Recently, the Authority for Advance Rulings (AAR), in the case of S Mohan, an employee of Infosys Technologies Limited, has held that a non-resident employee would be taxable in India on his income even though the employment is exercised outside India.
It was held that such employee would not be entitled to relief under the provisions of the Tax Treaty as he had not paid income-tax in the foreign country, either voluntarily or otherwise. The ruling is summarised below.
The taxpayer was a non-resident in India for the assessment year (AY) 2006-07. He had filed a return of income with the ADIT (International Taxation), Chennai, disclosing income from salaries received from his earlier employer and his current employer (Infosys Technologies Limited), during the relevant financial year. During the course of his employment with Infosys, the applicant was deputed on official duty to Norway where he worked for more than 182 days.
Will the taxpayer, being a non-resident in India, be eligible to claim an exemption under the Tax Treaty of income earned for services rendered outside India?
The taxpayer placed reliance on the decision of the AAR in British Gas (I) Pvt. Ltd (British Gas India (P) Ltd. v CIT  157 Taxman 225 (AAR)), and contended that as he was rendering services outside India i.e. exercising employment outside India, he was not liable to tax in India. The taxpayer also relied on the decision of the Supreme Court in the case of PVAL Kulandagan Chettiar (CIT v. PVAL Kulandagan Chettiar  267 ITR 654 (SC)), to claim relief under the India-Norway Tax Treaty (Tax Treaty).
The tax authorities contended that in the present case, Article 16(1) (As per Article 16 (1) of the Tax Treaty, 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 contracting 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 contracting state of the Tax Treaty is applicable. Further, relief from taxation, in India can be granted only if sufficient proof for payment of taxes in the other country is produced before them.
The AAR held that Article 16(1) of the Tax Treaty states that unless an employment is exercised in the other contracting state, the remuneration derived shall be taxable only in the state of residence. If, however, the employment is exercised outside the state of residence, the remuneration derived therefrom ‘may be taxed’ in the state in which the employment is exercised. Thus, it was open to the state in which the employment was exercised to subject the remuneration derived by a resident of the other contracting state to tax. Therefore, 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 in Norway. In such a situation, no relief is available to the applicant. It is important to note that the expression ‘may be taxed’ in Article 16 (1) has been used in distinction to the expression ‘shall be taxable’ in Article 16(2).
It was held that no relief would be available to the applicant, in the instant case. The AAR distinguished the decision in the case of British Gas India P Ltd, by stating that tax was actually paid by the taxpayer in the country where employment was exercised.
The AAR also considered Article 25 of the Tax Treaty, the provision relating to the elimination of double taxation, which provides that where the income earned by a resident of India may be taxed in Norway, India shall deduct the amount of income-tax paid in Norway from the tax payable in India. In this case, however, as the applicant failed to provide any proof that he was taxed in Norway or that he had paid income-tax in Norway, it was held that the applicant was liable to pay tax in India and he was not eligible to claim any relief under the provisions of the Tax Treaty.
The AAR also held that since the income was not taxed in Norway, such income would be taxable in India as the purpose of such bilateral treaties is to avoid double taxation and not to exempt income from tax altogether. The AAR thus ruled that the salary earned by a non-resident on employment exercised outside India is taxable in India and no relief can be claimed under the Tax Treaty unless tax has been paid in the other country.
The facts in the case of British Gas and in the present case were different and the ruling accordingly does not completely rule out the preferential tax treatment confirmed in the case of British Gas.
—Sourced from KPMG