Corporate executives travelling abroad on business assignments are in for some good news -- at least as per a recent Authority of Advance Ruling (AAR) judgment. As per the judgment, if the deputation abroad is for six months or more, such an executive would be a Non-Resident Indian (NRI) and consequently his Indian salary would be tax-free.
But first, let us understand the background. Typically, for international assignments, the executive continues to get his Indian salary in the Indian bank account and is also given a daily allowance during the stay abroad.
Now, as per the conventional application of the Tax Act, the Indian salary and also the savings from the daily reimbursement would have been fully taxable in the usual course.
However, the Authority of Advance Ruling (AAR) has ruled that such executive goes abroad essentially on employment and hence if he has not spent 182 days or more in India in any financial year, he would get the status of NRI and hence the salary would be tax-free.
However, to understand the concept clearly, first it is necessary for one to understand who exactly qualifies to be an NRI.
The Income Tax Act does not define the term NRI directly. Instead the term 'resident' is defined and by corollary, a person who does not qualify to be a 'resident' gets the tax status of an NRI. So let's see what the definition of the term 'resident' is.
A resident is one who during a financial year (FY) which is from April to March, satisfies any one of the following two conditions:
He is in India for at least
a) 182 days in the FY or
b) 365 days out of the preceding four FYs and 60 days in the current FY.
However, the act goes on to add that if such person leaves India in any year for the purpose of employment, the 60 days in the clause 'b' above is to be replaced by 182 days. In other words, the number of days under consideration for determining status would be 182 and not 60.
Putting it differently, no one can be born an NRI, rather an Indian resident becomes an NRI when he goes abroad. However, the purpose for which such person goes abroad is important.
If the trip abroad is for purposes other than employment, clause 'b' above would apply. On the other hand, if the purpose is employment, clause 'a' is applicable.
In the judgment under consideration, British Gas (I) Pvt Ltd., had assigned certain individuals to British Gas Group entities outside India. The employee in question had left around June 28, 2005. This meant that for FY 05-06, he had spent only 88 days in India. The company contended that since the employee had spent less than 182 days in India in FY 2005-06, he would be a non-resident and his income would be non-taxable.
On the other hand, the contention of the department was that since the employee was already in employment of the Indian company and is leaving India essentially on deputation, he cannot be said to leave India for 'purposes of employment.'
Consequently, the 60-day condition had to be applied and since he had spent 88 days already in India, he would not qualify to be an NRI.
The AAR ruled in the company's favour. As per the AAR, a careful reading of the law would show that the requirement is not leaving India for 'employment abroad,' but it is leaving India for the 'purposes of employment outside India.'
In other words, an individual need not be an unemployed person who leaves India for employment outside India. That he is employed in India is enough.
What is important is that the person is traveling on account of his employment. Therefore, the fact that the person was already an employee at the time of leaving India is hardly material or relevant.
However, it may also be mentioned that the AAR rulings are only applicable for the particular transaction of the particular assessee. Even for another similar transaction of the same assessee, the previous ruling doesn't apply. In the light of this, AAR rulings are at best of persuasive value and income tax authorities are not bound by the same while deciding on other cases.
It may also be noted that as per the Tax Act, any income of an NRI, which is received or accrued in India, is taxable in India. Consequently, the commission income of an NRI who had canvassed business abroad for a company, which was holding an exhibition in India, was held to be taxable in India as it was deemed to accrue in India.
In the light of such apparently conflicting interpretations, it will not be possible for any company to act unilaterally and not deduct tax at source on the salary incomes of its personnel deputed abroad.
In the absence of any clear specification in this regard from the Central Board of Direct Tax (CBDT), the only course for such employees would be to file their tax return and claim refund.
The writer Sandeep Shanbhag is Director of A N Shanbhag NR Group, a Mumbai based tax and investment advisory firm. He may be contacted at sandeep.shanbhag@moneycontrol.com
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