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TMI Blog2018 (2) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... by section 192(2) of the Act. - A.A.R. No 1217 of 2011 - - - Dated:- 29-1-2018 - Mr. R.S. Shukla, In-charge Chairman And Mr. Ashutosh Chandra, Member (Revenue) For the Applicant : Mr. Percy J. Pardiwalla, Sr. Advocate For the Department : Mr. K.V. Arvind, Sr. Standing Counsel Ms.Kavita Pandey, CIT(DR) Mr. A.K. Verma, DCIT(DR) RULING ( By Ashutosh Chandra ) The applicant, M/s Hewlett Packard India Software Operation Private Limited, had filed an application seeking a Ruling on the questions, subsequently enumerated, on the issue of taxability in India of the salary of its employees sent abroad for rendering services to a foreign company. The application was admitted on 24.05.2013. 2. The Applicant is incorporated in India and is engaged in the business of software development and IT Enabled Services. It has sent two of its employees Mr. Rajendrababu and Ms. Prashanth(assignees) on deputation to HP US and HP Germany, respectively. The periods of deputation in respect of the said employees are as under: S.No. Name of the employee Period of deputation 1. Mr. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent periodin the year of return to India after completion of the assignment. She would be taxable in Germany on her entire salary i.e. salary received in India as well as the allowances received in Germany, since the related services are rendered in Germany. 2.4 As regards residential status of assignees as per applicable treaty in the case of assignees, the following is submitted by the applicant: (i) As per Article 4(1) of the Indo US TreatyMr.Rajendrababu would be non-resident in India and liable to tax in India only on the income accrued / arising / received / deemed to accrue / arise in India. In other words, Mr. Rajendrababu is liable to be taxed only on India sourced income and therefore would not qualify as a resident of India as per Article 4(1) of the Treaty. Further as per the US domestic tax laws, Mr. Rajendrababu would be treated as resident of USA for the calendar year 2011 and part year resident for 2012 till the date of departure from USA. He would therefore be liable to tax on his worldwide income in USA during the assignment period and accordingly be treated as resident of USA as per the Treaty. (ii) As per Article 4(1) of the Indo-Germany treaty, Ms. P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of Article 23 of India Germany treaty in the case of Ms. Prashanth. 4. The Applicant has further stated that Section 5 of the Act defines the scope of total income. Section 5 (2) of the Act states that the total income of the non-resident includes income received in India comprising the salary paid by the applicant. However, as the computation of total income is subject to other provisions of the Act, benefits available to the assignee as per the provision of Section 90 of the Act need to be considered before arriving at the total income. Further Section 2(45) of the Act provides that total income referred to in Section 5 needs to be computed in the manner laid down in this Act. Accordingly, Section 90 of the Act would need to be considered in computing the total income. The assessee is therefore entitled to adopt either the provisions of the Act or the Treaty, to the extent they are more beneficial to him. 4.1 Since Mr Rajendrababu would be a resident in the USA as per the Indo US Treaty, he would have access to the benefits of Article 16 of the said Treaty. In other words salaries, wages, and other similar remuneration derived by a resident of USA in respect of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aties or the Act, the average rate of tax would be nil and withholding provisions under section 192 would not be triggered. 4.4 The applicant has cited the case of British Gas India Private Limited, (AAR/725/2006) wherein it was ruled that when salary is not taxable in India in accordance with the treaty between India and UK, provided the same is taxed in UK, in pursuance of the Treaty, the applicant should not deduct tax at source, provided it is satisfied from the details and particulars furnished under Section 192(2) that taxes have been paid on such payments in the UK. The facts in this case were similar to the current situation. The applicant has also referred to the case of Eli Lilly and Co. (India) Private Limited,(2009), 312 ITR 225 (SC), to say that salary for services rendered in India, but not paid in India, was chargeable to tax under the head salaries in India, and hence subject to tax withholding in India. As a corollary, where salary income is not chargeable to tax under the head salaries in India, the same should not be subject to tax withholding in India. In the case of CIT vs Coromandal Fertilisers Ltd, [1991], 187 ITR 673 (AP), it was held that unless there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as (foreign tax credit) at the time of withholding the taxes paid to the assignees in India for the relevant financial years, that is the year when they will be ROR in India, upon necessary information being furnished by assignees. 6. With regard to Question No.1, the Revenue in its earlier submission stated that as per Section5(2) of Income Tax Act, 1961, subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. 