IN INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA No.310/Hyd/10 (Assessment year 2002-03 Shri N.V.Srinivas, Hyderabad V/s. Income Tax Officer Ward 12(2), Hyderabad ( PAN - ABUPN 4791 N ) (Appellant) (Respondent) Appellant by : Shri S.Ravi Respondent by : Smt. K.Haritha DR Date of Hearing 03.03.2014 Date of Pronouncement 17.4.2014 ORDER Per Smt. Asha Vijayaraghavan, Judicial Member: This appeal by assessee is directed against order of Commissioner of Income-tax(Appeals) II, Hyderabad dated 14.12.2009 for assessment year 2002-03. 2. Brief facts of case are that assessee, individual on pay rolls of M/s. Motorola India Electronics Ltd., Bangalore as Software Engineer, filed his return of income for assessment year 2002-03, declaring salary of Rs.99,245 and claiming refund of Rs.1,90,997. assessee claimed his status as that of non-resident on ground that he was in USA on job assignment for 306 days and hence his salary income to tune of Rs.6,73,431 was exempt from tax under Article 16(1) of Double Taxation Avoidance Agreement(DTAA) between India and USA. In footnote to computation of income statement, assessee stated that he was tax resident of USA and exercised his employment in USA during financial year 2001-02, except for 59 days and that Article 16(1) of DTAA provides that remuneration derived by resident of contracting state in respect of employment shall be taxable only in that State, unless employment is 2 ITA No.310/Hyd/2010 Shri N.V.Srinivas, Hyderabad exercised in other contracting State. He has also filed certificate dated 6.6.2003 issued by M/s. Motorola India Electronics Ltd., Bangalore showing monthwise break-up of salary paid in India. During course of assessment proceedings, assessee has also filed W-2(Withholding Tax statement) of USA for calendar years 2001 and 2002. 3. Assessing Officer on examination of matter found that salary paid in India to assessee was Rs.5,51,378 and not Rs.6,73,431 as claimed by assessee. Further he also found that Certificate issued by Motorola Inc. (USA ) dated 8.4.2004 merely certified that amount paid in India was considered for taxation in USA and nowhere mentioned that said amount was brought to tax by US tax authorities and that said amount was not taxed by both US and Indian Authorities, i.e. not taxed twice. He also found that total salary shown in Form 16 is not inclusive of amounts taxed in US. He further found that salary paid in India on which TDS was effected was Rs.8,03,276 and salary offered by assessee in USA for taxation purpose is Rs.14,55,733 for calendar year 2001 and Rs.5,73,286 for calendar year 2002. Assessing Officer further found that there was no double taxation and that assessee was not eligible for any deduction of income from its salary for purpose of taxation in India. Assessing Officer accordingly rejected assessee s claim for deduction of Rs.6,73,431 and brought to tax income said to have been voluntarily offered by assessee to tax in USA during financial year 2001-02 of Rs.20,29,019 (Rs.1455733 + Rs.573286). In computation of tax liability, Assessing Officer allowed double taxation relief in respect of tax paid in USA of Rs.4,46,814 as per provisions of Article 25 of DTAA, and accordingly completed assessment vide order dated 21.3.2005 passed under S.143(3)(i) of Act. 4. On appeal CIT(A) confirmed assessment made as above, rejecting contentions of assessee, with regard to his residential status; 3 ITA No.310/Hyd/2010 Shri N.V.Srinivas, Hyderabad for relief under Article 16(1) of DTAA; and relief in tax in terms of Article 25 of DTAA, and accordingly dismissed appeal of assessee. 5. Aggrieved, assessee is in second appeal before us. 6. Though as many as seven grounds of appeal have been raised, there are only five effective grounds which read as follows- 1 2. That on facts and in circumstances of case, learned CIT(A) erred in confirming action of Assessing Officer in denying exemption from Indian income tax, salary income of appellant amounting to Rs.6,73,431, under Article 16(1) of Double Taxation Avoidance Agreement between India and USA read with section 90(2) of Income Tax Act, 1961. 3. That Learned CIT(A) erred in upholding action of Assessing Officer in levying to tax in India salary income of Rs.20,29,019 which accrued and arose outside India and was also received by Appellant outside India. 4. That on facts and in circumstances of case, Ld. CIT(A) erred in affirming Assessing Officer s action in holding that Appellant exercised employment in India. 