2018 (2) TMI 521 - AAR - Income Tax

Accrual of income - Taxability in India of the salary of its employees sent abroad for rendering services to a foreign company - assessment of income for period of deputation - DTAA - Held that - The income earned by the assignees/employees from the services rendered in USA / Germany, respectively, would be chargeable to tax in the USA / Germany only, and not in India, for the period of their deputation. As the assignees are not liable to be taxed in India in respect of their income during the financial year 2011-12, the Applicant is not obliged to withhold taxes on the salary paid to them in India for such period. Whether u/s 192, the Applicant can give credit to the assignees for the taxes paid in the USA / Germany? - Held that - While discharging its obligation u/s 192 the Applicant may take into account the credit for the taxes paid in the USA for Mr. Rajendrababu in view of Article 25 of the India-USA DTAA and for Ms. Prashanth in view of Article 23 of India Germany DTAA, after making proper verification as required by section 192(2) of the Act.

Issues Involved:
1. Taxability of salary paid in India to employees deputed abroad.
2. Obligation to withhold taxes on such salary paid in India.
3. Consideration of foreign tax credits while withholding taxes.

Issue-wise Detailed Analysis:

1. Taxability of Salary Paid in India to Employees Deputed Abroad:

The applicant, Hewlett Packard India Software Operation Private Limited, sought a ruling on whether the salary paid to its employees, Mr. Rajendrababu and Ms. Prashanth, who were deputed to the USA and Germany respectively, is taxable in India. The employees continued to receive salaries in India during their deputation and were considered non-residents in India for the financial year 2011-12.

The ruling emphasized that under Section 5(2) of the Income Tax Act, the total income of a non-resident includes income received in India. However, the computation of total income is subject to other provisions of the Act, including Section 90, which allows for the adoption of treaty provisions if they are more beneficial. The Indo-US and Indo-Germany treaties stipulate that salaries for employment exercised outside India are taxable only in the respective foreign countries.

The ruling concluded that since the employees were rendering services in the USA and Germany, the salary paid in India did not accrue in India and was not taxable in India. This was supported by precedents like Prahlad Vijendra Rao and Avtar Singh Wadhwan, which held that income accrues where services are rendered.

2. Obligation to Withhold Taxes on Salary Paid in India:

The applicant argued that under Section 192 of the Act, tax is required to be deducted only if the salary is chargeable to tax in India. Since the salary paid in India was not taxable in India, there was no obligation to withhold tax. The ruling referenced the case of British Gas India Private Limited, where it was held that no tax need be deducted on salary paid for services rendered outside India, provided the tax was paid in the foreign country.

The ruling agreed with the applicant, stating that the employer is not obliged to withhold tax on the salary paid in India for the financial year 2011-12, as the income was not chargeable to tax in India.

3. Consideration of Foreign Tax Credits While Withholding Taxes:

For the financial year 2012-13, the employees would be Resident and Ordinarily Resident (ROR) in India, making their worldwide income taxable in India. The applicant sought to know if it could give credit for taxes paid in the USA and Germany while discharging its tax withholding obligations under Section 192.

The ruling confirmed that the employees are entitled to foreign tax credits under Articles 25 and 23 of the respective treaties. Section 192(2) of the Act allows an employee to furnish details of salary and taxes paid to the employer, who must consider these details while computing the tax to be withheld. The ruling referenced the case of British Gas India Private Limited, which held that foreign tax credits should be considered while withholding taxes.

The ruling concluded that the applicant could take into account the credit for taxes paid in the USA and Germany while withholding taxes, provided proper verification is done as required by Section 192(2).

Conclusion:

1. The salary paid to the employees in India for the financial year 2011-12 is not taxable in India, and the applicant is not obliged to withhold taxes on such salary.
2. For the financial year 2012-13, the applicant can consider foreign tax credits while withholding taxes, after proper verification as required by Section 192(2).

The ruling was pronounced on January 29, 2018.

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