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ITAT decision on taxing software sales and royalties

Fact and issue of the case

Captioned appeal by the Revenue arises out of order dated 18.10.2021 passed by the learned Commissioner of Income Tax (Appeals)-43, New Delhi pertaining to Assessment Year 2017-18.

The grievance of the Revenue is with regard to the decision of learned First Appellate Authority holding that the amount received by the assessee from sale/distribution of software is not royalty within the meaning of Article 12(3) of India – Singapore Double Taxation Avoidance Agreement (DTAA).

Briefly the facts are, the assessee is a non resident corporate entity incorporated under the laws of Singapore and a tax resident of Singapore. For the assessment year under dispute assessee filed its return of income on 31.03.2018 declaring total income of Rs.1,56,50,870/-. As observed by the Assessing Officer, the assessee is engaged in the business of providing end to end software and cloud technology solution to its clients. In the year under consideration the assessee entered into certain transactions in India and earned revenue as under:

1.Fees for Technical Service	Rs. 1,56,50,875/-
2.Sale of Software	Rs. 12,87,22,587/-

In so far as FTS is concerned, the assessee voluntary treated as income in the nature of FTS and offered to tax in India. However, in so far as revenue earned from sale of software, the assessee pleaded before the Assessing Officer that it is sale/distribution of copyrighted article and not sale of copyright. Therefore, not in the nature of royalty. The Assessing Officer, however, was not convinced with the pleading of the assessee. Therefore, he issued a show cause notice to the assessee to explain why income received from sale of software should not be treated as royalty in terms of provisions of the Act as well as India – Singapore DTAA. In response to the show cause notice issued by the Assessing Officer, assessee furnished a detailed reply in support of its claim that the income earned is from sale of copyright article and not sale copyright itself. The Assessing Officer, however, did not find merit in the submissions of the assessee. Ultimately, he concluded that the revenue earned by the assessee is from transfer of right to use of copyright, hence, in the nature of royalty both under the provisions of the Act as well as under the India – Singapore DTAA. Accordingly, he added the amount of Rs.12,87,22,857/- to the income of the assessee. Assessee contested the aforesaid addition before learned Commissioner (Appeals).

After considering the submissions of the assessee in the context of facts and materials available on record and following the ratio laid down by the Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 125 taxman.com 42 (SC). Learned Commissioner (Appeals) ultimately accepted assessee’s claim that the revenue earned by the assessee is in the nature of sale of a copyrighted article and not for transferring the right to use any copyright. Thus, he held that the amount received is not in the nature of royalty but in the nature of business income and in absence of a Permanent Establishment (PE) is not taxable in India.

Before us, learned Departmental Representative strongly relied upon the observations of the Assessing Officer and submitted that the assessee has distributed/sold software to various customers in India. He submitted, though, the software sold is a copyrighted article, however, along with the software the assessee has sold/transferred the right to use the copyright. Therefore, the amount received from sale of software has to be treated as royalty. He submitted, the fact that the assessee has offered the revenue earned from software sale related services as FTS also proves that what the assessee has transferred is right to use the copyright.

Referring to the decision of the Tribunal in case of M/s Microsoft Corporation Vs. Assistant Director of Income Tax in ITA No. 1392/Del/2005. learned Departmental Representative submitted, the software sold by the assessee involves computer programme which is a process when it executes instruction lying in it in passive state. Therefore, the consideration received is for use of process which will amount to royalty under section 9(1)(vi) of the Act. Thus, he submitted, the Assessing Officer was justified in treating the amount received as royalty.

In reply, learned Counsel appearing for the assessee strongly relied upon the observations of learned First Appellate Authority and submitted that the facts on record would clearly reveal that what the assessee has sold to the customers are copyrighted articles and were sold on principal to principal basis. She submitted, the assessee is a non resident distributor who purchases software from non-resident manufacturers/sellers and re-sales them to distributors/end users in India. She submitted, when the assessee itself does not have any right in the copyright and purchases from another party for re-sale, how can it transfer such non-existent right to others? Thus, she submitted, assessee’s case is squarely covered by the decision of the Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (supra). Further, she submitted the decision of the Tribunal in case of Microsoft Corporation (supra) relied upon by the Revenue could be of no help as in an appeal preferred by the said assessee the Hon’ble Delhi High Court has accepted assessee’s claim and reversed the decision of the Tribunal.