5. That on facts and in circumstances of case, Ld. CIT(A) erred in upholding order of Assessing Officer in treating Appellant as tax resident of India. 6. That learned CIT(A) erred in upholding order of Assessing Officer in consequently levying interest under section 234B & 234C of Act. 7. . 7. learned counsel for assessee, reiterating contentions urged before Revenue authorities, submitted that during assessment year 2002-03, assessee was non-resident, as total stay during previous year 2001-02 was only 59 days, whereas total stay in US during that period was 306 days. While in employment in US during calendar year 2001, assessee has filed US Income-tax return as he was US tax resident. In said return, sum of US $ 6406 (equivalent to Indian 4 ITA No.310/Hyd/2010 Shri N.V.Srinivas, Hyderabad Rupees) received in India was offered to tax. Assessee has claimed exemption in terms of Article 16(1), being tax resident of USA was taxable in USA in respect of income earned in US. Since out of salary income of Rs.8,03,276, amount of Rs.6,73,431 relates to salary for working days in US, same was claimed was taxable at US by assessee. salary was claimed by assessee to have been sourced in USA since USA has jurisdiction to tax salary income. 8. learned counsel also submitted that assessee has also offered voluntarily sum of Rs.20,29,019 being per diem received in USA during financial year 2001-02. assessee claimed benefit of Article 16(1) of DTAA to said sum of Rs.20,29,019. assessee objected to Assessing Officer restricting relief for tax paid in USA to Rs.4,46,814 and submitted that credit for TDS has to be granted in full. assessee objected to decision of Assessing Officer in holding that assessee is not entitled to exemption in terms of DTAA between in India and USA, but in allowing claim for credit for tax paid in USA in terms of Article 25 of DTAA between India and USA for amount of Rs.4,46,814. 9. Learned Departmental Representative, on contrary has relied on orders of Revenue authorities. 10. We heard both parties and perused material available on record. Assessee s contention in Ground 2, relates to salary income received in India of Rs.8,03,276, out of which amount of Rs.6,73,431 relates to income earned while working in USA and which has been offered to tax in USA. short point of assessee is that interpretation of Article 16(1) would lead to conclusion that taxation rights for salary earned for work done in USA vests only with USA and that amount cannot be considered for Indian tax purposes in other words this is exemption 5 ITA No.310/Hyd/2010 Shri N.V.Srinivas, Hyderabad regime (as opposed to `credit regime) under DTAA. For this, assessee placed reliance on decision of Supreme Court in CIT vs. P.V.A.L.Kulandagan Chettiar (2004 267 ITR 654 SC). 11. Article 16(1) of Indo-US Double Taxation Avoidance Agreement reads as follows: Article 16 - Dependent personal services - 1. Subject to provisions of Articles 17 (Directors Fees), 18 (Income Earned by Entertainers and Athletes), 19 (Remuneration and Pensions in respect of Government Service), 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (Payments received by Students and Apprentices) and 22 (Payments received by Professors, Teachers and Research Scholars), salaries, wages and other similar remuneration derived by resident of Contracting State in respect of employment shall be taxable only in that State unless employment is exercised in other Contracting State. If employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State (emphasis supplied) 12. Here, as per prima facie facts on record, assessee is working in USA for 306 days and it is clear at outset that exercise of employment was in USA and hence remuneration derived therefrom may be taxed in USA as per Article 16.1. In P.V.A.L.Kulandagan Chettiar case (supra), expression may be taxed was held to mean that once tax was paid in foreign country, India loses its right to tax i.e., `exemption regime of DTAA was upheld. assessee following this has pleaded that salary income offered to tax in USA should be exempted from computation of taxable income in India. 13. We note that Section 90(3) introduced w.e.f AY 2004-05 was specifically introduced to address such conflicts and reads as follows: (3) Any term used but not defined in this Act or in agreement referred to in sub-section (1) shall, unless context otherwise requires, and is not inconsistent with provisions of this Act or agreement, 6 ITA No.310/Hyd/2010 Shri N.V.Srinivas, Hyderabad have same meaning as assigned to it in notification issued by Central Government in Official Gazette in this behalf. 