2025 (7) TMI 1045 - AT - Income Tax

Non-resident individual's China salary exempt under India-China DTAA Article 15(1) despite receipt in India

Sivakarthick Raman Versus The Assistant Commissioner of Income Tax, International Taxation Circle, Madurai.

ITAT Chennai allowed the appeal of a non-resident individual who claimed exemption under Article 15(1) of India-China DTAA for salary income received in ... Disallowing the exemption claimed under Article 15(1) of India-China DTAA r.w.s. 90 in respect of the salary income received in India for services rendered in China - Residency in China/ Non-Resident in India - Proof regarding residency and tax payment in China - AR submitted that on his overseas assignment with BMW China, the assessee continued to receive salary and benefits in India as his payroll remained in India for administrative convenience during his assignment to China in addition to certain benefits paid in China - HELD THAT:- The income of an individual who qualifies as a NR in India is taxable in India only to the extent it is accrued, deemed to accrue, received or deemed to be received in India. The expression “subject to” used in the opening para of the sub-section (2) indicates that the provisions of Section 5(2) of the Act are subject to other provisions of the Act and would have an overriding effect. If the charging provisions of the Act do not consider such receipts as taxable, it shall not be taxable under Section 5(2) of the Act. As per Section 9(1)(ii) of the Act, income under the head “Salaries” shall be deemed to accrue or arise in India if it is earned in India. Further, as per Explanation to Section 9(1)(ii) of the Act, services rendered in India are regarded as income earned in India. As indicated above, u/s. 5(2) of the Act, the total income of a NR includes income which is received or deemed to be received in India. It also includes income which accrues or arises or is deemed to accrue or arise in India during such previous year. Given that Section 5(2) begins with “Subject to the provisions of this Act”, the total income needs to be arrived at after considering all the relevant provisions of the Act. Section 15 of the Act provides for the chargeability of income under the head “Salaries”. Section 15(a) of the Act provides for chargeability of salary on due or accrual basis, Section 15(b) of the Act provides for chargeability of salary paid in advance, Section 15(c) of the Act provides for taxability of arrears of salary. Further, the explanation provides for clarity in situations where salary has been taxed on receipt basis; such salary shall not be taxed again on accrual basis. Section 15 of the Act contemplates chargeability of salary accrued to an employee, irrespective of whether it is received or not. However, where salary is received in advance, the same is taxable on receipt basis. This means that salary is taxable on accrual basis, the only exception being when salary is received in advance. To re-emphasize, it is only “advance salary” which is taxable on receipt as an exception to the general rule that salary is taxable on accrual basis. Based on the above, it can be concluded that Salary is chargeable to tax on accrual basis, Salary is chargeable to tax on paid basis only when it is paid in advance, Arrears of salary are chargeable to tax on receipt if it has not already been taxed on accrual basis. Based on the above, salary received by the assessee in India for services rendered in China is not taxable in India as per the provision of Section 5(2) read with Section 9(1)(ii) and Section 15(1)(a) of the Act. Admittedly during the FY 2021-22, the assessee duly qualified as a Non- Resident of India and as a Tax Resident of China for the Calendar Year 2021 and 2022 (i.e., period covering 01.04.2021 till 31.03.2022) and was eligible to claim the benefit of Article 15(1) of the India-China DTAA as he exercised employment/rendered services with BMW China in China. Further, the assessee has been duly taxed in China in respect of salary and benefits paid to him in India for the period 01.04.2021 to 31.03.2022 of Rs. 1,53,65,359/- and related to employment exercised/services rendered in China to BMW China. Since the assessee qualified as a Non-resident of India during FY 2021-22 and a Resident of China for the Calendar year 2021 and exercised his employment/rendered services in China with BMW China, the assessee claimed exemption of Rs. 1,53,65,359/- with respect to salary received in India for services rendered in China, under Article 15(1) of the India- China DTAA r.w.s. 90 of the Act and accordingly filed his return of income for the A.Y. 2022-23 on 18.07.2022 and claimed a refund of Rs. 52,22,590/-. Salary income for services rendered in China has been rightly offered tax by the assessee in China. Therefore, we set aside the order of the AO and direct the AO to allow the benefit of exemption under Article 15(1) of the DTAA between India and China. Appeal of the assessee is allowed. The core legal questions considered in this appeal pertain to the taxability and exemption of salary income received in India by an individual who was a tax resident of China and a non-resident of India during the relevant assessment year. The issues include whether the exemption under Article 15(1) of the India-China Double Taxation Avoidance Agreement (DTAA) read with Section 90 of the Income Tax Act, 1961 (the Act) applies to salary income received in India for services rendered in China; the correct interpretation and application of the relevant