2025 (10) TMI 761 - AT - Income Tax

Assessee allowed relief after admitting TRC to exclude US-earned salary under India-US DTAA Article 16(1), Section 90

ITAT, Chennai allowed the assessee's appeal for statistical purposes, admitting a Tax Residency Certificate (TRC) as additional evidence on the question ... Taxability of salary income earned outside India - income accrued outside India on account of the services being rendered in United States of America - HELD THAT:- As in this case, the Tax Residency Certificate is filed before us as additional evidence which we have admitted as it decides the substantial issue. AO is directed to verify the same and on verification if AO find that the TRC is genuine, then allow the relief u/s 90 under Article-16(1) of India US DTAA. Appeal of the assessee is allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether salary earned for services rendered outside India by a non-resident but received in India is taxable in India under section 5 read with section 9 and section 15 of the Income-tax Act? 2. Whether relief under section 90 and Article 16(1) of the India-USA DTAA is available where the assessee claims US tax residency but the Tax Residency Certificate (TRC) was not produced before the Assessing Officer (AO) / first appellate authority? 3. Whether a TRC produced before the Tribunal as additional evidence may be admitted and, if admitted, what is the appropriate remedial course (verification and remand) for allowing treaty relief? 4. Whether interest under section 234B is correctly levied in circumstances where the principal taxability of the salary and applicability of treaty relief remain contested (issue raised but not finally adjudicated by the Tribunal in view of remand). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of salary earned abroad but received in India Legal framework: Section 5(2) defines scope of total income of a non-resident to include income received in India or accruing/arising in India; Explanation 2 clarifies that inclusion on one basis precludes re-inclusion on another. Section 9(1)(ii) deems salary to accrue/ arise in India if it is earned in India; section 15 governs salary as a head of income. Precedent treatment: The Tribunal relied on coordinate bench decisions and various High Court and Supreme Court authorities holding that situs of salary accrual is the place where services are rendered and that mere receipt of salary in India is not decisive of taxability. Authorities cited include rulings establishing (a) precedence of specific charging provisions over a general 'received in India' clause, (b) that signing of contract or receipt location does not by itself fix accrual in India, and (c) that salary for services rendered entirely abroad does not accrue in India. Interpretation and reasoning: The Tribunal reconciled section 5(2) with section 9(1)(ii) by holding that section 5 must be read 'subject to' other provisions; therefore salary is taxable in India only if it accrues or arises in India, which in turn depends on where services were rendered. The location of receipt is of no consequence where services were rendered outside India. The Tribunal cited established principles that the situs of accrual equals situs of service and relied on case law to support the proposition that salary earned abroad by a non-resident is not taxable in India even if remitted or received in India. Ratio vs. Obiter: Ratio - Salary accrues where services are rendered; mere receipt in India does not make salary earned abroad taxable in India. Obiter - Discussion of various illustrative judgments and academic examples supporting the principle. Conclusions: The correct legal position is that salary for services rendered outside India accrues outside India and is not taxable in India merely because received in India; assessment must determine situs of accrual by identifying where services were performed. Issue 2 - Availability of section 90 relief and Article 16(1) of the India-USA DTAA when US residency is claimed Legal framework: Section 90 operates to give effect to DTAA provisions and, where beneficial to the taxpayer, treaty provisions override domestic provisions (section 90(2)). Article 16(1) of the DTAA (as invoked) allocates taxing rights over employment income to the State of residence subject to treaty conditions; tax residency must be established per treaty Article 4 and domestic rules. Precedent treatment: Authorities were cited establishing that a taxpayer who qualifies as resident of the treaty partner state and offers income to tax there may obtain relief under the treaty even if amounts are received in India; higher courts and tribunals have held treaty provisions override domestic charging rules where applicable. Interpretation and reasoning: The Tribunal reiterated that where an assessee qualifies as a resident of the treaty partner (USA) and the income is taxed there, Article 16(1) may preclude taxation in India. However, entitlement to treaty relief is fact-specific and contingent on proof of residency (TRC) and the income being subject to tax in the residence state. The AO and CIT(A) had denied relief because no US TRC was produced before them and because the available TRC related to another country; hence the lower authorities concluded the taxpayer had not established US residence. Ratio vs. Obiter: Ratio - Treaty relief under section 90/Article 16(1) requires proof of residence in the treaty partner and taxation of the income in that jurisdiction; in absence of such proof the domestic charging provisions apply. Obiter - Observations on the interaction of secondment/employer-employee nexus and employer reimbursement arrangements as factors relevant to residence and allocation. Conclusions: If the assessee establishes, by admissible evidence, tax residency of the USA and that the income was offered to tax there, relief under section 90 and Article 16(1) would be available notwithstanding receipt in India. Conversely, absent proof of US residency before the AO/CIT(A), treaty relief may be denied. Issue 3 - Admissibility of TRC produced before the Tribunal and appropriate remedial direction Legal framework: The Tribunal has discretion to admit additional evidence that bears on substantive issues; where such evidence is admitted, verification by the AO may be directed as appropriate under the facts. Precedent treatment: Coordinate bench decisions and principles of natural justice support admitting material which decisively bears on taxability, subject to verification where genuineness or other factual aspects require administrative confirmation. Interpretation and reasoning: The Tribunal admitted the US TRC produced before it as additional evidence because it decides the substantial issue of treaty entitlement. Recognizing the AO had no opportunity earlier to verify the TRC, the Tribunal directed the AO to verify the genuineness of the TRC and, upon successful verification, to allow the relief under section 90/Article 16(1) for the amount claimed. The direction is remedial and procedural - it preserves the assessee's right to treaty relief while ensuring factual verification by the assessing authority. Ratio vs. Obiter: Ratio - A TRC tendered before the Tribunal may be admitted; the AO should be directed to verify the TRC and, if found genuine, to grant treaty relief. Obiter - Comments on the need for earlier production for administrative ease but acknowledging Tribunal's power to admit late evidence in the interest of justice. Conclusions: The TRC was admitted; matter remanded to AO for verification of the TRC's genuineness and, if verified, grant of exemption under Article 16(1) and section 90 for the contested salary amount. Issue 4 - Levy of interest under section 234B Legal framework: Section 234B levies interest for default in payment of advance tax where tax liability is not paid or short paid; applicability depends on existence of assessable tax liability. Precedent treatment: Interest issues depend on the final determination of taxable income and thus are commonly resolved after primary taxability issues are decided. Interpretation and reasoning: The Tribunal did not finally adjudicate the correctness of interest under section 234B because the primary question of taxability/treaty relief was remanded for verification. Since allowance of treaty relief would affect the tax liability base that underpins interest calculations, the interest question must be revisited by the AO post-verification and recomputation. Ratio vs. Obiter: Ratio - Interest under section 234B cannot be finally upheld or reversed before determination of the principal tax liability; remand for recomputation is appropriate. Obiter - None beyond procedural consequence noted. Conclusions: The levy of interest under section 234B was not finally decided; the AO is required to recompute tax and interest after verifying the TRC and determining entitlement to treaty relief. Final Disposition (as concluded by the Tribunal) The Tribunal admitted the US TRC produced before it, directed the AO to verify the TRC's genuineness, and, on verification, to allow relief under section 90 read with Article 16(1) of the India-USA DTAA to the extent of the salary claimed (Rs. 1,31,04,562/-). The appeal was allowed for statistical purposes and remitted to the AO for verification and consequential recomputation of income, tax and interest.