IN THE ITAT BANGALORE BENCH ‘A’
Income Tax Officer, Ward 1(1), International Taxation
IT APPEAL NO. 10 (BANG.) of 2011
[Assessment Year 2006-07]
MAY 30, 2012
George George K, Judicial Member
This appeal instituted by the assessee is directed against the order of CIT(A), Bangalore dated 16.09.2010. The relevant assessment year is 2006-07.
2. The grounds of appeal read as follows:-
(i) The learned CIT(A) erred in upholding the order of the Assessing Officer in denying the exemption claimed by the assessee, in so far as-
(a) 15 days during the period 1st April, 2005 and 31st December, 2005 to the extent of Rs. 1,72,013/-
(b) 3 months during the period 1st January, 2006 and 31st March, 2006 to the extent of Rs. 17,70,151/-.
(ii) That the learned CIT(A) erred in not appreciating assessee’s eligibility for claim of exemption in respect of salary both under the Income Tax Act, 1961 as well as Double Taxation Avoidance Agreement between India and Japan.
(iii) That the learned CIT(A) erred in confirming the action of the Assessing Officer for levy of interest under section 243D of the Act.
3. Brief facts of the case are as follows:-
The assessee is an individual. He is a former employee of Motorola India Private Limited (Motorola India). During May, 2000, the assessee joined Motorola Japan Limited (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 (Courtesy page no.54 of the paper book filed by the assessee). 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 relevant to the concerned assessment year, the assessee had aggregate stay in India for 83 days (including the days of arrival and of departure).
3.1 The return of income was filed for the assessment year 2006-07 wherein he had claimed the status as non-resident and had 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|
(ii) Payment of taxes:
|TDS on salary||15,24,045|
|TDS on bank interest||9,546|
|TDS on interest on income tax refund relating to AY 2004-05 & 2005-06||18,663|
|Total taxes deducted||15,52,254|
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.
3.2 According to the assessee, as a full time employee of Motorola 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.
4. The Assessing Officer, however, disallowed the claim of exemption of salary and
(a) brought to tax the salary income for the days he was in India between 1st April, 2005 and 31st December, 2005 (i.e. 45 days) – Rs. 5,16,040/- and
(b) the entire salary income for the period between 1st January, 2006 and 31st March, 2006 (i.e. 90 days) – Rs.17,70, 151/-.
The aggregate salary income arrived at as a result of denial of tax exemption was Rs. 22,86,91/-. The Assessing Officer accepted the interest income that was disclosed by the assessee after considering the deduction under Chapter VIA and arrived at the total income at Rs. 23,71,251/-.
5. Aggrieved by the assessment, the assessee carried the matter in appeal before the first appellate authority.
6. Elaborate written submissions filed before the learned CIT(A), are extracted from pages 3 to 23 of his impugned order under consideration.
7. The CIT(A) partly allowed the appeal of the assessee. The CIT(A) had held as under :-
(a) April 1, 2005 to December 31, 2005 brought to tax 15 days salary (amounting to Rs.1,72,013/-);
(b) the entire salary for the period January 1, 2006 to March 31, 2006 was held to be taxable in India.
The relevant finding of the CIT(A) in respect of assessment of income for the period 1/4/2005 to 31/12/2005 reads as under:-
“6.2 The appellant was working as Managing Director of Motorola, Japan. He was a full time employee of M/s Motorola. Since he was of Indian origin, both in connection with his official duties, as also in connection with annual leave passage, he visited India during this period. According to the appellant, the entire visit of 83 days during the F.Y. 2005-06 was in connection with business visits. It was also true that he was entitled for annual leave passage. From the details submitted, it is not possible to bifurcate as to what constituted business visits and what constituted towards annual leave passage. Ordinarily most of the employees are allowed annual leave passage of 24 to 30 days. Even assuming that the appellant was entitled for 30 days leave passage, for a period of 9 months from 01.04.2005 to 31.12.2005, his entitlement was not more than 22½ days (30 × ¾). Out of the 45 days he spent in India, even if 22½ days are regarded as towards annual leave passage that leaves out another 22 ½ days. It is the appellant’s contention that the entire period is spent in India towards business visits. This argument cannot be accepted and out of the balance 22½ days, 1/3rd of the days could be regarded as towards business trips. Hence, 7½ days being 1/3rd of 22½ days is regarded as towards business purposes. Hence 22½ days is officially allowed for the employee towards annual leave passage and another 7½ days is regarded spent as for business purposes and the balance 15 days (45 – 22½ – 7½) income is to be regarded as earned in India and the AO is directed to recompute the income accordingly. The appellant gets a relief of Rs. 3,44,027/-. In giving this direction OECD Guidelines are kept in mind. As per OECD Glossary of Statistical Terms, earnings include the remuneration received for time not worked such as annual vacation and other paid leave or holidays”.
