1. Mr. A leaves India (for the first time) in May 2012 for a foreign country and visits India during September and December, 2012 - Accordingly, his total stay in India during the AY 2013-14 is less than 182 days and more than 60 days and his total stay in the foreign country is more than 183 days.
2. The employer remits a substantial part of his salary directly to his Bank Account in India and also pays the balance amount of his salary in his Bank Account in the foreign country.
3. However, Mr. A renders the employment wholly in the foreign country. The employer is a Permanent Establishment of an Indian Company in that foreign country and the case of Mr. A is covered by Clause 15 Dependent Personal Services of the DTAA between Indian and that foreign country as follows :- "ARTICLE 15 : Dependent Personal Services - 1. Subject to the provisions of Articles 16, 18 and 19, 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 period 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."
3A. The exception under Article 15(2) by virtue of which Income may have been taxable in India - is not applicable because Mr. A is not in India for more than 183 days (Clause (a)) and Clause (c) - remuneration is borne by the Permanent Establishment in the foreign country. The conditions in Clause 15(2) - are cumulative - use of "and" - so all the three conditions must be satisfied for it fall within the mischief of clause 15(2).
4. Tax paid in the foreign country is lower than the average rate of Tax in India.
Inferences
1. As per Fact No. 1, Mr. A will be Resident in India for AY 2012-13 as per Section 6(c) of the I T Act.
2. As per Fact No. 2, the Salary received in India for AY 2012-13 will be included in the Scope of Total Income -even if Mr. A was a Non-Resident - as per Section 5(2)(a) of the I T Act.
3. As per Fact No. 3, the foreign country has the right to Tax the Income from Dependent Personal Services to the exclusion of the jurisdiction of India.
The query is how to compute the DTAA releif:-
a. Elimination of Double Tax - Include the salary Income for Tax Computation in India and then reduce Tax paid in the foreign country ; or
b. The Salary Income is exempt by virtue of Article 15 of DTAA from Taxation in India and is not included in salary Income for Tax Computation in India.
15 May 2013
Please also refer to Ms. Pooja Bhat v. DCIT [2008] 26 SOT 574 [Mumbai] wherein observed in para 7 that "The scheme of taxation of income is contained in Chapter III of Double Taxation Avoidance Agreement (DTAA)/Indo-Canada Treaty. On an analysis of various Articles contained in Chapter III, we find that the scheme of taxation is divided in three categories. The first category includes Article 7 (Business profits without P.E. in the other State), Article 8 (Air transport), Article 9 (Shipping), Article 14 (capital gains on alienation of ships or aircrafts operated in international traffic), Article 15 (Professional services), Article 19 (Pensions) which provide that income shall be taxed only in the State of residence. The second category includes Article 6 (Income from immovable property), Article 7 (Business profits where PE is established in other contracting State), Article 15 (Income from professional services under certain circumstances), Article 16 (Income from dependent personal services where employment is exercised in other contracting State), Article 17 (director’s fees), Article 18 (income of Artistes and Athletes), Article 20 (Govt. Service) which provide that such income may be taxed in the other contracting State, i.e., State of income source. The third category includes Article 11 (Dividends), Article 12 (Interest), Article 13 (Royalty and fee for technical services), Article 14 (capital gains on other properties) and Article 22 (Other income) which provide that such income may be taxed in both the contracting States. For example, paragraph 1 of Article 11 provides that dividend income may be taxed in other contracting State while paragraph 2 provides that dividend income may also be taxed in the State of residence. Similarly, Article 14(2) and Article 22 provide that income may be taxed in both the countries." and HELD (also para 8) "In our opinion, such provisions (Clause 23 – Elimination of Double Taxation) has been made in the treaty to cover the cases falling under the third category mentioned in the preceding paragraph (para 7, supra) i.e., the cases where the income may be taxed in both the countries. Hence, the cases falling under the first or second categories would be outside the scope of Article 23 since income is to be taxed only in one state."
The case was with respect to India Canada DTAA. The provisions of the DTAA between India and the foreign country in the above query are similar to India Canada DTAA in respect of Dependent Personal Services and Elimination of Double Tax Relief (Article 23 in India Canada DTAA).
16 May 2013
I have also come across this notification by CBDT
"SECTION 90 OF THE INCOME TAX ACT, 1961 – DOUBLE TAXATION RELIEF – AGREEMENT WITH FOREIGN COUNTRIES – NOTIFIED AGREEMENT
NOTIFICATION NO. 91/2008, DATED 28-8-2008
In exercise of the powers conferred by sub-section (3) of section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief of tax or as the case may be, avoidance of double taxation, provides that any income of a resident of India "may be taxed" in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement."
22 May 2013
Foreign employer is a branch (PE) in the foreign country of a subsidiary (Incorporated and Resident of a Tax Haven jurisdiction) of an Indian Company.
CAclubindia
