RAMESH KUMAR ,CHENNAI vs. ITO INTERNATIONAL TAXATION , TUTICORIN

आदेश / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

2. The assessee has raised the following grounds for adjudication.

1. The Hon’ble CIT(A) has grossly erred in the facts and circumstances of the case and in law in disallowing the exemption of INR 28, 44, 650 claimed by the appellant for AY 2014-15 in respect of the services rendered in Switzerland under Article 15(1) of the Double Taxation Avoidance Agreement between India and Switzerland (DTAA) read with Section 90 of the Act.

2. The Hon’ble CIT(A) has grossly erred in the facts and circumstances of the case and in law in wrongly invoking the provisions of Article 23(1) of the DTAA -to hold that only a Resident of India can qualify for exemption under Article 15(1) of the DTAA.

2013-14, the assessee was seconded to Switzerland to work with Alcatel Lucent Schweiz Ag, Zurich (Alcatel Switzerland) with effect from July 29, 2013. During FY 2013-14, the assessee was in India for less than 182 days and qualified as a Non Resident as per explanation (a) to section 6(1) of the Act. Accordingly, the assessee had electronically filed his return of income on July 31, 2014, admitting an income of Rs. 11,86,040 and claimed exemption of salary under Article 15(1) of the Double Taxation Avoidance Agreement (tax treaty) between India and Switzerland amounting to Rs 28,44,650. The particulars of income and taxes disclosed in tax return by assessee are as given below.

` 11,86,040/- Income as per Tax Return Tax as per Tax Return ` 1,91,384/- TDS as per Tax Return ` 10,67,415/- Tax Refund claimed as per Tax Return ` 8,76,030/- 3.1 During the course of assessment proceedings, the case was selected for limited scrutiny assessment through issue of notice under section 143(2) of the Act and assessment order was passed on September 29, 2016 assessing income at `40,30,690/-. The tax demand of `10,19,120/- was raised on account of addition of `28,44,650/- made to the income in the assessment order. This addition was made on account of disallowance of relief, amounting to `28, 44,650, claimed by the assessee under Article 15(1) of the tax treaty. During the calendar years 2013 and 2014 relevant to Indian FY 2013-14, the assessee was exercising his employment in Switzerland and had filed his tax returns in Switzerland in the capacity of a tax resident of Switzerland and appropriate taxes have been paid to the Revenue Authority of Switzerland. During the period of secondment the payroll of the assessee was maintained with Alcatel India. During the course of assessment proceedings, the assessee was asked to submit his Switzerland tax returns and proof of employment in Switzerland. The assessee had duly submitted his Switzerland Tax Residency Certificate, for the years 2013 and 2014, certifying that the assessee qualified as a resident of Switzerland. He also duly submitted the copy of his Switzerland tax returns to the AO for the year 2013 and 2014 to substantiate his employment in Switzerland and the taxes have been paid on the salary income in Switzerland which is claimed as exempt in India in accordance with Article 15(1) of India- Switzerland tax treaty. However, the ld. Assessing Officer after examining the submission of assessee, considered that since the salary is received directly to an Indian bank account, it will be subject to tax as per Indian Income tax laws. The ld. Assessing Officer objected that assessee’s claim under Article 15(1) of the DTAA, which is not in order since as per Article 23 of the treaty, only residents are allowed to claim relief under the treaty.

Aggrieved by the order of ld. Assessing Officer, the assessee carried the appeal before the Ld.CIT(A). On appeal, Ld.CIT(A) following the decision of Chennai Tribunal in the case of ITA No.299/Mds./2016 dated 05.08.2016, observed that the assessee has been paid salary in India by an Indian Company, in Indian rupees and in asavings bank maintained in India. Therefore, the the salary received in India is taxable in accordance with the provisions of the section 5 and 9 and 192 of the Act as it is received in India and taxable in India. The Ld.CIT(A) rejected the assessee’s claim of exemption of salary under Article 15 of DTAA between India and Swiss Confederation. Against the order of Ld.CIT(A), now the assessee is in appeal before us.

