Foreign Assignment Allowance Received For The Services Rendered Outside India Can’t Be Taxed In India: ITAT

The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that foreign assignment allowance received by the assessee for services rendered outside India could not be taxed in India.

The bench of Rama Kanta Panda (Vice President) and K. Narasimha Chary (Judicial Member) has observed that the income derived by a non-resident for performing services outside India and the accrual thereof happen outside India; such income cannot be taxed in India under Section 5(2) of the Income Tax Act.

The appellants/assessees are the employees of IBM India Private Limited, which is an Indian company. The company sent the assessees on long-term assignments to various countries. During that year, the assessees received a salary, which includes the component of the foreign allowance received outside India. The employee transferred the foreign assignment allowance from the bank accounts held in India to the nostro accounts to top it up to the Travel Currency Card (TCC), which the assessee can use only abroad but not in India, and it is a foreign currency-denominated account.

All the assessees have offered a portion of the salary that was received by them in India but claimed the foreign assignment allowances received outside India as ‘exempt income’.

While processing the returns of income filed by all the assessees, the AO took the view that though the assessees qualified to be non-residents during the financial year 2017-18 and were physically working outside India, they were only loaned to other organisations to work in other countries. The assessees continued to be on the payrolls of IBM India Private Limited only. The Indian company transferred the sums representing the foreign allowances through the bank, which were disbursed outside India.

According to the Assessing Officer, the very fact that the employer deducted the TDS in India on the entire amounts paid to the assessee itself shows that, as per the employer, it was an Indian source of income earned by the assessees in India. Therefore, the status of employment is in India only, because the contract of employment was in India. The Assessing Officer concluded that the status of employment is in India, and accordingly, the salary income accrued to the assessee in India and, therefore, is liable to be taxed in India.

The assessees preferred appeals before the CIT (A). The learned CIT (A) concurred with the observations of the Assessing Officer and held that the place of accrual of salary income is in India and the other country is a host country as per the terms of the assignment contract. The TDS made by the employer is the primary evidence to show that the place of employment is in India and the entire salary is accrued to the assessee in India.

The tribunal held that the foreign assignment allowance that was topped up to the TCC of the assessee, though it was transferred by the employer from their bank account in India to the nostro accounts, is not taxable in India.

Case Title: Tadimarri Prasanth Reddy Versus ITO

Case No.: 366/Hyd/2022

Date: 28/06/2023

Counsel For Appellant: Nageswar Rao

Counsel For Respondent: KPRR Murthy

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