TDS u/s 192 in case of Non-Resident Indian
It is very common for Indians to work abroad and receive a salary from a foreign company. However, there is still a complexity involved in taxing salary received abroad by Non-Resident Indians (NRI). We all know only resident Indians are liable to pay tax in India for a simple reason that their income is earned in India.
However, there may be cases where a person is a non-resident and can also earn income in India for which the department has necessary provision for taxing such income. The important criteria for an income to be taxed in India is whether such income is earned in India or not.
Let’s look at some of the basic tenets which govern the taxation of salary income and determination of the residential status of an individual.
According to sec 6 of Income-tax act 1961, an individual will be considered as resident in India during the previous year:
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more (182 days); or
(b) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days (365 days) or more, is in India for a period or periods amounting in all to sixty days or more in that year.
If an individual satisfies any one of the above two conditions he will be considered as a resident in India during the previous year for Income tax purpose.
However, for an individual who is leaving the country for the employment outside India condition (b) would not be applicable and the only way he will be qualified as a resident of India would be, if his stay in India is 182 days or more during the previous year.
It becomes very important for any person to determine his residential status for taxability of his income during the previous year.
The above provision acts as a yardstick for a person who is leaving abroad and earning income outside India.
Taxability of Salary Income:
Salary received in India is taxable u/s 15 and TDS is deductible by the employer u/s 192 irrespective of his residential status. Hence, salary even if earned abroad and taxable in India, it will be deducted u/s 192 and there is no distinction between resident and non-resident with respect to salary income when it comes to deduction of TDS.
The very important criteria for determining whether a salary is taxable in India or not is to see whether such salary was accrued or arisen for work in India. According to sec 5(2) it reads as,
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
It was further clarified by giving an explanation (1) that "Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India"
From the above reading, it is clear that a salary to be taxed in India should have been accrued or arisen in India, otherwise mere receipt of such salary in India would not make it taxable in India even remittance is in an Indian bank account maintained by such Individual.
Furthermore, sec 9(1)(ii) taxes salary income only if it is earned in India.
For sec 9(1)(ii), to get attracted income should have fallen under the category of sec 5(2) and only then such income is taxable in India.
There may be a practical scenario where an individual may be a non-resident by virtue of explanation 1 to sec 6 during the PY by working for a foreign company. His stay in India would be less than 182 days during the PY and he would have been employed in a foreign company for a service in connection with India. In this case it is plain and clear that he would be a non-resident and his income is accrued or arisen in India irrespective from whom he receives salary, the same will be subject to tax in India u/s 9(1)(ii) and TDS u/s 192 will be deducted by the Indian Company as per CIT vs Eli Lilly (SC).
Even in the above case, Indian Company irrespective of being a payer or not will require to deduct TDS u/s 192 from such employee for the amount of salary received by such employee for the service in connection with India. TDS u/s 192 will be deducted by the Indian Company by considering his foreign salary income and salary which is payable to him in India.
If an Individual goes abroad for service to be rendered there, in other words, service in connection with the foreign company and all his income from salary is deemed to be accrued or arisen for service he carried out abroad.
In the above situation, it is important to analyze a case law Avdesh Kumar, Ghaziabad vs DCIT(ITAT)
In the above case, employee was sent from an Indian Company to be served in Korea for a work which is in relation to a company situated in Korea. There is no doubt about the nature of work and income in relation to such work carried out in Korea. It is simple to understand the fact that such income is accrued or arisen in Korea. The following facts are relevant in the above case,
i) Total Salary amounting to Rs. 29,57,900 which consists of salary from Indian Company of Rs. 12,48,198 and salary for the work carried out in Korea amount to Rs. 17,09,702.
ii) TDS on the above salary was deducted u/s 192 which comes to Rs. 7,68,829.
iii) The assessee filed a return of income (ROI) citing he is a resident and showed income from Rs. 12,48,198 and corresponding tax in his ROI and claimed the balance amount of Rs. 4,95,937 as a refund from the department.
iv) A.O added the above income of Rs. 17,09,702 as a part of the salary income of the assessee and passed an order on the same.
Though assessee erred in filing an ROI by claiming he is a resident and the fact that he was a non-resident during the PY by not staying in India for more than 182 days, he was granted refund by the tribunal by citing that income earned in Korea was not accrued or arisen in India hence such income was not subject to tax in India. DTAA between India and Korea with respect to salary portion is as under,
1. Subject to the provisions of Articles 16, 18, 19, 20 and 21, 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.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:
(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any 12 months commencing or ending in the fiscal year concerned; and
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.
From the above reading, it is clear that salary received in relation to employment in Korea will only be subject to tax in Korea alone and it cannot be brought to tax again in India because of the reason TDS u/s 192 was deducted.
It is clear that once DTAA provisions apply to the assessee then DTAA or IT act, whichever is more beneficial to the assessee the same shall be applied. Tribunal gave the verdict in favour of the assessee by not adding the above Rs. 17,09,702 as salary income and granting a refund of Rs. 4,95,937 to the assessee.
The following points merits consideration based on the above understanding:
i) Though Eli Lilly case puts the responsibility on the Indian company to deduct TDS, it is important to determine the nature of income earned by such employee for his work abroad.
ii) In the above case, the Indian Company erred in deducting TDS u/s 192 without knowing the fact that income earned in Korea cannot be taxed in India.
iii) The contract of employment determines whether income will be taxed in India or not. Due consideration should be given to the contract of employment for the purpose of deducting tax.
The above aspects are to be considered for any person who is leaving abroad for employment.
Conclusion:
1. I would advise the employee to read the employment contract in relation to his work abroad in order to know the exact nature of income he is earning in foreign currency and appropriately ask the employer to deduct tax on his income.
2. Income repatriated to India in foreign currency should only be deposited in Non-Resident Rupee (NRE) account in order to avoid any confusion.
3. If any tax was deducted by the foreign employer, necessary details of the same should be kept in a documentary file (preferably hard copy) for any future references and verification by the IT department, if demanded.
4. Return of Income (ROI) should be filed specifying as Non-resident if stay in India is not more than 182 days during the previous year.
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