1. Introduction

The case of S. Mohan, In Re adjudicated by the Authority for Advance Rulings on August 24, 2007, addresses the critical issue of whether salary income earned by an Indian resident, who rendered services abroad, is taxable in India under the Double Taxation Avoidance Agreement (DTAA) between India and Norway. The applicant, S. Mohan, employed by Infosys Technology Ltd., sought clarification on his tax liability, asserting non-resident status due to his overseas assignment in Norway exceeding 182 days within the financial year 2005-06.

The key issues revolved around the interpretation of Article 16 of the Indo-Norway DTAA concerning taxation of dependent personal services and the applicability of relief provisions under Article 25. The parties involved were the appellant, S. Mohan, represented by his counsel, and the Departmental Representative, Mr. A.N. Pahuja, Commissioner of Income Tax.

2. Summary of the Judgment

The Authority for Advance Rulings concluded that S. Mohan's salary income paid by his Indian employer is taxable in India. Despite his claim of non-resident status based on prolonged overseas service, the applicant failed to provide evidence of tax payment in Norway. The Authority emphasized that under Article 16(1) of the Indo-Norway DTAA, remuneration from employment exercised outside India "may be taxed" in the host state, Norway. However, since no tax was levied or paid in Norway, India is entitled to tax the income without granting any double taxation relief.

3. Analysis

3.1 Precedents Cited

The judgment references significant precedents, notably:

• CIT v. P.V.A.L Kulandagan Chettiar, [2004] 267 ITR 654: The Supreme Court elucidated the principles governing global income taxation and the supremacy of DTAA over the Indian Income-tax Act when conflicts arise.
• British Gas India P. Ltd., [2006] 287 ITR 462; [2006] 157 Taxman 225 (AAR): Addressed the taxability of salary paid to non-resident employees and the conditions under which double taxation relief is applicable.

These cases guided the Authority in interpreting the DTAA provisions, particularly in distinguishing between mandatory tax obligations under domestic law and the discretionary taxing rights under the treaty.

3.2 Legal Reasoning

The Authority delved into the text of Article 16 of the Indo-Norway DTAA, distinguishing between paragraphs (1) and (2). It clarified that paragraph (1) enshrines a discretionary right to tax ("may be taxed") for the host state, whereas paragraph (2) imposes a mandatory taxation obligation subject to specific conditions.

Since S. Mohan did not satisfy the conditions under Article 16(2) — notably the absence of tax payment in Norway — the Authority focused on Article 16(1). It determined that the discretionary taxing right of Norway was not exercised, thereby leaving India as the sole taxing authority without the necessity of granting double taxation relief.

Additionally, the Authority rejected the applicant's reliance on the Supreme Court's interpretation in CIT v. P.V.A.L Kulandagan Chettiar, emphasizing factual distinctions and the irrelevance of OECD Model Convention interpretations in this context.

3.3 Impact

This judgment reinforces the principle that absent tax payment in the host state, India retains the right to tax employment income, even if services are rendered abroad. It underscores the necessity for non-residents to substantiate claims for double taxation relief with concrete evidence of tax liability in the foreign jurisdiction.

Future cases involving similar factual matrices will likely refer to this ruling, particularly regarding the interpretation of the discretionary taxing rights under DTAA and the non-eligibility for tax relief in the absence of actual foreign tax payment.

4. Complex Concepts Simplified

4.1 Double Taxation Avoidance Agreement (DTAA)

A DTAA is a treaty between two countries to prevent individuals and businesses from being taxed twice on the same income. It allocates taxing rights between the countries to ensure fair taxation.

4.2 Article 16 of DTAA

This article deals with taxation of dependent personal services (e.g., salaries). It outlines when and where such income should be taxed, providing rules to avoid double taxation.

4.3 Resident vs. Non-Resident for Tax Purposes

An individual's tax residency status determines which income is taxable in a particular country. Residents are typically taxed on global income, while non-residents are taxed only on income earned within the country.

5. Conclusion