2020 (8) TMI 804 - AT - Income Tax

Deduction of tax at Source - taxability of Non-residents employees - joint venture partners - Reimbursement of salary on actual basis to the non resident employees of the joint venture partners - deemed to have accrued or arisen in India or not? - clause (ii) of section 9(1) of IT Act - HELD THAT - As per the provision of said section, the income falling under the head salary is deemed to accrue or arise in India if it is earned in India. Explanation to this provision further clarifies that the salary income referred to must be payable for services rendered in India and will also include the rest/leave period which is preceded and succeeded by service rendered in India - If we keep the facts of the present case in juxtaposition to the conditions enshrined in section 9(ii), it can be seen that the salary income earned by the non resident individuals were for the services rendered out side India and not in India. Therefore, such salary income cannot be deemed to have accrued or arisen in India as per section 9(ii) of the Act. The Assessing Officer in his anxiety to bring the salary income to tax in India has completely overlooked the impact of section 9(1)(ii) of the Act. The attempt on the part of the Assessing Officer to rope in the reimbursement of salary payment under section 9(1)(i) of the Act is completely misconceived. Having held so, taxability or otherwise of the income under the respective Tax Treaty provisions needs to be examined. We must hasten to add, neither the Assessing Officer nor learned Commissioner (Appeals) has examined the issue from the aforesaid angle.Thus, any income derived by them is taxable only in their country of residence and not in India. Therefore, the Treaty provisions being more beneficial as per section 90(2) of the Act, will override the provisions of the Act. Therefore, there is no need for the assessee to deduct tax at source while reimbursing the salary expanses - the decision of learned Commissioner (Appeals) upheld. Appeal dismissed.

Summary

Issues:
1. Challenge to order dated 15th March 2012 by Revenue.
2. Rectification application under section 254(2) filed by Revenue.
3. Deletion of disallowance under section 40(a)(iii) of the Act.

Analysis:
1. The appeal was filed by the Revenue challenging the order dated 15th March 2012, passed by the Commissioner of Income Tax (Appeals) regarding the assessment year 2008-09. The Tribunal recalled the earlier order to dispose of specific grounds, leading to the present appeal.

2. The issue pertained to the deletion of disallowance of a specific amount under section 40(a)(iii) of the Act. The Assessing Officer disallowed the amount for non-deduction of tax at source on salary payments to employees of joint venture partners. The Assessing Officer deemed the salary income to accrue or arise in India, leading to the disallowance.

3. The Commissioner (Appeals) observed that the salary income was not taxable in India as per section 9(1)(ii) since services were rendered and payments made outside India. The Commissioner held that the Assessing Officer erred in applying section 9(1)(i) to bring such income to tax. The Commissioner deleted the disallowance.

4. The Tribunal analyzed whether the reimbursement of salary to non-resident employees can be deemed to have accrued in India. It noted that the employees were located outside India and services were performed abroad. The Tribunal held that as per section 9(1)(ii), such income cannot be deemed to have accrued in India. The Tribunal also considered the Tax Treaty provisions with Japan and South Korea, concluding that the income derived by non-resident employees is taxable only in their country of residence, not in India. Therefore, the Tribunal upheld the decision of the Commissioner (Appeals) and dismissed the appeal.