P R E S E N T 

Honble Mr.Justice Syed Shah Mohammed Quadri (Chairman)

Mr.A S Narang (Member)

Mr.A Sinha (Member) 

Wednesday, the eighth November two thousand six 

A.A.R. No.725 OF 2006 

AIT Head Note: Salary paid by the Company registered in India to non-resident employees  for rendering services outside India shall not be taxable in India if the same has been offered for tax in the UK in pursuance of the DTAA.   

R U L I N G
(By Mr.A Sinha)

            The present application has been filed under section 245Q of the Income-tax Act 1961 [for short the Act] by the British Gas India Private Limited, Gurgaon [for short the applicant}, company which is registered in India under the Companies Act 1956.  Though the applicant itself is a resident in India within the meaning of section 6 of the Act, it has raised certain issues relating to the tax liability of some of its non-resident employees lent to group companies abroad.  The applicant has sought advance ruling of this Authority on the following questions :

            (i)         Whether in the facts and circumstances of the case and in law, salary income received in India by Mr.Manish Gupta from British Gas India  Private Limited for rendering services outside India is taxable in India?

            (ii)        Whether in the facts and circumstances of the case and in law, British Gas India Private Limited is required to withhold taxes on salary paid in India to Mr.Nipun Pradhan and Mr.Manish Gupta for rendering services outside India?

2.         The applicant has stated that it is a part of BG Group, a leading international energy company which deals in all kinds of natural gases.  India is one of BG Groups six core geographic areas of operation.  The applicant is responsible for managing and developing upstream and downstream interest of the Group in this country.  The applicant has lent some of its employees to BG Group entities outside India.  These employees temporarily work at overseas locations with BG Group companies.  Mr.Nipun Pradhan and Mr.Manish Gupta are two such employees of the applicant, who are at present working in the United Kingdom (U.K.).

            Mr.Nipun Pradhan :

Mr.Pradhan commenced his employment with the applicant in May-June 2000 as a Business Analyst at Gurgaon, India.  With effect from 19.01.2004 Mr.Pradhan was deputed to BG International Ltd., U.K (BG UK), a company registered in the U.K..  He was assigned as a Senior Analyst for a period of two years extendable for third year by mutual consent.  His assignment has since been extended till 18.01.2007.  He is currently working with BG UK at Berkshire, U.K..  During the period of deputation, he will continue to be on the payrolls of the applicant and would regularly receive salary in India from the applicant.  The applicant would recover this Indian salary from BG UK by raising a corresponding debit note.  Mr. Nipun Pradhan will, in addition to salary in India, also receive certain allowances in the U.K., namely commodities and services allowances, expatriate allowance and relocation allowance from BG UK.  These allowances are paid to him for the services rendered during his overseas assignment with BG UK, as also to meet the additional cost of living in the U.K..  These allowances are taxable in the U.K..  During the period of assignment, he will be rendering services to BG UK in the U.K..  In other words, he would not be rendering any services to the applicant in India during this period.  During the period of assignment, he will be visiting India on vacations.  During the financial year 2005-06 (assessment year 2006-07), Mr.Pradhans total stay in India did not exceed 60 days.  As such, according to the applicant, he should be treated as a non-resident in India during this year under section 6(1) of the Act.  Mr.Pradhan is a resident but not ordinarily resident as per U.K. Law on income-tax.  He has filed his tax returns in U.K. for the financial year 2003-04 (i.e. 6 April, 2003 to 5 April, 2004) and 2004-05 (i.e. 6 April 2004 to 5 April, 2005), but is yet to file tax return for tax year 2005-06 (i.e. 6 April, 2005 to 5 April, 2006) as the same is due to be filed on or before 31 January, 2007.  In his tax return for the financial year 2003-04, Mr.Nipun Pradhan has also included the salary received during the period in India.  He has also been regularly filing his tax returns in India.

Mr.Manish Gupta :

Mrr. Gupta commenced his employment with the applicant in February-March, 2002 as a Management Trainee at Gurgaon, India.  With effect from 01.07.2005, Mr.Gupta was deputed to BG UK as a Business Analyst for a period of two years.  Since then, he has been working with BG UK at Berkshire, U.K..  During the period of deputation he will continue to remain on the payrolls of the applicant and would regularly receive salary in India from the applicant who will recover this from the BG UK by raising a corresponding debit note.  Besides the Indian salary, BG UK will also pay him certain allowances, namely commodities and services allowances, expatriate allowance and relocation allowance in the U.K..  These allowances are paid for both services rendered during overseas assignment in the U.K., as also to meet the additional cost of living in the host country.  During the period of assignment, Mr.Gupta will be rendering services to BG UK and he will not be rendering any services to the applicant in India.  During the financial year 2005-06 (assessment year 2006-07), Mr.Guptas total stay in India did not exceed 182 days.  As such, according to the applicant, he should be treated as a non-resident during this period under Explanation (a) to section 6(1) of the Act.  As per the U.K. LAW, Mr.Gupta is a resident but not ordinarily resident from the date of his arrival there, i.e. 1 July 2005, and he is yet to file his tax return there for the tax years 2005-06 (i.e. 6 April 2005 to 5 April, 2006), as the same is due to be filed on or before 31 January 2007.

