Case Law Details
Background :-The Delhi High Court (CIT Vs. Dr. Percy Batlivala [ITA No. 13 08/2008]) has held that in respect of the expatriate employee sent on deputation to India, the amount of hypothetical tax representing the difference between the tax liability in the home country of the expatriate and in India should not be added to the salary income of such expatriate taxable in India.
Facts of the case
- Dr. Percy Batlivala (‘the employee’), a foreign national, was employed in the United States of America (USA). He was paid salary by his employer in the USA.
- The employee was deputed by his employer to India for a particular period.
- During the period of deputation, the employee was assured by his employer that the net amount of salary to be received by him after payment of taxes would be the same which he would have received in the USA.
- The difference between the tax amount (which the employee was paying in the USA) and the tax amount (which would have been payable in India) was treated as hypothetical tax (‘hypo tax’) by his employer.
- The hypo tax was not paid to the employee, thereby assuring him the net amount that he was to receive in the USA before sent on deputation to India.
- In the return of income filed in India, the employee claimed a deduction in respect of hypo tax from his salary offered to tax in India.
Issue before the High court :- Whether hypo tax can be allowed as deduction from the salary taxable in India?
Assessing officer’s decision :- The Assessing Officer disallowed the deduction claimed by the employee in respect of the hypo tax.
The Income-Tax Appellate Tribunal (ITAT’s) decision
- The hypo tax was not received at all by the employee in view of the nature of the arrangement2 (tax equalisation policy) between the employer and the employee.
- The hypo tax never accrued to the employee. Therefore, there was no question of addition of hypo tax to the income of the employee.
The High Court decision :- The High court upheld the decision of the ITAT and allowed the deduction of the hypo tax from the salary taxable in India.
Our Comments
This ruling highlights the principle that hypo tax computed under the tax equalisation policy implemented by the overseas employer to protect its expatriate employees from the adverse tax impact arising due to the overseas assignment should not be considered to an income earned by such expatriate.
This ruling being a High Court decision would have a greater reliance vis-à-vis the decisions of the Tribunals/ lower tax authorities on the similar matter.
Further, each tax equalisation policy should be examined before drawing any conclusion in respect of deduction of hypo tax.
Note 1 :- Tax equalisation policy framed by the company provides that the company shall bear assessee’s tax liability arising out of his foreign assignment. But company’s liability will be restricted only to the extent of additional liability over and above that would have arisen had the assessee been in USA.
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