An Individual who is not citizen of India or a person of
Indian origin may become resident in India only in one of the following
situations: -
(i) if he stays during previous year
2020-21 for 182 days or more; or
(ii) if he stays during the previous year 2020-21
for 60 days or more and also stays for 365 days or more in preceding four
previous years.
Thus, generally, a person will become resident in India for
the previous year 2020-21 only if he stayed in India for 182 days or more
unless he is covered by the exceptions discussed above.
Salary or Remuneration for services rendered by a foreign
national, employed by a foreign enterprise during the individual’s stay in
India, is exempt from tax in India if:
(a) the
total period of the stay in India does not exceed 90 days in a financial year
(b) the
foreign enterprise is not engaged in any trade or business in India
(c) the
remuneration is not liable to be deducted from the income of the employer
chargeable in India
The
Board vide Circular No. 685, dated June 17, 1994 has clarified that all
payments and perquisites to employees for services rendered
in India are taxable in India, irrespective of the
place where the payment is made and that the employers are liable to deduct tax
at source even in respect of payment of salary, allowances and perquisites
paid or provided abroad to their employees who have rendered service
in India.
The
Board's circular clearly states the legal position about
the taxability of the salaries earned in India by
virtue of section 9(1)(ii) of the Income-tax Act, 1961. There cannot be
any dispute about its legality and validity. According to section 9(1)(ii),
income which falls under the head 'Salaries', if it is earned in India, is
deemed to accrue or arise in India. For that purpose, income of the nature
of salary payable for services rendered in India, is regarded as
income earned in India
Board's
Circular No. 685, dated 17.06.1994
Subject : Non-initiation of penalty and prosecution
proceedings in certain cases of defaulters under Chapter XVII-B
It
has come to the notice of the Board that some of the employers, including
foreign companies operating in India, have been defaulting in deducting tax at
source as required under section 192, on the salaries and allowances paid
abroad, or perquisites provided abroad, to their employees for services
rendered in India. In some cases, tax might have been deducted at source, but
not remitted to Government. All payments and perquisites to employees for
services rendered in India are taxable in
India irrespective of the place where the payment occurs. The employers
are, therefore, liable to deduct tax at source even on payment of salary,
allowances and perquisites paid or provided abroad to their employees who have
rendered service in India. They are also required to remit such deducted tax to
Government. Failure to comply with these requirements would render the employer
an assessee in default, and would attract interest under section 201(1A).
Penalties under sections 221 (assessee in default) and 271C (failure to deduct
tax) are then leviable and prosecution proceedings under section 276B can also
be initiated in such cases.
2. To encourage immediate voluntary compliance, the Board
has decided that proceedings under sections 221 and 271C for levy of penalties
and proceedings under section 276B for prosecution need not be initiated in
cases where an employer voluntarily comes forward and pays the whole of the tax
due under section 192, along with interest liability under section 201(1A) on
or before July 31, 1994.
3. Employers (Indian and foreign), who committed default
in the past are advised to make use of this opportunity to pay up arrears of
TDS (tax deductible at source) together with interest on or before 31.07.1994
and avoid penalty and prosecution proceedings.
4. Wide publicity may be given regarding this
opportunity.
5. From 01.08.1994, penalty provisions under sections 221
and 271C and prosecution provisions under section 276B will be strictly
implemented according to law.
In
case of a foreign expatriate working in India, the remuneration received by
him, assessable under the head ‘Salaries’, is deemed to be earned in India if
it is payable to him for services rendered in India as provided in Section
9(1)(ii) of the Income Tax Act.
The explanation to the aforesaid law clarifies that income
in the nature of salaries payable for services rendered in India shall be regarded
as income earned in India. Further the income payable for the leave period
which is preceded and succeeded by services rendered in India and forms part of
the service contract shall also be regarded as income earned in India.
Thus, irrespective of the residential status of the
expatriate employee, the amount received by him as salary, for services
rendered in India shall be liable to tax in India being income accruing or
arising in India, and also be subject to TDS regardless of the place where
the salary is actually received.
Text of Section 9(1)(ii)
(ii) income which falls under the head “Salaries”, if
it is earned in India.
Explanation. - For the removal
of doubts, it is hereby declared that the income of the nature referred to in
this clause payable for -
(a) service rendered in
India; and
(b) the
rest period or leave period which is preceded and succeeded by services
rendered in India and forms part of the service contract of employment,
shall be regarded as income earned
in India ;
KEY
NOTE
Explanation under
section 9(1)(ii). The need of the Explanation arose in the
wake of the decision of the Gujarat High Court in CIT v. S.G.
