An employee who goes on deputation abroad would do well to look at the DTAA between India and the foreign country to gauge the tax impact.
Information technology (IT) companies invariably send their employees from India to other countries for short-duration service. Questions arise about the taxability of salary earned for services rendered abroad. Apparently, it appears that if the services are rendered abroad and the person concerned has not been in India for more than 182 days in a fiscal year, he will become a non-resident and salary attributable to foreign service will not attract Indian income-tax. This issue came up in the British Gas India (P) Ltd (287 ITR 462) case.
The Authority for Advance Ruling (AAR) held that the salary will not be taxable in India if the same has been offered for tax in the UK and tax need not be deducted at source in India by the Indian company. It was also held that if a person leaves India for employment, he will become a non-resident.
The Mohan case
As per the facts of this case (294 ITR 177 AAR), Mohan was employed with HCL, New Delhi, from April 1, 2005 to May 10, 2005. He then shifted to Infosys Technologies, Bangalore, and worked with the company from May 16, 2005 to March 31, 2006. Infosys sent him on deputation to Norway. He worked there for more than 182 days and became a non-resident for the financial year ending March 31, 2006. In the return for the assessment year 2006-07, he disclosed the income by way of salary from the employers in India. Tax was duly deducted at source and paid in India.
In the return he filed, Mohan did not claim exemption. Familiar with the decision in the British Gas India (P) Ltd case, Mohan filed an application before the AAR contending that the salary paid by Infosys to a non-resident employee for rendering services outside India was not taxable in India in view of the Double Taxation Avoidance Agreement (DTAA) between India and Norway.
It was argued that he was not legally liable to pay Indian income-tax, even though he received the salary income in India and in rupees for the services rendered by him in Norway for a period exceeding 182 days during the financial year.
The AAR looked into the Indo-Norwegian DTAA. According to Article 25(2) of the treaty, where an Indian resident derives income, which may be taxed in Norway, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in Norway.
The question before the AAR was whether the salary paid by the employer in India is taxable in India, though the assessee is a non-resident in India during the relevant financial year. It was admitted that the assessee did not pay any tax in Norway. The AAR looked into Articles 16(1) and 16(2) of the DTAA.
As per Article 16(1), if the employment is exercised outside India, the remuneration derived therefrom may be taxed in Norway. It was open to Norway to subject remuneration received by Mohan to tax. Norway could have taxed the assessee. But he was not so taxed. Under Article 16(2), such remuneration shall be taxed in Norway if the duration of stay in Norway did not exceed 182 days.
May be, shall be
The AAR observed that there is a distinction between may be taxed and shall be taxed. Article 16 was excluded for the reason that stay in Norway was for a period exceeding 182 days in the financial year 2005-06.
The AAR referred to the commentary on the OECD Model Convention and pointed out that the right of taxation is available under Article 16(1) to both Norway and India in regard to the employment income of Mohan in accordance with the Indian tax laws. He did not produce any proof to show that Norway had subjected him to tax or that he made any payment to the State of Norway on account of income-tax.
In this situation, the AAR decided the case against the assessee and held that the salary paid by Infosys in India for services rendered in Norway was taxable in India though the assessee was a non-resident of India during the relevant financial year.
The importance of this Ruling arises from the fact that every employee who goes on deputation abroad should look at the DTAA between India and the foreign country.
In the instant case, if the assessee had voluntarily paid the income-tax on the salary attributable to services in Norway to the Norwegian Government, he would have escaped the Indian income-tax.
Obviously, in this case, it was favourable for him not to pay tax to Norway. There may be countries where the tax rate is lower and, therefore, more favourable to the employee. In such cases, the salaried employee sent out on deputation should look into the DTAA and pay the tax abroad if he wants to avoid Indian income-tax.
T. C. A. Ramanujam (The author is a former Chief Commissioner of Income-Tax.)