4. Before us, ld.A.R submitted that Salary income is not taxable in India in respect of employment exercised outside India for a non- resident per the provisions of the Act and drew my attention to the following points.

2.1 As per Section 6(1) of the Act, it is not disputed that the Appellant qualified to be a Non-Resident in India for the AY 2014-15.

2.2 The provisions of Section 5(2) of the Act defines scope of total income in case of non-residents as under:

“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 (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.”

2.3 The expression “subject to” used in the opening para of the sub-section (2) indicates that the provisions of Section 5(2) of the Act are subject to other provisions of the Act and would have an overriding effect.

2.4 If the charging provisions of the Act do not consider such receipts as taxable, it shall not be taxable under Section 5(2) of the Act.

2.5 As per Section 9(1)(ii) of the Act, income under the head Salaries shall be deemed to accrue or arise in India if it is earned in India. Further, as per Explanation to Section 9(1)(ii) of the Act, services rendered in India are regarded as income earned in India.

2.6 In CIT v Nippon [1998] 233 ITR 158, the Hon’ble Calcutta HC has held that provisions of Section 5(2) of the Act are subject to other provisions of the Act and if other provisions are contrary to provisions of Section 5(2) of the Act, they will have an overriding effect on Section 5(2) of the Act.

2.7 Reliance is also placed on the following decisions in this regard:

• Arvind Singh Chauhan v ITO [2014] 42 Taxmann.com 285( Agra) - an employee has to render the services to get a right to receive a salary and situs of accrual of salary income is the place where the services are rendered; • Bombay High Court ruling in the case of Avtar Singh Wadhwan [2001] 247 ITR 260 - salary accrued outside India where the services were performed); • Bombay High Court in the case of CIT vs Estienne Andreas and Others (2000) 242 ITR 422 - in the context of India France DTAA, held that the remuneration received by the employees for the services rendered in France could not be subject to tax in India and Hon’ble Supreme Court has dismissed the special leave petition filed by the department against the above judgment as reported in (2000) 241 ITR (St) 124; • Karnataka High court in Prahlad Vijendra Rao 2011 198 Taxman 551 - salary income derived by a person working outside India for 225 days has been held as not to have accrued in India; • Bangalore ITAT in Bholanath Pal Vs. ITO (ITA No.l0/Bang/2011) - salary amount received by the appellant during stay outside India is not taxable as salary is accrued where employment services are rendered.

2.8 In the case of Authority for Advance Rulings in British Gas India Private Limited (2006) 155 Taxman 326 (AAR), the learned AAR while examining Article 16(1) of the Indo-UK DTAA, observed that since the non- resident individuals who are seconded to UK are drawing their salary in respect of employment being exercised in the UK, they shall be taxable in that country. Thus the salary paid by the applicant shall not be taxable in India as the same has been offered to tax in the UK in pursuance of the DTAA and the applicant is not liable to deduct tax at source on such salary payments.

2.9 Reference is also made to Circular 13 of 2017 holding that” salary accrued to a non-resident seafarer for services rendered outside India on a foreign going ship shall not be taxed in India merely because the amount has been credited to NRE account maintained with an Indian Bank by the sea-farer.

2.10 The Hon’ble Calcutta High Court has held in Utanka Roy v. Director of Income-tax (2017 82 Taxman.com 113) that ” Explanation 2 of Section 5(2) clarifies that income will not be treated to be received in India solely on the basis that such income was received or deemed to be received in / India. It has to be found out where the income to the person concerned had accrued. For the i purpose of finding out the place of accrual of income, the place where the services have been rendered become material.”

