Off-period salary of expatriates taxable

FOREIGN ENTERPRISES

As per the Income-tax Act, the salary income is taxable in India if it is earned in India. The term "earned in India" has been clarified by way of an Explanation in Section 9(1) (ii) as including the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment.

The Central Board of Direct Taxes vide its circular No. 779 dated September 14, 1999 has also clarified: "The Finance Act, 1999, has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for rest period or leave period which is both preceded and succeeded by service in India and forms part of the service contract of employment will also be regarded as income earned in India."

In the above context, an interesting issue was raised before Uttaranchal High Court in CIT vs Sedco Forex International Drilling Co. Ltd. (2003) 264 ITR 320. In this case, a foreign expert entered into a contract for employment with a foreign company which was involved in oil drilling in India.

The employee, a resident of UK, was required to work on a rig in Bombay High as per alternating time schedule of 35/28 days, that is, on period followed by 35/28 days of off period in the UK. The assessee claimed that the salary of the off period was not taxable in India.

It was contended on behalf of the assessee that during the off period, the assessee had to stand by. He could not move out of the UK. He could be summoned by the company at any time. The salary received by him for off period was, therefore, not taxable under Section 9 (1)(ii) as it was payable for services rendered outside India.

The high court observed that the salary income which was earned in India means payment for the services in India even if the contract was executed outside India and the amount was payable outside India.

It further observed that "in order to ascertain the intention of the contracting parties one has to study the terms of the contract ... In this case, the contract provides for on period and off periods. It covers both the periods.Therefore, both the periods form an integral part of the contract. It is not possible to give separate tax treatment to on period and off period salaries."

However, in view of the seriousness of the matter, the Supreme Court has admitted an SLP against the decision of Uttaranchal High Court (See 275 ITR 1 Stat.). Therefore, the final correct legal position will be known only after the apex court decides the issue.

In the meantime, the foreign employees who work in India on part-period basis will be well advised to suitably draft their employment contracts so as to remain outside the mischief of Section 9 (1)(ii) of Income-tax Act.

agar@nda.vsnl.net.in