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Changes to the tax treatment of Indian non-residents

Indian tax law can be particularly complex for internationally mobile employees and their employers, with taxation of employment income sometimes determined by both tax legislation and case law. This complexity means employers and their assignees should pay close attention to developments in case law that may impact taxation.

In a recent case, the Bangalore Bench of the Income-tax Appellate Tribunal (ITAT) [1] held that the salary received in India for services rendered overseas by a non-resident would not be taxable in India. This would apply even in the absence of a Tax Residency Certificate (TRC) from the country where the income is being taxed, (the USA in this case).

This ruling once again clarifies the taxability of income earned while on an assignment from India to a foreign country, showing that income attributable to duties performed outside India in a period of non-residency should not be subject to Indian income tax if paid in India. The ruling has also clarified that a TRC is not required to be given where a claim under a relevant double tax treaty is not claimed.

We have summarised key facts of the case, should you wish to discuss the key points in more detail please contact Akhil Chandna, Grant Thornton India.

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Facts of the case

The taxpayer is an individual earning income from their employment. During the year under review, the taxpayer was sent on an international assignment to the USA by their Indian employer, during which salary was paid locally and credited to their bank account in India. 

Since the individual was present in India for less than 182 days during the year under consideration, the taxpayer qualified as a non-resident in India for tax purposes. In their income tax return, only salary earned during the period of stay in India was reported as being subject to Indian tax. Salary earned during the foreign assignment was shown as exempt income.

The tax officer contended that the taxpayer would be required to provide a TRC from the USA, on the basis that the case falls under the double tax treaty between India and the USA. An assessment was issued that treated the salary earned during the taxpayer’s assignment in the USA as taxable in India.

The taxpayers’ contention

The taxpayer contended that salary would be chargeable to tax in India based on an ‘accrual basis’, that it should be sourced based on residency and performance of duties, and not merely on the basis it being received in India. As a non-resident in India, the salary income for the period where services were rendered in the USA would not accrue in India and should not be subject to tax in India.

The taxpayer also contended that the income was exempt under the Indian Income Tax Act, 1961 (the Act)[2] and not the double tax treaty. Accordingly, there would be no requirement to provide a TRC.

The Indian revenue authorities’ contention

The revenue authority disagreed with the taxpayer’s contentions on the following grounds:

  • details were not provided to establish that the taxpayer was working in the USA during the given period, and
  • as the salary was received in India, the position was put forward that this suggested that the services were rendered in India, unless proved otherwise.

The revenue authority also contended that the taxpayer’s case and the position put forward on the income tax return was under the double tax treaty. Since the taxpayer did to provide a TRC, the salary income earned while on assignment in USA would be taxable in India.

They also relied on a decision of Ahmedabad ITAT, where it was held that the failure to submit TRC is not a bar to grant benefits under a tax treaty, but the taxpayer is required to produce evidence of foreign entity’s entitlement to claim a benefit under a treaty.[3] Ultimately the revenue authority’s position was held as not applicable and correct.

Income-tax Appellate Tribunals’ observation and decision

  • The tribunal noted that the taxpayer had submitted details of their stay in the USA by providing passport and visa details along with the tax return filed in the USA.
  • It agreed with the contentions and judicial pronouncements relied upon by the taxpayer. 
  • The Ahmedabad ITAT’s ruling (supra) relied upon by the revenue authority had held that the TRC cannot be grounds for denying the benefit of DTAA, if the taxpayer can give evidence for the claim of exemption.
  • The taxpayer’s case is distinguished, as exemption has been claimed under the provisions of the Act and not the DTAA, hence, there is no requirement to furnish a TRC.][4] 
  • The tribunal also relied on a ruling passed by the co-ordinate bench of the Bangalore ITAT,[5] where it was held that the salary earned during the period of deputation to a foreign country would not be taxable in India as salary is accrued where employment services are rendered.[6]

We hope you found this summary useful. If you would like to discuss any of the areas raised in this article please contact Akhil Chandna, Grant Thornton India.

Read more insights on tax changes affecting internationally mobile employees

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[1] Smt. Maya C Nair Vs. ITO (ITA No. 2407/Bang/2018).

[2] Section 5(2) read with section 15 of the Act.

[3] Skaps Industries India Pvt. Ltd. v. ITO (ITA No. 478 & 479/Ahd/2018)

[4] As per section 90(4) of the Act, TRC is required to be filed where benefit is claimed under the DTAA.

[5] Bholanath Pal in ITA No. 10/Bang/2011 of ITAT.

[6] Section 15(1) read with section 9(1)(ii) of the Act.