TAXABILITY OF EMPLOYMENT INCOME OF NON-RESIDENT FOR SERVICES RENDERED OUTSIDE INDIA – India Tax Blog (2022)

Taxability of salary or employment income depends on the physical presence of the employee. The place where employees are physically present is generally considered as the place where the salary income is taxable.

A Company in India may pay salary to non-resident employees, who have rendered services from outside India. The salary may be credited to the bank account of employees either outside India or in India. The question that arises for consideration is whether such salary income is taxable in India.

The Revenue generally contends that the salary income is taxable in India on the ground that the employment is with the Indian company. Additionally, in case the salary is credited to bank account in India, the Revenue contends that the income is taxable as same is received in India (Section 5(2)(a)).

Section 9(1)(ii) deems that salary income shall be deemed to accrue or arise in India, if it is earned in India. Explanation below Section 9(1)(ii) further provides that income for services rendered in India shall be deemed as income earned in India.

To similar effect is Article 15 of the DTAA which deals with the taxation of salaries. It provides that remuneration derived by resident of one contracting State (say Japan), shall be taxable only in Japan. Article 15 further provides that such remuneration shall be taxable in other contracting State (say India), if the employment is exercised in the other contracting State (India).

(Video) Taxation of Foreign Income in India I Taxable & Non Taxable Components

Therefore, both under the Act and DTAA, salary income is deemed to accrue or arise in India if services are rendered in India.

This issue is also dealt in various cases by the Courts. The Courts have held in favour of the taxpayers. The Courts have held that the salary income is not taxable in India if the services are rendered outside India despite the fact that the contract of employment is with Indian company or the amount is credited to the bank account of employee in India. These decisions are discussed below.

In the case of CIT v Avtar Singh Wadhwan (2001) 247 ITR 260 (Bombay HC), the assessee

was working on an Indian ship owned by the Shipping Corporation of India (SCI). The ship did not touch the Indian coast except for 8 days during the relevant assessment year. The AO came to the conclusion that since the assessee was an employee of the SCI and earned salary as per contract with SCI, the income accrued to him in India. The Tribunal held that the place at which income accrued was the place where the services were rendered. The Tribunal concluded that the income having been earned in foreign waters, had accrued to the assessee outside India.

The Revenue filed appeal to HC and relying on the provisions of the Merchant Shipping Act, contended that foreign-going ship was an Indian ship and it continued to remain territory of India even outside India. The HC rejected the contention of Revenue and held that provisions of the Merchant Shipping Act cannot be read into the provisions of the Income-tax Act. Referring to the decision in the case of CIT v. Indo Oceanic Shipping Co. Ltd.[2001] 247 ITR 247 (Bom.) decided vide Income-tax Reference No. 444 of 1995, the HC observed that section 2(25A) which defines the term ‘India’ does not cover foreign-going Indian ships for the purposes of deduction in the hands of the employer.

(Video) When Should An NRI File Income Tax Returns In India ? By CA Sriram Rao

With respect to taxation of salary, the HC held as follows:

Under section 9(1)(ii), it is laid down as to what type of income shall be deemed to accrue or arise in India. The above section states that where the salary is earned in India, it shall be regarded as income arising in India. There is an Explanation also to the above section which, inter alia, declares that income of the above nature payable for services rendered in India shall be regarded as income earned in India. This Explanation clearly indicates that where salary is payable for services rendered in India, the same shall be regarded as income earned in India. Therefore, the relevant test to be applied is where the services have been rendered. If the services were rendered in India, then the salary income shall constitute income arising in India.

The HC held that the income accrued to the non-resident assessee outside India during the relevant period and same was not taxable.

Similar view was adopted in the case of Prahlad Vijendra Rao [2011] 198 Taxman 551 (Karnataka). The assessee earned salary income for working abroad for 225 days. The assessee worked on board of a ship, which was outside shores of India. The Karnataka High court held that salary income has not accrued in India and is not deemed to have accrued in India.

In the case of Hewlett Packard India Software Operation (P.) Ltd., In re [2018] 91 taxmann.com 473 (AAR – New Delhi), the applicant was a company incorporated in India. It sent two of its employees on deputation outside India. During the period of assignment, the employees would be rendering services in their respective country of deputation. However, the employees would be receiving salaries in India from the applicant and would also receive certain allowances in their respective country of deputation. The issue before the AAR was whether salary paid by the applicant to the assignees is liable to be taxed in India.

(Video) Income Tax on Foreign Income | Income Tax on Foreign Remittance | TCS on Foreign Remittance

The Revenue contended that since the assignees were paid and employed in India, and that the employer – employee relationship existed in India, they should be taxed in India. The AAR rejected the contention on the ground that income accrues where the services are rendered. The AAR held that since the income has not accrued in India, the same cannot be considered as chargeable to tax in India.

Useful reference can also be made to the following observations of Bangalore Tribunal in the case of Bholanath Pal v. ITO [2012] 23 taxmann.com 177 (Bangalore):

“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.”

