Treaty exemption for expatriate salary turns on whether remuneration was borne by the Indian permanent establishment

Expatriate employee remuneration is exempt under Article 15(2) of the India-Russia DTAA only if all three treaty conditions are met, including that the salary is not borne by the employer's permanent establishment in India. The Tribunal distinguished the India-France treaty language considered in Sedco Forex and held that tax payment in Russia was irrelevant to the Indian treaty test. Because the factual question whether the remuneration was borne by the Indian permanent establishment had not been properly verified, the matter was remanded to the CIT(A) for fresh determination after allowing the assessee an opportunity to substantiate its claim.

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Issues: Whether the remuneration of expatriate employees was exempt from tax in India under Article 15 of the Double Taxation Avoidance Agreement between India and the Russian Federation on the ground that it was not borne by the employer's permanent establishment in India.

Analysis: The exemption under Article 15(2) depended on satisfaction of all three conditions, and the controversy centered on clause (c). The Tribunal distinguished the India-France treaty clause considered in Sedco Forex, noting that the Russian treaty used materially different language: the remuneration must not be borne by a permanent establishment or fixed base of the employer in the other Contracting State. The fact that the employees had paid tax in Russia was held to be irrelevant to the Indian treaty test. At the same time, the Tribunal noted that the Assessing Officer and the CIT(A) had proceeded on presumptions arising from the employer's assessment under section 44BB of the Income-tax Act, 1961, while the assessee claimed it had not been given a proper opportunity to prove that the remuneration was not borne by the Indian permanent establishment. In the interests of justice, the Tribunal found it to restore the matter for verification of that factual issue.

Conclusion: The issue was remanded to the CIT(A) for fresh determination after giving the assessee an opportunity to establish that the remuneration was not borne by the employer's permanent establishment in India.

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