IF A PERSON IS NON RESIDENT IN BOTH THE STATES! WHERE TO TAX THE INCOME?
Facts of the Case
Assessee is an employee of a Canadian Company. He went to Canada on 1st March, 2013 and he came back to India on 2nd October, 2013. Then on 17th November, 2013 he again went to Canada and came back on 22nd November, 2013. Assessee was paid salary outside India and that was also in a Bank Account which is also operated outside India. It also to be noted that during the period of stay in India, neither salary was paid in India nor any other payment was received by the employee from the company in India.
The question before us is that whether employee was liable to be taxed in India for the period he stayed in India?
Analysis on the query
This is the case where taxability as per Indian domestic law and taxability as per Double Taxation Avoidance Agreements (hereinafter referred to as ‘DTAA’) has to be checked and those provisions which are most beneficial to the assessee will be applied to the case.
TAXABILITY AS PER INDIAN DOMESTIC LAW
Let us check the residential status of the assessee based on the taxability of income will have to be decided.
Step 1: Residential status
Assessee went to Canada on 1st March, 2013 and came back to India on 2nd October. Then he stayed in India till 17th November. Therefore his period of stay in India is 47 days. Then assessee again came back to India on 22nd November, 2013 and then continues to stay during the entire previous year. The total stay in India of the assessee is 177 Days.
As per section 6 of the Income tax act, 1961 (hereinafter referred to as ‘act’), if any person stays in India for the period of 182 days or more, then he shall be treated as ‘Resident’ for the purpose of the act. This is to be noted that the condition of 182 days or more has to be checked for each previous year separately.
The second basic condition for the residential status does not apply to the assessee.
Therefore, assessee is a non Resident for the purpose of the act.
Step 2: Taxability of Income
Since the assessee is a Non resident, therefore the following income shall be taxable in India
a. Income accrued in India or deemed to be accrued in India
b. Income received in India or deemed to be received in India
As per the facts of the case, assessee has earned his salary in India for 177 days, therefore, as per section 9 of the act, the salary income which is earned in India will be deemed to arise in India. Therefore, that portion of salary which is earned in India will be taxable in India.
This has to be taxed in India despite the fact that salary amount is credited by the foreign company outside India in a bank account which is also located outside India, this has been held in Elly Lilly Vs. CIT (2011) SC.
Salary income earned outside India, before his arrival in India will not be taxable in India because it has not been earned in India and section 9 does not attract in this case.
TAXABILITY AS PER DTAA
Now we have to analyze the DTAA between India and Canada and to check whether any benefit can be given to the assessee or not.
The salary income has to be decided as per Article 15 of the tax treaty. The article 15 of the treaty is as follows:
1. Subject to the provisions of Articles 16, 18 and 19, 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 State.
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 :
the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in the relevant fiscal year;
the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State, may be based in that State.
As per para 2 of article 15, if any person resident in Canada exercise the employment in India, and if the aforesaid conditions are fulfilled then, the salary income will be taxable in Canada only.
If we read our facts in the light of above law, then it can be concluded that in our case the aforesaid conditions are fulfilled as
i. Assesseee is present in India for less than 183 days, hence first condition is fulfilled
ii. Remuneration is paid by company which is not resident of India, hence second condition is also fulfilled;
iii.The remuneration is paid directly by the foreign company and no part of salary is being borne by the permanent establishment.
Therefore, when all the conditions are fulfilled, then it can be concluded that the salary income earned in India will be taxable in Canada only and no part of income is taxable in India.
However, some other facts may also be off prime importance in the deciding this issue, Facts are, in Canada, tax period starts from 1st January and ends on 31st December, so their tax period are as per calendar year. However in India, tax period is always from 1st April to 31st March. In our case, assessee has already paid tax in Canada for the period 1st Jan, 2013 to 31st Dec, 2013. And for next year, i.e. 1st Jan, 2014 to 31st Dec, 2014 he will be treated as Non resident.
In India, assessee is already a non resident for the PY 2013-14. Therefore, the question is that where will the income for the period 1st Jan, 2014 to 31st March 2014 will be taxable because for the period from 1st January to 31st March, 2014, assessee is non resident in the both the Countries. It has to be noted that since assessee is not a resident in Canada for the period 1st January to 31st March, then he will not be allowed to avail the benefit of article 15, because article 15 clearly talk about being resident of contracting state. But in our case, assessee is non resident for both the countries and therefore, article 15 will not apply.
However, since assessee has rendered his services in India and also no DTAA benefit is available to the assessee, hence as per section 9 of the domestic tax laws of India, the salary earned for the period 1st January to 31st March, 2014 will be taxable in India.
In the absence of applicability of article 15, case has to be decided as per domestic law and as per domestic law read with Elly Lilly v. CIT (2011) SC, the salary income earned during 1st January to 31st March, 2014 will be taxable in India.
By Paras Mehra
I am Paras Mehra, a Chartered Accountant. Co-founder of Quickcompany.in Many external people seek advice from me, I have been only a start up in this beautiful field, during my really small career, I had encountered with the following case and I found it interesting to share with you.
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