Case Law Details

Case Name : CIT Vs R. Rajgopal (Madras High Court)
Appeal Number :
Date of Judgement/Order :
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Madras High Court has recently held in the case of CIT Vs R. Rajgopal [TS-222-HC-2011 (MAD)] that, as the salary was paid directly by the Indian subsidiary company, conditions of Article 16(2)(b) of the Indo-UK Treaty was not fulfilled. Accordingly, the taxpayer was not entitled to claim short stay exemption under Article 16(2) of the India-UK Treaty.

Facts of the case –

1. Taxpayer was an employee of the UK entity and was working in their London office.  Taxpayer had worked in India for 20 days with Indian Subsidiary of the UK entity. A portion of the salary was payable in India and the said arrangement was made for the purpose of pensionary benefits. The Indian subsidiary paying the salary in India had deducted taxes and accordingly had issued a salary certificate in Form No. 16 for the same as well. It appears that the salary paid by the Indian subsidiary was not claimed as a deduction in their books of accounts but recovered from the UK parent company.  The taxpayer while filing his return of income for the assessment year 200 1-02 claimed exemption on salary income under Article 16(2) of the India-UK Treaty. The Assistant Director of Income Tax (International Taxation), Chennai (‘ADIT’ or ‘Assessing Officer’) issued a notice under Section 148 of the Income Tax Act, 1961 (‘the Act’) to the taxpayers Power of Attorney holder. Upon hearing the taxpayer, the Assessing Officer, passed the assessment order disallowing exemption claimed by the taxpayer.

2. The taxpayer filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) confirmed the order of the Assessing Officer holding that the contention of the taxpayer is not tenable as the taxpayer has not paid any tax in UK on the portion of income claimed exempt in his India tax return.

3. On preferring an appeal before the Income Tax Appellate Tribunal (ITAT), the ITAT deleted the additions and set aside the order of CIT (A) holding that the Indian subsidiary was only acting as a postman and such money was being recovered from the parent company and it was further held that the salary amount was never claimed as expenditure by the Indian subsidiary.

4. Aggrieved by the order of the ITAT, the Income Tax Department (ITD) preferred an appeal before the Honorable HC.

Issue before the Honorable HC – Whether on the facts and circumstances of the case, the ITAT was right in holding that the taxpayer being an employee of a foreign company receiving a portion of salary from an Indian company in India is eligible for exemption under Articles 16(1) and 16(2) of the India- UK Treaty, when the salary has been paid by the Indian subsidiary?

Taxpayer’s Contention – The portion of the salary paid in India by a foreign employer cannot be brought to tax and should be eligible for claiming exemption under Article 16(2) of the India- UK Treaty.

ITD’s Contention

Salary of the taxpayer cannot be considered to be exempt as the conditions stipulated in Article 16 of the India- UK Treaty were not fulfilled by the taxpayer.

• Article 16(2) of the India- UK Treaty makes it clear that if the remuneration is received by a resident of the contracting State in respect of employment exercised in the other contracting State, then such remuneration is not subjected to tax in that State, if:

• his stay in India does not exceed 183 days; and

• Remuneration is paid by the employer, who is not also a resident of the other State; and

• the remuneration is not tax deductible from the profits chargeable to tax in that State.

• The Indian subsidiary should be regarded as the taxpayer’s employer, even though the salary paid by the Indian subsidiary is recovered from the parent company.

• The portion of the salary paid in India through the Indian subsidiary was claimed as exempt in the taxpayers UK tax return and the same was not subjected to tax both in India and UK.

Honorable HC decision –The Honorable HC has held that- (1)  The ITAT has failed to see that the condition laid down in Article 1 6(2)(b) was not fulfilled by the taxpayer. (2) There is no dispute on whether the amount claimed by the taxpayer as exemption under Article 16 (2) of the India- UK Treaty is not taxed either in UK or in India. (3)  The condition stipulated in Article 1 6(2)(b) of the India- UK Treaty is not fulfilled in so far as the Indian subsidiary treated the taxpayer as its employee and issued a salary certificate in respect of the salary paid and tax deducted.

Conclusion:- The ruling highlights the principle that, if the salary is directly paid by the Indian subsidiary, and the withholding tax obligations such as issuing salary certificate etc. are complied by the Indian subsidiary, then the condition laid down under Article 16(2)(b) of the India- UK Treaty is not fulfilled, even though the salary was ultimately recovered from the foreign parent company. It also lays stress on the income being taxed in the home country to claim an exemption in India.

Accordingly, it is important for the taxpayer to justify its claim of short stay exemption by proper documentation of the salary payments received by or on behalf of the foreign company.


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June 2021