SALARY
TO NON RESIDENT DIRECTOR
TAXABILITY OF SALARY PAID TO NON RESIDENT
TAXABILITY OF SALARY PAID TO NON RESIDENT
Scope of Total Income - Section 5(2)
of Income Tax Act
Subject to the provisions of this
Act, the total income of any previous year of a person who is a non-resident
includes all income from whatever source derived which-
(a) is received or is deemed to be
received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed
to accrue or arise to him in India during such year.
Explanation 1.- Income accruing or
arising outside India shall not be deemed to be received in India within the
meaning of this section by reason only of the fact that it is taken into
account in a balance sheet prepared in India.
Explanation 2.-For the removal of
doubts, it is hereby declared that income which has been included in the total
income of a person on the basis that it has accrued or arisen or is deemed to
have accrued or arisen to him shall not again be so included on the basis that
it is received or deemed to be received by him in India.
Incomes Deemed to be accrues or arise in India - Section 9 of Income Tax Act
Following incomes are treated as
incomes deemed to have accrued or arisen in India:
• Capital gain arising on transfer of property situated in India.
• Income from business connection in
India.
• Income from salary in respect of
services rendered in India.
• Salary received by an Indian
national from Government of India in respect of service rendered outside India.
However, allowances and perquisites are exempt in this case.
• Income from any property, asset or
other source of income located in India.
• Dividend paid by an Indian
company.
• Interest received from Government
of India.
• Interest received from a resident
is treated as income deemed to have accrued or arisen in India in all cases,
except where such interest is earned in respect of funds borrowed by the
resident and used by resident for carrying on business/profession outside India
or is in respect of funds borrowed by the resident and is used for earning
income from any source outside India.
• Interest received from a
non-resident is treated as income deemed to accrue or arise in India if such
interest is in respect of funds borrowed by the non-resident for carrying on
any business/profession in India.
• Royalty/fees for technical
services received from Government of India.
• Royalty/fees for technical
services received from resident is treated as income deemed to have accrued or
arisen in India in all cases, except where such royalty/fees relates to
business/profession/other source of income carried on by the payer outside
India.
• Royalty/fees for technical
services received from non-resident is treated as income deemed to have accrued
or arisen in India if such royalty/fees is for business/profession/other source
of income carried by the payer in India.
From above we can conclude that
salary for services rendered outside India is not deemed to be accrued or arise
in India.
Income Deemed to be received in
India - Section 7 of Income Tax Act
The following incomes shall be
deemed to be received in the previous year :-
(i) the annual accretion in the
previous year to the balance at the credit of an employee participating in a
recognised provident fund, to the extent provided in rule 6 of Part A of the
Fourth Schedule ;
(ii) the transferred balance in a
recognised provident fund, to the extent provided in sub-rule (4) of rule 11 of
Part A of the Fourth Schedule ;
(iii) the contribution made, by the
Central Government or any other employer in the previous year, to the account
of an employee under a pension scheme referred to in section 80CCD.
From above we can conclude that salary received to in a bank account maintained
outside India is not covered in income deemed to be received in India.
Taxability of Income of Income of a
Non Resident
In case of a non resident following
income are chargeable to tax India:
• Income which accrues or arises in
India
• Income which is deemed to accrue
or arise in India
• Income which is received in India
• Income which is deemed to be
received in India
From above we can conclude that in
case of a Non Resident, income which is not deemed to accrue or arise in India
(or deemed to accrue or arise outside India) is not chargeable in India.
Thus payment of salary to a person
for services rendered outside India is not chargeable to tax in India.
LEGAL PRONOUNCEMENTS
Pramod Kumar Sapra, New Delhi vs Ito, Panipat on 30 October, 2017
Facts of the case
• Pramod Kumar Sapra (‘tax payer’)
employed with Reliance Industries Limited (‘RIL’) was deputed to Iraq as a
Country Manager from 16 April 2010.
• He received salary in his India
bank account during his deputation. Taxes were deducted by RIL on such salary.
• The tax payer qualified as
non–resident of India for the tax year 2010-11.
• Accordingly, he claimed deduction
amounting to INR 4,004,830 representing salary relating to services rendered in
Iraq and offered a net income of INR 98,520 in his return of income.