2.11 The Kolkata Tribunal decision in the case of Tapas Kumar Bandhophdyay v. DDIT [2016 159 lTD 309 has been wrongly applied to the facts of the present case by the learned AC and CIT(A) as in that case the assessee was not resident of any country while in the present case, the appellant is tax resident of Switzerland and has paid the applicable taxes in Switzerland (Pages 62-63 of the paper-book where the decision has been distinguished before the learned AO)

2.12 The decision cited by the Hon’ble bench during the course of the present hearing is also relevant in this context ie the jurisdictional Hon’ble Madras High Court has held in CIT v. Faizan Shoes (P) Ltd [2014 48 Taxman.com 48) that assessee was not liable to deduct tax at source when the nonresident agent provides services outside India on payment of commission.

2.13 It is pertinent to reiterate the fact that the appellant was exercising employment in SwitzerIaii and not in India. For administrative convenience, the appellant continued to receive is salary in India. The labour of service which entitled the appellant to the cash compensation was rendered outside India. The appellant reiterates before your Honours that only Iie payer is Alcatel India, but, services were rendered for Alcatel Switzerland in Switzerland. As the services are being rendered outside India, the salary income does not accrue in InJia and hence is not chargeable to tax in India (The relevant submissions in this regard re extracted at Pages 59-62 of the paper-book). {It is pertinent to note that the learned AO and Hon’ble CIT(A) have accepted the above facts and not disputed the same or called Ior additional evidence in this regard}.

2.14 The commentary from Klaus Vogel is also being relied upon in this regard. (Pages 60-61 of e paper-book.)

3. Treaty relief / exemption claimed under Article 15(1) of the India- Switzerland Double Taxation Avoidance Agreement (the DTAA)

3.1 As per provisions of Section 90(2) of the Act, the appellant is entitled to invoke the provisions of Indian tax laws or that of the DTAA, whichever is beneficial to him.

3.2 Article I of the DTAA provides that provisions of the DTAA shall apply to persons who are residents of one or both the countries. The Appellant qualifies to be a Non Resident of India for t e AY 2014-15 and a tax resident of Switzerland for the years 2013 and 2014 (i.e., corresponding Indian AY 2014-15) and is accordingly entitled to the beneficial provisions of the DTAA.

3.3 As per Article 15(1) of India-Switzerland DTAA, the remuneration derived by the Appellant as resident of a country (i.e. Switzerland) in respect of employment exercised in such other count (Switzerland) shall be taxable only in such other country (Switzerland) unless employment exercised in another country (i.e. India). The appellant would be taxable in India only if h exercised his employment in India( Pages 51-53 and Page 77-79 of the paper-book)

3.4 The Appellant has derived salary income of INR 28,44,650 for work days! services rendered i Switzerland and was a resident in Switzerland. Hence, the provisions of Article 15(1) of the India Switzerland DTAA are applicable to him.

3.5 Paragraph I of 2005 model OECD commentary provides the general rule relating to taxation f income from employment that such income is taxable in the State where the employment is actually exercised. Employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid.

3.6 A plain reading of Article 1 and Article 15 clearly envisages that the provisions of the DTAA ar applicable to a person who is a resident of at least one of the countries. The DTAA does not deprive the person from claiming benefits of the treaty if the person merely qualifies as a Ncn Resident of one of the countries.

3.9 The decision of Swaminathan Ravichandran v. ITO ( ITA 299/Mds/ 2016) applied by the Learned AO and CIT(A) is distinguishable in the facts of the Appellant’s case as under:

(a) In the case of Swaminathan, the services were utilised by the Indian company for generation of income in India whereas in the present case, the services are admittedly and indisputably rendered to Alcatel Switzerland in Switzerland and this fact has not been disputed or additional evidence sought by the authorities below (paper book pages 60-63, 13-15)

(b) In the case of Swaminathan, the concerned provisions pertain to India- China DTAA whereas the present case relates to India-Switzerland DTAA.

