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In Emmerich Jaegar v. CIT (2005)274ITR125 the assessee non-resident claimed benefit under an exception (exemption) provision of Article 14(2) under which profits or remuneration from professional services or from services as an employee derived by an individual who is resident of Austria may be taxed in India only of such services are rendered in India. However, clause (2) of article 14 carves out an exception and lays down four conditions, which are required to be fulfilled before an individual who is otherwise held to be liable to tax under the Act in India is not to be taxed in India. One such condition is that if the profits or remuneration are subject to Austrian tax.


To satisfy such condition the assessing officer demanded from the assessee copy of the assessment order or evidence of payment of taxes in Austria to which the Gujarat High Court took an exception when it pointed out that being liable to tax and being actually taxed are two different things and in the given situation, it is always possible that a person may be liable to pay tax under a statute, but may not be actually taxed by virtue of, may be, some other provision under the same statute. Of course in that case the non-resident has to report such law exempting him from tax in his home state.


Interestingly in 10ITR (Trib) 48 the department opined that tax treaty between India and Malaysia would apply only to income generated in India or Malaysia and will not apply to a foreign income of the Malaysian branch of the assessee investment company where income was derived from investments made in third countries and further claimed to be exempt under the Malaysian tax statute. The foreign investments were looked after by the Malaysian branch of the assessee. In matters of investments and other corporate decisions, the assessee-company had been availing of the service of a Singapore-based consultant company. While filing its returns of income, the assessee adopted a stand that the income from investments made outside India was attributable to its Malaysian branch which was a permanent establishment (PE) in Malaysia, within the meaning of article 5 of the DTAA between India and Malaysia.


The income withheld by the Malaysian branch of the assessee as not taxable in India is its foreign income arising out of the assets held outside India and outside Malaysia. Such foreign income becomes liable for taxation in Malaysia only when it is brought into that country. As the impugned assessment years are concerned, the assessee has not brought such income to Malaysia as such therefore it was not liable to pay tax in that country.


The AO held that if the Malaysian foreign income of the assessee was not taxable under the Malaysian Income-tax Act, it had to be assessed under the Indian Income-tax Act. The Chennai bench then held that it is true that the prime motivating factor in developing the concept of the tax treaty is the genuine grievance of the international assessees that the same amount of income became subject of taxation both in the home state and in the Contracting State. It is to alleviate this burden of double taxation that the instrument of the DTAA has been evolved through a process of law. But that does not mean that an assessee should invariably pay tax at least in one country. There is no such compulsion apparent in the scheme of the DTAA. It is not possible to make out a general proposition that the income of an international assessee must be invariably taxed at least in one of the States; either in the home state or in the Contracting State.


Post amendment in section 6 effective 1.4 2021 this theory will not apply anymore to the case of an individual who, being a citizen of India, having a total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. By this amendment even third world incomes would be subject to tax in India in such case situations.

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