act is also proposed to be amended to provide for deduction of tax at source on payment of interest to non-residents by the Government, public sector banks and public financial institutions only at the time of payment instead of at the time of credit of such income.”
3.2 Period of 150 days or more as occurring in Explanation (b) to S. 6(1) was further increased to the period of 182 days by the Finance Act, 1994. In the Memorandum explaining the provisions of the Finance Bill, 1994, in respect of the fact as to why the period of stay is being increased from 150 days to 182 days, it was mentioned as under :
“Extending the period of stay in India in the case of the non-resident Indians without their losing the non-resident status.
Under the provisions of clause (1) of S. 6 of the Income -tax Act, an individual is said to be resident in India in any previous year, if he has been in India during that year, :
i. for a period or periods amounting to one hundred and eighty-two days or more, or
ii. for a period or periods amounting to sixty days or more and has also been in India within the preceding four years for a period or periods amounting to three hundred and sixty-five days or more.
However, the period of sixty days is increased to one hundred and fifty days in the case of a non-resident Indian, i.e., a citizen of India or a person of Indian origin within the meaning of Explanation to clause (e) of S. 115C of the Act, who, being outside India, comes on a visit to India.
Suggestions have been received to the effect that the aforesaid period of one hundred and fifty days should be increased to one hundred and eighty-two days. This is because the non-resident Indians who have made investments in India, find it necessary to visit India frequently and stay here for proper supervision and control of their investments. The Bill, therefore, seeks to amend clause (b) of the Explanation to S. 6(1)(c) of the Income-tax Act, in order to extend the period of stay in India in the case of the aforesaid individuals from one hundred and fifty days to one hundred and eighty-two days, for being treated as resident in India, in the previous year in which they visit India. Thus, such non-resident Indians would not lose their ‘non-resident’ status if their stay in India, during their visits, is up to one hundred and eighty-one days in a previous year.
The proposed amendment will take effect from 1-4-1995 and will, accordingly, apply in relation to the A.Y. 1995-96 and subsequent years, i.e., each previous year commencing on or after 1-4-1994.”
Analysis and discussion on provisions of S. 6(1)(c) r/w Explanation thereto in respect of A.Y. 2010-11 (F.Y. 2009-10) :
Let us now examine the provisions of S. 6(1)(c) and the Explanation thereto :
4.1 Re-applicability of Explanation (b) to S. 6(1)(c) :
It is very clear that S. 6(1)(a) is not applicable and, therefore, the status of the querist is to be determined as per provisions of S. 6(1)(c) of the Act. S. 6(1)(c) along with Explanation has been reproduced above.
There is also no doubt that the querist was in India for a period amounting to 365 days and more during the four years preceding the F.Y. 2009-10.
As the querist had left India on 25th March,2009, i.e., during the previous year 2008-09, in our opinion, the Explanation (a) will not be applicable as he has not left India during the previous year 2009-10. Explanation (a) applies only to an individual in relation to the previous year in which he leaves India. As the querist has left India on 25th March, 2009, i.e., previous year relevant to the A.Y. 2009-10, Explanation (a) cannot be applied while determining his residential status for A.Y. 2010-11.
In our view, the above-referred Explanation (a) is applicable to that previous year in which the assessee, being a citizen of India, leaves India. It is true that the word ‘any previous year’ is mentioned when an assessee, a citizen of India, leaves India; but then, it is clearly mentioned that provisions of sub-clause (c) of S. 6(1) shall apply in relation to ‘that year’. (Emphasis supplied.) The word ‘that year’ refers to the previous year in which the assessee has left India for the purpose of employment outside India. Hence, clause (a) of Explanation to S. 6(1)(c) will not be applicable in the case of the querist because he has left India in the previous year relevant to the A.Y. 2009-10.
4.2 Re-applicability of Explanation (b) toS. 6(1)(c) :
Let us now consider the querist’s main contention that in case a person has made a visit to India in any previous year, then the words ‘60 days’ as appearing in S. 6(1)(c) should be substituted as 182 days, irrespective of the fact that the assessee came to India permanently upon completion of the assignment during the same previous year. Let us again read Explanation (b) which is as under :
“(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of S. 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words ‘sixty days’, occurring therein, the words ‘one hundred and eighty-two days’ had been substituted.”