Vamsee Krishna Kundurthi v. ITO (International Taxation), [2021] 128 taxmann.com 368 (Hyderabad – Trib.) – The assessee was a non-resident in India. The Assessee rendered services in Austria. The employer deducted TDS and issued Form 16. The assessee claimed NIL income and claimed refund of TDS. The AO held that said salary income is taxable in India on ground that assessee could not produce Tax Residency Certificate (TRC) from said country. The ITAT held that the assessee was liable to tax in Austria in respect of salary received for services rendered in Austria in pursuance of Article 15 of India-Austria DTAA. The ITAT held that the AO is not justified in taxing the salary income and exemption as per DTAA should be granted.

(Video) NRI TAXATION - Impact Of Overstay In India FY 2020- 21 - All That You Need To Know

Similar view is adopted in the following cases:

  • Utanka Roy v. DIT (2017) 82 taxmann.com 113 (Calcutta HC)
  • Texas Instruments (India) (P.) Ltd., In re [2018] 90 taxmann.com 353 (AAR – New Delhi)
  • Smt. Maya C Nair v ITO ITA No. 2407/Bang/2018
  • DCIT v. Chukkapalli Mallikarjuna [2019] 107 taxmann.com 285 (Visakhapatnam – Trib.)
  • Neeraj Badaya v ADIT [2016] 67 taxmann.com 240 (Jaipur – Trib.)
  • Paul Xavier Antony Samy v ITO [2020] 115 taxmann.com 143 (Chennai – Trib.)
  • Ranjit Kumar Bose v. ITO [1986] 18 ITD 230 (CAL ITAT)
  • Deepak Kumar Todi v DDIT TS-220-ITAT-2019(Kol ITAT) – salary remitted to NRE account in India for services rendered in Nigeria is not taxable on receipt basis.

OECD Commentary

OECD Model Convention, 2017 in para 1 of the commentary on Article 15 provides that place where the employee is physically present is the place of exercise of employment. The relevant extracts are as follows:

Paragraph 1 establishes the general rule as to the taxation of income from employment (other than pensions), namely, that such income is taxable in the State where the employment is actually exercised. The issue of whether or not services are provided in the exercise of an employment may sometimes give rise to difficulties which are discussed in paragraphs 8.1 ff. Employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid. One consequence of this would be that a resident of a Contracting State who derived remuneration, in respect of an employment, from sources in the other State could not be taxed in that other State in respect of that remuneration merely because the results of this work were exploited in that other State.

Klaus Vogel in his commentary on Dependent Personal Services, Article 15

(Video) How Indians Can Pay ZERO Taxes Legally! India Taxes and India Tax Residency Explained in 2022

Same view is taken in the commentary. Relevant observations are: “As a rule, the place where the employment is exercised is the place where the employee is personally present for the purpose of exercising his employment. If the activities cannot be exercised elsewhere than on the spot, there is no question that this spot is the place where the employment is exercised………All that matters under the MCs is whether or not the employee is personally present.”

FAQs

Is non-resident income taxable in India? ›

In case of resident taxpayer all his income would be taxable in India, irrespective of the fact that income is earned or has accrued to taxpayer outside India. However, in case of non-resident all income which accrues or arises outside India would not be taxable in India.

What is the taxable income in case of non-resident? ›

NRI or not, any individual whose income exceeds Rs 2,50,000 is required to file an income tax return in India.

Is salary earned from working abroad taxed in India? ›

income tax in India. The foreign income i.e. income accruing or arising outside India in any financial year is liable to income-tax in that year even if it is not received or brought into India. There is no escape from liability to income-tax even if the remittance of income is restricted by the foreign country.

Which ITR is applicable for non-resident Indian? ›

A non-resident or a person not ordinarily resident in India, earning income in the form of salary and interest, is required to furnish return of income in ITR-2 form.

How much foreign income is tax free in India? ›

Minimum exemption of Rs 2,50,000 is allowed on your total income and the remaining income is taxable as per income tax slab rates.

Is a non resident required to file income tax return? ›

Yes. NRIs should file an income tax return in India if they have taxable income in India. For example, an NRI having a house property in India, earning rental income would be required to file an income tax return, if the rental income exceeds the exemption amount.

Who is a non resident for tax purposes? ›

A non-resident alien for tax purposes is a person who is not a U.S. citizen and who does not meet either the “green card” or the “substantial presence” test as described in IRS Publication 519, U.S. Tax Guide for Aliens.

Is income earned overseas taxable? ›

In general, yes—Americans must pay U.S. taxes on foreign income. The U.S. is one of only two countries in the world where taxes are based on citizenship, not place of residency. If you're considered a U.S. citizen or U.S. permanent resident, you pay income tax regardless where the income was earned.

Do I need to pay tax if I work overseas? ›

If you work overseas, you are likely to be taxable in the overseas country where you work.

Do I need to pay income tax if I work abroad? ›

Indians working abroad do not need to pay tax in India for their income earned abroad. However, any income earned through an Indian source-profession or business is liable to be taxed. The earlier definition of a non-resident Indian was someone who lived for more than 183 days or more than six months outside of India.

