Facts of the case:
The assessee is an individual. He is a former employee of Motorola India. During May, 2000, the assessee joined Motorola Japan as the Managing Director and he was working with Motorola Japan until April, 2006. He was transferred to Motorola Japan from Motorola India as part of intra group transfer. During the entire period between May, 2000 and April, 2006, the assessee was working wholly and exclusively for Motorola Japan.
The salary, for administrative convenience, was paid by Motorola India on behalf of Motorola Japan. It was submitted that this was mainly because of personal and other obligations which the assessee had to discharge in India. The salary was credited to the assessee’s bank account in India. Taxes were deducted under Section 192 of the Act. During the previous year, the assessee had an aggregate stay in India of 83 days (including the days of arrival and departure).
The return of income was filed for the assessment year 2006- 07 wherein he had claimed the status of a non-resident and declared the following income.
- Income from salary (before claiming exemption under the India- Japan Double Taxation Avoidance Agreement) 47,94,431
- Income from other sources (including interest on refund Rs.91,480) 1,85,060
- Exemption under the India-Japan Double Taxation Avoidance Agreement) 47,94,431
- Gross total income 1,85,060 Less: Deductions under Chapter VIA 1,00,000
- Total income 85,060
It was submitted before the Assessing Officer that since the assessee was a resident of Japan for the period relevant to the Indian previous year 2005-06 (concerning assessment year 2006-07), he had paid taxes in Japan in respect of salaries paid in India on behalf of Motorola Japan.
Japan, the assessee was wholly and exclusively working for Motorola Japan and his entire salary was earned in Japan. Even under the Indian Income Tax Act, 1961, the assessee being governed by the provisions of section 9(1)(ii), was not taxable in India as, having exercised his employment in Motorola Japan, he earned the entire salary outside India and was not taxable in India at all. Therefore, in accordance with the provisions of Article 15(1) of the India-Japan Double Taxation Avoidance Agreement (DTAA) as well as the Indian Income Tax Act, the assessee is entitled to exemption in respect of entire salary.
The Assessing Officer, however, disallowed the claim of exemption of salary and brought to tax the salary income for the days he was in India. Aggrieved by the assessment, the assessee carried the matter in appeal before the first appellate authority.
The CIT(A) partly allowed the appeal of the assessee.
Being aggrieved by the order of the CIT(A), the assessee filed an appeal before ITAT.
Judgment:
Tribunal considered the article 15(1) of India-Japan tax treaty which provided that :-
“Subject to the provisions of articles 16, 18, 19, 20 and 21, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Contracting State”.
Article 15(2) of India Japan Treaty DTAA provides for the following :-
“Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned Contracting State, if :
(a) the recipient is present in that other Contracting State for a period or periods not exceeding in the aggregate 183 days during any taxable year or ‘previous year’, as the case may be; and
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other Contracting State; and
(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in that other Contracting State”.
Tribunal observed that As per Article 15(1) of the DTAA between India and Japan, the tax resident of Japan can be taxed in India only if the assessee is present in India for more than 183 days. From the assessment order it is clear that the assessee was present in India only for 83 days and hence, the assessee cannot be taxed in India for any part of salary for services rendered to Motorola Japan. The tax year in Japan is January to December whereas for India, it is April to March. For the purpose of Indian tax, one has to see the corresponding position in Japan for determining tax residency in Japan. It is seen that the assessee was present in India only for 83 days during the period April 1, 2005 to March 31, 2006. Hence, as the assessee was present in Japan for more than 183 days during the said period, the assessee would be regarded as a tax resident of Japan and entitled to claim tax treaty benefits as a tax resident of Japan. In view of the same, and further that the assessee’s stay in India was only 83 days during the year under appeal, the assessee is entitled for exemption of tax in respect of his income from salary for the entire year.
The salary amount that is received by the assessee during his stay in Japan is not taxable as per the provisions of Income Tax Act, 1961 for the following reasons:-
• The assessee is a non-resident is an undisputed fact. A non-resident is taxable under section 5(2). The provision reads as follows :
“Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which Page 16 of 18 16 ITA No.10/Bang/2011
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year”.
As per section 15, salary is not taxable on receipt basis except in case of advance salary or arrears salary. Regular salary under section 15(1)(a) is taxable on accrual basis. Salary is accrued where the employment services are rendered. In the instant case, for the assessee, the normal place where the employment services rendered is in Japan and not in India. His visits to India are in connection with business and not for rendering employment services for any Indian entity. There is no employment agreement for having rendered any services for Indian entity. In the instant case, the salary accrues to the assessee in Japan and the accrued salary is partly delivered by Motorola India in India. Hence, there is no accrual of salary in India.
“salaries” under section 15 shall be deemed to accrue or arise in India if it is earned in India, i.e., if the services under the agreement of employment are or were rendered in India. In the instant case, the employment services were entirely rendered outside India. Hence, the salary is not earned for rendering services in India. Therefore, salary for the entire year is not taxable. In this connection, reliance is placed on the following decisions:-
DIT (Intnl. Taxation) v Prahlad Vijendra Rao (2011) 198 Taxman 551 (Kar.)/(2011) 24 CTR Kar.) 107; Ranjit Kumar Bose v ITO (1986) 18 ITD 230 (Calcutta ITAT);
CIT v Avtar Singh Wadhwan (2001) 247 ITR 260 (Bom.); Sreenivas Kumar Sistla (AAR No.514 of 2000).
For the aforesaid reasons, the salary which was received by the assessee for the services rendered in Japan for the period 1/4/2005 to 31/3/2006 is not liable to tax in India.
Shri Bholanath Pal vs The Income Tax Officer, Ward-1(1), International Taxation, Bangalore