7.1 Similarly, the relevant finding of the CIT(A) in respect of the assessment of income for the period 1/1/2006 to 31/3/2006 at para 6.3 reads as follows:-
“6.3 The AO has discussed in detail as to why he was non-resident in India for the period from 01.04.2005 to 31.03.2006, and, in particular, for the period from 01.01.2006 to 31.03.2006. It is also discussed in detail in para 7 of his order that the appellant was in Japan for only 148 days during the calendar year 2006, being the Japanese Tax year. Since the appellant was non resident in Japan for the entire period from 01.01.2006 to 31.12.2006, even for the part period 01.01.2006 to 31.03.2006 his status was adopted as non resident in Japan. DTAA is applicable only for the persons who are residents of one or both the contracting states. In the appellant’s case, for this period of 3 months, he was non resident in India as also he was non resident in Japan. Apparently, for this reason the relief applicable under DTAA is not allowable and, accordingly, it is held that the Assessing Officer was perfectly correct in taxing the entire sum of Rs.17,70,151/- as per provisions of Section 5(2) of the I T Act and the said addition is confirmed”.
8. Being aggrieved by the order of the CIT(A), the assessee is in appeal before us.
9. Elaborate written submissions were filed by the learned AR. However, the summary of the same reads as follows:-
(a) The appellant was a non resident in India during the P.Y. 2005-06.
(b) The appellant was a resident in Japan for the India P.Y. 2005-06.
(c) While discussing the provisions of DTAA from the India taxation perspective, it is necessary to consider the Indian financial year as the ‘year’.
(d) By applying the provisions of Article 15(1) and 15(2) of the treaty also, the appellant is not taxable in India.
(e) The provisions of section 5 are subject to the other provisions of the Act and cannot tax an amount which is otherwise outside the ambit of taxation.
(f) Salary is chargeable to tax on due basis and therefore, the appellant’s salary cannot be taxed in India on receipt basis.
(g) Salary is considered to be accrued in the State where the employee exercises the employment and therefore, the appellant’s salary accrued in Japan.
(h) The appellant’s visits to India are for business visits and therefore, the salary relatable to the period of his stay during the P.Y. is not taxable in India.
(i) Hence, by applying Indian Income-tax Act, as well as Treaty, salary income shall not be taxable in India. As such the appellant is entitled for full exemption in respect of salary since it relates to overseas employment.
10. The learned DR has also filed a written submission dated 10/4/2012. The relevant para of the written submission filed by the learned DR reads as follows:-
“Contention of the assessee that while discussing the provision of DTAA from the Indian taxation perspective it is necessary to consider the Indian financial year as the ‘year’. By applying the provision of article 15(1) and 15(2) of the treaty also the appellant is not taxable in India. Considering the assessee’s submission, facts of the assessee and applicability of article 15(1) and 15(2) is discussed below:-
|15.2(a)||The recipient is present in that other contracting state for a period or the aggregate 183 days during any taxable year or previous year as the case may be.||It is admitted fact that the assessee worked as Managing Director of Motorola Japan during May 2000 to April, 2006. Thus he rendered services for Motorola in Japan in that period, accordingly he has furnished, his return of income in Japan by adopting calendar year as “taxable year” for 2000 to 2005 hence the assessee’s case the previous year is calendar year not the Financial Year (Fiscal Year) as claimed by the assessee. Furthermore, he availed the tax relief all these years under India-Japan DTAA, therefore, his claim for treating the F.Y. as the previous year is not maintainable, deserves rejection.|
|15.2(b)||The remuneration is paid by or on behalf of an employer of that other contracting state.||The assessee is an employer of M/s Motorola India Electronics Pvt. Ltd. its office at Bagmane Tech Park, No.66/11, Plot No.05, C.V. Raman Nagar, Post, Bangalore-560093 from which he was receiving salary. The salary for the financial year 2005-06 was paid by Motorola India accordingly TDS certificate also issued by the company. Thus the employer company is not a resident of company of Japan.|
|15.2(c)||The remuneration is not born by a permanent establishment or a fixed base which the employer has in that other contracting state.||M/s Motorola India Electronics Pvt. Ltd. (the employer company) incorporated in India under the Companies Act 1956 and its Registered Office is in India. The assessee was expatriation for the period from May 2000 to April, 2006.|
From the above analysis the assessee is non resident of Japan during the period from 01.01.2006 to 31.12.2006, hence, the AO as well as the CIT(A) has rightly held that DTAA relief on income tax or tax is not applicable to the assessee for the period from 01.01.2006 to 31.12.2006 and same may be sustained”.