Pgnatale (1980) 124 ITR 391 (Guj.). In that case, the expression
'earned in India' was held to mean income earned by the assessee only by
its accrual or arising by the assessee rendering service in respect of which
debt was created in his favour.
Source of salary explained
For taxability of income under the head
‘Salaries’, the source should be a contract of employment and the amount
received from rendering services in terms of that contract from the employer.
The location of payment or of the employee or the place of the
contract are of no relevance as long as the location of service is in India.
The salary is then stated to have been earned in India.
Source of salary comprises three elements
The source of salary comprises three
elements, viz., getting the job, doing it and getting paid for
it. Its location could be decided on the basis of the pre-dominant element or
elements. If the source of income concerns substantially in making the
contract, the place where it is made may be regarded as the only significant
factor. If it concerns in first making the contract and then carrying it into
effect in circumstances such that both elements are substantial factors in the
source, apportionment must be made. If the making of the contract is an
insignificant factor and the only substantial factor is its performance, the
place of performance is the only legal source. The Income-tax Act deems the
performance of service to be the only relevant factor for taxing the amount
in India.
Employment exercised aboard a ship
Double taxation avoidance agreements with other countries
normally provide that the remuneration derived in respect of the employment
exercise aboard a ship or an aircraft operated in international traffic or
abroad a boat engaged in inland water transport may be taxed in the State in
which the place of effective management of the enterprise is situated. In view
of this, therefore, the remuneration in respect of such employment cannot be
taxed in India if the effective management is not situated
in India subject to exemption as provided in Section 10(6)(viii) of the
Income Tax Act, 1961.
Employment exercised by a resident assessee
- Taxability in the State of residence
According to the double taxation avoidance
agreements, salary is taxable in the State of which
the employee is a resident. But in case the employment is exercised
in the other State and the remuneration is derived from such exercise, it may
be taxable in the other State. For example, in the case of a resident
of USA, salary would be taxable in USA for services
rendered in India. But if the employment is exercised
in India and the remuneration is derived from such exercise, it may
be taxable in India also. The words used in the double
taxation agreement mostly are, ‘employment is exercised’. Under the Income-tax
Act, the words used are ‘service rendered in India’. Thus, there is a
distinction between these two expressions. The deeming provision could be applicable
only if the services are rendered in India.
'Exercise of employment' and 'rendering services'
Exercise
of employment is not the same thing as rendering services. The distinction is
the same as the distinction between doing business in India and doing
business with India. In the event of a taxpayer deriving employment
income, the location of the source of such income is where he performs his
duties of employment, since it is the performance of such duties which produces
the employment income – FCT v. French 11 ATD
288.
For
the purpose of the expression ‘income earned in India’, the geographical
source of income is relevant. In a case where the places of the signing of the
employment contract, the performance of service and the payment are
outside India, the source of employment income derived by
the employee while performing his service is outside India.
Employment income taxable only subject to conditions as per
DTAA [CBDT Circular No. 2 of 2021, dated 03.03.2021]
Article
related to employment income in the DTAA with different countries governs the
taxation of employment income. For example, Article 16 of the Indo-USA DTAA
provides following for taxation of employment income:
“DEPENDENT
PERSONAL SERVICES
1. Subject
to the provisions of Articles 17 (Directors’ Fees), 18 (Income Earned by
Entertainers and Athletes), 19 (Remuneration and Pensions in respect of
Government Service). 20 (Private Pensions, Annuities, Alimony and Child
Support), 21 (Payments received by Students and Apprentices) and 22 (Payments
received by Professors, Teachers and Research Scholars), 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 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
Stale.
2. 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
State, if:
(a)
the recipient is present in the other State for a period or periods not
exceeding in the aggregate 183 days in the relevant taxable year;
(b)
the remuneration is paid by, or on behalf of an employer who is not a resident
of the other State; and
(c)
the remuneration is not borne by a permanent establishment or a fixed base or a
trade or business which the employer has in the other State.
3.
Notwithstanding the preceding provisions of this Article, remuneration derived
in respect of an employment exercised aboard a ship or aircraft operating in
international traffic by an enterprise of a Contracting State may be taxed in
that State.”