(c) The AO has, in the present case, relied on the language of Article 23(2)(a) of the India — Switzerland DTAA to deny the exemption under Article 15(1) India- Switzerland DTAA. The learned AO has wrongly interpreted Article 23(2)(a) India- Switzerland DTAA pertaining to a resident of Switzerland who ,may claim exemption in Switzerland of income that may be taxed in India. The same has no applicability where exemption is claimed in India, in respect of income only taxable in Switzerland, as per the language of Article 15(1) India- Switzerland DTAA.

(d) The provisions of Article 23 of the India —Switzerland DTAA at the outset states that” Subject to any provisions of the law of India which may from time to time be in force and which relates to the relief of taxes paid in a country outside India ‘Thus, Article 23 pertains to grant of foreign tax credit on income of a resident also subject to tax in another country. Article 15(1) of the DTAA on the other hand specifically provides that salary derived by a resident of Switzerland is taxable only in Switzerland in respect of employment exercised in Switzerland.

(e) There is no specific nexus between Article 15(1) and Article 23 of the DTAA. (f) The exemption claimed under Article 15(1) of the DTAA has been allowed, in identical facts and circumstances, in the cases of Arjun Bhowmik (ITAT Delhi), Neeraj Badaya (ITAT Jaipur) J and Bholanath Pai (ITAT Bangalore), Sunil Chittaranjan Munsif (ITAT, Ahmedabad).

Ld.A.R pleaded that in view of the above points, the exemption claimed be granted.

[ARTICLE 23] ELIMINATION OF DOUBLE TAXATiON .1.(a) Subject to any provisions of the law of India, which may from time to time be in force and which relates to the relief of taxes paid in a country outside India, where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Switzerland, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in Switzerland whether directly or by deduction. Such deduction shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in Switzerland. (b) Where a resident of Switzerland derives gains from the alienation of shares which may be taxed in India according to Article 13, paragraph 5, sub-paragraph (b), India shall allow as a deduction from tax on that income, an amount equal to the income tax paid in Switzerland on these capital gains. The deduction shall not, however, exceed that part of the Indian income-tax, which is imposed on these capital gains 2. (a) Where a resident of Switzerland derives income which, in accordance with the provisions of this Agreement may be taxed in India, Switzerland shall, subject to the provisions of subparagraphs ( b), (c) [***] exempt such income frOm tax but may, in calculating tax on the remaining income of that resident, apply the rate of tax which would have been applicable, if the exempted income had not been so exempted provided, however, that such exemption shall apply to gains referred to in paragraph of Article 13 only if actual taxation of such gains in India is demonstrated.

(b) Where a resident of Switzerland derives dividends, interest, royalties or fees for [technical] services which, in accordance with the provisions of Articles 10, 11 and 12, may be taxed in India, Switzerland shall ailow, upon request, a relief to such resident. The relief may consist of,

(i) a credit from the Swiss tax on the income of that resident of an amount equal to the tax levied in India in accordance with the provisions of Articles 10, 11 and 12, such credit shall not, however, exceed that part of the Swiss tax, as computed before the credit is given, which is appropriate to the income which may be taxed in India; or (ii) a lump sun reduction of the Swiss tax; or (iii) a partial exemption of such dividends, interest, royalties or fees for technical services from Swiss tax, in any case consisting at least of the deduction cit the tax levied in India from the gross amount of the dividends, interest, royalties or fees for technical services.

Switzerland shall determine the applicable relief and regulate the procedure in accordance with the Swiss provisions relating to the carrying out of international Conventions of the Swiss Confederation for the avoidance of double taxation. (C) [****j 3. Article 21 renumbered as article 23, by Notification No. GSR 74(E), dated 7-2- 2001 4. ‘and (ci)” omitted, by Notification No. GSR 74(E), dated 7-2-2001.