10.1 The learned DR also distinguished the judgements relied on by the learned AR.
11. In the rejoinder, the following specific rebuttals were made by the learned of the assessee :-
1. The appellant was an employee of Motorola India Private Limited (“Motorola India”). During the financial year 2005-06 relevant to the assessment year 2006-07, he was assigned to work to be discharged in Japan.
The appellant was not an employee of Motorola India. He was transferred from Motorola India to Motorola Japan in the year 2000-01. He was an employee of Motorola Japan and worked as the Managing Director of Motorola Japan. During the financial year 2005-06, the appellant performed his services wholly and exclusively for Motorola Japan as its employee. Kindly refer to the confirmation letter issued by Motorola enclosed at page no.54 of the paper book.
2. The learned DR, at page no.4 and 5 of his submissions has contended that for the purpose of claim of relief of the ‘calendar year’ (and not the ‘financial year’) has to be considered as the ‘previous year’.
In India, the ‘previous year’ means the period from April 1st to March 31st. As per section 3, there cannot be any other period which can be considered for taxation of income in India. In case of divergence in the taxable years between two countries of a treaty, the taxable year of the country in which assessment is made has to be considered. In other words, while checking the residential status in Japan (for applying India – Japan treaty) to tax assessment in India for financial year 2005-06, the stay of the person in Japan in the period 1st April, 2005 to 31st March 2006 needs to be checked and whether such person would be treated as a tax resident of Japan on the basis as if the said period was taxable unit in Japan has to be considered.
3. The learned DR in page no.5 of his submissions has contended that the assessee is an employee of Motorola India Electronics Pvt. Ltd. ….. and the employer company is not a resident of Japan.
The above contention is factually incorrect. Kindly refer to the confirmation letter issued by Motorola enclosed at page no.54 of the Paper Book wherein it has been confirmed by Motorola that the appellant worked exclusively for Motorola Japan. Also, the appellant wishes to refer to paragraph no.6.2 (page no.25) of the order of the Commissioner of Income Tax (Appeals)-IV (CIT) where it was upheld by the CIT that the appellant was a full time employee of Motorola Japan.
4. The learned DR in page no.5 of his submissions has further contended that the assessee is an employee of Motorola India and thus the employer company is not a resident of Japan.
Again, the above contention is factually incorrect. As already mentioned earlier, the appellant was an employee of Motorola Japan and salary was disbursed through Motorola India only as a matter of convenience.
5. The learned DR in page no.3 of his submissions has relied on a ruling by the Authority for Advance Rulings (‘AAR’) in the matter of DHV Consultants B V in re (2005) 277 ITR 97. In this matter, the applicant wanted the determination of applicability of Clause 2 of Article 15 of the Double Taxation Avoidance Agreement (‘DTAA’) between India and the Netherlands. The learned DR has further submitted that clause 2 of Article 15 of DTAA between India and the Netherlands is identical to the one in the DTAA between India and Japan. Further, the learned DR, in page no.4 of his submissions, has relief on the decision of the Allahabad High Court in the matter of CIT v Elitos S.P.A.  280 ITR 495. In this matter, the allowability of double taxation relief under clause 2 of Article 16 of DTAA between India and Italy was in dispute.
