Indians working in UK: Per diem paid by Indian company may be tax-free in India if these conditions are met

Indians working in the UK may receive per diem payments from their Indian employers. However, these payments are generally taxable in the UK and not in India under specific conditions. The taxability in India depends on the employee's residential status and where the employment is exercised. A recent ITAT Delhi case illustrates the application of the India-UK DTAA in determining taxability.

If you are an Indian employee sent to work in the United Kingdom and receiving per diem payments (for living expenses and incidental costs) from your Indian employer, those payments are usually taxable in the UK under the India-UK DTAA unless specific conditions apply. The taxability of these per diem payments in the UK can vary based on several factors. However, from India perspective, they are usually not taxable if certain conditions are met under the India-UK DTAA.

For an Indian employee assigned to the UK branch of the same employer, receiving per-diem payments from the Indian branch during the period of UK assignment, the taxability in India mainly hinges on the employee's residential status, the place where employment is exercised, the nature of the per-diem, and whether double taxation avoidance treaty (DTAA) benefits under the India-UK DTAA apply.

Recently there was a case in ITAT Delhi, involving a Bangalore employee from an MNC who was sent to work at the company's UK branch and received a total of Rs 16 lakh in per diem payments from the Indian MNC. However, this employee did not separately show the per diem payments in his UK tax return, although it was included in his Indian Form 16. So the Indian Income Tax Department sought to tax it since the Indian employer paid this money.

In this case, it is mentioned that the Indian employee was working in the UK branch of the same company back then, leading us to conclude that he was a tax resident of the UK during that particular time period.

Thus CA Suresh Surnana says that when an employee qualifies as a tax resident of the UK under the India-UK DTAA, holds a valid UK Tax Residency Certificate, is non-resident in India, and the employment is exercised in the UK, the remuneration or per-diem relatable to such UK employment should be taxable in the UK and not in India, even if the payment is made by the Indian branch or routed through Indian payroll.

From a double taxation treaty perspective, the Article 16 of the India-UK DTAA dependent personal services broadly provides that salaries, wages and other similar remuneration derived by a resident of one contracting state in respect of employment are taxable only in that state unless the employment is exercised in the other contracting state.

Surana says: "If the employment is exercised in the other state, the remuneration derived from such employment may be taxed in that other state, subject to the specific exception contained in Article 16(2)."

Surana explains that this means that according to Article 16(2), the remuneration derived by a resident of a contracting state in respect of an employment exercised in the other contracting state shall not be taxed in that other state if:

* He is present in that other state for a period or periods not exceeding in the aggregate 183 days during the relevant fiscal year;

* The remuneration is paid by, or on behalf of, an employer who is not a resident of that other state; and

* The remuneration is not deductible in computing the profits of an enterprise chargeable to tax in that other state.Surana thus says that if the employee is a tax resident of the UK, then there is no disclosure required to be made in the Indian tax return for that year.

Therefore, Surana points out that the per-diem payments received by an Indian employee during his/her UK work assignment should not be taxed in India even if the money is paid from an Indian branch of bank, if the employee is a UK treaty resident/non-resident in India, the employment is exercised in the UK, and the DTAA benefit under Article 16 is duly supported by documentation and there is no specific reporting requirement in the Indian ITR for that year.

Why was Section 5(2) applied in this case (ITAT Delhi)?In this ITAT Delhi case, Section 5(2) was invoked by the Assessing Officer (AO) because the employee was a non-resident in India during the relevant year and part of the salary/per-diem was reflected as received in India through Indian payroll/Form 16.

According to Surana, the AO therefore applied Section 5(2)(a), which taxes income received or deemed to be received in India in the hands of a non-resident, and held that the amount could not be excluded just because the employment was exercised in the UK.

However, the ITAT Delhi granted relief to the employee by applying the beneficial provisions of the India-UK DTAA.

Surana says that the tax tribunal noted that the employee was assigned to the UK, had stayed in India for less than 60 days, qualified as a non-resident in India and had also furnished a UK Tax Residency Certificate. The per-diem of Rs 16,17,724 was paid by virtue of the UK assignment and related to employment exercised in the UK.

Surana mentions that the tax tribunal held that Article 16(1) of the India-UK DTAA, read with Section 90 of the Income-tax Act, would prevail over the domestic provisions where it is more beneficial to the employee.

Surana says: "Since the employment was exercised in the UK and the assessee was a UK tax resident, the per-diem, if taxable at all, was taxable in the UK and not in India. Accordingly, the addition made by the AO by relying on Section 5(2) alone was held to be unsustainable."

Thus, Surana says that Section 5(2) was relevant at the domestic law stage because the assessee was a non-resident and the income was received in India.

However, the employee won the case since as Surana says, the India-UK DTAA treaty allocated taxing rights to the UK for remuneration linked to UK employment, and Section 90 permitted the assessee to apply the DTAA provisions as being beneficial over the domestic provisions.