We have considered rival submissions and perused the materials on record.

Observation of the court

Undisputedly, the assessee is a tax resident of Singapore, hence, a non resident entity. Facts on record reveal that the assessee is simply a distributor of software. It purchases software from non-resident manufacturers/sellers, such as, Microsoft, Adobe etc. and distributes/sells them to distributors and customers in India. Thus, the assessee itself is not the manufacturer or creator of software. Therefore, assessee cannot own copyright over the softwares as the manufacturer or creator of the software can hold copyright over the software. From the submissions made before the departmental authorities, these facts are clearly discernible. Thus, the products sold by the assessee are ready to use off the shelf or shrink wrapped softwares, which are nothing but copyrighted articles. From the nature of software products sold by the assessee, it can be very well construed that the copyright over the software sold by the assessee were owned by the companies creating such softwares like Microsoft, Adobe, etc. The assessee is merely a trader of software, hence, has no domain or ownership over the software. Thus, when the assessee does not have any ownership over the softwares sold, it could not have transferred the right to use of copyright of the software to distributors/customers in India. In case of Engineering Analysis (supra), the Hon’ble Supreme Court had an occasion to examine when the consideration received from sale of software can be considered to be in the nature of royalty. The Hon’ble Supreme Court had segregated the transactions relating to the sale of software to following four categories:

The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer.

The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, nonresident suppliers or manufacturers and then reselling the same to resident Indian end-users.

The third category concerns cases wherein the distributors happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users.

The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users.”

Undisputedly, assessee’s case falls within the third category. While deciding the issue whether the payment made is in the nature of royalty, the Hon’ble Supreme Court very clearly and categorically held that the amount paid by resident Indian end users/distributors to non-resident computer software manufactures/suppliers as consideration for the re-sale/use of the computer software through end user license agreement/distribution agreement is not in the nature of royalty for the use of copyright in the computer software, hence, cannot be treated as royalty. Thus, the aforesaid ratio laid down by the Hon’ble Supreme Court clearly applies to the facts of the present appeal. Thus, in our considered opinion, learned Commissioner (Appeals) has adopted the right course of action while deleting the addition made by the Assessing Officer, following the ratio laid down by the Hon’ble Supreme Court in case of Engineering Analysis (supra). Pertinently, for the sake of completeness, we must observe, though, learned Departmental Representative had placed strong reliance upon the decision of the Tribunal in case of M/s Microsoft Corporation Vs. ADIT (supra), however, while deciding the appeal filed by Microsoft Corporation, the Hon’ble Jurisdictional High Court in order dated 18.07.2022 in ITA No. 663/Del/2011, following the decision of the Hon’ble Supreme Court in case of Engineering Analysis Center of Excellence Pvt. Ltd. Vs. CIT (supra), has allowed assessee’s appeal, thereby, reversing the decision of the Tribunal. Therefore, the decision cited by learned Departmental Representative would be of no help to the Revenue.

In view of the aforesaid, we do not find any infirmity in the decision of learned Commissioner (Appeals) on the issue. Grounds are dismissed.

In the result, appeal is dismissed.

Order pronounced in the open court on 26/12/2022

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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July, 1
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Income Tax, Income Tax Circular Notification
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From April 1, 2023, the tax rate for FTS and royalties provided by non-residents of India quadrupled

In India, the tax rate that non-residents must pay is typically different than the tax rate that residents must pay. The scope of Fees for technical services and royalties covers the majority of the services that India imports from other nations or from non-residents.

According to section 115A of the Income Tax Act, the tax rate in India up until this point for both of the aforementioned services rendered by non-residents was 10% plus surcharge + cess. As a result, this was seen as a very advantageous rate, and many were content to pay such tax rates in India and claim the same in their home countries, as most DTAA likewise had tax rates that, if any, were between 10-15%.