3.         The Commissioner of Income-tax, Faridabad (for short Commissioner) has in his comments stated that though Mr.Nipun Pradhan was a non-resident in India for the financial year 2005-06, he was still liable to pay tax in India by virtue of the provisions contained in sub-section (2) of section 5 of the Act and the following express clauses contained in the assignment letter dated 26.03.2003 :

For the period of the overseas assignment, you will be employed according to the terms and conditions of employment as specified in your Contract of employment and the International Assignments documentation, which is subject to periodic review.  Whilst on assignment, your terms and conditions will be governed by the law of India.

According to the Commissioner, so far as Mr.Manish Gupta is concerned, he spent a total number of 88 days in India during the financial year 2005-06.  But prior to that in all other previous years, he was present in India for all the 365 days.  As such, he would be regarded as a resident in India in view of the provisions of Explanation(b) to sub section(1) of section 6 of the Act.  Mr.Manish Gupta would also be liable to pay tax in India under section 5 of the Act as he has received salary in India for the whole financial year 2005-06.  His assignment letter dated 25.05.2005 also contains a clause similar to that of Mr.Nipun Pradhan indicated above in this paragraph.  This would also make him liable to pay tax in India.  As he was a resident in India during the financial year 2005-06, the provisions contained in article 16(1) of the Double Taxation Avoidance Agreement (DTAA) with the U.K. would not be attracted in this case.

4.         The comments of the Commissioner dated 29.05.2006 were forwarded to the applicant, asking it to show cause as to how Mr.Manish Gupta could be considered a non-resident in the light of the Explanation(a) to section 6(1) of the Act.  The applicant in its reply dated 26.07.2006 stated that Explanation(a) to section 6(1) mentioned that in the case of a citizen of India who left India in the previous year for the purpose of employment outside India, the words one hundred eighty two days would substitute the words sixty days in sub-clause 9c) of section 6(1).  As Mr.Gupta has spent only 88 days in India in the financial year 2005-06, which is less than 182 days, he would be a non-resident in India for the above period.

5.         The matter was heard by us on 31.07.2006.  It was observed that the contention of the Commissioner that Mr.Gupta had been in India for more than 60 days ignored Explanation (a) to section 6(1) of the Act.  If clause (c) was read in the light of the said Explanation, it would be apparent that the stay of Mr.Gupta in India was less than 182 days and, therefore, he would become a non-resident.  Thus, the requirement of the tax liability of non-resident for the purpose of definition of Advance Rulings in section 245N(a) of the Act was satisfied.

Accordingly, by order dated 31.07.2006, this Authority held that Mr.Gupta was not a resident in India in the financial year 2005-06.

6.         During the course of argument, the learned counsel for the applicant contended that section 4 of the Act created a charge on the total income subject to the provisions of the Act.  Section 5 specified the scope of total income which was also subject to the provisions of the Act.  Section 90, under which the Central Government entered into agreement with the Government of a foreign country, referred to granting of relief in respect of income-tax chargeable under the Act.  Since section 90 itself provided for relief in respect of tax chargeable under the Act, the provisions of section 4 and 5 would be subject to the terms of DTAA.  He placed reliance for the above proposition on the cases of Union of India Vs. Azadi Bachao Andolan (263 ITR 706 (SC) and CIT vs. P.V.A.L., Kulandagan Chettiar (267 ITR 654 (SC).  The learned counsel further argued that tax could be deducted at source only when income was chargeable to tax in India.  If the income was not chargeable in India, the provisions of deduction of tax at source would not apply.  According to him, Chapter XVII dealing with deduction of tax at source, provided for Collection and Recovery of Tax.  Chargeability to tax was a condition precedent and where the tax itself was not chargeable, there was no question of collection and recovery thereof.  In support of the above argument, the learned Counsel placed reliance on CIT Vs Cooper Engineering Ltd. (68 ITR 457 (Bom.) and Al Nisr Publishing (239 ITR 879).  He further argued that under the provisions of article 4(1) of the DTAA between India and the U.K., Mr.Nipun Pradhan and Mr.Manish Gupta were tax residents of the U.K..  Article 16(1) of the DTAA provided that salary derived by a resident in the U.K. in the respect of employment would be taxed in the U.K., unless the employment was exercised in India.  This gave U.K. the right to tax Mr.Nipun Pradhans and Mr.Guptas salary received in India. 