3. Omitted by Notification No.SC) 2903(E), dated 27-12-2011. Prior to its omission, subparagraph (c); as amended by Notification No. GSR 74(E), dated 7- 2-2001, read as under: ‘(c) Where a resident of Switzerland derives interest dealt with in sections 10(4), 10(4B), 10(15 )(iv) and 8OL of the Indian Income-tax Act, 1961 (43 of 1961) and referred to in sub-paragraph (d ) of paragraph 3 of Article 11, Switzerland shall allow, upon request, a relief to such resident of an amount equal to 10 per cent of the gross amount of the interest.” As per Clause 2 (a) of the Article 15 of the DTAA between India and Swiss Confederation, a resident of Switzerland derives income, which in accordance with the provisions of this agreement may be taxed in India, Switcherland shall, subject to the provisions of sub paragraph (b)(c) exempt such income from tax. The exemption under Article 15 (1) of the DTAA between India and Swiss confederation is applicable only to Resident md ans. In this assessee’s case, the assessee is a tax resident of Switzerland and non resident in India as per the provisions of the Income-tax Act, 1961. As the assessee is a non resident, exemption under Article 15 (1) of the DTAA between India and Swiss Confederation is not applicanle because of the Article 23 of the DTAA which allows exemption only to a resident indian assessee. The claim of the assessee under Article 15 (1) of the DTAA between India and Swiss Confederation is not in order and cannot be entertained. The exemption under Art dc 15(1) is not applicable to the assessee and the salary paid in India is taxable under Section 5(2) of the Income-tax Act, 1961.

4.1 Further, ld.D.R submitted that Co-ordinate Bench of Chennai Tribunal in dated 05 082016 in the case of Sri Swaminatbari Ravidandran Vs ITO, Chennai has held that the salary received in India is taxable only in India. The above decision falls in line with the contentions of the Department.

4.2 Further, it is also submitted that Kokatta Branch of ITAT in the case of Tapas Kurnar Bandopadahay Vs DDIT doted 0106-2016 reported in in 70 Taxmann.corn 50 as held that the salary received by a non resident in India is taxable in India as per the provisions of the Income Tax Act. The Authority for Advance Ruling in (2007) 294 ITR 17/ AAR in the case of an employee of Infosys who was deputed to Norway has ruled that the salary paid by the employer in India is taxable in India though the assessee is a non resident in India during the relevant financial year and he is not eligible to any relief in terms of DTAA. Both the decisions also support the view of ld. Assessing Officer. The assessee has been paid salary in India by an Indian company, in Indian rupees and in a savings bank maintained in India, Accordingly, the salary received in India is taxable in accordance with the provisions of Section 5 and 9 and 192 of the Income-tax Act, 1961 as it is received in India and taxable in India. The assessee’s claim of exemption of salary under Article 15 of the DTAA between India and Switzerland is not In accordance with law, hence not entertained and disallowed.

5.1 On the other hand, the contention of ld.D.R is that salary for services rendered outside India would be taxable in India, if it was received in India as per Sec.5(2)(a) of the Act. As seen from the facts of the case of the assessee was continued to be in the pay-roll of Indian company M/s.ALCATEL LUCENT India Ltd., New Delhi and salary was paid and credited in Indian rupees to the assessee’s bank account with HDFC bearing No.04931130003475 at Mugaperu, Chennai. It is also noted that in accordance with the provisions of the section 192 of the Act, the company was already deducted the tax at source from the salary paid to the assessee. The terms and conditions also show that the place of payment of salary to the assessee is Indian Territory, which is originally assessee’s first home country.

5.2 In my opinion, the salary is includible in the assessment under section 5(2)(a) of the Act, which says that any income received by a Non-Resident in India is taxable in India. There is a fair finding in the order of the lower authorities that there is no dispute that the salary was received in India. This should put end to the controversy, therefore, it was rightly taxed in India u/s.5(2)(a) of the Act. Further, in the present case, the salary income was received by the assessee in India. It is necessary to examine whether the salary is deemed to accrue or arise in India by applying the Sec.9(1) of the Act and Explanation thereto. In my opinion, the Explanation to 9(1)(ii) of the Act says that where the salary is payable for services rendered in India, the same shall be regarded as income earned in India.