provisions of the Act and DTAA; the determination of employer-employee relationship; the relevance and sufficiency of evidence regarding residency and tax payment in China; and the validity of interest levied under Sections 234B and 234D of the Act.Issue-wise detailed analysis:1. Applicability of Article 15(1) of India-China DTAA and Section 90 of the Act for exemption of salary income received in India for services rendered in ChinaThe relevant legal framework includes Article 15(1) of the India-China DTAA which provides that salaries derived by a resident of a Contracting State in respect of employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. The salary is taxable in the other State only if the employment is exercised there. Section 90 of the Act empowers the Central Government to enter into agreements for avoidance of double taxation and to apply the provisions of such agreements.The Court examined whether the appellant, being a resident of China and non-resident of India for the relevant period, was eligible to claim exemption of salary income received in India for services rendered in China under Article 15(1). The appellant's employment contract with BMW China, inter-company cross-charge agreements, and tax filings in China were scrutinized to establish that the employment was exercised in China and that BMW China was the legal and economic employer. The Court noted that the salary was paid through BMW India's payroll in India for administrative convenience, but the employment services were physically rendered in China.The Court relied on the OECD Model Convention commentary and judicial precedents emphasizing that the place where employment is exercised is where the employee is physically present performing the services. It was held that salary income for services rendered in China is taxable only in China and exempt in India under Article 15(1) of the DTAA. The Court also observed that the appellant had been duly taxed in China on the said salary.Competing arguments by the Revenue that the employer-employee relationship existed with BMW India and that salary received in India is taxable were rejected based on documentary evidence and judicial precedents. The Court distinguished contrary decisions by smaller benches and followed coordinate bench rulings favoring the appellant's position.Conclusion: The Court held that the appellant was entitled to exemption under Article 15(1) of the India-China DTAA read with Section 90 of the Act for salary income received in India for services rendered in China.2. Determination of employer-employee relationship and chargeability of salary under Sections 5(2), 9(1)(ii), and 15 of the ActThe Revenue contended that the appellant remained an employee of BMW India, and hence salary received in India was taxable under Section 15 (chargeability of salary income), Section 5(2)(a) (income received in India taxable for non-residents), and Section 9(1)(ii) (income deemed to accrue or arise in India if services rendered in India).The Court analyzed the employment contract with BMW China and the inter-company cross-charge agreement which clearly indicated that BMW China was the legal and economic employer during the appellant's assignment in China. The appellant's payroll remained in India only for administrative convenience. The Court emphasized that the situs of accrual of salary income is the place where services are rendered, not necessarily where salary is paid or received.Section 5(2) of the Act states that total income of a non-resident includes income received or deemed to be received in India or accruing or arising or deemed to accrue or arise in India, subject to the provisions of the Act. The Court interpreted 'subject to the provisions of this Act' as meaning that other charging provisions must be considered before determining taxability. Section 9(1)(ii) provides that salary income accrues or arises in India only if services are rendered in India.Judicial precedents, including decisions of High Courts and Tribunals, were cited to support that salary income for services rendered outside India is not taxable in India even if paid or received in India. The Court held that salary received in India for services rendered in China is not taxable in India under Sections 5(2), 9(1)(ii), and 15 of the Act.Competing arguments regarding taxability based on receipt of salary in India and employer-employee relationship with BMW India were rejected in light of documentary evidence and binding judicial precedents.Conclusion: Salary income received in India for services rendered outside India (China) is not taxable in India under the relevant provisions of the Act.3. Eligibility for DTAA benefits despite non-resident status in India and relevance of Article 23The Revenue argued that since the appellant was a non-resident in India, he was not eligible to claim benefits under Article 15 of the India-China DTAA, particularly when read with Article 23 (relief from double taxation), and that the DTAA provisions were incorrectly applied.The Court clarified that Article 15(1) is to be read independently of Article 23. Article 23 applies when an individual is a resident of India and claims credit for taxes paid abroad on doubly taxed income. Since the appellant was non-resident in India and resident in China, Article 23 was not applicable. The Court referred to Article 1 of the DTAA which defines eligibility for treaty benefits, emphasizing that a person who is resident of one or both Contracting States is eligible.The Court relied on coordinate