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S. Mohan, In Re

Authority For Advance Rulings

Aug 24, 2007

Judgment

Subsequent
References

CaseIQ

Smart Summary (Beta)

Structured Summary of the Opinion (P.V. Reddi J., Chairman)

Factual and Procedural Background

The applicant filed a return of income for the assessment year 2006-07 before the ADIT (International Taxation), Chennai, disclosing total income of Rs. 6,56,390 and paying tax of Rs. 1,49,855 (which included tax withheld). His employer Infosys Technology Ltd., Bangalore, had deducted Rs. 89,639 from the salary of Rs. 5,08,615. During the relevant financial year 2005-06 the applicant was employed with HCL Ltd., New Delhi (1 April 2005 to 10 May 2005) and with Infosys Technology, Bangalore (16 May 2005 to 31 March 2006). He was deputed by Infosys to Norway where he worked for more than 182 days and claimed to be a non-resident for Indian tax purposes.

The applicant paid Indian tax on the disclosed income without claiming exemption but sought an advance ruling, relying on the Indo–Norway Double Taxation Avoidance Agreement (DTAA) and invoking the Authority's prior ruling in British Gas India P. Ltd. He contended that salary paid by an Indian employer for services rendered outside India to a non-resident should not be taxable in India under the DTAA. The Director of Income-tax (International Taxation), Chennai, filed comments taking the position that Article 16(1) (but not Article 16(2)) of the DTAA applies, that India can tax the income subject to relief for taxes paid in Norway, and that no proof of tax paid in Norway had been produced by the applicant. The Authority formulated the question (see below) and heard the parties before pronouncing a ruling.

Legal Issues Presented

Whether the salary paid by the employer in India is taxable in India, though the assessee is non-resident in India during the relevant financial year?

Arguments of the Parties

Applicant's Arguments

The salary paid by Infosys (an Indian employer) for services rendered by the applicant in Norway is not taxable in India under the Indo–Norway DTAA (relying primarily on Article 16).
The applicant asserted non-resident status for the year because he worked in Norway for more than 182 days and filed his return without claiming exemption but seeks a ruling on his legal liability.
He relied on the Authority's earlier ruling in British Gas India P. Ltd. and sought to place reliance on the Supreme Court decision in CIT v. P.V.A.L. Kulandagan Chettiar to support the contention that treaty provisions can modify tax liability under domestic law.

Revenue / Departmental Arguments

The Director of Income-tax submitted that Article 16(1) (but not Article 16(2)) applies because the applicant stayed in Norway for more than 182 days, and therefore India may tax the income under the treaty and domestic law.
Relief under the DTAA (Article 25(2) as cited) would require proof of tax paid in Norway; no such proof was produced.
The Director contended that the British Gas ruling is distinguishable on facts and on the conditions under which relief was granted in that ruling.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
British Gas India P. Ltd., In re — [2006] 287 ITR 462 (AAR) (and related order [2006] 285 ITR 218)	Held that salary paid to employees for services outside India would not be taxable in India if the same has been offered to tax in the other Contracting State; relief and non-deduction at source were made conditional on proof of taxes paid in the other State.	The court held this ruling distinguishable and inapplicable because the applicant had not shown that tax was paid or offered for tax in Norway. The Authority also considered observations in the s.245R(2) order construing section 6(1) of the Income-tax Act to be on different provisions and facts and therefore not relevant.
CIT v. P.V.A.L. Kulandagan Chettiar — [2004] 267 ITR 654 (Supreme Court)	States general principles that a DTAA can modify or qualify domestic charging provisions (sections 4 and 5), and, on the facts of that case, residence/fiscal domicile rules (article IV) led to the treaty prevailing over domestic tax liability where personal and economic relations were closer to the other State.	The Authority held this decision inapplicable: the language of the relevant treaty article differed; the rules for determining residence under article IV were not engaged here; the factual matrix (closer personal/economic relations) was absent as the applicant was on deputation and salary was paid in India by an Indian employer.

