Treaty salary exemption and foreign per diem receipt kept U.S.-earned income outside Indian tax for that year.

Salary earned for employment exercised in the United States, and taxed there, was treated as outside Indian tax for the relevant assessment year because Article 16(1) of the India-USA DTAA allowed taxation in the other Contracting State and the later section 90(3) clarification could not control that year. Per diem received outside India for services rendered in the United States was also held outside section 5(2) because it was neither received nor accrued in India. The combined treaty and domestic law analysis therefore prevented Indian taxation of both items.

---

---

Issues: (i) Whether salary earned for employment exercised in the United States and offered to tax there was exempt from Indian tax under Article 16(1) of the Double Taxation Avoidance Agreement between India and USA; (ii) Whether per diem received in the United States was taxable in India under section 5(2) of the Income-tax Act, 1961.

Issue (i): Whether salary earned for employment exercised in the United States and offered to tax there was exempt from Indian tax under Article 16(1) of the Double Taxation Avoidance Agreement between India and USA.

Analysis: Article 16(1) provides that salary is taxable only in the State of residence unless the employment is exercised in the other Contracting State, in which event the remuneration may be taxed in that other State. The assessee had worked in the United States for the relevant period and had offered the salary to tax there. The later clarification under section 90(3) and the notification issued thereunder could not govern the assessment year in question. Applying the interpretation of the phrase "may be taxed", the Indian tax authorities could not tax the same salary income for that year.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether per diem received in the United States was taxable in India under section 5(2) of the Income-tax Act, 1961.

Analysis: Under section 5(2), the total income of a non-resident includes income received or deemed to be received in India, or income accruing or arising or deemed to accrue or arise in India. The per diem was received outside India and related to services rendered in the United States. Its situs of receipt and accrual was outside India, so it did not fall within section 5(2). The same result also followed from the treaty-based exemption analysis.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The salary income taxed in the United States for the relevant assessment year could not be brought to tax in India, and the per diem received outside India was also outside the Indian charging provisions.

Ratio Decidendi: For the relevant assessment year, income covered by a treaty provision stating that remuneration "may be taxed" in the other Contracting State was not taxable in India on the exemption basis, and income neither received nor accruing in India could not be taxed under section 5(2) of the Income-tax Act, 1961.

---