Treaty salary exemption denied where Indian company was treated as employer and payment failed the non-resident employer condition.

Exemption under Article 16(2) of the India-UK tax treaty was denied because the remuneration was not shown to have been paid by, or on behalf of, a non-resident employer. Although the day-count condition was treated as satisfied, the decisive issue was the source and character of the salary payment: the Indian company issued the salary certificate, deducted tax at source, and was treated on the facts as the employer for the relevant payment. The claim that it merely acted for the foreign employer was rejected on concurrent factual findings, so the treaty condition for exemption was not met and the salary remained taxable in India.

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Issues: Whether the assessee was entitled to exemption from tax under Article 16(1) and Article 16(2) of the Double Taxation Avoidance Agreement between India and the United Kingdom in respect of the salary amount retained in India.

Analysis: The exemption under Article 16(2) depended upon satisfaction of the treaty conditions, including presence in the other State for not more than 183 days, payment by or on behalf of an employer who was not resident in that State, and non-deductibility of the remuneration in computing the profits of an enterprise chargeable to tax there. The first condition was treated as satisfied, but the crucial dispute concerned the source and character of the payment. On the facts, the payment was made through the Indian concern, which issued the salary certificate and deducted tax at source, and the assessee's claim that the Indian entity was merely acting on behalf of the foreign employer was not accepted. The concurrent factual findings showed that the Indian company treated the assessee as its employee for the relevant payment, so the treaty condition that the remuneration be paid by a non-resident employer was not fulfilled.

Conclusion: The assessee was not entitled to exemption under Article 16(2) of the treaty, and the addition was rightly upheld in favour of the Revenue.

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