• The return was subjected to
scrutiny during which the said deduction of salary was accepted by the
Assessing Officer (‘AO’).
• Later, the Principal Commissioner
of Income Tax (‘Pr. CIT’), held that the AO has not examined the issue of
deduction of such huge quantum of salary in light of section 5(2) of the Income
Tax Act, 1961 (‘the Act’); salary will be taxable in India as received in
India. Therefore, the Pr.CIT held that the impugned assessment order is
prima-facie erroneous and prejudicial to the interest of the Revenue.
• Further to this, the Pr. CIT
passed a revisionary order under section 263 of the Act setting aside the assessment
order of the AO and disregarding the detailed submissions furnished by the tax
payer providing details of his residential status and scope of taxable income.
• Aggrieved by the action of the Pr.
CIT, the tax payer approached the Delhi Tribunal.
Issue before Tribunal
• Whether salary income received in
India for services rendered outside India is taxable in India?
• Whether the impugned order by Pr.
CIT needs to be quashed?
Ruling of the Tribunal
The order of the Pr. CIT was quashed
and the deduction of salary as claimed by the tax payer was upheld by the Delhi
Tribunal on account of the following :
• The details of the tax payer’s
physical presence were not disputed by either AO or Pr. CIT. Hence, his
residential status is accepted as non-resident under section 6(1) of the Act.
• Receipt of salary in India and
taxes deducted by RIL thereon cannot determine the taxability in India. Section
5(2) does not specifically envisage that the income received by a non-resident
for services rendered outside India can be reckoned as part of taxable income
in India. Hence, salary received for services rendered in Iraq cannot be held
taxable in India as the same has not been received for services or activities
carried out in India.
• Revisionary jurisdiction under
section 263 can only be exercised on an assessment order if the said order is
found to be erroneous insofar as it is prejudicial to the interest of the
Revenue. Thus, both conditions viz. erroneous and prejudicial to the interest
of Revenue are to be fulfilled simultaneously. In this case, the order passed
by the AO, could be described as erroneous in the absence of any proper
enquiry. However, on merits, it is not prejudicial to the interest of the
Revenue.
As the payment of salary is exempt from tax there is no requirement to deduct
TDS under section 195 & 192.
Arvind
Singh Chauhan vs. ITO (ITA No. 319 and 320/Agr/2013)
Summary
Once it is not in dispute that the
assessee qualifies to be treated as a 'non-resident' under Section 6 of the
Act, as is the undisputed position in this case, the scope of taxable income in
the hands of the assessee, under Section 5(2), is restricted to (a) income
received or is deemed to be received in India, by or on behalf of such person;
and (b) income which accrues or arises, or is deemed to accrue or arise to him,
in India. Therefore, it is only when at least one of these two conditions is
fulfilled that the income of a non -resident can be brought to tax in India
Considering that your stay in India
does not equal to 182 days or more during FY14 due to employment outside India,
you would qualify as a non-resident as per income tax laws in India. In case of
a non-resident, only such income which is received, accrues, arises or is
deemed to accrue or arise in India is taxable in India. Income in the nature of
salary is deemed to accrue or arise in India only if the services are rendered
in India. Since the services in your case are rendered outside India, the
salary income can be stated to be accruing outside India.
However, since you receive the salary in your savings bank account in India, a
question also arises whether the salary credited in India is considered to be
received or deemed to be received in India. The Agra bench of the Income-tax
Appellate Tribunal (ITAT) in a recent judgement in the case of Arvind Singh
Chauhan vs. ITO (ITA No. 319 and 320/Agr/2013) held that the income earned by
the individual from a shipping company and credited to the Non-resident Rupee
(NRE) account in India is not taxable as it does not accrue or arise in India
and cannot be deemed to accrue or arise in India as the services were rendered
outside India.
Further, the Tribunal held that the
income should also be considered to be received outside India as the assessee
was in lawful right to have received the salary at the place of employment, and
it was as a matter of convenience that the salary was thereafter transferred to
the Indian account. In the light of the fact that the salary accrues to India
on account of the services rendered outside India and I am assuming that the
lawful right to receive the salary in your case arose in Nigeria, the salary
earned by you could be considered as not taxable in India. But if you have
earned any salary income prior to September 2013 or earned any other taxable
income during FY14 in India, it would be taxable.
