Salary Income for Non-Resident Services Abroad Taxable Only in Country of Residence Under DTAA Section

The ITAT Chennai held that salary income earned by a non-resident individual for services rendered outside India is taxable only in the country of residence under the DTAA between India and Malaysia. Although part of the salary was paid in India by the Indian employer, the situs of income accrual is where the services were performed, i.e., Malaysia. The assessee, being a tax resident of Malaysia and having offered the salary to tax there, is exempt from Indian tax on that income. The appeal was allowed, granting exemption for salary received in India for services rendered abroad.

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1. ISSUES PRESENTED and CONSIDERED

1. Whether a Non-Resident individual, employed by a foreign entity and resident in a foreign country, is taxable in India on salary income received in India but earned for services rendered outside India under the Indo-Malaysia Double Taxation Avoidance Agreement (DTAA), specifically Article 16.

2. Interpretation and applicability of Section 5(2) and Section 9(1)(ii) of the Income Tax Act regarding the taxability of salary income received in India by a Non-Resident but accrued for services rendered outside India.

3. Whether the provisions of the DTAA between India and Malaysia override the domestic provisions of the Income Tax Act to grant exemption on salary income taxable in Malaysia but received in India.

4. The relevance and binding effect of precedents and coordinate bench decisions, including the overruling of earlier Tribunal decisions, on the taxability of salary income of Non-Resident Indians employed abroad but receiving salary payments in India.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Salary Income Received in India by a Non-Resident but Earned Abroad under Indo-Malaysia DTAA (Article 16)

- Relevant Legal Framework and Precedents:

Article 16 of the Indo-Malaysia DTAA provides that salaries derived by a resident of one Contracting State in respect of employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. Clause 1 states that if employment is exercised in the other State, remuneration may be taxed there. Clause 2 provides an exemption if certain conditions are met, including presence not exceeding 183 days, remuneration paid by a non-resident employer in that State, and remuneration not borne by a permanent establishment in that State.

Various Tribunal decisions (Nanthakumar Murugesan, Ramesh Kumar AE) have overruled earlier decisions (Dennis Victor Rozario) and allowed exemption under Article 16 in similar facts.

- Court's Interpretation and Reasoning:

The assessee qualified as a Non-Resident of India and a Resident of Malaysia, employed by TCS Malaysia. Though part of salary was paid in India for administrative convenience, services were rendered outside India. Applying Article 16(1), salary is taxable only in Malaysia as the employment was exercised there.

The Tribunal accepted the view that the DTAA provisions override the domestic law to the extent beneficial, per Section 90(2) of the Act.

- Key Evidence and Findings:

Undisputed facts included the assessee's residency status, place of employment, and salary payment pattern. The salary was taxed in Malaysia, and the assessee claimed exemption in India under the DTAA.

- Application of Law to Facts:

The Tribunal applied Article 16 to exempt salary from Indian tax despite receipt in India, since employment was exercised in Malaysia and tax was paid there.

- Treatment of Competing Arguments:

The Revenue relied on the AO and CIT(A) orders, which held salary taxable under Section 5(2) because it was received in India and relied on the earlier Tribunal decision in Dennis Victor Rozario. The Tribunal distinguished these by relying on subsequent coordinate bench decisions overruling that precedent and on the DTAA provisions.

- Conclusion:

The salary income earned for services rendered abroad and taxed in Malaysia is exempt from Indian tax under Article 16 of the Indo-Malaysia DTAA, notwithstanding receipt of salary payments in India.

Issue 2: Interpretation of Section 5(2) and Section 9(1)(ii) of the Income Tax Act on Taxability of Salary Received in India by a Non-Resident

- Relevant Legal Framework and Precedents:

Section 5(2) defines total income of a Non-Resident as income received or deemed to be received in India or accruing/arising or deemed to accrue/arise in India. Explanation 2 clarifies income is not to be taxed twice on receipt and accrual bases.

Section 9(1)(ii) deems salary income to accrue or arise in India only if earned in India, i.e., services rendered in India or connected leave periods.

