Treaty override on non-resident salary taxed where employment is exercised, not where credited in India

A non-resident's salary credited in India for services rendered in the United States was treated as not taxable in India because section 90 gives overriding effect to the more beneficial India-US DTAA. Under Article 16(1), employment income is taxable only in the State where the employment is exercised, and on the stated facts the services were exercised in the United States. Section 5(2)(a) could otherwise bring receipt in India within the charge, but the treaty provision prevailed and excluded the salary from Indian tax.

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Issues: Whether salary received in India by a non-resident for services rendered in the United States was taxable in India, or whether Article 16(1) of the India-US Double Taxation Avoidance Agreement read with section 90 of the Income-tax Act, 1961 excluded such income from Indian tax.

Analysis: The assessee was a non-resident during the relevant year and rendered services in the United States while on assignment there. The salary was credited in India, and the Revenue relied on section 5(2)(a) of the Income-tax Act, 1961 to contend that receipt in India attracted tax. The Tribunal followed the earlier ruling in British Gas India (P) Ltd., In re, and held that although section 5(2)(a) could otherwise fasten tax liability, section 90 gives overriding effect to the applicable treaty where it is more beneficial. Under Article 16(1), remuneration is taxable only in the State where the employment is exercised, and on the facts the employment was exercised in the United States.

Conclusion: The salary was not taxable in India by reason of the treaty benefit, and the addition was directed to be deleted.

Ratio Decidendi: Where a non-resident renders employment services in a treaty partner State, the salary is taxable in India only if the treaty permits it, and section 90 gives the more beneficial treaty provision overriding effect over section 5(2)(a) of the Income-tax Act, 1961.

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