In a significant ruling on cross-border taxation, the Income Tax Appellate Tribunal (ITAT), Delhi, held that salary received by a resident Indian for services rendered abroad is not taxable in India under Article 15 of the Double Taxation Avoidance Agreement (DTAA) between India and Australia. The judgment clarifies the scope of taxability for foreign-earned income and underscores the primacy of DTAA provisions over domestic tax laws in such cases.
Background & Facts
The Dispute
The appellant, Kapil Gupta, a resident Indian, migrated to Australia during the Assessment Year (AY) 2020-21 to take up employment with M/s Modis Consulting Pvt. Ltd., an Australian employer. He rendered services in Australia and received a salary of Rs. 14,16,115, which was taxed in Australia with Rs. 3,40,428 deducted as tax at source. Despite this, the Central Processing Centre (CPC), Bangalore, included the salary in his taxable income in India, leading to a dispute over its taxability under the India-Australia DTAA.
Key Facts
- The appellant filed his return of income for AY 2020-21 on 29.09.2020, declaring Rs. 14,16,115 as salary received from the Australian employer
- Services were rendered entirely in Australia, and the salary was taxed in Australia under their domestic laws
- The appellant relied on Article 15 of the India-Australia DTAA, which stipulates that salary is taxable only in the country where services are rendered
- On 19.02.2022, the appellant filed Form 67 seeking foreign tax credit for the taxes paid in Australia
- The CPC rejected the appellant’s rectification application for exclusion of the salary from Indian taxation
Procedural History
The dispute progressed through the following stages:
- 29.09.2020: Return of income filed declaring foreign salary
- 30.04.2023: Assessment order passed u/s 154 of the Income-tax Act, 1961 by the CPC, including the foreign salary in taxable income
- 23.01.2026: Appeal filed before the ld. Commissioner of Income Tax (Appeals) [ld. JCIT(A)], which adjudicated the matter solely on the grounds of foreign tax credit, condoning the delayed filing of Form 67
- 03.06.2026: Appeal heard by the ITAT, Delhi
- 30.06.2026: ITAT pronounced the final order
Relief Sought
The appellant sought:
- Exclusion of the Australian salary (Rs. 14,16,115) from taxable income in India
- Non-grant of foreign tax credit, as the income was not taxable in India under Article 15 of the DTAA
The Legal Issue
The central question before the ITAT was whether salary received by a resident Indian for services rendered abroad is taxable in India under the Income-tax Act, 1961, or whether it is exempt under Article 15 of the India-Australia DTAA, which provides that such income is taxable only in the country where the services are rendered.
Arguments Presented
For the Appellant
- Contended that Article 15 of the India-Australia DTAA overrides the provisions of the Income-tax Act, 1961 and mandates that salary is taxable only in the country where services are rendered
- Argued that since the services were rendered in Australia and taxed there, the income should not be taxed again in India
- Highlighted that the CPC erred in including the foreign salary in the taxable income without considering the DTAA provisions
For the Revenue
- Relied on the Income-tax Act, 1961, arguing that the appellant, being a resident Indian, was liable to pay tax on his global income
- Contended that the delayed filing of Form 67 for foreign tax credit should not be condoned, as Rule 128(9) mandates timely filing
- Submitted that the ld. JCIT(A) had correctly adjudicated the matter by granting foreign tax credit, albeit on a different ground
The Court's Analysis
The ITAT examined the provisions of Article 15 of the India-Australia DTAA, which states:
"Salaries, wages, and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State."
The Tribunal observed that the appellant’s employment was exercised entirely in Australia, and the salary was received and taxed there. Therefore, under Article 15, the income was not taxable in India. The ITAT emphasized that DTAA provisions prevail over domestic tax laws where there is a conflict, relying on the principle of lex specialis derogat legi generali (specific law overrides general law).
The ITAT further noted that the ld. JCIT(A) had erred in adjudicating the matter solely on the grounds of foreign tax credit without addressing the core issue of taxability under Article 15. The Tribunal held that since the income was not taxable in India, the question of granting foreign tax credit did not arise.
The Verdict
The ITAT allowed the appeal, directing the Assessing Officer to exclude the Australian salary of Rs. 14,16,115 from the appellant’s total income in India. Consequently, the foreign tax credit of Rs. 3,40,428 was also held ineligible, as the income was not taxable in India. The grounds raised by the appellant were fully allowed.
What This Means For Similar Cases
DTAA Provisions Override Domestic Tax Laws
- Practitioners must argue that DTAA provisions take precedence over the Income-tax Act, 1961 where there is a conflict
- Article 15 of the DTAA clearly stipulates that salary for services rendered abroad is taxable only in the country where the services are performed, provided the taxpayer is a resident of that country
Foreign Tax Credit Not Applicable for Non-Taxable Income
- If income is not taxable in India under DTAA, foreign tax credit cannot be claimed, as the credit is linked to the taxability of the income in India
- Taxpayers must ensure that Form 67 is filed only for income that is taxable in India, not for income exempt under DTAA
Procedural Compliance Must Align With Substantive Rights
- The ITAT’s ruling underscores that procedural aspects, such as the filing of Form 67, must align with the substantive rights under DTAA
- Delayed filing of Form 67 may be condoned, but only if the income is taxable in India under the applicable legal framework
