IT APPEAL NO. 308 (JP) OF 2014
[ASSESSMENT YEAR 2008-09]

R. P. TOLANI, JUDICIAL MEMBER

P.K. Prasad for the Appellant. 
Raj Mehra (JCIT) for the Respondent.

ORDER

R.P. Tolani, Judicial Member - This is an appeal filed by the assessee against the order dated 09/01/2014 passed by the learned CIT (A)-II, Jaipur for A.Y. 2008-09 agitating various issue which in effect raise that the ld. CIT (A) has erred in law and on facts in: —

Ld. Counsel contends that impugned assessment has been framed by ld. AO treating the assessee as non-resident, which is further evident from the fact that the case of the assessee was transferred from ITO, Ward 3(3), Jaipur to Assistant Director of Income Tax (International Taxation), Jaipur who framed the assessment. During this year, the assessee was transferred from India subsidiary to Fidelity Investments Systems Inc, Boston, USA (FIS) to act as a lead software engineer, accordingly he left India on 30.05.2007 in connection with his US employment. Hence, for the period from 1/4/2007 to 30.05.2007 he was an employee of FBSI and with effect from 31.05.2007, he started working for FIS.

Provisions of section 5(2) starts with the expression "subject to the other provisions of the Act. . . . .as a result of section 5(2), it follows that salary is to be taxed in India subject to other provisions of the Act. Other provisions of the Act is the context of salary income refers to the following provisions:

. . . . . .the following income shall be chargeable to income-tax under the head Salaries:

The assessee summarized its arguments as under:

2. Ld. AO proposed to assess the above salary in India, assessee objected to that claiming that the relevant services were rendered in US only for internal facilitation the salary was paid in India. Reliance was placed on the decisions in the cases of Ranjit Kumar Bose v. ITO [1986] 18 ITD 230 (Cal.), British Gas India (P.) Ltd., In re [2006] 155 Taxman 326 (AAR) & CIT v. Estienne Andre [2000] 242 ITR 422 (Bom.). The ld Assessing Officer however held that exemption u/a 16(1) of DTAA was not applicable as Fidelity Business Services India Pvt. Ltd. had issued form No. 16 which indicated that the impugned part of salary was taxable in India. Since the salary is received in India by the employee through a credit to his salary account and TDS is deducted thereon in India, the same will be taxable in India irrespective of the residential status, in accordance with Section 5 of the Income Tax Act, 1961. The claim of exemption of income amounting to Rs. 8,25,792/- out of the above on the basis of Article 16(1) of India-USA Double Taxation Avoidance Agreement by the assessee is not correct.

3. Aggrieved, the assessee preferred first appeal before the ld CIT (A), who erroneously held that the assessee remained on the payroll of FBSI and was not on the payroll of FIS, that is the reason his salary was credited by FBSI in India and TDS was deducted thereon. In view of the section 5(2) of the Act, total income of any previous year of a person who is a resident includes all income from whatever source derived which is received or deemed to be received in India in such year by or on behalf of such person on accrues or arises to him in India during such year. Since, the salary is received in India by the employee through a credit to his salary account due from his India employer in India, the same will be taxable in India irrespective of the residential status, in accordance with Section 5 of the Income Tax Act, 1961. The claim of exemption of income amounting to Rs. 8,25,792/- out of the above on the basis of Article 16(1) of India USA Double Taxation Avoidance Agreement by the assessee is not correct. The term residence used in DTAA provisions is not similar to the term residential status used in the Income Tax Act, therefore, the assessee was not entitled to use the same as synonymous to each other. The assessee will be a resident of India in accordance with the DTAA between the India and USA and the right of taxation in respect of salary income of the employee will remain with the India whether or not the right of taxation in respect of this sum vest with USA.

4. The ld counsel for the assessee referred to the paper book and contends that it has not been disputed that the services for impugned period were rendered in USA, which is certified by Fidelity USA as well as Indian counterpart. Besides the due taxes on the impugned income having been levied by US tax authorities. It has also not been disputed that no services were rendered by the assessee in India and they were rendered in US. The amount was paid to assessee by the Indian entity as an internal arrangement between USA and Indian counterpart and this amount has been reimbursed to Indian entity by Fidelity Investment, Boston, USA. Thus the essence of the tax liability as perceived by authorities below is not relevant issue i.e. rendering of services in USA but a merely because the amount was paid by an Indian entity and TDS was deducted thereon. Looking at the small amount, the India entity did not apply for exemption U/s 192/193 of the Act. Besides in law the salary was not taxable in India consequently assessee also did not raise any objection for such TDS. Besides the Indian entity was to be reimbursed by the US entity. In view of these undisputed facts and circumstances the salary in question is not taxable in India being clearly exempt u/a 16(1) of DTAA. Further reliance in placed on the following judicial precedents:—

5. The ld DR, on other hand, contends that a plain and simple reading of Section 9 reveals that any payment of salary made to assessee in India is liable to be to be taxed and Article 16(1) of DTAA does not apply to it. Orders of authorities below are relied on.

6. I have heard the rival contentions of both the parties and perused the material available on the record. As the facts emerge from record t the assessee's residential status as nonresident has been accepted by the ld Assessing Officer, therefore, there is no justification on the part of the ld CIT (A) to hold that the assessee was a resident. It has not been disputed that the services in question was rendered by the assessee in US and taxed in the USA, which is evident from the relevant record filed on the paper book. The applicability of article 16(1) of Indo-USA DTAA depends on the country where services are rendered which in this case is undisputedly USA. The application of article 16(1) of Indo-USA DTAA cannot be denied to assessee merely because the salary check was paid by an Indian entity and the undisputed fact that no service was rendered by assessee for the impugned period in India. The Hon'ble Supreme Court in the case of Kedar Nath Jute Mfg. Co. Ltd. v. CIT (Central) [1971] 82 ITR 363 has held that actual and legal nature of the transaction will decided the taxability and not mere book entries or assumptions. In view thereof, judgments in the case of Nippon Yusen Kaisha Tokyo, Japan (supra), Khambaty (supra) andRanjit Kumar Bose (supra), I hold that the nonresident assessee is not liable for tax in India on the impugned amount.

7. In the result, the appeal of the assessee is allowed.