5.3 The effect of Explanation is that it is no longer open to an assessee to say that though he rendered services in India, since the contract of employment was entered into outside India, the salary could not be said to have accrued or arisen in India. In such a case, the Explanation deems the salary as having accrued or arisen in India, notwithstanding that the contract of employment was entered into outside India. From the Explanation it is not permissible to infer the corollary, viz. that in all cases where services are rendered outside India, the salary cannot be deemed to accrue or arise in India. The Explanation deals with a different situation and its scope should not be extended to cases which are not contemplated by it.

The AO has rightly applied the first part of sec.5(2)(b). He held that since the contract of employment had been entered into in India and since all rights flowing there from were also enforceable in India, the salary must be held to have accrued or arisen to the assessee in India. He had not, therefore, considered it necessary to address the question as to whether the salary could be ‘deemed’ to accrue to the assessee in India.

5.4 Sec. 9(1) provides for certain situations where the income may be "deemed" to accrue or arise in India. The later part of s. 5(2)(b) and s. 9(1) can be resorted to only when the income is not normally to be considered as having accrued or arisen to the assessee in India. These provisions can be resorted to only to find out whether the law has provided for deeming the income in question as having accrued or arisen in India. The deeming provisions cannot be looked into when under general principles, the income has accrued or arisen to the assessee in India. The salary received by the assessee has accrued or arisen to the assessee in India, for the reasons given by A.O with which I fully agree and it is, therefore, not necessary to examine the question whether the salary is also deemed to accrue or arise to the assessee by applying s. 9(1) and the Explanation thereto.

Therefore, the salary received by the assessee in India was taxable u/s.5(2)(a) on receipt basis and also as having accrued or arisen to him in India u/s.5(20(b). Sec.9(1)(ii) read with Explanation thereto was not relevant for the controversy.

5.5 Further, the assessee has taken one more plea that in view of Article 15(1) of the DTAA with Switzerland, the said salary is not taxable in India. I have gone through Article 15(1) of the DTAA. In my humble opinion, Article-15 of DTAA with India and Switzerland, exemption allowable to only resident Indian and not to the non- resident. In the present case, there is no dispute that as the assessee is a non-resident, the said Article is not applicable. This view is fortified by the order of Tribunal in the case Shri Swaminathan Ravichandran Vs. I.T.O in ITA No.299/Mds./2016 vide order dated 05.08.2016.

5.6 The decision in the case of Arvind Singh Chauhan followed the decision in the case of A P Kalyankrishnan [1992] 195 ITR 534, where income had suffered tax outside lndia and then was received in India for the sake of convenience. In the present case, the income had neither suffered tax nor been received in any other jurisdiction. In the case of Arvind Singh Chauhan (2014) 42 Taxman.com 285(Agra), the Agra Tribunal took a view that the taxpayer had a lawful right to receive a salary at the location of the foreign employer and the transfer of money to India was only a matter of convenience.

However, as per Section 5(2)(a) of the Act, the relevant / criterion is not the right to receive a salary, but the receipt of salary income which is in India.

5.7 The decision in the case of Captain A L Fernandez (81 ITD 203)(Mum.) clearly lays down that salary for services rendered aboard a ship outside the territorial waters of any country would be taxable in India, if it was received in India as per Section 5(2)(a) of the Act. This decision was not brought to notice to the Agra Tribunal in the case of Arvind Singh Chauhan(supra). Following the decision of the Mumbai Tribunal in the case of Captain A L Fernandez(81 ITD 203), the salary income received by the non-resident taxpayer in the present case were held as taxable in India by virtue of receipt in India as per Section 5(2)(a) of the Act.

Order pronounced on 16th November, 2017.