Court's Reasoning and Analysis

The following summarizes the step-by-step legal reasoning as set out in the opinion.

The starting point is the relevant treaty text: Article 16 of the Indo–Norway DTAA (Dependent personal services). The Authority set out both paragraph 1 and paragraph 2 of Article 16 and noted Article 25(2) (tax credit / exemption mechanics) as relevant.
Article 16(2) (which contains a rule that can make remuneration taxable only in the resident State where the presence in the other State does not exceed 183 days, among other conditions) does not apply because the applicant was present in Norway for more than 182 days during the financial year. Therefore Article 16(1) governs the taxability question.
Article 16(1) provides that salaries derived by a resident are taxable only in the State of residence unless the employment is exercised in the other Contracting State; if so exercised, "such remuneration as is derived therefrom may be taxed in that other State." The Authority emphasized the distinction between the expressions "may be taxed" (Article 16(1)) and "shall be taxable" (Article 16(2)).
The Authority adopted the plain meaning of "may be taxed" (and referenced the OECD Commentary as a valuable interpretative aid) to conclude that both Contracting States have the power to tax employment income where the employment is exercised in the other State. Thus, Norway had the right to tax the income, but the mere availability of that right does not automatically preclude India from taxing the income under its domestic law unless the treaty as applied and factually demonstrated produces a different result.
Relief under the DTAA (as reflected in Article 25(2) cited in the opinion) requires that the applicant show that the income was taxed in Norway (or that Norway has otherwise exercised its taxing rights). The applicant produced no evidence that Norway taxed the salary or that he paid tax to Norway.
The Authority considered and rejected the applicant's attempts to rely on the Supreme Court decision in CIT v. P.V.A.L. Kulandagan Chettiar. The opinion explains three reasons for rejection: (a) the treaty language and context in that decision differed from the Indo–Norway Article 16(1) language at issue here; (b) the residence-determination rules (Article IV in that case) were not in issue in the present case; and (c) the factual matrix in P.V.A.L. (closer personal and economic relations with the other State, and presence of business assets abroad) differs markedly from the present case of a deputed employee paid in India by an Indian employer.
The Authority also addressed the applicant's reliance on parts of the British Gas orders, including a section 245R(2) order and the AAR ruling. It observed that the British Gas AAR relief was explicitly conditional on taxes having been paid in the other State and that the observations in the s.245R(2) order concerned a different statutory provision (section 6(1) of the Income-tax Act) and a different legal issue (residency for eligibility to seek an advance ruling). Consequently, those decisions do not assist the applicant on the present facts.
Because Norway's right to tax had not been exercised (no proof of taxation or tax paid in Norway was produced), and Article 16(1) does not operate to prohibit Indian taxation in such circumstances, the Authority concluded that no relief under the DTAA could be granted to the applicant.

Holding and Implications

Holding: THE QUESTION IS ANSWERED IN THE AFFIRMATIVE AND AGAINST THE APPLICANT. The applicant's salary income has been rightly taxed in India and he is not eligible to obtain relief under the Double Taxation Avoidance Agreement on the material before the Authority.

Implications

Direct effect on the parties: The applicant's salary income for the relevant year remains taxable in India; no relief under the Indo–Norway DTAA was granted because the applicant did not demonstrate that Norway had taxed that income (no proof of tax paid in Norway was produced).
No broader precedent was created by this ruling beyond its application to the facts before the Authority: the opinion distinguishes earlier decisions (British Gas AAR and orders; the Supreme Court decision in P.V.A.L.) and explains why those authorities do not alter the outcome here. The Authority did not state any new general principle beyond applying the treaty text and the need for evidence of taxation in the other Contracting State to obtain treaty relief.

End of summary. The foregoing is a faithful reconstruction of the facts, arguments, authorities cited, reasoning and the final ruling as stated in the provided opinion. No information beyond the supplied text has been added.

Show all summary ...

