Foreign-sourced salary not taxable in India where services were performed in China under the India-China DTAA

Salary paid to a non-resident is taxable in India only to the extent it is attributable to services rendered in India; the foreign component linked to services performed in China falls outside Indian taxation under Section 5(2) read with Sections 9(1)(ii) and 15 of the Income-tax Act. Treaty relief under Article 15(1) of the India-China DTAA cannot be denied merely because the recipient is non-resident, and the article governs salary for employment exercised outside India. The Indian tax assessment must therefore exclude the foreign-sourced salary component while retaining taxability only for the India-related portion.

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Issues: Whether salary received by a non-resident assessee for services rendered in China was taxable in India, and whether exemption under Article 15(1) of the India-China DTAA was ible for the foreign component of salary.

Analysis: The assessee was a non-resident in India and had rendered services partly in India and partly in China. The salary attributable to services performed in India had already been offered to tax in India, while the balance salary attributable to services performed in China had been offered to tax in China. The Tribunal followed its earlier coordinate bench view that Section 5(2) has to be read with Sections 9(1)(ii) and 15 of the Income-tax Act, 1961, and that salary is deemed to accrue or arise in India only to the extent it is earned in India in respect of services rendered in India. It further held that treaty relief could not be denied merely because the assessee was a non-resident, and that Article 15(1) governed the taxability of salary for employment exercised outside India.

Conclusion: Salary relating to services rendered in China was not taxable in India, while salary attributable to services rendered in India remained taxable in India. The assessee succeeded on the substantive grounds.

Final Conclusion: The assessment was to be recomputed by excluding the foreign-sourced salary component from Indian taxation, and the appeals were allowed.

Ratio Decidendi: Salary income is taxable in India only to the extent it is earned through services rendered in India; salary attributable to employment exercised in a foreign jurisdiction falls outside the Indian tax net and is governed by the applicable DTAA article.

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