AR No 1299 of 2012
Texas Instruments (India) Pvt. Ltd., In re
A.Ys.: 2011-12 and 2012-13, Date of Order: 29th January, 2018
Facts
The applicant, was an Indian entity which
had sent an employee on an assignment to the USA for two years. During that
period the employee was on payroll with its group entity in the USA (US Co).
While he was in USA, though the employee had not rendered any service in India,
for fulfilling his personal obligations, he received part of the salary in
India from the applicant.
In respect of financial year 2011-12 the
employee would have been a non-resident (“NR”)
in India and for financial year 2012-13 he would have been a resident in
India.
The employee would be resident in the USA
for the calendar years 2010, 2011 and 2012 as per the US domestic laws.
Accordingly, his global income, including salary paid in India, would be taxable
in USA.
The applicant sought ruling of AAR on the
following questions.
Question 1: Whether the Applicant is obliged
to withhold taxes on the salary paid in India to the employee in financial year
2011-12, when the employee qualified as an NR in India;
Question 2: Whether the Indian employer can
consider claim of foreign tax credit (“FTC”) at withholding stage in respect of
the taxes paid in the USA by the employee in financial year 2012-13 when he
would be a resident in India.
The applicant contended as follows before
the AAR.
As regards question 1
– In
terms of section 5(2) of the Act, the scope of total income of a non-resident
comprises income received in India, including salary received by the employee
in India. However, it is to be computed in terms of section 2(45) of the Act, after providing
reliefs, such as, treaty reliefs. Hence, first the taxability of salary needs
to be determined and then the availability of treaty benefit for computing the
taxable total income.
– Since
no services were rendered in India, salary for employment exercised in the USA
would not accrue in India. This is supported by the provisions of section 15
read with explanation to section 9(1)(ii) of the Act, decision in DIT vs.
Sri Prahlad Vijendra Rao (ITA No 838/ 2009) and decision in CIT vs.
Avtar Singh Wadhwan [2001] 247 ITR 260 (Bom) and commentary by Professor
Klaus Vogel on Article 15 of the OECD Model Convention
– U/s.
90 of the Act, the employee is entitled to adopt either the provisions of the
Act or India-USA DTAA, whichever is more beneficial. As per Article 16 of DTAA,
the salary received by a USA resident in respect of employment is taxable only
in USA since the employment is not exercised in India. Hence, though the salary
was to be paid in India, , it would not be taxable in India.
– U/s.
192 of the Act, an employer is required to withhold taxes only if salary is
chargeable to tax in India. Also, as per section 192 read with section 2(10) of
the Act, taxes are required to be withheld considering the average rate of tax,
which is determined by dividing income-tax on total income by the total income.
In the instant case, as the total income with respect to salary paid in India
would not be chargeable to tax in India, the average rate of tax will work out
to Nil.
As regards question 2
– The
employee would be a resident in India for financial year 2012-13. Hence, in
terms of Article 25 of India-USA DTAA he will be entitled to claim FTC on taxes
paid in USA.
– Section
192(2) of the Act provides that an employee working under more than one
employer during any financial year can furnish details of salary and TDS to one
of the employers, and such employer is obliged to consider the same while
arriving at the quantum of total taxes to be withheld.
– Since
withholding tax provisions apply only to the extent of actual tax liability,
the treaty relief should be available to the employee at the tax withholding
stage without having to wait to seek this relief only at the time of filing
return of income.
– Hence,
relying on decisions in British Gas India Private Limited (AAR/725/2006)
and Coromandel Fertilizers Ltd [1991] 187 ITR 673 (AP), the Indian
employer would be required to consider FTC while arriving at the taxes to be
withheld at source in India.
The tax authority contended as follows before the AAR.
As regards question 1
– U/s.
5(2) of the Act, any income (which includes salary) received in India is liable
to tax in India. Hence, it will be subject to withholding tax. Salary due from
an employer in India is chargeable to tax in India and its payment will trigger
withholding tax obligations in India.
– An
Indian employment contract is an evidence of employer-employee relationship in
India. If the employer is an Indian entity, the employment is considered to be
exercised in India. Place where services are actually rendered or where the
employee is physically present is not relevant.
As regards question 2
– Grant
of claim of FTC involves interpretation of the articles of DTAA and examination
of satisfaction of other conditions, such as, actual payment of taxes in USA,
attribution of tax to income, etc. Only tax authority would have such
expertise. An employer would neither have the opportunity nor such expertise to
carry out such exercise at the time of withholding tax at source. From
financial year 2012-13, there is an additional requirement for obtaining a Tax
Residency Certificate (“TRC”) in order to avail Treaty benefits.
– Further,
section 192 of the Act does not provide for allowing FTC at the withholding
stage. Hence, the Indian employer cannot give benefit of FTC at the time of
withholding tax.
Held
As regards question 1
– U/s.
4 of the Act, income tax is to be charged in accordance with, and subject to,
provisions of the Act, on the total income of a taxpayer. The total income
chargeable to tax for a non-resident is subject to other provisions of the Act.
– The
judicial decisions cited by the Indian employer, and decision in Utanka Roy
vs. DIT (International Taxation) (2017) 390 ITR 109 (Cal), have held that,
the actual place of rendering services is the key test in determining place of
accrual of salary to a non-resident, and that salary received in respect of
services rendered outside India has to be considered as being earned outside India.
Since the employee was rendering services in the USA during FY 2011-12, the
salary accrued to him in USA and not in India.
– Whether
the employer was an Indian entity or not was immaterial and the only material
point for consideration is the place where the services were rendered. This is
also supported by the Commentary by Klaus Vogel on Article 15 and Explanation
to section 9(1)(ii) of the Act.
– Further,
even as per the provisions of Article 16 of DTAA, any income from services
rendered in USA would be chargeable to tax in USA. Thus, applying section 90 of
the Act, the beneficial provisions of the DTAA would prevail.
– Accordingly,
as the employment was exercised in the USA, the salary did not accrue in India.
Therefore, the Indian employer is not required to withhold taxes on the portion
of salary paid in India to its NR employee.
As regards question 2
– Under
Article 25 of India-USA DTAA, the employee is entitled to benefit of claim of
FTC.
– U/s.
192(2) of the Act, in respect of payments received by an employee from more
than one employer, the employee could furnish details of salary paid and tax
deducted to one of the employers, who would then be required to consider the
same at the time of withholding tax.
– Although,
the machinery provisions of the Act do not provide for claim of FTC at
withholding stage, the judicial decisions cited by the applicant had held that
FTC can be considered by the Indian employer at the withholding stage. Thus,
the Indian employer could consider the same while computing withholding tax.
– However,
while the Indian employer can consider FTC at the time of withholding tax, it
is also obligated to exercise due diligence in satisfying itself about the
details of period of residence, TRC, details of income earned and taxes
deducted, the period of income, etc., before doing so.
– If
the tax authority believes that the Indian employer has failed in carrying out
such due diligence, it may take appropriate action under the Act.