Can we file ITR 1 for non-resident? ›

ITR-1 cannot be filed by any individual who: is a Resident Not Ordinarily Resident (RNOR), and Non-Resident Indian (NRI)

Do NRI declare foreign income in ITR? ›

A person, who is an Ordinary Resident (OR), has to offer global income in the Indian ITR. However, in case of Not Ordinary Resident (NOR) and Non-Resident (NR), foreign income is not taxable in India and only Indian Income shall be offered for tax in India ITR.

Where do you show foreign income in ITR of a non resident? ›

So, if you have earned a property income held in a foreign country, list the income under the head 'Income from house property. If the income is a payment for your services rendered abroad, include it under 'Income from salary.

How do I declare foreign income in ITR? ›

A resident taxpayer who has credit for the amount of any foreign tax paid in a country outside India by way of deduction or otherwise will be required to furnish the statement in Form 67 on or before the due date specified for furnishing the return of income under sub-section (1) of Section 139 to claim credit of such ...

How do you include foreign income on tax return? ›

Form 2555. You must attach Form 2555, Foreign Earned Income, to your Form 1040 or 1040X to claim the foreign earned income exclusion, the foreign housing exclusion or the foreign housing deduction.

Do I need to file tax return in India if I am NRI? ›

Yes. NRIs should file an income tax return in India if they have taxable income in India. For example, an NRI having a house property in India, earning rental income would be required to file an income tax return, if the rental income exceeds the exemption amount.

How can NRI avoid taxes? ›

The best way for an NRI to avoid paying a high TDS is to open a Non Resident Ordinary Rupee Account (NRO), a Foreign Currency Non Resident Account (FCNR) and a Non Resident External Account (NRE).

Do NRI declare foreign income in ITR? ›

If you are a resident of India, your global income will be taxed in India whether it is earned in India or outside India subject to DTAA(Double Taxation Avoidance Agreement) with the foreign countries. So any income earned by an NRI outside India will not be taxable in India.

How do I show foreign income in ITR? ›

So, if you have earned a property income held in a foreign country, list the income under the head 'Income from house property. If the income is a payment for your services rendered abroad, include it under 'Income from salary.

Is Aadhaar card mandatory for NRI income tax return? ›

Rohan Shetty Jossi John Abu Dhabi: The Indian government has exempted NonResident Indians (NRIs) from the requirement of quoting Aadhaar (Indian biometric ID card) number while filing income tax returns back home.

What is the tax exemption limit for NRI? ›

It provides than an Indian citizen earning Total Income in excess of ₹ 15 lakh (other than income from foreign sources) shall be deemed to be Resident in India if he / she is not liable to pay tax in any country.

How do I get a NRI tax exemption certificate? ›

NRI Lower TDS Certificate or TDS Exemption Certificate – Section 197 (Form 13) To seek relief in the Withholding Tax Rates, NRI/Foreign Citizen can apply for Lower TDS Certificate (TDS Exemption Certificate) with the Jurisdictional Income Tax Authority. This application is submitted in Form 13 of Income Tax Forms.

Who is NRI for tax purposes? ›

NRI, PIO, and RNOR Status

The NRI status in India is attained by people who are Indian citizens but stay in India for less than 182 days in the preceding financial year or people who live outside India for employment, business, or any other purpose for an uncertain period.

Videos

1. Funds Received In NRE Account May Be Taxable - A Must Watch For NRIs - CA Sriram V Rao
(NRI Money Clinic)
2. Answering queries of NRIs on their Legal matters in India | Advocate Nidhi Singh
(NRI Legal Services)
3. Taxation of Social Media Influencers; How to Avail of Tax Treaty Benefits; Question and Answer
(Tax Training by Elsa M. Cañete)
4. Foreign Income Exclusion or Foreign Tax Credit: Which is best for you?
(US & UK Property Tax Specialists)
5. NRI Taxation in India under Income Tax | NRI Taxation | Taxes on Non Resident Indian
(CA Sansaar)
6. FATCA India: 2020 IRS Update Tax & Offshore Reporting - Indian Assets, Accounts Investments & Income
(Golding & Golding International Tax Lawyers)

Top Articles

You might also like

Latest Posts

Article information

Author: Kimberely Baumbach CPA

Last Updated: 12/15/2022

Views: 6227

Rating: 4 / 5 (61 voted)

Reviews: 84% of readers found this page helpful

Author information

Name: Kimberely Baumbach CPA

Birthday: 1996-01-14

Address: 8381 Boyce Course, Imeldachester, ND 74681

Phone: +3571286597580

Job: Product Banking Analyst

Hobby: Cosplaying, Inline skating, Amateur radio, Baton twirling, Mountaineering, Flying, Archery

Introduction: My name is Kimberely Baumbach CPA, I am a gorgeous, bright, charming, encouraging, zealous, lively, good person who loves writing and wants to share my knowledge and understanding with you.