Treaty residency and place of employment control salary taxation when services are exercised outside India.

Salary earned by a non-resident who was also a tax resident of China, for employment actually exercised in China, was held taxable only in China under Article 15(1) of the India-China DTAA. The fact that the payroll was maintained in India and the salary was credited from India did not change the situs of employment or the character of the income. Since the services were rendered outside India, Sections 5(2), 9(1)(ii) and 15(a) did not bring the salary to tax in India, and treaty relief under Section 90 was available.

---

---

Issues: Whether salary received in India for services rendered in China by a non-resident assessee, who was a tax resident of China, was exempt under Article 15(1) of the India-China DTAA read with Section 90 of the Income-tax Act, 1961, and consequently not taxable in India under Sections 5(2), 9(1)(ii) and 15(a) of the Income-tax Act, 1961.

Analysis: The assessee was held to be a non-resident in India and a tax resident of China for the relevant period. The salary related to employment actually exercised in China and had been subjected to tax in China. The mere fact that the payroll was maintained in India and the salary was credited from India did not alter the situs of employment or the character of the income. Applying Article 15(1) of the India-China DTAA, salary derived by a resident of China in respect of employment exercised in China was taxable only in China. The provisions of Section 5(2) were read subject to the Act and, on the facts, Sections 9(1)(ii) and 15(a) did not bring the income to tax in India because the services were rendered outside India.

Conclusion: The exemption under Article 15(1) of the India-China DTAA was allowable and the salary income was not taxable in India.

Ratio Decidendi: For a non-resident who is also a treaty resident of the other contracting state, salary is taxable only in the state where the employment is actually exercised, and receipt of salary in India through an Indian payroll does not by itself make the income taxable in India.

---