Eli
Lily and Co. (India) (P.) Ltd. (supra)
Unless there was an obligation on
the employee to pay tax on income from salaries, there would not be any
liability to deduct tax under section 192 by the employer.
Sumana
Bandyopadhyay vs. DDIT (Calcutta High Court)
Question in appeal : “Whether on the
facts and in the circumstances of the case and in law, income by way of salary
which became due and has accrued to the assessee, a non-resident, for services
rendered outside India and which is not chargeable to tax in India on the “due”
or “accrual” basis, can be said to be chargeable to tax on the “receipt” basis
merely because the foreign employers, on the instructions of the assessee, have
remitted a part of amount of salary to the assessee’s NRE bank account in
India?”
The matter has been examined in the Board Section 5(2)(a) of the Income-tax Act
provides that only such income of a non-resident shall be subjected to tax in
India that is either received or is deemed to be received in India. It is
hereby clarified that salary accrued to a non-resident seafarer for services
rendered outside India on a foreign ship shall not be included in the total
income merely because the said salary has been credited in the NRE account
maintained with an Indian bank by the seafarer.”
We accordingly allow the appeal and answer the question framed by us in favour
of the assessee.
CIT vs
Avtar Singh Wadhwan on 20 November, 2000
The Tribunal came to the conclusion
that the assessee had worked outside India during the relevant accounting year
except for eight days. That, the salary was received by him outside India.
That, the place of contract was not relevant. That, the source from which
payment was made was not relevant. That, what was relevant was the place where
the service was rendered. That, the place at which income accrued was the place
where the service was rendered.
AUTHORITY
OF ADVANCE RULING
No taxes to be withheld for
non-residents rendering services outside India; credit for overseas taxes
permissible for residents at withholding stage, Rules AAR
Facts
• M/s. ABC India Private Limited
(ABC India/applicant) deputed two of its employees (assignees) to ABC United
States (ABC US) and ABC Germany for a period of two years and three months and
two years respectively.
• The assignees continued to be on
the payroll of ABC India and received salary (except certain allowances paid
overseas) in India while rendering services in the host countries (USA /
Germany).
• As per the Income Tax Act, 1961
(ITA), the assignees qualified as non-residents (NR) for the Financial Year
(FY) 2011-12 and resident and ordinarily residents (ROR) for the FY 2012-13 in
India.
• They qualified as residents of the
host country by virtue of the provisions of the respective Double Taxation
Avoidance Agreements (DTAA) for the deputation period.
• ABC India continued to operate
withholding taxes on the salary payments as a matter of abundant caution. The
applicant was of the view that taxes withheld will be refunded to them by
virtue of beneficial provisions of the respective tax treaties. Further, other
employees who had taken recourse to the said treaty provisions had been granted
refunds by the tax authorities.
• ABC India posed two questions
seeking a ruling from the Authority of Advance Ruling (AAR).
Issues before the AAR
• Whether ABC India is obliged to
withhold taxes for salary payments made in India to the non-resident assignees
rendering services abroad when such salary was not liable to be taxed in India?
Observation and Ruling of the AAR
1. Whether withholding of taxes is
required for salary payments made in India to non-residents?
Arguments by ABC India
• The scope of total income of a
non-resident1 includes income received in India, comprising the salary paid by
ABC India. However, this is subject to the other provisions of the ITA and
hence effect has to be given to the applicable provisions, recourse to tax
treaty being one of them. Accordingly, assignees are entitled to adopt either
the provisions of the ITA or DTAA, whichever is beneficial2;
• As per ITA, salary is chargeable
to tax on accrual basis and taxability on payment basis is triggered only when
it is paid in advance;
• Income in the nature of salaries
is deemed to accrue or arise in India only when it is earned in India, i.e.
