[2018] 91 taxmann.com 473 (AAR – New Delhi)
Hewlett Packard India Software Operation
(P.) Ltd., In re
A.A.R. NO. 1217 OF 2011
Date of Order: 29th January 2018
Section 9 of the Act; Article 25 India-USA
DTAA; Article 23 of India-Germany DTAA – On return to India when employees
become residents, the payment to be made being in nature of salaries, section
192(2) would apply subject to credit for taxes deducted during their deputation
outside India
Facts
The Applicant was incorporated in India and was engaged in the business
of software development and IT Enabled Services. The Applicant had sent one
each of its employees on deputation to USA and Germany, respectively.
During the deputation period, though the employees would render services
in the respective country of deputation, they would continue to be on the
payrolls of Applicant. They would regularly receive salaries in India from the
Applicant and certain allowances in the respective country of deputation to
meet local living expenses.
While on deputation, the employees would be non-residents in India
during one financial year. In the year of their return after completion of assignment,
they would be Resident and Ordinarily Resident (ROR).
The Applicant sought ruling on the following questions.
– Whether salary paid by the Applicant to the
employees was liable to be taxed in India having regard to provisions of the
Act and the DTAA?
– Whether the Applicant can take credit for
taxes paid abroad in terms of Article 25 of India-USA DTAA and Article 23 of India-Germany
DTAA while discharging its tax withholding obligations u/s. 192?
Held – 1
– The employees would render services in
USA/Germany and would be non-residents for tax purposes during one financial
year.
– As per section 4 of the Act, tax is chargeable
in accordance with, and subject to, the provisions of the Act in respect of the
total income of the previous year of every person. Section 5(2) deals with
income of non-residents. Section 5(2) is ‘Subject to the provisions of this
Act’, which brings Chapter IV (computation of total income) into play. In
Chapter IV, section 15 deals with the head ‘Salaries’. Thus, chargeability to
tax under the head ‘Salaries’ arises under section 5(2), read with section 15.
Merely because section 5(2) is the charging section, income that the employees
would receive in India should not be taxed in India.
– The income accrues where the services are
rendered. Though the employees are covered in section 15(a), being
non-residents, and since they would be rendering services in USA/Germany, the
salary would accrue to them in USA/Germany. Merely because the
employer-employee relationship would exist in India, and they would be paid in
India, they could not be taxed in India. Hence, the income would not be
chargeable to tax in India. This view is supported by the Explanation to
section 9(1)(ii) of the Act.
– An employer is required to deduct tax from
salary payable to an employee but only if the employee is liable to pay tax on
salary. In case of the employees, since the salary would accrue to them outside
India, the Applicant would not be required to withhold tax u/s. 192 of the Act
at the time of payment.
Held – 2
– The employees would be covered by the tax
credit provisions of Articles 25 of the India-USA DTAA and Article 23 of
India-Germany DTAA, respectively. Hence, they would be entitled to foreign tax
credit. When they become residents, and since the nature of payments made to
them would be salaries, section 192 applies. Therefore, if payments were to be
received by the employees from more than one source during a particular year,
the present employer could give credit for foreign taxes to be deducted during
their deputation outside India.
