Salary taxed by place of service and foreign tax credit may reduce TDS after Indian residency

Salary and perquisites paid in India to an employee deputed to the USA were held not taxable in India for the period services were rendered outside India, because salary is earned where the employment is exercised and the India-USA DTAA allocated taxing rights accordingly; no withholding obligation under section 192 arose on that amount. For the later period, when the employee became resident in India, the employer could take account of foreign tax credit for taxes paid in the USA while computing tax deductible at source under section 192(2), subject to the employee furnishing the necessary particulars.

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Issues: (i) Whether salary and perquisites paid in India to an employee deputed abroad and rendering services outside India were taxable in India, and whether tax was required to be withheld under section 192. (ii) Whether, while deducting tax at source on salary payable after the employee became resident in India, the employer could take credit for taxes paid in the USA under the India-USA DTAA.

Issue (i): Whether salary and perquisites paid in India to an employee deputed abroad and rendering services outside India were taxable in India, and whether tax was required to be withheld under section 192.

Analysis: Total income under section 5(2) is subject to the charging and computation provisions, including section 15. Salary is chargeable as income from salaries only where it accrues or is earned in India. The expression "earned in India" is linked to where services are actually rendered, and the explanation to section 9(1)(ii) supports that salary is earned in India when services are rendered in India. On the facts, the employee rendered services in the USA, so the split pay and perquisites, though paid in India, accrued outside India. The India-USA DTAA also allocated taxing rights to the state where the employment was exercised, and the place of physical presence while performing the work was material. Since the amount was not chargeable to tax in India, the employer's obligation to deduct tax under section 192 did not arise.

Conclusion: The salary and perquisites were not taxable in India for the relevant period, and the employer was not obliged to withhold tax on them under section 192.

Issue (ii): Whether, while deducting tax at source on salary payable after the employee became resident in India, the employer could take credit for taxes paid in the USA under the India-USA DTAA.

Analysis: Once the employee returned to India and became resident and ordinarily resident, salary payments received from more than one source during the year attracted section 192(2). Article 25 of the India-USA DTAA permitted relief by way of foreign tax credit, and the employer could compute tax deductibility after taking account of the foreign taxes already paid, subject to necessary particulars being furnished by the employee. The absence of a special TDS mechanism for foreign tax credit did not exclude the operation of section 192(2), which allowed the employer to consider the employee's details and determine the correct amount deductible.

Conclusion: The employer could take account of credit for taxes paid in the USA while deducting tax at source under section 192 for the later period.

Final Conclusion: The ruling was in favour of the applicant on both questions, holding that no TDS was required on the foreign-accruing salary for the first period and that foreign tax credit could be considered for the later resident period.

Ratio Decidendi: Salary from employment is taxable in India only when the employment is exercised in India or the services are rendered in India, and where treaty relief applies, the employer may determine TDS after giving effect to the foreign tax credit mechanism recognised by the relevant DTAA and section 192(2).

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