Devi Dayal v. Asst. CIT (IT) [2024]

🏢 Devi Dayal vs. ACIT (IT) – ITAT Delhi on Taxability of Salary Paid in India for Services Rendered Abroad under India–Austria DTAA (2024)

📌 Background

A recurring question in international taxation concerns whether salary paid in India to a non-resident employee deputed abroad for work is taxable in India, especially when the services are performed outside Indian territory.

In Devi Dayal v. ACIT (IT) [(2024) 205 ITD 299 / 228 TTJ 727 / 109 ITR 87 (SN)(Delhi)(Trib.)], the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) examined this question in the context of a deputation to Austria, under the India–Austria DTAA.

The Tribunal held that since the assessee, a non-resident, rendered all services outside India, the salary received for such employment cannot be taxed in India, even if paid by an Indian company.

📂 Facts of the Case

• Assessee: Mr. Devi Dayal, an employee of an Indian company.
• Deputation: Deputed to work on a project awarded by the International Atomic Energy Agency (IAEA) in Vienna, Austria.
• Residential Status: Non-resident under Section 6 of the Income-tax Act, 1961, for the relevant assessment years 2016–17 and 2017–18.
• Salary Payment:
  • Salary and compensatory allowances were paid from India, but credited to an account accessible only through a credit card valid in Austria.
  • Entire salary was utilized outside India.
• Assessing Officer’s (AO) Action:
  • Added the entire salary and allowances to taxable income on the ground that the assessee did not furnish a Tax Residency Certificate (TRC).
  • Treated the salary as deemed to accrue or arise in India under Section 9(1)(ii).
• CIT(A)’s View:
  • Upheld the AO’s order, reasoning that payment originated from India.
• Assessee’s Argument:
  • Salary related to employment exercised abroad, and therefore not taxable in India under both the Income-tax Act and the India–Austria DTAA.

❓ Point of Dispute

Whether the salary paid in India to a non-resident for services rendered outside India is taxable in India under Section 9(1)(ii) of the Income-tax Act, or exempt under Article 15 of the India–Austria DTAA.

📑 Submissions by the Assessee

• Non-Resident Employment:
  • The assessee was deputed abroad for work under an international project (IAEA) and physically rendered all services outside India.
  • Thus, salary was earned outside India, even though it was disbursed from India.
• Non-Resident Status:
  • As per Section 6, the assessee did not meet the residency test, confirming non-resident status.
• No Services Rendered in India:
  • Salary accrued only by virtue of services rendered in Vienna, not in India.
  • Therefore, Section 9(1)(ii) deeming provision could not apply.
• No Rest or Leave Period in India:
  • The assessee neither took rest nor leave periods that were preceded and succeeded by services abroad, a critical test recognized in judicial precedents such as Prahlad Vijendra Rao v. ITO (2011).
• DTAA Protection:
  • Under Article 15 (Dependent Personal Services) of the India–Austria DTAA, salary income is taxable only in the country where employment is exercised.
  • Since services were performed in Austria, India had no taxing right.
• Non-Furnishing of TRC Not Fatal:
  • The absence of a TRC does not invalidate DTAA protection if the substance of tax residency and place of service are evident through documentary proof.

📑 Submissions by the Revenue

• The AO contended that:
  • The salary was paid by an Indian company from India.
  • In the absence of a TRC, the assessee could not claim DTAA benefits.
  • Thus, the income was deemed to accrue in India as per Section 9(1)(ii).
• The Revenue argued that the source of salary was in India, making it taxable under domestic law irrespective of the situs of employment.

⚖️ Legal Principles & Tribunal’s Findings

1. Scope of Section 5 – Non-Resident Taxability

The Tribunal emphasized that under Section 5(2), a non-resident is taxable in India only on:

• Income received or deemed to be received in India, or
• Income accruing or deemed to accrue in India.

Since the assessee did not receive or utilize salary in India, and all services were rendered abroad, the income did not accrue in India.

2. Section 9(1)(ii) – Salary for Services Rendered in India

The Tribunal observed:

“Salary income can be deemed to accrue in India only if the services are rendered in India.”

Here, the entire employment was exercised in Vienna, Austria.
Thus, Section 9(1)(ii) was not applicable.

3. Rest/Leave Period Rule

Following judicial precedents, the Tribunal reaffirmed that salary is taxable in India only if there is a rest or leave period in India, linked to services rendered outside India.
Since the assessee had no such period, this condition was not met.

4. DTAA Article 15 – Taxation of Employment Income

Article 15 of the India–Austria DTAA states:

“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.”

Since the employment was exercised in Austria, the income was taxable only in Austria.

5. Non-Furnishing of TRC

The Tribunal clarified that the absence of a Tax Residency Certificate (TRC) does not automatically disqualify treaty protection if facts substantiate non-residency and foreign source of income.
The focus must be on substance over form.

🏁 Held

✅ The assessee was a non-resident during the relevant assessment years.
✅ All services were rendered outside India, in Vienna (Austria).
✅ Salary and allowances were paid abroad and utilized outside India.
✅ There was no rest or leave period linking the income to India.
✅ Salary income did not accrue or arise in India under Sections 5 and 9(1)(ii).
✅ Under Article 15 of the India–Austria DTAA, the income was taxable only in Austria.
✅ Addition by the AO was therefore deleted in full.

✅ Practical Impact for Taxpayers

• Clear Exemption for Deputed Employees: Salary received for foreign assignments by non-residents is not taxable in India if the services are performed outside India.
• DTAA Supremacy: DTAAs override domestic provisions in case of conflict, protecting employees from double taxation.
• No TRC, No Problem (Substance Matters): While TRC helps, its absence does not defeat genuine non-resident status if the facts are clear.
• Consistency with Judicial Trend: Reinforces a growing jurisprudence protecting international assignees and expatriates from unfair taxation in India.

🔑 Key Takeaways

1. Salary Source Rule: Salary accrues where employment is exercised, not where it is paid.
2. Non-Resident Exemption: Non-residents are taxed in India only for services rendered within India.
3. Rest/Leave Rule Clarified: No rest or leave in India = no Indian income link.
4. DTAA Overrides: Article 15 ensures salary taxation only in the country of employment.
5. TRC Not Mandatory Where Facts Are Clear: Documentary evidence of foreign posting and non-residency suffices.

📢 Why This Case Matters

The Devi Dayal (2024) ruling provides critical guidance for employees deputed abroad by Indian companies—especially in international organizations and project-based assignments.

It affirms that salary for services rendered outside India remains outside India’s tax jurisdiction, even if disbursed from India, ensuring alignment with global tax principles and OECD Model Convention standards.

By upholding fairness and substance in cross-border employment taxation, the decision strengthens India’s compliance with DTAA obligations and offers comfort to Indian professionals on foreign assignments.

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