Because they would not have to file an income tax return in India if they accepted these tax rates, the non-residents were very glad to do so.

However, this tax rate has now been doubled from the previous 10% to 20% plus surcharge and cess. By virtue of the Finance Act of 2013, which the President approved on March 31, 2023, the Income Tax Department proposed this adjustment.

This modification was initially introduced on March 23, 2023, as an amendment to the Finance Bill, 2023, and it became effective on April 1, 2023. Therefore, 21.84% is the maximum tax rate that applies to non-residents for FTS and royalties.

Because of this, there was no time for non-residents to consider, plan, or strategize their services in India. Additionally, because non-residents’ tax withholding is typically at a rate where the entire tax is withheld, any payment made to a non-resident after April 1, 2023, must also be subject to the new rates.

In addition, if a person wants to take advantage of the treaty, they must present a valid Tax Residency Certificate (TRC) for India; if the TRC does not include all 5 components (Status, Nationality, UIN, Period, and Address), they must also submit Form 10F with the TRC.

Additionally, under notification 03/2022 Dt. 16.07.2022, CBDT made it essential for non-resident service providers to file Form 10F electronically on an e-filing portal. To accomplish this, they must obtain a PAN since this will be needed to register on the e-filing portal and submit Form 10F. Even though there is a relaxation from the requirement to file Form 10F electronically if you get FTS or royalty income, you still need to do so because the relaxation conditions won’t apply if the TRC is missing any information.

A non-resident corporation must file an income tax return in India after it obtains a PAN there.

There are now a number of arguments made in opposition to Form 10F or the TRC requirement, claiming that neither is necessary to receive treaty benefits under the DTAA. Another defence that some people use is that not all five details must be provided in the TRC, under subrule 2 of rule 21AB, therefore even if some are available, Form 10F is not necessary.

Therefore, taking into account all of the aforementioned facts and amendments as well as the short amount of time that the government allowed between informing the public of the change and putting it into effect, it can be said that many people will not be pleased with these changes, particularly in India where the deductor was responsible for paying the cost of tax and the government had not given a justification for raising the tax rate.

So, let’s see how much the Indian government’s initiatives, such as the first online Form 10F filing and the current double-rate FTS and royalty service, would help draw non-residents to India.

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April, 12
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Despite the lack of a PAN for a non-resident payee, TDS must be withheld at the rates outlined in Tax Treaties

Fact and issue of the case

The brief facts leading the present appeal are that in the intimation passed by learned AO dated the 03-08-2020, he has invoked section 206AA of the Act and held that the assessee company was under an obligation to deduct higher rate of TDS in case of non-availability of PAN of the nonresident payee. The assessee company, during the period under consideration had made payments to various non-resident parties and had deducted TDS as per the rate mentioned in the Treaty between India and respective countries or as per the rate mentioned in the Act, whichever is more beneficial to the assessee. An intimation under section 154 of the Act for the first quarter of financial year 2010-11 (assessment year 2011-12) was issued by the Asst Commissioner of Income Tax, Centralised Processing Cell, TDS (AO) to the assessee on account of short deduction of TDS (and interest thereon) amounting to Rs. 36,39,590/- on the ground that in case of payments where PAN of the non—resident parties was not available, the assessee was required to deduct tax under section 206AA of the Act and there was short deduction of TDS in case where TDS was deducted at the rate applicable under the respective Tax Treaty.

The assessee preferred appeal before Ld. CIT(Appeals) against the aforesaid additions. In appeal, Ld. CIT(Appeals) decided the issue in favour the assessee on the ground that the assessee’s own case, the Ahmedabad ITAT in ITA number 2642/Ahd/2017 dated 05-04-2018 for assessment year 2016-17 has adjudicated this issue in favour of the assessee. Further, Ld. CIT(Appeals)-8, Ahmedabad in appeal number CIT (A)-8/11363/16-17 dated 25-05-2018 has also passed order in favour of the assessee on this very issue.

