Should an Indian company deduct tax from salary paid to its employees on deputation to its UK parent, when the income has been offered for tax in the UK in pursuance of the DTAA?
Speaking at the World Oil & Gas Assembly in Jaipur on December 2, 2005, Frank Chapman, BG Group Chief Executive, said, "In the real world one can bump into many obstacles." He spoke of `difficulties around the balance between interventionist strategies and a reliance on markets' and the need for `a delicate balancing act around achieving confidentiality within the relationship, as well as transparency'. And he painted the picture of `that early uncharted territory where the parties are trying to frame the relationship,' where `the basics of trust, alignment, and time to get to know one another are essential for success'.
Recently, British Gas India Private Ltd, Gurgaon, which is part of the UK-based BG Group, did just that, when trying to explore an ambiguous tax terrain, and aiming to ensure alignment with what's right. The company's application before the Authority for Advance Rulings (AAR), New Delhi, had a straight poser: Should the company deduct tax from salary paid to its employee who is on deputation to the parent company?
Facts of the case
First, the facts. "India is one of BG Group's six core geographic areas of operation," and BGI, the applicant, lent some of its employees to BG Group entities outside India. "These employees temporarily work at overseas locations with BG Group companies."
The application before the AAR was about two such employees, identified for this story as NP and MG, `at present working in the UK,' as the text of the Authority's ruling dated November 8, on www.taxindiaonline.com reads.
NP, a Business Analyst at BGI, is on a three-year deputation from 2004 to BG International Ltd, UK. "During the period of deputation, he will continue to be on the payrolls of the applicant (that is, BGI, the Indian company) 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." NP is also eligible to receive certain allowances from BG UK, such as `commodities and services allowances, expatriate allowance and relocation allowance'. These allowances, which are taxable in the UK, are for `the services rendered during his overseas assignment' and also `to meet the additional cost of living in the UK'.
NP has been filing his tax returns in the UK. He has been visiting India on vacations, and has been regularly filing his tax returns in India too. MG's case is almost similar, but for difference in the period of deputation. During the financial year 2005-06 (assessment year 2006-07), NP's total stay in India did not exceed 60 days, while MG's stay was for 88 days.
BGI submitted that under the provisions of Article 4(1) of the DTAA (double taxation avoidance agreement) between India and the UK, the two employees NP and MG were tax residents of the UK. "Article 16(1) of the DTAA provided that salary derived by a resident in the UK in respect of employment would be taxed in the UK, unless the employment was exercised in India," said BGI. Accordingly, the UK had the right to tax salary that the two employees received in India, said the company.
The Commissioner of Income-tax (CIT), Faridabad, had a different view. He relied on the assignment letter that BGI had given its employees. It said, "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."
This clause in the company's letter would make NP liable to pay tax in India though he was a non-resident in India for the financial year 2005-06, said the CIT. Ditto for MG too, he contended. In MG's case, the DTAA would not apply, noted the CIT, because `he was a resident in India during the financial year 2005-06,' the stay in India being more than 60 days.
On the last, though, BGI's response was that as per Explanation (a) to Section 6(1) of the Income-Tax Act, 1961, 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 (c) of Section 6(1). Since MG had 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, submitted BGI.
Even after the question of residential status was sorted out, the Department wished to bring the Indian salary to tax in India. "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 UK," said Kartar Singh, arguing for the Department. "Mandate of the provisions of law as contained in sub-section (2) of Section 5 was very clear that any income received in India was subject of taxation laws of this country," he reasoned.
But, M. S. Syali, speaking for BGI was of the view that Section 4 (`charge of income-tax') and Section 5 (`scope of total income') were `subject to the terms of DTAA'. Tax could be deducted at source only when income was chargeable to tax in India, said Syali. "If the income was not chargeable in India, the provisions of deduction of tax at source would not apply."
The Authority's reasoning
Mr Syed Shah Mohammed Quadri, Chairman of the AAR, and Members Mr A. S. Narang and Mr A. Sinha, heard the rival arguments. They studied the relevant provisions of law and also precedents cited by both the sides. Importantly, the Authority looked at Section 192 of the Income-Tax Act, which is about deduction at source of tax from salary. "A plain reading of this provision makes the intention of the Legislature clear," observed the AAR. "At the time of paying salary to its employee, the employer shall deduct applicable income-tax therefrom."
What 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," clarified the AAR. It said that Section 192(2) - which is relevant to those `employed simultaneously under more than one employer', or those who `held successively employment under more than one employer' - covers NP and MG, said the Authority. Only, "The employee has to furnish these details and particulars in the prescribed form and manner."
Thus, salary paid by BGI to NP and MG shall not be taxable in India, if the same has been offered for tax in the UK in pursuance of the DTAA, ruled the AAR. Also, that BGI should not deduct tax at source from salary paid to the two, "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." A ruling of interest to those who go on overseas deputation.