Taxability of overseas salary and foreign tax credit at withholding stage under salary withholding rules clarified.

Salary for services rendered abroad by assignees deputed to the USA and Germany accrued outside India and was not chargeable in India during the deputation period; accordingly, no tax was required to be withheld under section 192 on those payments. For salary paid after the assignees returned to India and became residents, treaty-based foreign tax credit could be considered at the withholding stage, subject to verification of residence, treaty entitlement, and proof of foreign tax payment under section 192(2).

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Issues: (i) Whether salary paid in India to assignees deputed abroad was taxable in India and whether the employer was obliged to deduct tax at source on such salary. (ii) Whether, while deducting tax under section 192, the employer could give credit for foreign taxes paid by the assignees in the USA and Germany.

Issue (i): Whether salary paid in India to assignees deputed abroad was taxable in India and whether the employer was obliged to deduct tax at source on such salary.

Analysis: The income of non-residents under section 5(2) is subject to the other provisions of the Act, including section 15. Salary is chargeable under the head 'Salaries' when it accrues where the services are rendered. Since the assignees rendered services in the USA and Germany during the deputation period, the salary attributable to that period accrued outside India. The Treaty provisions also supported taxation only in the State where employment was exercised. As the salary was not chargeable to tax in India, section 192 did not require deduction of tax from such payments.

Conclusion: The salary for the deputation period was not taxable in India and the employer was not obliged to withhold tax on it.

Issue (ii): Whether, while deducting tax under section 192, the employer could give credit for foreign taxes paid by the assignees in the USA and Germany.

Analysis: Once the assignees returned to India and became residents for the relevant year, section 192 applied to salary payments. The foreign tax credit available under the applicable treaty articles could be taken into account in computing the tax deductible, and section 192(2) permitted the employer to consider salary and tax particulars furnished by the employee from other employments or sources. Proper verification of residence, treaty entitlement, and foreign tax payment was required before allowing the credit at the withholding stage.

Conclusion: The employer could take credit for foreign taxes paid by the assignees, subject to verification under section 192(2).

Final Conclusion: The ruling held that salary for services rendered abroad was not chargeable in India during the deputation period, but foreign tax credit could be considered when withholding tax on salary payable after the assignees became residents in India.

Ratio Decidendi: For salary income of a non-resident, taxability depends on where the employment is exercised and where the services are rendered; if the income is not chargeable in India, no withholding under section 192 arises, and treaty-based foreign tax credit may be considered at the deduction stage when authorised by section 192(2).

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