Taxability of salary or employment income depends on the physical presence of the employee. The place where employees are physically present is generally considered as the place where the salary income is taxable.
A Company in India may pay salary to non-resident employees, who have rendered services from outside India. The salary may be credited to the bank account of employees either outside India or in India. The question that arises for consideration is whether such salary income is taxable in India.
The Revenue generally contends that the salary income is taxable in India on the ground that the employment is with the Indian company. Additionally, in case the salary is credited to bank account in India, the Revenue contends that the income is taxable as same is received in India (Section 5(2)(a)).
Section 9(1)(ii) deems that salary income shall be deemed to accrue or arise in India, if it is earned in India. Explanation below Section 9(1)(ii) further provides that income for services rendered in India shall be deemed as income earned in India.
To similar effect is Article 15 of the DTAA which deals with the taxation of salaries. It provides that remuneration derived by resident of one contracting State (say Japan), shall be taxable only in Japan. Article 15 further provides that such remuneration shall be taxable in other contracting State (say India), if the employment is exercised in the other contracting State (India).
Therefore, both under the Act and DTAA, salary income is deemed to accrue or arise in India if services are rendered in India.
This issue is also dealt in various cases by the Courts. The Courts have held in favour of the taxpayers. The Courts have held that the salary income is not taxable in India if the services are rendered outside India despite the fact that the contract of employment is with Indian company or the amount is credited to the bank account of employee in India. These decisions are discussed below.
In the case of CIT v Avtar Singh Wadhwan (2001) 247 ITR 260 (Bombay HC), the assessee
was working on an Indian ship owned by the Shipping Corporation of India (SCI). The ship did not touch the Indian coast except for 8 days during the relevant assessment year. The AO came to the conclusion that since the assessee was an employee of the SCI and earned salary as per contract with SCI, the income accrued to him in India. The Tribunal held that the place at which income accrued was the place where the services were rendered. The Tribunal concluded that the income having been earned in foreign waters, had accrued to the assessee outside India.
The Revenue filed appeal to HC and relying on the provisions of the Merchant Shipping Act, contended that foreign-going ship was an Indian ship and it continued to remain territory of India even outside India. The HC rejected the contention of Revenue and held that provisions of the Merchant Shipping Act cannot be read into the provisions of the Income-tax Act. Referring to the decision in the case of CIT v. Indo Oceanic Shipping Co. Ltd.[2001] 247 ITR 247 (Bom.) decided vide Income-tax Reference No. 444 of 1995, the HC observed that section 2(25A) which defines the term ‘India’ does not cover foreign-going Indian ships for the purposes of deduction in the hands of the employer.
With respect to taxation of salary, the HC held as follows:
Under section 9(1)(ii), it is laid down as to what type of income shall be deemed to accrue or arise in India. The above section states that where the salary is earned in India, it shall be regarded as income arising in India. There is an Explanation also to the above section which, inter alia, declares that income of the above nature payable for services rendered in India shall be regarded as income earned in India. This Explanation clearly indicates that where salary is payable for services rendered in India, the same shall be regarded as income earned in India. Therefore, the relevant test to be applied is where the services have been rendered. If the services were rendered in India, then the salary income shall constitute income arising in India.
The HC held that the income accrued to the non-resident assessee outside India during the relevant period and same was not taxable.
Similar view was adopted in the case of Prahlad Vijendra Rao [2011] 198 Taxman 551 (Karnataka). The assessee earned salary income for working abroad for 225 days. The assessee worked on board of a ship, which was outside shores of India. The Karnataka High court held that salary income has not accrued in India and is not deemed to have accrued in India.
In the case of Hewlett Packard India Software Operation (P.) Ltd., In re [2018] 91 taxmann.com 473 (AAR – New Delhi), the applicant was a company incorporated in India. It sent two of its employees on deputation outside India. During the period of assignment, the employees would be rendering services in their respective country of deputation. However, the employees would be receiving salaries in India from the applicant and would also receive certain allowances in their respective country of deputation. The issue before the AAR was whether salary paid by the applicant to the assignees is liable to be taxed in India.
