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May 2018

6 Ss. Section 9 of the Act; Article 16 of India-USA DTAA; Article 15 of India-Germany DTAA – Employees deputed to Germany and USA for rendering services abroad being non-residents, salary would accrue to them in respective foreign countries during period of deputation and would not be liable to tax in India

By Geeta Jani
Dhishat B. Mehta
Chartered Accountants
Reading Time 4 mins

[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.

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