Considering the legislative history of amendments and the purpose for which the amendments were introduced, one has to consider the purpose of entry of the person in India during the previous year. If all the entries are in India for the purposes of visit, then the period of 60 days as mentioned in S. 6(1)(c) will be substituted to 182 days. However, in our opinion, if in the previous year, the assessee has come to India permanently after completing his assignment outside India, then the Explanation(b) will not be applicable. In other words, if a person returns to India for stay in India after complet-ing his assignment/employment outside India, he cannot be considered to have come to India ‘on a visit’ and therefore, the criterion of 182 days as pre-scribed in explanation (b) to S. 6(1)(c) would not be applicable.
4.3 Thus, in our opinion, the querist is not entitled to the benefit of either Explanation (a) or Explanation (b) to S. 6(1)(c). Since he was in India for a pe-riod amounting to more than 365 days in the four years prior to 1st April, 2009, and more than 60 days during F.Y. 2009-10, he is a resident of India in F.Y. 2009-10 and, therefore, his salary received for the period of employment outside India is taxable in India, subject to Double Taxation Relief under Article 23 of India-Germany DTAA.
4.4 Our view is strongly supported by the decision of the Bangalore Bench of the Tribunal in the case of Manoj Kumar Reddy v. ITO, (2009) 34 SOT 180 (Bang.). It is also supported by the decision of the Punjab and Haryana High Court in the case of V. K. Ratti v. CIT, (2008) 299 ITR 295/(2007) 165 Taxman 177 (P & H).
4.5 The following important observations of the Bangalore Tribunal in Manoj Kumar Reddy’s case (supra) are also worth noting :
Considering the legislative history of amendments and the purpose for which the amend-ments have been introduced, one has to consider the entry of the person in India during the previous year. If all the entries are in India for the purpose of a visit, then the period of 60 days as mentioned in S. 6(1)(c) will be substituted to 182 days. However, if in the previous year, the assessee has come to India permanently after leaving his employment outside India, then the Explanation (b) will not be applicable. (Para 3.15)
We had already pointed out that a visit to India does not mean that if he comes for one visit, then Explanation (b) to S. 6(1) will be applicable, irrespective of the fact that he came permanently to India during that previous year. Looking to the legislative intention, we hold that the status of the assessee cannot be taken as resident on the ground that he came on a visit to India and, therefore, the period of 60 days as mentioned in S.6(1)(c) should be extended to 182 days by ignoring his subsequent visit to India after completing the deputation outside India. (Para 3.16)
During the course of proceedings before us, the learned AR has raised an alternative contention regarding the status given as resident. The learned AR submitted that 60 days referred to in S. 6(1) should exclude the period of stay in India on visit. If this is not accepted, then it will lead to absurd result as stated in para 2.1 of rejoinder to remand report. The learned AR has tried to explain the absurdity in case the period of stay in India on visit is not excluded. In Example A, the learned AR submitted that a person comes on visit and his stay in India on visit is 120 days. He will be treated as non-resident as per clause (b) of the Explanation. In Example B, if a person comes on visit and stays in India for 90 days and returns abroad and, later on, comes back to India permanently and he stays in India for a period of 30 days, he will become a resident according to the
Assessing Officer. This is because his stay in India has exceeded 60 days if period of visit is also included. In both the cases, the stay is only 120 days. However, in Example B, a person becomes a resident while in Example A, he remains non-resident. (Para 3.17)
Advance ruling in the case of Shri Anurag Chaudhary, (2010) 322 ITR 293 :
Since the querist has strongly relied upon the afore-said advance ruling, let us examine the ruling :
5.1 Brief facts :
In this case, the applicant, an individual, left India for the USA, on deputation to an associate company in the USA on 31st March, 2008 and came back to India, after completion of the assignment on 29th November, 2008. Thus, during the F.Y. 2008-09, he was in India for 122 days. The issue before the AAR was, whether the applicant was non-resident in the F.Y. 2008-09.
