Salary earned in India and Article 15 short stay exemption – Non Resident Taxation – International Taxation Case Study
Joseph Clarke, an Australian resident, worked in India on a construction Project, which constituted a PE of the employer in India. For the India work where he was present for 160 days and he earned a taxable salary of Rs. 24,00,000. Based on the following provision of India Australia Treaty, examine the taxability of salary earned by him under all options, if more than one ? Also examine, if TDS has to be withheld on such salary payment ?
Article 15
Dependent Personal Services
- Subject to the provisions of Articles 16, 17, 18, 19 and 20, salaries, wages and other similar remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in that other State.
- Notwithstanding the provisions of paragraph (1), remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if :
a)the recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in a year of income of that other State;
b)the remuneration is paid by, or on behalf of, an employer who is not a resident of that other State; and
c)the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in that other State.
- Notwithstanding, the preceding provisions of this Article, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by a resident of one of the Contracting States may be taxed in that State.
Salary earned in India and Article 15 short stay exemption – Non Resident Taxation – Solution:-
Section 9(1)(ii) of the IT Act, provides that if a non-resident individual has certain income , which is taxable under the head “Salaries”, it shall be deemed to accrue or arise in India, if it is earned in India.
Salary income would be treated as earned in India if it is payable for services rendered in India. Thus , salary earned by Joseph Clarke would be liable to tax in India as per the IT Act . However, given that he is a resident of Australia, he can opt to be governed by the provisions of India- Australia treaty, in case they are more beneficial .
Article 15(1) provides that India would have the right to tax the salary income if the employment is exercised in India. However, this Rule is subject to the exception, provided in Article 15(2), which provides that the salary income would be taxable only in Australia if the following conditions are satisfied : –
– the recipient is present in India for a period or periods not exceeding in the aggregate 183 days in a year of income of that other State – This condition is satisfied as he is in India for 160 days
– the remuneration is paid by, or on behalf of, an employer who is not a resident of that other State – This condition is satisfied as Payor is a non-resident ; and
– the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in that other State.
In the present case, while condition 1 and 2 are clearly satisfied , we do not know whether the PE of the employer has claimed a deduction in respect of such salary. Therefore the following two situations may arise : –
–PE of the employer has claimed a deduction in respect of such salary
The income will be taxable in India, since all the conditions to claim the exemption has not been satisfied. In view of this, TDS has to be withheld on such salary payment
– PE of the employer has not claimed a deduction in respect of such salary
The income will be taxable only in Australia. Since the income is not taxable in India, no TDS has to be withheld from such salary payment
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