In a ruling which could affect tax payments of thousands of employees of Indian IT companies earning mega bucks on overseas assignments, the Authority of Advance Rulings (AAR) has said that that there was no escape from paying tax on the amount earned during a stint with the employer’s foreign affiliates.
If there was a deputation, income tax had to be paid either in India, if it had not already been paid abroad, and even a tax treaty would not rescue IT professionals.
“The ruling is relevant for the determination of the income of non- resident employees sent on deputation abroad, as it specifies that it may not only be in India but also other contracting state which may have the right to tax same income, depending on the provisions contained in the treaty. In a cross-border world with a growing trend of mobile executives, this ruling could have a significant impact,” legal and tax consulting firm Nishith Desai & Associates said.
Income tax department officials , buoyed by the ruling, said this could form the basis for dealing with a host of similar cases. The logic, they said, was simple. “If the company is subject to Indian tax laws, the employee will have to pay taxes in India even if the income was earned overseas and the manager had claimed NRI status by virtue of having spent the stipulated number of days outside the country.”
In the case between the tax department and S Mohan, an Infosys employee who went to Norway on deputation, Mohan claimed NRI status for tax purposes saying he spent over 183 days outside the country during 2005-06. Though he paid income tax on the salary he received in India, Mohan sought an AAR ruling on the deputation amount he earned since he believed he did not have to pay taxes on it.
The clause relating to “dependent personal services” (DPS) in the India-Norway tax treaty specified that the remuneration earned by DPS provider would be taxable in the state of residence (India). When the service was provided in another contracting state the other state could also tax it.
The clause relating to elimination of double taxation provided that where the income earned by an Indian resident was taxed in Norway, the government will have to deduct tax paid in the European country from the tax paid in India.
“In this case the applicant failed to provide any proof that he was taxed in Norway or that he had paid tax to Norway, and it was held that the applicant was liable to pay tax in India and he was not eligible to get any relief under the treaty,” it said.