when the services are rendered in India (explanation to Section 9(1)(ii));
• An employer is obliged to withhold
taxes only when the salary is chargeable to tax;
• The relevant article under the
DTAA3 provides that salaries, wages and other similar remuneration derived by
resident of USA/ Germany shall be taxable in the host country as employment is
exercised there. Further, model commentaries also provide that the place of
employment is where employee is physically present rather than place of receipt
of salary;
• In the instant scenarios, since
salary paid in India is not taxable in India both as per ITA and DTAA, it would
not constitute income chargeable under the head salaries. Hence, ABC India does
not have an obligation to withhold tax on such salary payment;
• Further taxes are to be withheld
at the average rate of income-tax i.e. rate arrived at by dividing the amount
of income-tax by the total income. Thus, where total income (salaries) is nil,
the average rate of tax would be nil and withholding provisions would not be
triggered;
• In the case of British Gas India
(AAR/725/2006) it was held that salary is not taxable in India provided same is
taxed in UK;
• Reliance was also placed on the
Supreme Court decision in the case of Eli Lilly and Co. (312 ITR 225) where it
was held that withholding tax obligation is triggered if salary is taxable in
India and on the Andhra Pradesh High Court ruling in the case of Coromandel
Fertilisers Ltd (187 ITR 673) wherein the Court held that no requirement to
withhold taxes arises, unless the salary income was taxable in the hands of the
recipient.
Arguments by Revenue
• Salary income received in India is
taxable under the ITA;
• Services are considered as
rendered in India as contract between the employer and employee has been
entered in India.
Ruling of AAR
• Income-tax shall be charged in
accordance with and subject to provisions of the ITA;
• Section 5(2) has to be read in
conjunction with other applicable sections to determine chargeability to tax.
Salary income accrues where the services are rendered and therefore salary
income received by assignees of ABC India for services rendered overseas is not
chargeable to tax in India;
• The recent decision of the
Calcutta High Court in the case of Utanka Roy (390 ITR 109) following the
decisions in the case of Avtar Singh Wadhwan (247 ITR 260) and Prahlad Vijendra
Rao (ITA No. 838/2009), held that where services are rendered outside India,
income is earned outside India. This decision would apply to the present
scenario;
• The material point was not whether
the employer was an Indian company or not, but where the services were rendered
and income accrued to the employee;
• The decisions endorse the view
taken by Klaus Vogel in his commentary on Dependent Personal Services, Article
15, i.e. employment is exercised in the place where employee is personally
present;
• ABC India is not required to
withhold taxes on salaries paid by it as the non-resident assignees are not
liable to be taxed in India.
Texas Instruments (India) Pvt. Ltd.: If employee is not liable to be taxed in
India in respect of his income, the employer is not obliged to withhold taxes
on the salary paid to him in India.
REQUIREMENT
FOR FILING FORM 15CA & 15CB
Rule – 37BB of Income Tax Rules:
(1) The person responsible for
paying to a non-resident, not being a company, or to a foreign company, any sum
chargeable under the provisions of the Act, shall furnish the following,
namely:-
(i) the information in Part A of
Form No.15CA, if the amount of payment or the aggregate of such payments, as
the case may be, made during the financial year does not exceed five lakh
rupees;
(ii) for payments other than the
payments referred in clause (i), the information,-
(a) in Part B of Form No.15CA after
obtaining,-
(I) a certificate from the Assessing
Officer under section 197; or
(II) an order from the Assessing
Officer under sub-section (2) or sub-section (3) of section 195;
(b) in Part C of Form No.15CA after
obtaining a certificate in Form No. 15CB from an accountant as defined in the
Explanation below sub-section (2) of section 288.
(2) The person responsible for
paying to a non-resident, not being a company, or to a foreign company, any sum
which is not chargeable under the provisions of the Act, shall furnish the
information in Part D of Form No.15CA.
As per Rule 37BB in case of payment
of any sum to nonresident which is not chargeable to tax under the Act the
company is required to file Form 15 CA.
Form No. 15CB will only be required
for payments made to non-residents, which are taxable and if the payment
exceeds Rs. 5 lakhs.
Thus the company is required to file Form 15 CA only and there is no need to
file Form 15 CB.
