Non-resident salary reimbursement for services outside India was not taxable, so section 40(a)(iii) disallowance failed.

Reimbursement of salary paid to non-resident employees for services rendered at head offices outside India was held not taxable in India because section 9(1)(ii) applies only where salary is earned for services rendered in India. The attempt to apply section 9(1)(i) was rejected as misplaced. The applicable tax treaties treated salary of a non-resident as taxable where the employment is exercised, and because the employment was exercised outside India, the treaty position prevailed under section 90(2). The reimbursement was therefore not liable to disallowance under section 40(a)(iii).

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Issues: Whether reimbursement of salary paid to non-resident employees of the joint venture partners, for services rendered at their head offices outside India, was chargeable to tax in India so as to warrant disallowance under section 40(a)(iii).

Analysis: The salary payments were made to non-resident employees who rendered services outside India, though in connection with an Indian project. Under section 9(1)(ii) of the Income-tax Act, salary is deemed to accrue or arise in India only when it is earned in India for services rendered in India, including the related rest or leave period. On the facts, the income was earned for services rendered outside India, so the deeming provision did not apply. The attempt to invoke section 9(1)(i) was held to be misplaced. The relevant tax treaties also provided that salary income of a non-resident is taxable in the country where the employment is exercised, and since the employment was exercised in the countries of residence, the treaty provisions were more beneficial and prevailed under section 90(2).

Conclusion: The reimbursement was not taxable in India and the disallowance under section 40(a)(iii) was rightly deleted.

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