5.2 We reproduce the important operative paragraphs of the Ruling :
“From a reading of S. 5(1)(c) it is clear that for the income earned by the applicant on account of employment in the USA to be taxable in India, the applicant should have been resident of India during the relevant previous year. In other words, if the applicant is held to be a ‘resident’ of India during the F.Y. 2008-09, then, his salary income from employment in the USA would be taxable under the Income-tax Act, 1961. S. 6 Ss.(1), which determines the residential status of an individual, requires that either the applicant should have been in India for 182 days [vide clause (a)] or for 60 days or more, if he was in India for 365 days or more in four preceding years [(vide clause (c)]. The Explanation to this sub-section provides that a citizen of India who leaves India for the purpose of employment outside India can be considered as resident of India, if he has been in India for 182 days or more even though he may have been in India for more than 365 days in 4 preceding years. The net effect of S. 6(1) read with the Explanation is that for an individual who has left India for employment outside India, he should be treated as resident of India only if he was in India during the relevant period/year for 182 days or more. In other words, if an individual has spent less than 182 days in India during a previous year and was outside India for the purposes of employment, then regardless of his being in India for 365 days or more during 4 preceding previous years, he cannot be treated as a resident of India.
There is no information regarding the applicant’s stay in India during 4 preceding years. If the applicant was not present in India for more than 365 days in 4 preceding years, then clause (a) of Ss.(1) of S. 6 would apply and it requires stay of 182 days or more in India to be treated as resident. On the other hand, if the applicant was present in India for 365 days or more during 4 preceding few years, then clause (c) of Ss.(1) to S. 6 read with Explanation (a) would apply and it requires stay of 182 days or more for a person who leaves India for employment outside, to be treated as resident of India.
From the facts available in the application, the applicant satisfies neither clause (a), nor clause (c) of S. 6(1) so as to merit treatment as a resident of India during the relevant period. It necessarily follows that the applicant was
‘non-resident’ during the relevant period. Consequently his income that accrued outside India in the USA by reason of his employment there cannot form part of the total income taxable in India. The Department in its comments dated 28-1-2010 has also clarified that the applicant may be treated as NRI as he remained in India for 123 days during the F.Y. 2008-09.
In the light of the foregoing, the question is answered in the negative. To elaborate, the applicant being a non-resident during the previous year 2008-09, the income earned by him from his employment in the USA cannot be taxed under Income-tax Act, 1961.”
5.3 With respect, we are not in agreement with the conclusions of the AAR, as the AAR has not advanced any cogent reasons for arriving at its conclusions. We may mention that the ap-plicant was not present before the AAR and the Tax Department submitted that the applicant may be treated as a non-resident during the F.Y. 2008-09. In our opinion, the decision of the Bangalore Tribunal in Manoj Kumar Reddy’s case (supra) represents a correct and better interpretation of the applicable legal provisions in respect of Explanation (a) and (b) to S. 6(1)(c).
Planning possibilities :
With regard to the hypothetical situation presented by the querist, if the querist would have been deputed to Germany on or after 1st day of April, 2009, Explanation (a) to S. 6(1) would have been applicable and the querist would have been a non-resident in F.Y. 2009-10.
Alternatively, if the querist would have returned to India on or after 1st February, 2010, he would be a non-resident in India in F.Y. 2009-10, as he would have not met the criteria/tests laid down in S. 6(1)(a) or 6(1)(c) for being considered as resident in India.
Summation :
Explanation (a) to S. 6(1)(c) applies only to an individual in relation to the previous year in which he leaves India for the purpose of employment outside India. As the querist had already left India 25th March, 2009, i.e., previous year relevant to the A.Y. 2009-10, Explanation (a) cannot be applied while determining his residential status for A.Y. 2010-11. Hence, clause (a) of Explanation to S. 6(1)(c) will be applicable for the previous year in which an assessee leaves India for the purpose of his employment.
Therefore, in our view Explanation (a) is not applicable in the case of the querist for A.Y 2010-11.
Considering the legislative history of amendments and the purpose for which the amendments have been introduced, one has to consider the purpose of entry of the person in India during the previous year. If all the entries in India are for the purpose of visits, then the period of 60 days as mentioned in S. 6(1)(c) will be substituted to 182 days. However, in our opinion, if in the previous year, as the querist had returned to India permanently after completing his assignment outside India, the Explanation (b) will not be applicable in his case.
Thus, in our opinion, the querist is not entitled to the benefit of either Explanation (a) or Explanation (b) to S. 6(1)(c). Since he was in India for a period amounting to more than 365 days in the four years prior to 1st April, 2009 and present in India for 126 days during F.Y. 2009-10, in our opinion he is a resident of India in F.Y. 2009-10 and, therefore, his salary received for the period of employment out-side India is taxable in India, subject to Double Taxation Relief under Article 23 of India-German DTAA.