bench decisions holding that DTAA benefits are available to non-residents of India who are residents of the other Contracting State and that the Revenue's reliance on Article 23 to deny benefits was misplaced.Conclusion: The appellant, being resident of China and non-resident of India, was eligible to claim exemption under Article 15(1) of the India-China DTAA, and Article 23 was not applicable to deny such benefits.4. Sufficiency of evidence for residency in China and payment of tax in ChinaThe Revenue contended that the appellant did not provide a Tax Residency Certificate (TRC) and failed to demonstrate payment of tax in China.The Court held that the appellant's China tax returns for the relevant calendar years, showing taxable income and taxes paid, were sufficient evidence of residency and tax payment in China. The Court referred to judicial precedents where absence of TRC was not a ground for denial of DTAA benefits if sufficient evidence of residency and taxation abroad was furnished.The appellant also submitted passport and travel records evidencing non-resident status in India. The Court found that the evidence was adequate and the Revenue's objections were unfounded.Conclusion: The appellant sufficiently proved residency in China and payment of taxes thereon, satisfying the requirements for claiming DTAA benefits.5. Levy of interest under Sections 234B and 234D of the ActThe appellant challenged the levy of interest under Sections 234B and 234D, arguing that since the salary income was not taxable in India, no interest should be levied.The Court, having held that the salary income was not taxable in India, implicitly concluded that the levy of interest under these provisions was not justified. However, specific detailed discussion on interest was limited in the judgment.Conclusion: Interest levied under Sections 234B and 234D was not sustainable as the underlying tax demand was not justified.6. Treatment of contrary judicial precedents and reliance on coordinate bench decisionsThe Revenue relied on decisions by smaller benches (SMC bench) which held against the appellant's claim. The Court distinguished these decisions on facts and legal grounds and preferred coordinate bench decisions rendered by larger benches or benches with similar jurisdiction and facts, including the appellant's own earlier case for AY 2020-21.The Court emphasized the binding nature of coordinate bench decisions and the principle of judicial consistency, overruling contrary smaller bench decisions where applicable.Conclusion: The Court followed coordinate bench decisions favorable to the appellant and rejected contrary smaller bench rulings.Significant holdings:'The salary income as accrued to the assessee for work performed in a foreign jurisdiction would not be taxable in India whereas the salary received for work performed in India would be taxable in India. The benefit of DTAA would be available to the assessee as per the decision of coordinate bench of Chennai Tribunal in Shri Paul Xavier Antonysamy V/s ITO... wherein it was held by the bench that the provisions of Sec.5(2) are subjected to other provisions of the Act. Even as per the provisions of Sec.9(1)(ii), salary income could be deemed to accrue or arise in India only if it is earned in India in respect of services rendered in India.''Article 15(1) of the India-China DTAA exempts salary income received in India for services rendered outside India by a resident of China who qualifies as non-resident in India. The situs of accrual of salary income is the place where services are rendered and not the place of receipt of salary.''The absence of a Tax Residency Certificate cannot be a ground for denying the benefit of DTAA if sufficient evidence is furnished to establish residency and payment of tax in the other Contracting State.''Section 5(2) of the Act is 'subject to the provisions of this Act' and hence, the chargeability provisions including Section 15 and Section 9(1)(ii) must be considered before taxing income received in India.''The appellant was resident in China and non-resident in India for the relevant period, rendered services in China, and was taxed in China on the salary income. Therefore, exemption under Article 15(1) of the India-China DTAA read with Section 90 of the Act is available and the salary income received in India for services rendered in China is not taxable in India.'Final determinations:The exemption under Article 15(1) of the India-China DTAA read with Section 90 of the Act applies to salary income received in India for services rendered in China by a resident of China and non-resident of India.The employer-employee relationship during the assignment was with BMW China, and the salary paid through BMW India's payroll for administrative convenience does not affect the situs of accrual.Salary income received in India for services rendered outside India is not taxable in India under Sections 5(2), 9(1)(ii), and 15 of the Act.The appellant's residency in China and payment of tax thereon were sufficiently established despite absence of a TRC.The levy of interest under Sections 234B and 234D is not sustainable in view of the non-taxability of the salary income in India.Coordinate bench decisions favorable to the appellant are binding and have been correctly followed by the Court, overruling contrary smaller bench decisions.The appeal is allowed, setting aside the orders of the Assessing Officer and the Dispute Resolution Panel, and directing the grant of exemption and refund claimed by the appellant.