This issue was discussed at length by the ITAT in the case of Serum Institute of India Ltd.[2015] 56 taxmann.com 1 (Pune – Trib.), wherein the ITAT held that TDS on payments made to non-residents who did not furnish their PAN can be deducted as per rate prescribed in DTAA and section 206AA cannot be invoked to insist on tax deduction at rate of 20 per cent.

Observation of the court

Accordingly, Ld. CIT(Appeals) decided the appeal in favour of the assessee with the following observations:

Ground no. 1 to 4 relates to the deduction of Rs. 36,39,590/- for short deduction of TDs and interest thereon. The appellant has relied upon the order of Hon’ble Ahmadabad ITAT Bench in ITA no. 2642/AHD/2017 dated, 05.04.2018 in his own case for A.Y. 2016-17 which is in appellant’s favour. Moreover, appellant has relied upon the decision of Ld. CIT(A)-8, (Ahmadabad) with relevant para is as under: “Considering the facts stated herein above and respectfully following the decision of the High Court of Delhi, Ahmadabad ITAT and my predecessor CIT(A) referred above, it is held that as per the provision of TDS are to be read along with DTAA for computing the tax liability on the sum in question and therefore when the recipient is eligible for benefit to DTAA the addition on the ground of short deduction of TDS applying the provision of 206AA is not correct. The assessing officer is directed to delete the on the basis of application of section 206AA. He is also directed to delete the interest which is consequential too the demand of short deduction. Accordingly the related grounds of appeal are allowed.” 8. Since, the facts are identical and it has also been held in various judicial pronouncement that provision under section 206AA cannot over ride beneficial provision of DTAA. Therefore, appellant is not liable for short deduction of TDS and interest thereon as levied by AO. Therefore, these grounds of appeal are allowed. 9. In the result, the appeal is allowed.

the ITAT made the following important observations:

We have carefully considered the rival submissions. Section 206AA of the Act has been included in Part B of Chapter XVII dealing with Collection and Recovery of Tax – Deduction at source. Section 206AA of the Act deals with requirements of furnishing PAN by any person, entitled to receive any sum or income on which tax is deductible under Chapter XVII-B, to the person responsible for deducting such tax. Shorn of other details, in so far as the present controversy is concerned, it would suffice to note that section 206AA of the Act prescribes that where PAN is not furnished to the person responsible for deducting tax at source then the tax deductor would be required to deduct tax at the higher of the following rates, namely, at the rate prescribed in the relevant provisions of this Act; or at the rate/rates in force; or at the rate of 20%. In the present case, assessee was responsible for deducting tax on payments made to non-residents on account of royalty and/or fee for technical services. The dispute before us relates to the payments made by the assessee to such nonresidents who had not furnished their PANs to the assessee.

In the case of Danisco India (P.) Ltd.[2018] 90 taxmann.com 295 (Delhi), the Delhi High Court held that where assessee, an Indian remits payments to company located in Singapore which is not a tax assessee in India, and tax relationship between two countries is regulated in terms of Indo-Singapore DTAA, rate of taxation would be as dictated by provisions of treaty and not under section 206AA.

In the case of Infosys Ltd. v DCIT [2022] 140 taxmann.com 600 (Bangalore – Trib.), the ITAT held that if rate of tax applicable under DTAA is lower than 20 per cent tax rate as prescribed under section 206AA, TDS has to be deducted at such lower rate even if non-resident deductee fails to furnish its PAN.

We further observe that all appeals filed by the Department are time barred by 2 days. However, considering the miniscule period of delay, the delay in filing of appeal by the Department is hereby condoned.

In the combined result, all eighteen appeals filed by the Department are dismissed.

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

Read the full order from here

DCIT-Vs-Adani-Wilmar-Ltd.-ITAT-Ahmedabad

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February, 28
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The ITAT explains the taxability of the amount received for the ship’s time charter

Fact and issue of the case

The facts in brief are that, assessee is a company incorporated in and tax resident of UAE and is engaged in the business of shipping operation. It has entered into Time Charter contract with M/s Poompuhar Shipping Corp. Ltd. (PSCL) dated 18.04.2018 for transporting coal from Paradeep port to Tutucorine in Tamil Nadu, through its ship ‘MV Eastern View’. The said contract was a period of 13 months. The assessee in turn has chartered the vessel ‘MV Eastern View’ from M/s Power Overseas Investment LLC, again on Time Charter Basis. The assessee has disclosed the receipts of transporting coal from port to port from (PSCL) as shipping business and offered to tax u/s 44B of the Act, i.e. @ 7.5% of the gross receipt attributable to shipping operations carried out in India.

