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2018 (2) TMI 520 - AAR - Income TaxTaxability in India of the salary of its employee, sent abroad for rendering services to a foreign company - Accrual of income - assessment of income for period of deputation - DTAA - withhold taxes on such salary paid in India - Held that - The Income earned by Mr T N Santhosh Kumar from the services rendered in the USA would be chargeable to tax in the USA, and not in India, during the period that he was rendering services in the USA. We are in agreement with the view that the split pay and perquisites received in India by Mr T N Santosh Kumar but accrued outside India, would not be taxable in India, and consequently, the employer, Texas Instruments (India) Pvt. Ltd., ie. the Applicant would not be obliged to withhold tax on the same at the time of payment under section 192 of the Act. Whether u/s 192, the Applicant can give credit to Mr T N Santhosh Kumar for the taxes paid in the USA, as per Article 25 of the India USA DTAA? - Held that - While discharging its obligation u/s 192 in respect of his income for the FY 2012-13, the Applicant may take into account the credit for the taxes paid in the USA for Mr. T.N. Santhosh Kumar, in view of Article 25 of the India-USA DTAA.
Issues Involved:
1. Taxability of salary paid to an employee sent abroad for services rendered outside India. 2. Obligation of the employer to withhold taxes on salary paid in India. 3. Credit for taxes paid in the USA under the India-USA DTAA. Issue-wise Detailed Analysis: 1. Taxability of Salary Paid to an Employee Sent Abroad for Services Rendered Outside India: The applicant, an Indian company, sent an employee to the USA for an expatriate assignment. The employee received part of his salary in India and part in the USA. The key question was whether the salary paid in India for services rendered in the USA is taxable in India. The Authority examined Section 5(2) of the Income Tax Act, which defines the scope of total income for non-residents, and Section 15, which deals with the chargeability of income under the head "salaries." It was concluded that since the employee rendered services in the USA, the salary accrued in the USA and not in India. Therefore, it is not chargeable to tax in India. This conclusion was supported by the Karnataka High Court's ruling in the case of Prahlad Vijendra Rao and the Mumbai High Court's decision in Avtar Singh Wadhwan, which emphasized that the place where services are rendered determines where the income accrues. Further, Article 16 of the India-USA DTAA states that salaries derived by a resident of a contracting state in respect of employment shall be taxable only in that state unless the employment is exercised in the other contracting state. Since the employee rendered services in the USA, his salary is taxable in the USA, not in India. 2. Obligation of the Employer to Withhold Taxes on Salary Paid in India: The applicant argued that since the salary paid in India is not chargeable to tax under the head "salaries" in India, there is no obligation to withhold tax under Section 192 of the Income Tax Act. The Authority agreed, citing the case of British Gas India Private Limited, where it was ruled that salary paid for services rendered outside India is not taxable in India, and no tax needs to be deducted if the income is taxed in the other country. The Authority concluded that the split pay and perquisites received in India but accrued outside India are not taxable in India. Consequently, the employer is not obliged to withhold tax on the same at the time of payment under Section 192 of the Act. 3. Credit for Taxes Paid in the USA Under the India-USA DTAA: For the financial year 2012-13, the employee's residential status in India would be "Resident and Ordinarily Resident" (ROR). The applicant sought a ruling on whether it could take credit for taxes paid in the USA while discharging its obligation under Section 192. The Authority referred to Article 25 of the India-USA DTAA, which provides for credit for foreign taxes paid. It was held that the employee is entitled to credit for taxes paid in the USA once he becomes a resident in India. Section 192(2) of the Income Tax Act allows an employer to consider the details of salary and tax deducted at source from other employers while computing the tax to be withheld. The Authority emphasized that the employer must exercise due diligence in verifying the details of the period of residence, Tax Residency Certificate (TRC), details of income earned, and taxes deducted. If the employer fails to do so, the Revenue can initiate action as per the Act. Conclusion: 1. The salary paid to the employee in India for services rendered in the USA during FY 2011-12 is not taxable in India, and the employer is not obliged to withhold taxes on it. 2. For FY 2012-13, the employer can take credit for taxes paid in the USA while discharging its obligation under Section 192, in view of Article 25 of the India-USA DTAA. The ruling was pronounced on January 29, 2018.
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