The Revenue contended that since the assignees were paid and employed in India, and that the employer – employee relationship existed in India, they should be taxed in India. The AAR rejected the contention on the ground that income accrues where the services are rendered. The AAR held that since the income has not accrued in India, the same cannot be considered as chargeable to tax in India.
Useful reference can also be made to the following observations of Bangalore Tribunal in the case of Bholanath Pal v. ITO [2012] 23 taxmann.com 177 (Bangalore):
“12.7 As per section 15, salary is not taxable on receipt basis except in case of advance salary or arrears salary. Regular salary under section 15(1)(a) is taxable on accrual basis. Salary is accrued where the employment services are rendered. In the instant case, for the assessee, the normal place where the employment services rendered is in Japan and not in India. His visits to India are in connection with business and not for rendering employment services for any Indian entity. There is no employment agreement for having rendered any services for Indian entity. In the instant case, the salary accrues to the assessee in Japan and the accrued salary is partly delivered by Motorola India in India. Hence, there is no accrual of salary in India.
12.8 In terms of section 9(1)(ii) income chargeable under the head “salaries” under section 15 shall be deemed to accrue or arise in India if it is earned in India, i.e., if the services under the agreement of employment are or were rendered in India. In the instant case, the employment services were entirely rendered outside India. Hence, the salary is not earned for rendering services in India. Therefore, salary for the entire year is not taxable.”
Vamsee Krishna Kundurthi v. ITO (International Taxation), [2021] 128 taxmann.com 368 (Hyderabad – Trib.) – The assessee was a non-resident in India. The Assessee rendered services in Austria. The employer deducted TDS and issued Form 16. The assessee claimed NIL income and claimed refund of TDS. The AO held that said salary income is taxable in India on ground that assessee could not produce Tax Residency Certificate (TRC) from said country. The ITAT held that the assessee was liable to tax in Austria in respect of salary received for services rendered in Austria in pursuance of Article 15 of India-Austria DTAA. The ITAT held that the AO is not justified in taxing the salary income and exemption as per DTAA should be granted.
Similar view is adopted in the following cases:
- Utanka Roy v. DIT (2017) 82 taxmann.com 113 (Calcutta HC)
- Texas Instruments (India) (P.) Ltd., In re [2018] 90 taxmann.com 353 (AAR – New Delhi)
- Smt. Maya C Nair v ITO ITA No. 2407/Bang/2018
- DCIT v. Chukkapalli Mallikarjuna [2019] 107 taxmann.com 285 (Visakhapatnam – Trib.)
- Neeraj Badaya v ADIT [2016] 67 taxmann.com 240 (Jaipur – Trib.)
- Paul Xavier Antony Samy v ITO [2020] 115 taxmann.com 143 (Chennai – Trib.)
- Ranjit Kumar Bose v. ITO [1986] 18 ITD 230 (CAL ITAT)
- Deepak Kumar Todi v DDIT TS-220-ITAT-2019(Kol ITAT) – salary remitted to NRE account in India for services rendered in Nigeria is not taxable on receipt basis.
OECD Commentary
OECD Model Convention, 2017 in para 1 of the commentary on Article 15 provides that place where the employee is physically present is the place of exercise of employment. The relevant extracts are as follows:
Paragraph 1 establishes the general rule as to the taxation of income from employment (other than pensions), namely, that such income is taxable in the State where the employment is actually exercised. The issue of whether or not services are provided in the exercise of an employment may sometimes give rise to difficulties which are discussed in paragraphs 8.1 ff. Employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid. One consequence of this would be that a resident of a Contracting State who derived remuneration, in respect of an employment, from sources in the other State could not be taxed in that other State in respect of that remuneration merely because the results of this work were exploited in that other State.
Klaus Vogel in his commentary on Dependent Personal Services, Article 15
Same view is taken in the commentary. Relevant observations are: “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 spot is the place where the employment is exercised………All that matters under the MCs is whether or not the employee is personally present.”