Ld. AO after analyzing the contract between the assessee and M/s PSCL, deduced that assessee is simply letting out the vessel and PSCL has hired the vessels for the period of 13 months for carrying out coal from Paradip port to Tuticorin, Tamil Nadu. He held that PSCL is paying the assessee for the use/right to use by way of leasing or letting out the vessel and therefore, the same is to be taxed under ‘royalty’ u/s 9(1)(vi). AO observed that assessee is being paid fixed amount irrespective of fact, whether the vessel is being used by the charter or not. He held that assessee is not being paid for transporting coal form one port to another within India territory albeit for leasing the vessel. Therefore, it cannot be taxed u/s 44B of the Act. Thus, on these facts he strongly relied upon the judgment of Hon’ble Madras High Court in the case of M/s Poompuhar Shipping Corp. Ltd. vs. ITO (360 ITR 257) and held that the amount received by the assessee is liable to tax under the head ‘Royalty’.

On the other hand, Ld. DR strongly relied on the orders passed by AO and Ld. DRP and submitted , in the case of Poompuhar Shipping Corporation Ltd, the Hon’ble Madras High Court has clearly held that the payment made to a non-resident company who has given the ship on time charter basis to Poompuhar Shipping Corp. Ltd. is a ‘Royalty’ within the meaning of section 9(1)(vi). Thus, this issue stands squarely covered against the assessee by the Hon’ble Madras High Court in the case of the payer itself therefore, no different view can be taken.

We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material placed on record. The main issue involved here is, whether the income earned by the assessee is to be taxed u/s 44B of the Act on the presumption basis as claimed by the assessee in the return of income; or whether the receipt should be taxed as ‘royalty’ for use of an equipment in terms of clause (iva) to Explanation 2 to section 9(1)(vi).

The case of the assessee is that, since it is a non resident company engaged in the business of operation of ships, i.e., the ship of the assessee is used for transporting of coal and has operated a ship on time charter basis by PSCL, therefore it has be subjected to tax under the special provision of section 44B of the Act. Whereas, the case of the revenue is that the ship is equipment which has been let out by the assessee and hired by the charter. The receipts are in the nature of hire charges, therefore, it is the use of the equipment and accordingly, the judgment of Hon’ble Madras High Court is squarely applicable.

First of all, we have to see whether the income earned by the assessee was in the nature of ‘royalty’ within the meaning of section 9(1)(vi) r.w. Explanation (iva). Clause (iva) to Explanation 2 of section 9(1)(vi) reads as under:- (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44B.

Observation of the court

Now we have to see, whether these parameters is applicable in the present case and whether, it can be held that the consideration paid under time charter fits in the definition of the royalty under clause (a) of section 9(1)(iv). In our opinion and analysis of the agreement before us, the aforesaid principle and ratio laid down by the Hon’ble High Court is not applicable in the present case for the reasons enumerated hereunder:

i. The assessee is a UAE based company which has hired ship on Time Charter from M/s Power Overseas Investment LLC owner, a different entity. Thereafter it has entered into time charter agreement with M/s Poompuhar Shipping Corp. Ltd. Though for all purposes the assessee can be said to be owner of the ship till it is in its possession and control for the time period it has taken on time charter. As per the terms of the agreement which we have discussed hereinabove, firstly it can be seen that the payment which assessee was receiving was not purely on account of giving use or right to use the ship to M/s Poompuhar Shipping Corp. Ltd., that is, the charterer and the payment was calculated on the basis of daily freight and load capacity.

ii. The assessee though the owner of the ship but was never separated from the use of the ship nor granted the ship to the charterer, which is generally is in the case of typical time charter.