‘183’ days rule for exemption
The double taxation avoidance agreements mostly provide for
non-taxability of income as salary if a foreign employer has not
been present in the country for more than 183 days. The general rule in the
agreements is that income is not subject to tax in the country in which the
employment is exercised if—
(a) the recipient is present
in the source country for a period not exceeding 183 days in the fiscal year;
(b) the remuneration is paid
by, or on behalf of, an employer who is not resident of the source country;
(c) the remuneration is not
borne by a permanent establishment or a fixed base which the employer has in
the source country.
If the exercise of employment is in the country other than
the employer's country of residence, salary or wages would
be taxable in the country of his residence rather than in the country
where the services are rendered, if any, of the above conditions is satisfied.
‘Ninety days’ rule for exemption
However, in case of a foreign employee there is a
provision under the Income-tax Act - section 10(6)(vi) which grants
exemption where the foreign enterprise is not engaged in any trade or business
in India, the stay of the employee in India does not
exceed in the aggregate a period of 90 days in such previous year, and the
remuneration is not liable to be deducted from the income of the employer
chargeable under the Act.
‘183 days’ and ‘90 days’ rule
Thus,
there are two types of exemptions: one in respect of residents of countries
with which India does not have a double taxation avoidance agreement
(90-day rule); and the other in respect of others, i.e., residents
of those countries with which India has double taxation avoidance
agreements (183-day rule).
Exemption of certain amount received by non-citizens
in the circumstances mentioned in Section 10(6)
|
Section 10(6) exempts certain amount received by
non-citizens in the circumstances mentioned therein. In case of double
taxation avoidance agreements, salary is taxed by the State of
which a person is resident unless the employment is exercised in the other
State. |
|
The
following incomes are exempt when received by an individual who is not a
citizen of India: (i) Certain types of Salary or remuneration
[Section 10(6)(ii)] Following types of
remunerations are exempted under section 10(6)(ii) of the Income Tax Act
– (a) The remuneration received by an ambassador or other
officials of the Embassy, High Commission or Legation of a foreign State in
India. (b) The remuneration by a consular officer of a foreign State
in India. (c) The remuneration received by a trade commissioner or other
official representative in India of a foreign State, provided corresponding
officials of the Government of India in that country are given a similar
concession. (d) The remuneration received by a member of the staff of any
of the officials referred to in (a), (b) and (c) above. If
the person mentioned above in (a) to (d) is a subject of the country
represented, is not engaged in any business, profession or employment in
India (otherwise than as a member of such staff), and the country represented
gives similar concession to the members of the staff of corresponding
officials of the Government of India. (ii) Salary
or Remuneration received by non-Indian citizen as an employee of foreign
enterprise [Section 10(6)(vi)] (e.g., technician deputed by a
foreign firm to work in India) · The amount of remuneration received, by an individual
who is not a citizen of India, as an employee of the foreign enterprise is
available as an exemption under section 10(6)(vi). · The said remuneration should have been received for
services rendered during his stay in India. · The exemption is available only if the below mentioned
conditions are satisfied. · (a) the foreign enterprise is not engaged in any trade or business in India ; (b) his stay in India does not exceed in the aggregate a
period of 90 days in such previous year ; and (c) such remuneration is not liable to be deducted from
the income of the employer chargeable under the Act. (iii) Salary or Remuneration
to Foreign Employee or Non-Resident Member of Crew, for services rendered in
connection with his employment on a foreign ship [Section
10(6)(viii)] Eligible
exemption and conditions thereon - (a) The exemption is available towards any income received or
due to any individual being a non-resident. (b) Such income should be chargeable under the head ‘Salary’. (c) The remuneration should have been received towards the
services rendered in connection with his employment on a foreign ship. (d) The total stay of the employee in India should not exceed
the aggregate period of 90 days in the previous year. (iv) Salary
or Remuneration received by an employee of foreign govt. during his stay
in India for his training in India [Section 10(6)(xi)] Remuneration
received by an Individual, who is not a citizen of India, as an employee of
the Government of a foreign state during his stay in India in connection with
his training in any Government Office/Statutory Undertaking, etc. Such
remuneration shall be fully exempted if he is taking training in any of the
following concern : (a) Institution owned by Government (b) A company wholly owned by Central or State govt. or partly
owned by Central and partly by State Government (c) A subsidiary Co. of company referred at point (b)
above (d) Any corporation established by or under Central, State or
Provincial Act (e) Any society registered under Societies Registration Act;
1860 and which is wholly financed by Central or State Government. |
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