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October 3, 2007
Double tax whammy for mobile executives
The Authority for Advance Rulings (“AAR”)
has recently ruled, in the case of
S. Mohan v. Director of Income-tax (International Taxation), Chennai
[2007-TIOL-11-ARA-IT], that a non-resident employee (“Applicant”)
employed with Infosys Technology Ltd., an Indian company (“Employer”)
would be taxable in India on his income from deputation with the
Employer’s foreign affiliate situated in Norway (“Foreign
Co”). It was further held that the Applicant would not be
entitled to relief under the provisions of Articles 16 and 25 of
the India-Norway tax treaty (“Treaty”)
as he had not paid income tax in
Norway
either voluntarily or otherwise.
In
this case, the Applicant was employed with the Employer from May
16, 2005 to March 31, 2006, during which time he was sent to Norway
on deputation. As he remained outside India for a period exceeding 183
days in the financial year 2005-06, he claimed that he was a
non-resident for Indian income tax purposes, and therefore not
required to pay Indian income tax on his income from deputation.
The salary received by him in India was
received in Indian rupees, upon which he paid income tax and
subsequently sought a ruling with regard to his tax liability.
The issue under consideration was whether the salary paid by the
Employer to the Applicant, for rendering services outside India, could be taxable in India, considering that there exists a tax treaty
between India
and the country in which the Applicant was resident.
The AAR examined Article 16 of
the Treaty on “dependant personal services”, as per which the
remuneration earned by a provider of dependant personal
services, would be taxable in the state of residence of such
employee. Where the dependant personal services are rendered in
the other contracting state, the remuneration may be taxed
in the other state as well. However, if certain conditions
contained in Article 16(2) are satisfied, for example if the
period of stay of the employee is less than 183 days in the
aggregate days in any two
consecutive years in the other contracting state, the
remuneration shall be taxable only in the state of residence.
In this case, the AAR examined the provisions of the Treaty and
held that the exception contained in Article 16(2) may not apply
as the Applicant had stayed in
Norway
for a period exceeding 183 days in financial year
2005-06. Therefore, upon a plain reading of Article 16 and the
interpretation contained in the OECD Commentaries, as right to
tax would lie with the state of residence as well as the other
contracting state, both Norway and India should have the right
to tax such income.
The AAR also considered Article 25 of the Treaty, the provision
relating to the elimination of double taxation, which provides
that where the income earned by a resident of
India
may be taxed in Norway, India shall deduct the amount of income tax paid
in Norway
from the tax payable in
India. However, in this case,
as the Applicant failed to provide any proof that he was taxed
in Norway or
that he had paid income tax to the State of Norway, it was held
that the Applicant was liable to pay tax in
India
and he was not eligible to get any relief under the provisions
of the Treaty. The AAR also
considered the ruling in the case of
British Gas [285 ITR
218] and held that the ruling would not be applicable to the
instant case due to a difference in facts.
This ruling is relevant for the determination of the income of
non-resident employees sent on deputation abroad, as it
specifies that it may not only be India but also the other
contracting state which may have a right to tax the same
income, depending on the provisions contained in the relevant
treaty. In a cross border world with a growing trend of mobile
executives, this ruling could have a significant impact on the
taxation of such mobile executives.
Source:
AAR
Ruling in the case of S. Mohan
v. Director of Income-tax (International Taxation), Chennai
[2007-TIOL-11-ARA-IT]
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