EXPATRIATES IN INDIA - SOME ISSUES WITH REFERENCE TO AAR RULING
- INTRODUCTION
Authority for Advance Ruling addressed some of the issues arising on deputation of foreign Expatriates in India on high technology project implementation. They may be employed by Foreign Companies or deputed to Indian companies as an employee of Indian companies.
Some of the issued are presented below for the benefits of our readers.
- 2 RELIEF UNDER SECTION 10(5B)
2.1 Section 10(5B) provides for relief from tax, on tax paid by the employer on behalf of his employee. In other words, there is no grossing up of tax in case the employee is paid a net of tax salary. This issue has been dealt with in several advance ruling relating to expatriate taxation.
2.2 Let us first see the provision of section 10(5B). The section provides that:
__ If an individual renders services as a technician in the employment (commencing after 31st march, 1993);
__ the employment is with the Government, local authority, corporation set up under special law, institute or body established in India for carrying on scientific research as is approved for this clause or clause 6(vii-a)by the Department of Scientific and Industrial Research, or any business carried on India;
__ the individual was a non - resident in any of the four financial years immediately preceding the year in which he arrived in India;
__ the tax is paid by the employer on salaries;
then the tax will not be grossed up for a period of 48 months from the date of arrival in India.
Central Government has been given the power to waive the condition regarding the requirement of non - residence. This can be done for those who are employed in India for designing, erecting or commissioning of machinery or plant, or supervising activities pertaining to the above.
2.3 Thus briefly, the main conditions are :
__ The person should be employed in India.
__ He should have been non - resident for any of the preceding four year.
__ He should be a "technician" having specialised knowledge in the specified field.
___ Relief is for maximum of forty - eight months.
- 3 The different issues which arouse in different rulings were:
3.1 The meaning of the phrase "employed in a business carried on in India".
3.2 Whether an employee of a foreign company, rendering services in India is eligible for relief u/s. 10(5B).
3.3 Whether the employee was a technician within the meaning of the section.
- 4 Let us consider the first issue --- meaning of the phrase "employed in any business in India", In fact the first application before the AAR was on this matter. The ruling was in the matter of Robert W. Smith (212 ITR 275). The fact of the case were as under:
A citizen of the U.S.A.-- Mr. Robert Smith an employee of a US company which made chewing gums. The US company had invested in the Indian subsidiary. Mr Smith was deputed to India to supervise the construction of the factory of the Indian company. He has specialised in the construction and commissioning chewing gum plants. _
The issue was, whether such a person can be said to be employed in any business carried on India.
- 5 The authority has discussed this subject at great length. Primarily it may appear that if the Indian company has not yet commenced its business, relief will not be available. However, one will have to look at the object of the section to appreciate its true import.
- 6 The AAR has given four reasons for opening that relief u/s. 10(5B) will be available.
6.1 The provision for granting relief from grossing up has been in existence since 1922 in some of the other. CBDT had in 1964 explained the provision of 10(6)(vii). The tax concessions to foreigners have been introduced " in the context of the need for accelerating the industrial development of India for which it is, inter alia, necessary to encourage that inflow of foreign investments in fields in which technology is of high order and to acquire the scientific, technological and managerial knowledge and skill developed in foreign countries". If we keep this object in mind, then one should give a wider meaning to the section so that the object of the section is achieved.
6.2 Provision to section 10(5B) enable the Central government
To waive the condition relating to non-residence in India, in case the individual is employed for designing, erection or commissioning of machinery or plant------
Thus it appears that relief is available even while the plant is being erected. Erection of plant can take place normally before business commences.
6.3 Relief is available not just to persons employed in a business in India, but also to persons employed In Central Government, local authorities, etc. There is no condition that the business should be carried on.
- 7 Thus the above arguments clearly support a view that relief should be available to persons to employed in India, even if the business has not commenced. The term business should be given a broader meaning.
- 8 The other issue is whether a foreign employee working in India, is entitled to exemption u/s. 10(5B).
This issue has been discussed in the ruling of Arthur E. Newell vs. CIT - 233 ITR 776. An employee of Kodak U.S.A. had come to India, to set up a plant for the subsidiary company- Kodak India Ltd. The employee was a paid remuneration by Kodak U.S.A.
- 9 The AAR opined that one of the condition for getting relief u/s.10(5B) was that the person should be employed in a business in India. The section does not place any restriction regarding the status of the employer. It is not necessary that the business should be carried on by the employer in India. As long as the employee is rendering services in a business in India, relief will be available.
In fact it may be anomalous to hold that the relief will not be available if it is foreign employer who pays the tax ( a situation more beneficial to India ). To make a distinction would be meaningless.
The authority has also discussed whether relief u/s. 10(6)(vi) will limit the benefits u/s.10(5B). Section 10(6)(vi) is similar to articles under Double Tax Avoidance Agreements for Dependent Personal Services. The section provides that remuneration of employees of foreign enterprises will not be taxable in India at all if:
___ the foreign enterprise is not engaged in any trade or business in India;
___ the state in India does not exceeds in the aggregate, a period of ninety days; and
___ such remuneration is not liable to be deducted from the income of the employer chargeable under the act.
The AAR has held that both the relieves are independent. If there is any conflict between the provisions, the assessee can choose the relief beneficial to him.
Thus the assessee will get relief under section 10(5B) and 10(6)(vi).
- 10 Thus primarily relief under section 10(5B) has been discussed by the rulings as far as expatriate taxation is concerned. The provision should be widely interpreted.
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