P.V Reddi J., (Chairman).:— The facts giving rise to this application are as follows:

The applicant filed a return of income for the assessment year 2006-07 with the ADIT (International Taxation), Chennai, disclosing the income of Rs. 6,56,390 and paid tax of Rs. 1,49,855 including the tax withheld. Infosys Technology Ltd., Bangalore, with whom the applicant was employed withheld an amount of Rs. 89,639 towards income-tax by way of deduction from the salary of Rs. 5,08,615. The applicant states that during the relevant financial year 2005-06 he was employed with HCL Ltd., New Delhi, from April 1, 2005, to May 10, 2005, and with Infosys Technology, Bangalore from May 16, 2005, to March 31, 2006. He states that he was deputed on official duty to Norway by his employer Infosys Technology Ltd. and he worked there for more than 182 days and he is therefore a non-resident for tax purposes.

2. In the return of income filed by the applicant the income by way of salary from the employers in India was disclosed and the tax due thereon was paid. No claim for exemption or deduction was put forward. Taking inspiration from the ruling of this Authority in British Gas India P. Ltd., [2006] 287 ITR 462; [2006] 157 Taxman 225 (AAR) (Application No. AAR/725/2006), the present application was filed contending that the salary paid by Infosys Technology Ltd. to a non-resident employee for rendering services outside India is not taxable in India in view of the Double Taxation Avoidance Agreement and, therefore, he was not legally liable to pay the tax. It is, thus, seen that the applicant received the salary income in India in Indian rupees for the services rendered by him in Norway for a period exceeding 182 days during the financial year. The applicant returned the income and paid the tax without claiming exemption. However, that does not disentitle him from seeking ruling to determine his legal liability to pay income-tax.

3. The applicant's claim is based on the Double Taxation Avoidance Agreement which in the instant case is the Indo-Norway Double Taxation Avoidance Agreement notified on September 9, 1987. The taxability of income from employment is covered by article 16 of the said Agreement which reads as follows (see [1988] 169 ITR (St.) 15, 28):

“Article 16—Dependent personal services:

1. Subject to the provisions of articles 17, 18, 19, 20, 21 and 22, 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 that other State for a period or periods not exceeding in the aggregate 183 days in any two consecutive years of income; and

(b) the remuneration is paid by, or on behalf of, an employer who is a resident of the State of which the recipient is a resident; and

(c) the remuneration is not reasonably connected with the activities of a permanent establishment or a fixed base which the employer has in the other State.”

4. Another relevant provision is clause (2) of article 25 of the Double Taxation Avoidance Agreement which says that where a resident of India derives income which in accordance with the provisions of this Convention, may be taxed in Norway, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in Norway whether directly or by deduction. So also if a resident of Norway derives income which may be taxed in India, Norway shall exempt such income subject to the other clauses of the article.

5. The Director of I.T (International Taxation), Chennai, in his comments submits that in the present case, article 16(1) but not article 16(2) of the Double Taxation Avoidance Agreement is applicable; hence he can be taxed in the status of resident on the income derived by him in India though the services were rendered in Norway. However, the Indian tax authorities are bound to grant necessary relief, to ensure that the income of the applicant is not taxed twice. In order to get relief the applicant has not submitted any proof of payment of tax on this income in Norway. It is also pointed out that the ruling in British Gas India P. Ltd., [2006] 287 ITR 462 (AAR); [2006] 157 Taxman 225 (AAR) is distinguishable.

6. The following is the question framed in the application:

Whether the salary paid by the employer in India is taxable in India, though the assessee is non-resident in India during the relevant financial year?

