DTAA relief for salary income: pay received in India was not taxable where services were rendered in Malaysia.

Salary paid in India to a non-resident who was a tax resident of Malaysia was not taxable in India where the employment services were rendered in Malaysia. Section 5(2) brings a non-resident's income into charge only if it is received, deemed to be received, accrued, or deemed to accrue in India, and section 9(1)(ii) deems salary to accrue in India only when earned through services rendered in India. Because the assessee was entitled to the more beneficial Article 16 of the India-Malaysia DTAA under section 90(2), the salary remained taxable only in Malaysia. The treaty relief was allowed and the addition was set aside.

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Issues: Whether salary paid in India to a non-resident assessee, who was a tax resident of Malaysia and had rendered the services in Malaysia, was taxable in India or exempt under Article 16 of the India-Malaysia DTAA.

Analysis: The assessee was a non-resident in India and a resident of Malaysia. The salary component was connected with employment services rendered in Malaysia, though the payment was routed through India for administrative convenience. Section 5(2) of the Income-tax Act, 1961 includes in the total income of a non-resident only income received or deemed to be received in India and income accruing or arising or deemed to accrue or arise in India. Section 9(1)(ii) of the Act treats salary as deemed to accrue or arise in India only if it is earned in India, which depends on where the services are rendered. The treaty position under Article 16 of the India-Malaysia DTAA applied because the assessee was a resident of Malaysia, and under Section 90(2) of the Act the more beneficial treaty provision prevails. On that basis, the salary was taxable only in Malaysia and not in India merely because it was paid in India.

Conclusion: The salary income was held not taxable in India and the exemption claim under the India-Malaysia DTAA was allowed.

Final Conclusion: The assessee's appeal succeeded, and the addition denying treaty relief was set aside.

Ratio Decidendi: Salary earned for services rendered outside India by a non-resident is not taxable in India merely because it is paid in India, and a beneficial DTAA provision prevails over the Act under Section 90(2).

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