iii. If the agreement provides that the charterer will pay for the use and hire of the said vessel per running day of 24 hours per calendar month, it means that the payment was to be calculated on per day basis which is a kind of voyage freight. This is also further evident from the method and manner of freight calculation and dead freight calculation. If freight is calculated on pro-rata basis, then under no circumstances, it can be inferred that use or right to use of the ship is given to the charterer.

iv. It was never the condition that the ship itself, and the control over the working and navigation was transferred for the time period to the charterer who used the vessel and there was never a transfer of ship and the control over navigation to charterer, which was one of the condition laid down in the aforesaid judgement. Even though, pressing of compensation or functional control and custody of vessel with the assessee is not relevant factor for deciding the equipment royalty, but then there has to be leasing and letting of the equipment with complete use or right to use of vessel giving to the hirer or charterer. There has to be some kind of economic benefit while giving use or right to use the ship to the charterer which here in this case is not fully satisfied. Had it been so, then the assessee would have only received fixed amount for the time period of the time charter agreement and nothing would have depending on loading capacity and freight calculation based on loading of carriage. The freight is not calculated when there is no carriage of goods due to certain circumstances and the charterer was not required to make any payment.

v. Another important observation made by the Hon’ble High Court while deciding this issue and on the reading of various charter agreements involved in those cases that hire was payable for the use of the ship for specific period of time irrespective of whether the charterer choose to use it for carrying carriage or lays it out of the use and the owner and possession of the vessel which even though remain with the owner who was separated for the use of ship which was granted to the charterer. Here this condition is absent in the present time charter agreement, because the payment is decided purely on the basis of the loading of the good and the determination of the freight is based on the loading capacity and not to the some kind of fixed amount. This material difference itself distinguishes the facts involved in the case before the Hon’ble High Court.

Thus, we hold that the aforesaid judgment of Hon’ble High Court is not applicable on the facts of the present case. Accordingly, we hold that;

> Firstly, the payment received by the assessee from M/s Poompuhar Shipping Corp. Ltd. is not in the nature of ‘royalty’ and hence, the same is not taxable under section 9(1)(vi) of the Income Tax Act.

> Secondly, the agreement and the payment received by the assessee is for carriage of goods and for operating the ships, therefore the income of the assessee has rightly been offered to tax u/s 44B of the Act.

In the result, the appeal filed by the assessee stands allowed. Orders pronounced in the open court on 30th December, 2022.

Read the full order from here

Nan-Lian-1

Conclusion

The tribunal has ruled in favour of the assessee and dismiss the appeal.

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January, 30
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Income Tax
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Salary received from Foreign Countries for rendering Services cannot be taxed in India for non-production of TRC

What is Tax Residency Certificate under Income tax?

From 01.4.2013 the India Residents who earns Income from Countries with which India have a DTAA can obtain a Tax Residency Certificate from Income Tax Department. The same may be submitted to the Payer to claim DTAA Benefit. TRC shall contain the following particulars, namely:-

(i) Name of the assessee;

(ii) Status (individual, company, firm etc.) of the assessee;

(iii) Nationality (in case of individual);

(iv)Country or specified territory of incorporation or registration (in case of others);

(v) Assessee’s tax identification number in the country or specified territory of residence or in case no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory;

(vi)Residential status for the purposes of tax;

(vii) Period for which the certificate is applicable; and

(viii) Address of the applicant for the period for which the certificate is applicable;

(2) The above details shall be provided by the non resident assessee in Form 10F

(3) The certificate referred to in sub-rule (1) shall be duly verified by the Government of the country or the specified territory of which the assessee, referred to in sub-rule (1), claims to be a resident for the purposes of tax.