14. Subsequently there was Notification No.91/2008 dated 28th August 2008 which has clarified that when phrase may be taxed is used in DTAA, then India can include such income taxed in other country in total taxable income in India. Relevant portion of said Notification reads as follows: In exercise of powers conferred by sub-section (3) of section 90 of Income-tax Act, 1961 (43 of 1961), Central Government hereby notifies that where agreement entered into by Central Government with Government of any country outside India for granting relief of tax or as case may be, avoidance of double taxation, provides that any income of resident of India "may be taxed" in other country, such income shall be included in his total income chargeable to tax in India in accordance with provisions of Income-tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with method for elimination or avoidance of double taxation provided in such agreement. 15. With insertion of S.90(3) and subsequent Notification referred to above, it is clear that exemption regime sought by assessee cannot come into play. However, fact is that Notification cannot apply for impugned assessment year, viz. 2002-03, as even if Notification were said to be clarificatory it could be retrospectively applicable only from assessment year 2004-05 onwards when Section 90(3) was introduced. We see similar view taken by Mumbai Bench of Tribunal in case of Essar Oil Limited vs. ACIT (ITA No. 2428/Mum./2007, ITA No.2442/Mum./2007) wherein it was held that Notification No.91 of 2008 was clarificatory and applicable from assessment year 2004-05 onwards only. 16. In view of above discussion, considering totality of facts and circumstances of instant case, and following decision of Apex Court in case of P.V.A.L.Kulandagan Chettiar (supra), interpretation of phrase may be in Article 16(1) is applied in 7 ITA No.310/Hyd/2010 Shri N.V.Srinivas, Hyderabad impugned assessment year so as to exempt from Indian taxable income of assessee, his salary income which has been offered to tax in USA. We therefore allow this ground of assessee on this aspect. 17. With respect to Ground No.3, it is case of assessee that per diem being received outside India means that these are payments to non-resident received outside India. 18. We heard both sides on this issue. Relevant portion of Section 5(2) of Act reads as follows: (2) Subject to provisions of this Act, total income of any previous year of person who is 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. From plain reading of Section 5(2), it is clear that per diem paid in USA is not income received or deemed to be received in India; neither does it accrues or arises in India as it is towards working in USA. As held by Bombay High Court in case of CIT V/s. Avtar Singh Wadhwan (247 ITR 260), situs of accrual is situs of services rendered which in instant case is clearly in USA and amounts are also received in USA. Hence, it cannot form part of income taxable in India as per Section 5. Mutually exclusive to this argument, we can apply same rationale of earlier ground (i.e, interpretation of Article 16(1)) can be applied too applying `exemption regime for impugned year and hence even under this view per diem cannot be brought to tax in India. Hence this Ground of appeal of assessee is also allowed. 19. Grounds No.4 and 5 of assessee, noted above, are merely consequential and supportive of Grounds 2 and 3 and do not call for separate 8 ITA No.310/Hyd/2010 Shri N.V.Srinivas, Hyderabad adjudication. Similarly, Ground No.6 relating to charging of interest under S.234B and 234C, is also merely consequential and needs no separate adjudication, and Assessing Officer is directed to recompute interest chargeable, if any, while giving effect to this order. We order accordingly. 20. In result, assessee s appeal is allowed. Order pronounced in court on 17.4.2014 Sd/- Sd/- (B.Ramakotaiah) (Asha Vijayaraghavan) Accountant Member Judicial Member Dt/- 17th April, 2014 Copy forwarded to: 1. Shri N.V.Srinivas, Plot No.63, Shilpa Brindavan, Shamshiguda, Near Yellamma Banda, Kukatpally, Hyderabad 72. 2. Income Tax Officer Ward 16(2), Hyderabad 3. Commissioner of Income-tax(Appeals) II, Hyderabad 4. Commissioner of Income-tax I, Hyderabad 5. Departmental Representative, ITAT, Hyderabad. B.V.S N.V.Srinivas v. ITO