If A Person Is Non-Resident In Both The States! Where to Tax the Income?

Facts of the Case :

 Assessee is an employee of a Canadian Company. He went to Canada on 1^st March 2013 and he came back to India on 2^nd October, 2013.

Then on 17^th November, 2013 he again went to Canada and came back on 22^nd November, 2013. Assessee was paid salary outside India and that was also in a Bank Account which is also operated outside India.

It also to be noted that during the period of stay in India, neither salary was paid in India nor any other payment was received by the employee from the company in India.

Query raised :

 The question before us is that whether the employee was liable to be taxed in India for the period he stayed in India?

Analysis on the query :

 This is the case where taxability as per Indian domestic law and taxability as per Double Taxation Avoidance Agreements (hereinafter referred to as ‘DTAA’) has to be checked and those provisions which are most beneficial to the assessee will be applied to the case.

Taxability as Per Indian Domestic Law

Let us check the residential status of the assessee based on the taxability of income will have to be decided.

Step 1: Residential status

The assessee went to Canada on 1^st March 2013 and came back to India on 2^nd October. Then he stayed in India till 17^th November.

Therefore his period of stay in India is 47 days. Then assessee again came back to India on 22^nd November, 2013 and then continues to stay during the entire previous year. The total stay in India of the assessee is 177 Days.

As per section 6 of the Income-tax act, 1961 (hereinafter referred to as ‘act’), if any person stays in India for the period of 182 days or more, then he shall be treated as ‘Resident’ for the purpose of the act.

This is to be noted that the condition of 182 days or more has to be checked for each previous year separately.

The second basic condition for the residential status does not apply to the assessee.

Therefore, assessee is a non Resident for the purpose of the act.

Step 2: Taxability of Income

Since the assessee is a Nonresident, therefore the following income shall be taxable in India

• Income accrued in India or deemed to be accrued in India
• Income received in India or deemed to be received in India

As per the facts of the case, assessee has earned his salary in India for 177 days, therefore, as per section 9 of the act, the salary income which is earned in India will be deemed to arise in India.

Therefore, that portion of salary which is earned in India will be taxable in India.

This has to be taxed in India despite the fact that the salary amount is credited by the foreign company outside India in a bank account which is also located outside India, this has been held in Elly Lilly Vs. CIT (2011) SC.

Note : A taxpayer can generally only be a resident of one state. When a person spends a significant amount of time in two states, they must file a tax return as a resident of one state and a non-resident of the other.

By law, two states cannot tax the same income because each state must exempt all earnings and other sources of income that were previously taxed from taxes.

Salary income earned outside India, before his arrival in India will not be taxable in India because it has not been earned in India and section 9 does not attract in this case.

Taxability as Per DTAA

Now we have to analyze the DTAA between India and Canada and to check whether any benefit can be given to the assessee or not.

The salary income has to be decided as per Article 15 of the tax treaty. The article 15 of the treaty is as follows:-

• Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State.
• If the employment is so exercised, such remuneration as is derived there from may be taxed in that other State.
• Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if :-

(a)	The recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in the relevant fiscal year;
(b)	The remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
(c)	The remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.

• Notwithstanding the preceding provisions of this Article, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State, may be based in that State.

As per para 2 of article 15, if any person resident in Canada exercises employment in India, and if the aforesaid conditions are fulfilled then, the salary income will be taxable in Canada only.

If we read our facts in the light of the above law, then it can be concluded that in our case the aforesaid conditions are fulfilled as

• Assesseee is present in India for less than 183 days, hence the first condition is fulfilled
• Remuneration is paid by a company that is not a resident of India, hence the second condition is also fulfilled;
• The remuneration is paid directly by the foreign company and no part of the salary is being borne by the permanent establishment.

Therefore, when all the conditions are fulfilled, then it can be concluded that the salary income earned in India will be taxable in Canada only and no part of income is taxable in India.

However, some other facts may also be off prime importance in deciding this issue, Facts are, in Canada, the tax period starts from 1^st January and ends on 31^st December, so their tax period are as per calendar year.

However in India, the tax period is always from 1^st April to 31^st March. In our case, the assessee has already paid tax in Canada for the period 1^st Jan 2013 to 31^st Dec 2013. And for next year, i.e. 1^st Jan 2014 to 31^st Dec 2014 he will be treated as a Nonresident.

In India, assessee is already a non-resident for the PY 2013-14. Therefore, the question is that where will the income for the period 1^st Jan 2014 to 31^st March 2014 will be taxable because for the period from 1^st January to 31^st March 2014, assessee is nonresident in both Countries.

It has to be noted that since assessee is not a resident in Canada for the period 1^st January to 31^st March, then he will not be allowed to avail the benefit of article 15, because article 15 clearly talk about being a resident of the contracting state. But in our case, the assessee is a nonresident for both countries, and therefore, article 15 will not apply.

However, since assessee has rendered his services in India and also no DTAA benefit is available to the assessee, hence as per section 9 of the domestic tax laws of India, the salary earned for the period 1^st January to 31^st March 2014 will be taxable in India.

Final Conclusion

In the absence of applicability of article 15, the case has to be decided as per domestic law and as per domestic law read with Elly Lilly v. CIT (2011) SC, the salary income earned from 1st January to 31st March 2014 will be taxable in India.

Central Board of Direct Tax notifies  the Protocol amending the Double Taxation Avoidance Agreement (DTAA) between India and Kuwait.