Non-resident salary taxation under India-Japan treaty: employment exercised outside India was not taxable in India.

Salary earned by a non-resident for services rendered wholly outside India was treated as taxable only in the State of residence under Article 15 of the India-Japan tax treaty. Because the employee was resident in Japan, present in India for only 83 days, and the treaty conditions for source-State taxation were not satisfied, India could not tax the salary. Section 5(2) did not extend chargeability where section 9(1)(ii) was not attracted, so employment income accrued outside India and was not taxable in India; the salary was accordingly exempt.

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Issues: Whether the salary received by a non-resident assessee for services rendered in Japan was taxable in India under the Income-tax Act, 1961 and the India-Japan Double Taxation Avoidance Agreement.

Analysis: The assessee worked as Managing Director of Motorola Japan during the relevant previous year and was present in India for only 83 days. On the facts found, he was a resident of Japan and a non-resident of India for the relevant year. Under Article 15(1) of the India-Japan Double Taxation Avoidance Agreement, salary is taxable only in the State of residence unless the employment is exercised in the other State. Under Article 15(2), taxation in the source State is excluded where the presence in that State does not exceed 183 days and the other treaty conditions are satisfied. The salary was held to accrue where the employment services were rendered, namely outside India, and section 5(2), being subject to the Act, did not enlarge chargeability where section 9(1)(ii) was not attracted.

Conclusion: The salary income for the relevant year was not taxable in India and the assessee was entitled to exemption in respect of such salary income.

Final Conclusion: The appeal succeeded on the principal salary-taxability issue, with only the unargued interest ground left undisturbed.

Ratio Decidendi: Salary earned by a non-resident for employment exercised wholly outside India is not taxable in India where the treaty conditions for source-State taxation are not met and the employment income is not deemed to accrue or arise in India under the Act.

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