PROVISIONS
OF FEMA
Under FEMA any transaction is classified
as Capital Account Transaction or Current Account Transaction. Payment of
remuneration to director will be classified as current account transaction as
per the definition given under the Act. Definitions are as follow:
Section 2
(e) "capital account
transaction" means a transaction which alters the assets or liabilities,
including contingent liabilities, outside India of persons resident in India or
assets or liabilities in India of persons resident outside India, and includes
transactions referred to in sub-section (3) of section 6;
Section 6(3) Without prejudice to the generality of the provisions of
sub-section (2), the Reserve Bank may, by regulations, prohibit, restrict or
regulate the following-
(a) transfer or issue of any foreign
security by a person resident in India;
(b) transfer or issue of any
security by a person resident outside India;
(c) transfer or issue of any
security or foreign security by any branch, office or agency in India of a
person resident outside India;
(d) any borrowing or lending in
foreign exchange in whatever form or by whatever name called;
(e) any borrowing or lending in
rupees in whatever form or by whatever name called between a person resident in
India and a person resident outside India;
(f) deposits between persons
resident in India and persons resident outside India;
(g) export, import or holding of
currency or currency notes;
(h) transfer of immovable property
outside India, other than a lease not exceeding five years, by a person resident
in India;
(i) acquisition or transfer of
immovable property in India, other than a lease not exceeding five years, by a
person resident outside India;
Section 2
(j) "current account
transaction" means a transaction other than a capital account transaction
and without prejudice to the generality of the foregoing such transaction
includes,-
(i) payments due in connection with
foreign trade, other current business, services, and short-term banking and
credit facilities in the ordinary course of business,
(ii) payments due as interest on
loans and as net income from investments,
(iii) remittances for living
expenses of parents, spouse and children residing abroad, and
(iv) expenses in connection with
foreign travel, education and medical care of parents, spouse and children;
Section 5. Any person may sell or draw foreign exchange to or from an
authorised person if such sale or drawal is a current account transaction:
Provided that the Central Government may, in public interest and in
consultation with the Reserve Bank, impose such reasonable restrictions for
current account transactions as may be prescribed.
As per Schedule III of Master Direction No. 8/2015-16
A Company can pay foreign remittance upto $250,000.00 without obtaining prior
approval of any authority under the Liberalized Remittance Scheme.
Summary:
Foreign National as a Director under
Foreign Exchange Management Act (FEMA), 1999
As per Companies Act and FEMA, there
are no restrictions for a foreign national to become a director in an Indian
Company. He is eligible for sitting fees, remuneration, commission, travel
expenses just like any other director.
A foreign national as a director in
an Indian company can hold and maintain a foreign currency account with a bank
outside India and receive or remit the whole salary payable to him for his
services. Where foreign nationals are engaged by Indian companies, the Indian
companies shall make an application for remittance of remuneration to
authorized dealers with a statement and undertaking certificate regarding
payment of Income Tax.
No restrictions on current account
transaction, unless specified
Basically, all current account
transactions are free, unless specifically restricted by Central Government.
Thus, there are no restrictions on following current account transactions-
• Salary/remuneration to foreign
nationals/foreign directors [However, this would be is subject to restrictions
under any other law e.g. Company Law.
• Payment for imports of goods which
are permitted to be imported Remittance of interest on investment made from
abroad.
• Remittance of principal amount
i.e. capital is permitted subject to restrictions imposed in the scheme. - . -
Tax will be deducted at source as per Income Tax provisions.
• Remittance of interest on funds
borrowed from abroad as per approved schemes. Even penal interest can be
remitted. - . - Tax will be deducted at source as per Income Tax provisions.
• Remittance of dividend is
permitted if the foreign investment was as per approved scheme. - . -
Remittance of dividend requires permission only when investment was allowed
subject to dividend balancing condition.
• Booking of passage for foreign
travel with airline/shipping companies or booking of cargo in ships/aircrafts.
Indian office/agent can accept payment in Indian rupees and make remittance
abroad to Principal.
• Remittance from EEFC/RFC account
for permitted current account transactions
• Export Commission
• There is no restriction on
remittance for advertisement in print media or advertisement on internet or TV
PROVISIONS
UNDER COMPANIES ACT
There is no provision under the
Companies Act which restrict the payment of remuneration to a non resident
director by a private company.
No comments:
Post a Comment