2006 (11) TMI 139 - AAR - Income Tax

Applicant itself is a resident in India has raised issue of tax liability of some of its non-resident employees lent to group companies abroad - salary paid by the applicant to Mr. Manish Gupta shall not be taxable in India if the same has been offered for tax in the U. K. in pursuance of DTAA - applicant shall not deduct tax at source from salary paid to Mr. Gupta in India provided it is satisfied from the details furnished u/s 191(2) that taxes have been paid on such payments in the U. K.

Summary

Issues Involved:
1. Taxability of salary income received in India for services rendered outside India.
2. Obligation of British Gas India Pvt. Ltd. to withhold taxes on salaries paid in India for services rendered outside India.

Detailed Analysis:

Issue 1: Taxability of Salary Income Received in India for Services Rendered Outside India
- Facts and Circumstances: The applicant, British Gas India Pvt. Ltd., assigned Mr. Manish Gupta to BG Group entities outside India. Mr. Gupta commenced employment in India in 2002 and was deputed to the UK from July 1, 2005. He spent less than 182 days in India in the financial year 2005-06.
- Applicant's Argument: Mr. Gupta is a non-resident under Explanation (a) to Section 6(1) of the Income-tax Act, 1961, as he stayed in India for only 88 days in the relevant financial year.
- Commissioner's Argument: Mr. Gupta is a resident in India as he stayed for more than 60 days.
- Legal Interpretation: Explanation (a) to Section 6(1) substitutes "sixty days" with "one hundred and eighty-two days" for citizens leaving India for employment outside. Mr. Gupta's stay of 88 days makes him a non-resident.
- Ruling: Mr. Manish Gupta is not a resident in India for the financial year 2005-06. Consequently, the salary received in India for services rendered outside India is not taxable in India.

Issue 2: Obligation to Withhold Taxes on Salaries Paid in India for Services Rendered Outside India
- Applicant's Argument: Taxes should not be withheld if the income is not chargeable to tax in India. The Double Taxation Avoidance Agreement (DTAA) between India and the UK provides that salary derived by a resident of the UK is taxable in the UK unless the employment is exercised in India.
- Commissioner's Argument: Income received in India is taxable under Indian law, regardless of the DTAA. The employees were on the payroll of the Indian company, and their employment was not on behalf of the UK company.
- Legal Interpretation: Section 5(2) of the Act includes all income received in India by a non-resident. However, Section 90 allows the DTAA to override the Act's provisions. Article 16 of the DTAA states that salaries for employment exercised in the UK are taxable in the UK.
- Ruling: The salary paid by the applicant to Mr. Manish Gupta shall not be taxable in India if it has been offered for tax in the UK under the DTAA. The applicant shall not deduct tax at source from salaries paid to Mr. Nipun Pradhan and Mr. Manish Gupta in India, provided it is satisfied that taxes have been paid on such payments in the UK.

Conclusion:
- Taxability of Salary: The salary received in India by Mr. Manish Gupta for services rendered outside India is not taxable in India if it is taxed in the UK.
- Withholding Tax Obligation: British Gas India Pvt. Ltd. is not required to withhold taxes on salaries paid in India to Mr. Nipun Pradhan and Mr. Manish Gupta for services rendered outside India, provided taxes are paid in the UK.