7.         Mr. Kartar Singh, Additional Commissioner, on the other hand, argued that the mandate of the provisions of law as contained in sub section (2) of section 5 was very velar that any income received in India was subject of taxation laws of this country,.  Therefore, even if Mr.Nipun Pradhan and Mr.Manish Gupta were non-resident in the financial year 2005-06, the salary income received by them in India would be governed by the Act.  It was also argued that both the employees were posted by the applicant to its group company in the U.K. on deputation basis, with salaries being paid by the Indian company in India, but certain allowances being paid by the group company in the U.K..  There was no doubt, as regards the Indian salary, that source of such salary income lay in India, since both the employees continued to be on the payroll of the Indian company in India even when they were posted in the U.K..  Therefore, it could not be said that employment was exercised on behalf of the U.K. company.  Also, by virtue of the express clause contained in the assignment letters dated 26.03.2003 and 25.05.2005 in respect of Mr.Nipun Pradhan and Mr.Manish Gupta respectively, the cases of the said persons were well covered by the Indian laws and not the laws of the U.K., as pleaded by the applicant.  As regards article 16 of DTAA, Mr. Kartar Singh argued that the words employment and exercised were important .  Both the employees were in the regular employment with Indian company although on deputation to a Contracting State.  Salaries were being paid in India.  The terms of employment were governed by laws of India.  The employees had simply been leased to the U.K. associate company.  They were not on regular payroll of the overseas company.  Considering these circumstances and the facts of the case, it could not be said that employment was on behalf of the foreign company.  These employees rather performed special duties at the behest of their Indian employers although at a distant destination.  Therefore, the provisions of article 16 of DTAA did not help the applicant in so far as taxability of salary paid in India was concerned.  He accordingly prayed that this Authority might direct the applicant to deduct taxes upon the payments made to Mr.Nipun Pradhan and Mr.Manish Gupta by way of salaries in India irrespective of the fact that the services were being rendered by them outside India, i.e. in the U.K.

8.         We have considered the contentions of the learned Counsel and carefully gone through the pleadings and written submissions of both the sides. The main issue that needs to be decided first is whether the salary received in India by the above named two employees of the applicant is taxable in India or not.  It may incidentally be mentioned that so far as allowances paid to them in the U.K. is concerned, the Commissioner has not claimed these to be taxable in India.  He has rather stated his written submission that there is no dispute with regard to payments made in the U.K..  Besides, it is not an issue to be decided in this case.  So, once it is decided that the Indian salary is taxable in India, then it well have to be determined whether the DTAA between India and the U.K. contains any provisions for granting relief in respect of such taxes or for avoidance of double taxation.  The question whether any taxes are to be deducted from the Indian salary or not will follow from what view we take on the foregoing issues and the provisions of section 192 of the Act.  In this connection, it will be useful to refer to section 5 of the Act, which lays down the scope of the total income.  The relevant provision of this section reads as under :

5(1)     xx        xx        xx        xx        xx

(2)        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;  . 

(b)        xx        xx        xx        xx        xx       

            The above provision very clearly states that the total income of a non-resident includes all income from whatever source derived, which is received in India by or on behalf of such person.  This leaves no manner of doubt that the Indian salary of the concerned employees of the applicant is taxable in India.  In fact, the applicant has also fairly conceded that the salary received by Mr.Nipun Pradhan and Mr.Manish Gupta in India is chargeable to tax here.  But it is contended by the applicant that because of the provisions of the DTAA, no tax is actually payable in India.

9.         We may now turn to the issue of DTAA. Clause (1) of article 4 of this agreement reads as under :

For the purpose of this Convention, the term resident of a Contracting State means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.

Because of their residence, Mr.Nipun Pradhan and Mr.Manish Gupta are liable to income tax in the U.K. and so they are residents of the U.K. for the present purpose.  These two persons are presently exercising their employment in the U.K..  Therefore, the provisions of clause (1) of article 16 would be attracted in their case, which is extracted below :

Subject to provisions of Articles 17 (Directors fees), 18 (Artistes and athletes), 19(Government remuneration and pensions), 20 (Pensions and annuities), 21(Students and trainees) and 22 (Teachers) of this Convention, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State.  If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

Since they are drawing their salary in respect of employment being exercised in the U.K., they shall be taxable in that country.