6.1 In the instant case, the Applicant, M/s Hewlett Packard India Software Operations (P) Limited, is making payment in India to its employees working in USA/Germany, who even if considered as non-residents for the purpose of income-tax during in a particular Financial Year, the provision of Section 5(2) of IT Act will apply. Therefore, any salary paid in India by the applicant to its employees outside India is liable to tax in India. Hence the applicant is require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the term services rendered in India is to be understood in terms of where the employees are physically present while rendering services. This is clearly elucidated by the explanation to Section 9(1)(ii) of the Income Tax Act, extract provided below. 9. (1) The following incomes shall be deemed to accrue or arise in India:- (ii) income which falls under the head Salaries , if it is earned in India. For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for- (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India; Thus, salary is considered to be earned in India if services are rendered in India. Just because the salary is paid in India by an entity in India it cannot be concluded that the income is earned in India. In this connection he also invited reference to paragraph 1 of the OECD commentary to Article 15, wherein it is clarified that the place where the employee is physically present when performing the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is/her return. 9. We have considered the submissions of both sides. As far as the facts of the case are concerned, the same are not in dispute. The assignees/ employees of the Applicant company, are non-residents for tax purposes during the financial year 2011-12, and are on deputation with Hewlett Packard USA/ Germany and are rendering services in the USA /Germany respectively. As far as question no. 1 is concerned, the only issue is whether with reference to the salaries received by them in India, there would be a liability on the employer, the Applicant, to deduct tax there from. 9.1 Let us first examine the position with reference to the Income tax Act, 1961. Section 4 of the IT Act 1961 states that income-tax shall be charged in accordance with and subject to the provisions of this Act in respect of the total income of the previous year of every person. Total Income as provided in Section 2(45) of the Act means such total income as is referred to in section 5, computed in the manner laid down in this Act. Section 5 deals with the Scope of Total Income , and sub-section (2) relates to non-residents. Section 5(2) begins with the words Subject to the provisions of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional Taxation), decided by the Hon ble High Court of Calcutta (2016), 390 ITR 109, and it was held that the services rendered outside India have to be considered as income earned outside India. 9.3 In the case of Avtar Singh Wadhwan (supra), the other objection raised by the Revenue was also answered, namely that the case of Prahlad Vijendra Rao, and other cited cases, were not applicable since in those cases the employer was a foreign company. In the Avtar Singh Wadhwan case the employer was an Indian company, as in the case of the Applicant, and the same conclusion was reached. In other words, whether the employer was Indian or not was immaterial, and the material point was where the services were rendered and where the income had accrued to the employee of the Applicant company. 9.4 The above decisions endorse the view taken by Klaus Vogel in his commentary on Dependent Personal Services, Article 15, which states that: As a rule, the place where the employment is exercised is the place where the employee is personally present for the purpose of exercising his employment. If the activities cannot be exercised elsewhere than on the spot, there is no question that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax on that income was paid in the UK. The Applicant s reliance on the cases of Eli Lily and Co. (India) Private Ltd. and Coromondal Fertilizers support this view that unless there was an obligation on the employee to pay tax on income from salaries, there would not be any liability to deduct tax under section 192 by the employer. 9.8 To conclude, we are in agreement with the view that the salaries received in India by the assignees but accrued outside India for the FY 2011- 12, would not be taxable in India, and consequently, the employer, Hewlett Packard Software Operation Private Limited i.e. the Applicant, would not be obliged to withhold tax on the same at the time of payment, under section 192 of the Act. 10. The second question raised by the Applicant with regard to the FY2012-13 is whether u/s 192, the Applicant can give credit to the assignees for the taxes paid in the USA / Germany. The cases of the assignees are clearly covered by the provisions contained in Articles 25 of the India-USA DTAA and Article 23 of India Germany DTAA respectively. As such they are entitled to the credit for the foreign taxes deducted. Once they become residents on return to India durin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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