7. We have heard the arguments of learned counsel for the applicant and the departmental representative, Mr. A.N Pahuja, Commissioner of Income-tax. The claim has to be decided on the basis of the provisions of the Double Taxation Avoidance Agreement referred to above. It is common ground that the applicant's liability to pay tax under the relevant charging provisions of the Indian Income-tax Act is not in dispute. Paragraph 2 of article 16 does not come into play in the instant case for the reason that the applicant's stay in Norway was for a period exceeding 182 days in the financial year 2005-06. The taxability of his employment income has to be determined in the light of paragraph 1 of article 16 only. On an analysis of article 16(1), it is clear that unless employment is exercised in the other Contracting State, the remuneration derived shall be taxable only in the State of residence. However, if the employment is exercised outside the usual State of residence, the remuneration derived therefrom “may be taxed” in the State in which the employment was exercised. Thus, it was open to the State in which the employment was exercised to subject the remuneration derived by a resident of a Contracting State. That means, Norway could have taxed the applicant, but it is not the case of the applicant that he has been so taxed or that he paid any tax voluntarily or otherwise, to the Norway Government. In such a situation, no relief is available to the applicant, as rightly contended by the Revenue. It is apposite to note that the expression “may be taxed” has been used in contradistinction to the expression “shall be taxable” occurring in article 16(2). That this distinction is not without significance is emphasized in the Commentary on the OECD Model Convention, which is a valuable aid to the interpretation of treaty provisions. Going by the plain interpretation of the expression “may be taxed” and the interpretation that has been placed in the said commentary, the right of taxation is available to both the Contracting States in regard to the employment income of the applicant in accordance with the relevant domestic laws. We repeat that the applicant has not produced any proof that in exercise of such right, Norway State subjected him to tax or that the applicant made any payment to the State of Norway on account of income-tax.

8. Faced with this difficulty, learned counsel for the applicant has tried to bring the applicant's case within the ratio of the decision of the Supreme Court in CIT v. P.V.A.L Kulandagan Chettiar, [2004] 267 ITR 654 in which general principles governing taxation of global income have been stated by the Supreme Court in the following words (page 659):

“Where liability to tax arises under the local enactment the provisions of sections 4 and 5 of the Act provide for taxation of global income of an assessee chargeable to tax thereunder. It is subject to the provisions of an agreement entered into between the Central Government and the Government of a foreign country for avoidance of double taxation as envisaged under section 90 to the contrary, if any, and such an agreement will act as an exception to or modification of sections 4 and 5 of the Income-tax Act. The provisions of such agreement cannot fasten a tax liability where the liability is not imposed by a local Act. Where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act, as is clear from the provisions of section 90(2) of the Act. Section 90(2) makes it clear that ‘where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax, or for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee’ meaning thereby that the Act gets modified in regard to the assessee in so far as the agreement is concerned if it falls within the category stated therein.”

9. In that case, the High Court repelled the contention of the appellant (Revenue) that wherever the expression “may be taxed” is used, there is no prohibition or embargo against the authorities acting under the provisions of the Indian Income-tax Act assessing the category or class of income concerned. Notwithstanding the said expression used in the treaty between India and Malaysia, the High Court took the view that the Indian authorities could not tax the income of the applicant on the test of closer personal and economic relations. This decision has been confirmed by the Supreme Court. Before adverting to the crucial observations of the Supreme Court, it may be pointed out that the High Court refused to place reliance on the articles of Model Conventions prepared by OECD on the ground that it would not be a safe and acceptable guide for construction. On this aspect and on the scope of the expression “may be taxed”, the Supreme Court did not express any opinion. Moreover, the Supreme Court clarified that it affirmed the judgment of the High Court for different reasons. We quote the following passage in the judgment of the Supreme Court to which our attention was drawn by the applicant's counsel (page 671):

“We need not enter into an exercise in semantics as to whether the expression ‘may be’ will mean allocation of power of tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid, no relief can be sought. Reading the treaty in question as a whole, when it is intended that even though it is possible for a resident in India to be taxed in terms of sections 4 and 5, if he is deemed to be a resident of a Contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant, the treaty will have to be interpreted as such and prevails over sections 4 and 5 of the Act. Therefore, we are of the view that the High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court.”