10.        Section 90 of the Act empowers the Central Government to enter into agreements with foreign Governments for granting tax relief and avoidance of double taxation.  Sub-section (2) of this section states that in relation to a person covered by such an agreement, the provisions of the Act shall apply to the extent they are more beneficial to that person.  In Union of India vs. Azadi Bachao Andolan (263 ITR 706) and Commissioners of Income-tax Vs. P.V.A.L., Kulandagan Chettiar (267 ITR 654), the Supreme Court has held that the provisions of an agreement notified under section 90 would override the provisions of the Act to the extent of inconsistency between the two.  Sincie sections 4 and 5 are subject to other provisions of the Act, including section 90, the provisions of such an agreement would prevail over the provisions relating to chargeability to income tax and ascertainment of total income.  In view of these decisions, there is no doubt that it is open to the applicant to take recourse to article 16 of the DTAA, which would prevail over the provision of section 5(2)(a) of the Act.  It is, in fact, seen from the pleadings of the applicant, that in his tax return filed in the U.K. for the financial year 2003-04, Mr.Nipun Pradhan has also included the salary received by him during this period in India.  Thus, he has offered the Indian salary also for tax purpose in the U.K..

11.        Chapter XVII of the Act deals with collection and recovery of tax,.  The purpose of the provisions of this chapter, as contained in section 190, is that prior to the regular assessment being made, the tax on income shall be payable by deduction or collection at source or by advance payment, etc..  A question arises whether tax at source can be deducted under this chapter only if the income is taxable under the Act.  The contention of the applicant is that chargeability to tax is a condition precedent for deduction of tax.  In this connection, it has relied on the cases of Cooper Engineering Limited (68 ITR 457 Bom) and Al Nisr Publishing (239 ITR 879 AAR).  In Cooper Engineering Limited case, the question was deduction of tax on payment of interest to a non-resident, under the erstwhile provision of section 18(3B) of the Act.  The Bombay High Court held as follows :

Therefore the position upon the statute is this that unless any payment of interest is such that interest is chargeable under the Act, the liability upon the person responsible for paying it to deduct the tax at source is not there.  In the present case, upon the facts found we have already shown that the amount of interest payable to M/s Tata Ltd., London was not an amount chargeable under the Act.  Therefore, there was no obligation upon the assessee to deduct the amount of interest at source.

In Al Nisr case, the question was whether the advertisement revenue remitted out of India by the agents of the non-resident applicant, was subject to deduction at source under section 195 of the Act.  This Authority considered the issue in the light of the DTAA between India and UAE and the provisions of the Act.  It came to the conclusion that the agent had an independent status within the meaning of article 5 of the DTAA, and the non-resident applicant had no permanent establishment in India within the meaning of article 7 of the DTAA.  On the basis of this, the Authority determined that the commission received in India was not taxable in the hands of the applicant.  Therefore, there was no obligation to deduct tax at source from its remittance.

12.        Section 192 deals with deduction from salaries.  The relevant provisions of this section are given below :

192

(1)        Any person responsible for paying any income chargeable under the head Salaries shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assesses under the head for that financial year.

(1A)      xx        xx        xx        xx        xx

(1B)      xx        xx        xx        xx        xx

(2)        Where , during the financial year, an assesses is employed simultaneously under more than one employer, or where he has held successively employment under more than one employer, he may furnish to the person responsible for making the payment referred to in sub-section (1) (being one of the said employers as the assessee may, having regard to the circumstances of his case, choose), such details of the income under the head Salaries due or received by him from the other employer or employers, the tax deducted at source therefrom an such other particular, in such form and verified in such manner as may be prescribed, and thereupon the person responsible for making the payment referred to above shall take into account the details so furnished for the purposes of making the deduction under sub-section(1)].

xx        xx        xx        xx        xx       

The above provision is quite clear and unambiguous.  A plain reading of this provision makes the intention of the Legislature clear.  At the time of paying salary to its employee, the employer shall deduct applicable income tax therefrom.  But if the employee is serving more than one employer simultaneously, he has a choice of furnishing details of salary received from one employer and other particulars with regard to it, to the other employer who shall take these into account for the purpose of making deduction of tax at source.  The employee has to furnish these details and particulars in the prescribed form and manner.  In the case before us, Mr.Nipun Pradhan and Mr.Manish Gupta are permanent employees of the applicant and are at the same time temporarily serving BG UK..  They are simultaneously receiving salary from both.  Therefore, they are covered by sub-section (2) of section 192.

13.        In the light of the above discussion, we determine as follows :

(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 sour