Salary paid by Infosys to non-resident employee taxable in India: AAR

AIT News Network

NEW DELHI. Justice PV Reddy Chairman of Authority for Advance Rulings(Income Tax) vide a recent ruling AIT-2007-341-AAR, in case of an employee of Infosys who was deputed to Norway,  has ruled that the salary paid by the employer in India is taxable in India, though the assessee is non- resident in India during the relevant financial year. He is not eligible to get any relief in terms of the DTAA.

T H E    F A C T S:

The applicant filed a return of income for the assessment year 2006-07 with the ADIT(International Taxation), Chennai, disclosing the income of Rs. 6,56,390/- and paid tax of Rs. 1,49,855/- including the tax withheld.  Infosys Technology Ltd., Bangalore, with whom the applicant was employed withheld an amount of Rs.89,639/- towards income-tax by way of deduction from the salary of Rs.5,08,615/-. The applicant was deputed on official duty to Norway by his employer Infosys Technology Ltd., and he worked there for more than 182 days and he was therefore a non-resident for tax purposes.

The applicant received the salary income in India in Indian rupees for the services rendered by him in Norway for a period exceeding 182 days during the financial year. The applicant returned the income and paid the tax without claiming exemption. The applicant's claim was based on the Double Taxation Avoidance Agreement which in the instant case is the Indo-Norway DTAA notified on 9th September, 1987.

T H E   R U L I N G:

It is common ground that the applicant's liability to pay tax under the relevant charging provisions of the Indian Income-tax Act is not in dispute. Para 2 of Article 16 of DTAA does not come into play in the instant case for the reason that the applicant's stay in Norway was for a period exceeding 182 days in the financial year 2005-06. The taxability of his employment income has to be determined in the light of Para 1 of article 16 only. On an analysis of Article 16(1), it is clear that unless employment is exercised in the other Contracting State, the remuneration derived shall be taxable only in the State of residence. However, if the employment is exercised outside the usual State of residence, the remuneration derived therefrom 'may be taxed' in the state in which the employment was exercised. Thus, it was open to the State in which the employment was exercised to subject the remuneration derived by a resident of a Contracting State. That means, Norway could have taxed the applicant, but it is not the case of the applicant that he has been so taxed or that he paid any tax voluntarily or otherwise, to the Norway Government. In such a situation, no relief is available to the applicant, as rightly contended by the Revenue. It is apposite to note that the expression 'may be taxed' has been used In contradistinction to the expression 'shall be taxable' occurring In Article 16(2). That this distinction is not without significance is emphasized in the Commentary on the OECD Model Convention, which is a valuable aid to the interpretation of treaty provisions. Going by the plain interpretation of the expression 'may be taxed' and the interpretation that has been placed in the said commentary, right of taxation is available to both the Contracting States in regard to the employment income of the applicant in accordance with the relevant domestic laws. We repeat that the applicant has not produced any proof that in exercise of such right, Norway State subjected him to tax or that the applicant made any payment to the State of Norway on account of income tax.

The ruling in British Gas India P. Ltd. AIT-2006-96-AAR does not has any bearing on the issues that has arisen in the present case. The concluding part of the Ruling brings out clearly what has been held there. We quote that portion:

“(i)      The salary paid by the applicant to Mr. Manish Gupta shall not be taxable in India, if the same has been offered for tax in the U. K. in pursuance of the DTAA.

(ii)       The applicant shall not deduct tax at source from salary paid to Mr. Nipun Pradhan and Mr. Manish Gupta in India, provided it is satisfied from the details and particulars furnished under section 192(2) that taxes have been paid on such payments in the U.K."

                In the face of the clear stand of the applicant that no income tax was paid nor offered to be paid on the salary income in Norway, the ratio of that Ruling cannot be called in aid.

Another contention raised by the counsel for the applicant is based on the order of this Authority under section 245R(2) in the same case of British Gas (I) Pvt. Limited AIT-2006-96-AAR.The following observations towards the end of the order have been referred to:

"A careful reading of Explanation (a) would show that the requirement of the Explanation is not leaving India for employment outside India. For the purpose of the Explanation an individual need not be an unemployed person who leaves India for employment outside India. Therefore, the fact that Mr. Gupta was already an employee at the time of leaving India is hardly material or relevant. For all these reasons, we hold that Mr. Manish Gupta is not a resident in India in the financial year 2005-06.”

These observations were made in the context of construing clause (a) of Explanation to section 6(1) of I.T. Act according to which if an individual who is a citizen of India leaves India in any previous year for the purpose of employment outside India, then in relation to that year, he will be resident in India if he is in India for a period or periods amounting in all to 182 days or more. Section 6 of the Income-tax Act defines 'residence in India'. The issue involved and the provision construed was entirely different in that case. The issue was whether the applicant was non-resident during the relevant year so as to be eligible to seek advance ruling. Construing the said provision in section 6, it was held that the applicant - employee was non-resident, irrespective of the fact that the applicant who was already in employment left India on deputation to U.K.

The question raised in the application should be answered in the affirmative and against the applicant. His salary income has been rightly taxed in India and he is not eligible to get any relief in terms of the DTAA.

(Click here for full text of ruling AIT-2007-341-AAR)