Facts of the Case

  • The assessee, Mr. Sakakibara Yutaka, an individual, was a permanent resident of Japan and an employee of M/s. Suzuki Motors Corporation (SMC), Japan.
  • Pursuant to a technical collaboration agreement between SMC and M/s. Maruti Udyog Ltd. (MUL), India, the assessee was deputed to India to provide guidance and technical assistance.
  • During his period of deputation in India, the assessee received a salary from SMC Japan amounting to ₹5,86,847.
  • Additionally, MUL provided him with accommodation at Samrat Hotel, bearing rent expenses to the tune of ₹1,80,660.
  • The Assessing Officer (AO) proposed to tax the rent paid by MUL as a perquisite in the hands of the assessee. The AO also sought to tax the daily allowance and the salary received by the assessee in Japan, invoking Article 15 of the India-Japan DTAA.
  • The CIT(A) partly accepted the appeal, leading both parties to approach the Income Tax Appellate Tribunal (ITAT). The ITAT ruled in favor of the assessee, holding that his residential status was "Not Ordinarily Resident" (NOR), and thus his foreign-sourced salary could not be taxed in India. The Revenue appealed this order to the Delhi High Court.

Issues Involved

  1. Whether the Income Tax Appellate Tribunal (ITAT) was correct in holding that the rent-free accommodation provided by MUL to an employee of SMC Japan does not constitute a taxable perquisite under Section $17(2)$ of the Income Tax Act, 1961, and whether the assessee is eligible for exemption under Section $10(14)$?
  2. Whether the ITAT was legally justified in holding that the salary earned by the assessee from his foreign employer (SMC Japan) was not taxable in India for the entire year under consideration, given his residential status as "Not Ordinarily Resident"?

Petitioner’s (Revenue's) Arguments

  • The Revenue argued that by virtue of Article 15 of the Double Taxation Avoidance Agreement (DTAA) between India and Japan, the assessee was liable to pay tax in India on the entire salary received by him for his period of employment and stay in India.
  • It was contended that the provisions of the treaty (DTAA) override the domestic taxing statute, thereby giving the Indian tax authorities the primacy to tax the foreign-sourced income of the deputed individual.
  • The Revenue also supported the Assessing Officer's addition regarding the daily allowance, under the assumption that the amount paid by MUL to SMC was ultimately meant for and received by the individual employee.

Respondent’s (Assessee's) Arguments

  • The assessee contended that he was a permanent resident of Japan and his undisputed residential status in India under Section $6(6)$ of the Act was "Not Ordinarily Resident" (NOR). Therefore, under Section $5(1)(c)$, income earned outside India could not be taxed in India.
  • The respondent argued that under Section $90(2)$ of the Income Tax Act, 1961, the domestic law applies over the DTAA if the provisions of the domestic Act are more beneficial to the assessee. Since the domestic provisions exempted his foreign income, the DTAA could not be used to create a disadvantageous tax liability.
  • Regarding the rent-free accommodation, the respondent stated that MUL was contractually obligated to provide accommodation under the collaboration agreement, and since there was no employer-employee relationship between him and MUL, it could not be taxed as a perquisite under Section $17(2)$.
  • Regarding the daily allowance, the respondent provided a certificate from SMC confirming that the allowance paid by MUL to SMC was never disbursed to the individual employee.

Court Order / Findings

  • On Residential Status and DTAA Primacy: The High Court affirmed the ITAT's view that the assessee's undisputed status was "Not Ordinarily Resident" in India (having worked for 273 days in the previous year and not being a resident in 9 out of 10 preceding years).
  • Application of Section 90(2): The Court upheld that under Section $90(2)$, domestic law prevails if it is more beneficial than the DTAA. Since the Income Tax Act did not bring his foreign-earned salary into the tax net due to his NOR status, the treaty provisions could not be applied to tax him.
  • On Daily Allowance and Perquisites: The Court found no evidence that the daily allowance paid by MUL to SMC was ever received by the assessee. The additions made by the AO were based merely on conjectures and surmises.
  • Conclusion: The High Court dismissed the Revenue's appeal, holding the ITAT's order to be unexceptionable and answering the substantial questions of law in favor of the assessee.

 Important Clarification 

  • The Delhi High Court explicitly noted that the legal position adopted by the Tribunal is well-settled and perfectly in line with the landmark judicial precedents on this subject.
  • The Court placed direct reliance on the decision of the Allahabad High Court in Morgenstern Werner v. CIT and Anr. (1998) 233 ITR 751, which was subsequently approved and affirmed by the Supreme Court of India in CIT v. Morgenstern Werner (2003) 259 ITR 486 (SC). The principle establishes that the foreign salary of a "Not Ordinarily Resident" individual cannot be dragged into the Indian tax net if domestic law offers a more beneficial treatment than the DTAA.

Section Involved

  • Income Tax Act, 1961: Section $5(1)(c)$ (Scope of total income for Not Ordinarily Resident)
  • Income Tax Act, 1961: Section $6(6)$ (Residential status of "Not Ordinarily Resident")
  • Income Tax Act, 1961: Section $9(1)(i)$ (Income accruing or arising in India)
  • Income Tax Act, 1961: Section $10(14)$ (Exemptions on special allowances/perquisites)
  • Income Tax Act, 1961: Section $17(2)$ (Definition and valuation of perquisites)
  • Income Tax Act, 1961: Section $90(2)$ (Primacy of Act over DTAA when provisions of the Act are more beneficial)
  • Double Taxation Avoidance Agreement (DTAA) between India and Japan: Article 15 (Taxation of salary/employment income)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2012:DHC:4761-DB/RVE03082012ITA1112006.pdf

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