Fact and Issue of the case

The assessee, a Non resident individual, filed his return of income for the A.Y 2014-15 on 31.07.2014 admitting “Nil” income. During the assessment proceedings u/s 143(2) of the Act pursuant to selection of his return of income for scrutiny under CASS, the assessee was required to furnish certain information and the said information was furnished by the assessee. On verification of Form-16 issued by the assessee’s employer i.e., IBM India (P) Ltd for the A.Y 2014-15, the Assessing Officer found that during the relevant A.Y, the gross salary of the assessee was Rs.36,61,667/- and the exempt income u/s 10 of the I.T. Act was Rs.53,676/-. The Assessing Officer observed that the employer had deducted the tax at source of Rs.8,61,345/-. Further, on verification of the total income filed by the assessee along with the return of income for the A.Y 2014-15, the Assessing Officer found that the assessee has claimed double taxation relief under section 90 of the I.T. Act and admitted NIL total income but claimed TDS of Rs.8,61,345/- in his return.

As the assessee has spent less than 60 days in India during the FY 201314, he qualifies as a Non resident under section 6(1) of the Act. Therefore, the foreign allowance of Rs.19, 79, 072/- was not offered to tax in India in the return of income as the same was received by him outside India for the services rendered outside India and shall not form part of total income under section 5(2) of the Income tax Act, 1961. Also, as the assessee qualifies as a tax resident of Austria, exemption under Article 15(1) of the India- Austria Double taxation Avoidance Agreement (‘DTAA’) has been claimed in the return of income for the employment income.

Based on the above, any salary income earned by a tax resident of Austria for services rendered in Austria is taxable only in Austria. In case services have been rendered in India the income for work days spent in India is taxable in India. The Assessee wishes to submit that for the captioned AY, he was a tax resident of Austria and a non- resident in India. Hence, the salary received with respect to the services rendered in Austria is not taxable as per article 15(1) of the India- Austria DTAA.

In view of the above, in the return of income filed, the Assessee has claimed exemption of the salary income of INR 16,28,920 under Article 15(1) of India- Austria DTAA. In view of the above facts, we wish to inform your good self that the salary income as disclosed in Part B of Total Income in income tax return is less than the salary income as disclosed in Annexure 2 of TDS return filed by the employer as the assessee has claimed DT AA relief and exemption under section 5(2) of the Act in the return of income filed by him. We shall not be able to produce Austrian TRC as issuance of the same is dependent on the Austria tax authorities.”

Observation of the Tribunal

From the facts of the case it is apparent that during the previous relevant to AY 2014-15, the assessee qualifies as a non-resident in India and as a tax resident in Austria. The salary and allowances are earned by the assessee in respect of employment rendered in Austria due to his foreign assignment. Hence, the first two conditions enumerated under Article 15(1) of the India-Austria DTAA stands satisfied. Therefore, the assessee ‘s claim of exemption in regard to his salary income as per the provisions of Article 15(1) of the India- Austria DTAA in the return of income filed by him is appropriate. Further in the case of ITO Vs. Sunil Chitranjan Muncif (2013 58 SOT 356 – ITAT, Ahmedabad), on which reliance placed by the assessee, it was held that there was no dispute about the fact that the assessee is a NRI and the salary income received by him in India for employment exercised in UK has been offered by him for taxation in UK in pursuance of Article 16 of DTAA with UK. Hence, the salary received by the assessee was not taxable in India in pursuance of DTAA between India and UK.

In the case of DIT Vs. Prahlad Vijendra Rao (239 CTR 107), on which reliance placed by the assessee, the Hon’ble Karnataka High Court held that under section 15 of the Act even on accrual basis salary income is taxable i.e. it becomes taxable irrespective of the fact whether it is actually received or not; only when services are rendered in India it becomes taxable by implication. However, if services are rendered outside India such income would not be taxable in India. The other objections raised by the Ld. AO that evidence was not produced for receiving the foreign allowance outside India and the bank account of the assessee maintained abroad was not produced is not relevant because the facts of the case establish es that the salary and the foreign allowance was received in India for the services rendered abroad and by virtue of DTAA and the Act, there is no bar in law for receiving the money in India.

For the above-mentioned reasons, the court directed the Learned AO to delete the tax imposed on the assessee with respect to his salary income of Rs. 12,90,846/- and the foreign allowances of Rs. 22,48,501/ – aggregating to Rs. 35,39,347/- earned by him outside India during the relevant assessment year”.