A large number of expatriate employees are deputed to work in India from the side of foreign companies. Their salary may be paid by the foreign companies, or, by Indian counterparts or, by both.

Further the salaries and other facilities may be paid/provided partly in the foreign country and partly in India. The taxation of salary income creates a complex problem, since the entire salary income may not accrue in the foreign country, or, in India.

To overcome this difficulty, the tax treaties usually contain a specific provision declaring that such income should normally be taxed in the employees' country of residence, but the same may become taxable in India, if the employee stays in India for more than 183 days in a fiscal year.

However, in order to claim exemption from tax in India,  the following conditions should be satisfied:

• The total duration of employee's stay (in aggregate) in India does not exceed 183 days in a tax year (April 1 to March 31);
• The remuneration for services rendered by the employee is paid by, or on behalf of, an employer who is not a resident of India; and
• The remuneration is not borne by a permanent establishment or fixed base, which the employer has in India.

Whereas there is no difficulty in interpreting conditions specified in para (i) and (ii) above, the interpretation of (iii) is not so easy because the words  "borne by a permanent establishment" are not explained in any of the tax treaty.

In the above context, a recent case of DHV Consultants (2005) 147 Taxman 521 (AAR) -- may be referred to. A Dutch company had set up several projects offices in India for providing consultancy services in India.  For this purpose, the Dutch company sent its employees from Netherlands to India. During their stay in India the employees continued to receive salary in Netherlands.

In the above background, the Dutch company raised a question before the Authority for Advance Rulings as to whether the salary paid to an individual either in India or outside India in respect of services rendered by him in India will be chargeable to tax in India or not.

As per the tax treaty with the Netherlands, the remuneration paid for employment exercised in India would be exempt from tax in India if all the three conditions are satisfied.

The Authority observed that the Dutch company is charging royalty and fees for technical services on which, it is liable to pay tax at concessional rate of 20 per cent under section 115A of the Act inscribed in section 115A is clearly due to the fact that tax on such income is computed on gross basis whereas for other income (other than royalty and fees for technical services) of a foreign company, tax is computed on net basis.

Providing for lower rate of tax under section 115A as compared with the rates prescribed in the Finance Act is clearly for allowing margin for the deduction of expenses, which include remuneration paid to employees working in India.

The implication of the aforesaid case is that when a foreign company pays tax at a concessional rate provided in section 115A as compared with rates prescribed in the respective Finance Act, it is a clear case of allowance of margin for expenses including remuneration paid to employees working in India.