The appellant wishes to submit that the appellant is not taxable in India under the provisions of clause 1 and clause 2 of Article 15 of the DTAA between India and Japan as well as under the provisions of section 5 and section 15 of the Act. Further, all the required conditions under clause 1 as well as clause 2 of Article 15 of the DTAA between India and Japan are fulfilled. Therefore, the rulings of the AAR in the matter of DHV Consultants and decision of the Allahabad High Court in the matter of CIT v Elitos S.P.A. are not relevant and hence not applicable to the appellant.
6. The learned DR in page no.6 of his submissions has submitted that the facts of the case in DIT v Prahlad Vijendra Rao  198 Taxman 551 (Karnataka) (which is relied by the appellant) are distinguishable to the facts of the appellant.
The learned DR has failed to establish how the facts of the above case can be distinguished from that of the appellant. The principle laid down in the above judgement of the Karnataka High Court is that under the provisions of the Act, regular salary is taxable on accrual basis and not on receipt basis. This principle is squarely applicable in the appellant’s situation.
7. The learned DR in page no.7 of his submissions has contended that the issue in the matter of Ranjit Kumar Bose v Income Tax Officer  18 ITD 230 (Calcutta ITAT) (which is relied by the appellant) relates to assessment year 1983-84 and the DTAA between India and Japan was not in force for that A.Y.
The principle laid down in this judgement is similar to that in DIT v Prahlad Vijendra Rao supra. The above decision of the Calcutta ITAT is based only on the provisions of the Act. The DTAA between India and Japan has no bearing on this decision. Therefore, whether the DTAA between India and Japan was in force at that time or not is of no consequence. The principle of this decision is precisely applicable to the facts of the appellant.
12. We have heard the rival submissions and perused the materials on record. It is an admitted fact that the assessee worked as the Managing Director of Motorola Japan during May, 2000 to April, 2006. It is also an admitted position that for the previous year relevant to the assessment year, namely, from 1/4/2005 to 31/3/2006, the assessee was a tax resident in Japan and salary was earned in Japan for which taxes were paid in Japan. In terms of Article 1 of the DTAA between India and Japan, DTAA shall apply to persons who are residents of one or both the countries. The assessee qualifies to be a non resident of India for the P.Y.2005-06. However, the assessee qualifies to be a non permanent tax resident of Japan (for the corresponding Indian P.Y. 2005-06) in accordance with the domestic tax laws of Japan.
12.1 Admittedly, the assessee is a non resident of India for the entire previous year and was a tax resident of Japan. The assessee, therefore, entitled to the benefits of the India-Japan DTAA as a tax resident of Japan (and non resident of India).
12.2 Article 15(1) of India Japan Treaty DTAA provides for the following :-
“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”.
12.3 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”.
12.4 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.
12.5 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
(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”.
12.6 The provisions of section 5(2) start with the expression “subject to the provisions of this Act”. Hence, the provisions of section 5(2) are subject to other provisions contained in the Act and other provisions of the Act will have significant impact on the interpretation of Section 5(2). Reference is made to “The Law and Practice of Income-tax” by Kanga, Palkhivala and Vyas (Vol. I, Ninth Edition, page 311). Reference is also to the following judgements:-
• CIT v. Nippon Yusen Kaisha Tokyo  233 ITR 158/99 Taxman 210 (Cal.);
• CIT v. F.Y. Khambaty  159 ITR 203/24 Taxman 29 (Bom.).
12.7 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.
12.8 In terms of section 9(1)(ii) income chargeable under the head “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 (International Taxation) v. Prahlad Vijendra Rao  198 Taxman 551/10 taxmann.com 238 (Kar.)
♦ Ranjit Kumar Bose v. ITO  18 ITD 230 (Cal.);
♦ CIT v. Avtar Singh Wadhwan  247 ITR 260/115 Taxman 536 (Bom.);
♦ Sreenivas Kumar Sistla (AAR No.514 of 2000).
12.9 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.
13. During the course of hearing of appeal, no argument was raised by the learned AR with reference to levy of interest under section 234D; hence, ground no. (iii) mentioned (supra) is dismissed.
14. In the result, the appeal filed by the assessee is partly allowed as indicated above.