10. Thus, the Supreme Court's conclusion rests on the fact that the personal and economic relations of the assessee in relation to the capital asset were far closer in the State of Malaysia than in India and therefore the residence in India was irrelevant. The wording “personal and economic relation”, is found in article IV dealing with the fiscal domicile. Paragraph 2 of the said article provides as to how the residential status shall be determined in the case of a person considered as resident of both the Contracting States as per paragraph 1. In that context, certain rules were spelt out in article IV(2). Among them, clause (a) is relevant for our purpose (page 665):

“Article IV: Fiscal domicile

2. Where by reason of the provisions of paragraph 1 of this article an individual is a resident of both Contracting States, then his residential status shall be determined in accordance with the following rules:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer;”

11. This judgment does not in any way support the contention of the applicant. Firstly, the language of the treaty provision in which the expression “may be taxed” was used in article VI of the India-Malaysia treaty is not comparable to the language employed in article 16(1) of the Indo-Norway treaty with which we are concerned. Secondly, the question of determination of residential status by the application of criteria contained in article IV of the treaty does not arise here. Thirdly, even if such test is applied, it cannot be said that the applicant has closer ties—personal or economic— with Norway. Here is a case where the applicant was sent on deputation to Norway and for services rendered there, his salary was paid in India in Indian rupees by his Indian employer. It is not the case of the applicant that during the brief period he worked in Norway on behalf of the Indian company, he developed close personal or economic relations with that country. The factual situation in the case dealt with by the Supreme Court is vastly different. In that case, the assessee-company owned rubber estates in Malaysia. It sold the property as a result of which short-term capital gains accrued. The assessee was having no permanent establishment for business in India. It was on those facts that it was held that the fiscal residence test as per article IV(2)(a) was not satisfied for the purpose of bringing income to Indian taxation. We have no hesitation in holding that the decision of the Supreme Court in CIT v. P.V.A.L Kulandagan Chettiar, [2004] 267 ITR 654 cannot be called in aid by the applicant.

12. The ruling in British Gas India P. Ltd., In re, [2006] 287 ITR 462 472 (AAR); [2006] 157 Taxman 225 has been referred to in the application filed and also in the course of arguments. We do not think that the said ruling has any bearing on the issues that has arisen in the present case. The concluding part of the ruling brings out clearly what has been held there. We quote that portion:

“(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 Double Taxation Avoidance Agreement.

(ii) The applicant shall not deduct tax at source from salary paid to Mr. Nipun Pradhan and Mr. Manish Gupta in India, provided it is satisfied from the details and particulars furnished under section 192(2) that taxes have been paid on such payments in the U.K”

13. In the face of the clear stand of the applicant that no income-tax was paid nor offered to be paid on the salary income in Norway, the ratio of that ruling cannot be called in aid.

14. Another contention raised by counsel for the applicant is based on the order of this Authority under section 245R(2) in the same case of British Gas India Pvt. Ltd., [2006] 285 ITR 218. The following observations towards the end of the order have been referred to (page 221):

“A careful reading of Explanation (a) would show that the requirement of the Explanation is not leaving India for employment but it is leaving India for the purposes of employment outside India. For the purpose of the Explanation an individual need not be an unemployed person who leaves India for employment outside India. Therefore, the fact that Mr. Gupta was already an employee at the time of leaving India is hardly material or relevant. For all these reasons, we hold that Mr. Manish Gupta is not a resident in India in the financial year 2005-06.”

15. These observations were made in the context of construing clause (a) of the Explanation to section 6(1) of the Income-tax Act according to which if an individual who is a citizen of India leaves India in any previous year for the purpose of employment outside India, then in relation to that year, he will be resident in India if he is in India for a period or periods amounting in all to 182 days or more. Section 6 of the Income-tax Act defines “residence in India”. The issue involved and the provision construed were entirely different in that case. The issue was whether the applicant was non-resident during the relevant year so as to be eligible to seek an advance ruling. Construing the said provision in section 6, it was held that the applicant-employee was non-resident, irrespective of the fact that the applicant who was already in employment left India on deputation to the U.K For the foregoing reasons, the question raised in the application should be answered in the affirmative and against the applicant. His salary income has been rightly taxed in India and he is not eligible to get any relief in terms of the Double Taxation Avoidance Agreement. Accordingly, we pronounce the ruling.