SALARY TO NON RESIDENT DIRECTOR

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.