Judgments from Calcutta High Court, Madras High Court, Karnataka High Court, and Supreme Court emphasize that taxability depends on situs of accrual (place of rendering services), not mere receipt of salary in India.

- Court's Interpretation and Reasoning:

The Tribunal held that Section 5(2) must be read subject to other provisions, including Section 9(1)(ii). Salary received in India by a Non-Resident for services rendered outside India does not accrue or arise in India and hence is not taxable here.

Explanation 2 to Section 5 prevents double taxation by excluding income already taxed on accrual basis from being taxed again on receipt basis.

- Key Evidence and Findings:

The assessee rendered services entirely outside India, was resident and taxed in Malaysia, and salary was paid partly in India for administrative convenience.

- Application of Law to Facts:

Since services were rendered outside India, salary income did not accrue or arise in India under Section 9(1)(ii). Receipt of salary in India does not trigger tax liability under Section 5(2) alone.

- Treatment of Competing Arguments:

The Revenue's argument that salary received in India is taxable under Section 5(2) was rejected by applying the principle of situs of accrual and reliance on judicial precedents clarifying that mere receipt is insufficient for taxability.

- Conclusion:

Salary income earned abroad and received in India by a Non-Resident is not taxable in India under Sections 5(2) and 9(1)(ii) of the Income Tax Act.

Issue 3: Applicability and Primacy of DTAA Provisions over Domestic Law under Section 90(2) of the Income Tax Act

- Relevant Legal Framework and Precedents:

Section 90(2) provides that where a DTAA exists, the provisions of the Income Tax Act apply only to the extent they are more beneficial to the assessee. The Supreme Court has held that DTAA provisions override domestic law to avoid double taxation.

Supreme Court rulings emphasize that DTAA acts as an exception or modification to domestic provisions and prevails in case of conflict.

- Court's Interpretation and Reasoning:

The Tribunal applied Section 90(2) to hold that the exemption under Article 16 of the Indo-Malaysia DTAA modifies the tax liability under Sections 5 and 9 of the Act in favor of the assessee.

- Key Evidence and Findings:

The assessee was resident and taxed in Malaysia, and the DTAA provisions were applicable to him. The domestic provisions alone would have taxed salary received in India, but DTAA provides exemption.

- Application of Law to Facts:

The Tribunal reconciled the domestic provisions with DTAA, applying the DTAA exemption as more beneficial, thereby exempting salary income from Indian tax.

- Treatment of Competing Arguments:

The Revenue's reliance on domestic law ignoring DTAA provisions was rejected. The Tribunal gave precedence to DTAA as per Section 90(2).

- Conclusion:

DTAA provisions under Article 16 override domestic law to exempt salary income earned abroad and taxed in Malaysia from Indian tax, even if received in India.

Issue 4: Effect of Coordinate Bench Decisions and Overruling of Earlier Precedents on Taxability of Salary Income of Non-Residents Employed Abroad

- Relevant Legal Framework and Precedents:

Earlier Tribunal decision in Dennis Victor Rozario held salary received in India taxable, but later coordinate benches in Nanthakumar Murugesan and Ramesh Kumar AE overruled this view, granting exemption under DTAA.

Judicial discipline requires following later coordinate bench decisions unless overruled by higher courts.

- Court's Interpretation and Reasoning:

The Tribunal relied on the more recent coordinate bench decisions that recognized the exemption under DTAA for salary earned abroad and taxed in the foreign country despite receipt in India.

- Key Evidence and Findings:

Identical facts in coordinate bench decisions supported the assessee's claim for exemption.

- Application of Law to Facts:

The Tribunal applied the overruling decisions to the present case, rejecting the AO and CIT(A) reliance on the earlier Dennis Victor Rozario decision.

- Treatment of Competing Arguments:

The Revenue's insistence on earlier precedent was rejected in light of subsequent overruling decisions.

- Conclusion:

Subsequent coordinate bench decisions overruling earlier precedent favoring taxability of salary received in India but earned abroad are binding and support exemption under DTAA.

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