ITAT exempts Rs 17.25 lakh per-diem under India-UK DTAA Article 16

For tax and treaty practitioners, this ruling is a textbook application of Article 16 of the India-UK DTAA—confirming that employment income, inclusive of per-diem, is taxable solely in the country where the services are performed and the employee is resident. The tribunal’s meticulous distinction between source of payment and locus of employment will shape litigation strategy in similar cases involving DTAAs with other nations.

In a significant ruling for cross-border employment, the Income Tax Appellate Tribunal (ITAT) Delhi has held that per-diem allowances paid by an Indian employer to a non-resident employee working in the UK are not taxable in India, falling under the protective umbrella of Article 16 of the India-UK Double Taxation Avoidance Agreement (DTAA). The case involved an employee based in Bengaluru who was assigned to the UK branch of an MNC from April 1, 2016, to March 31, 2017. During this period, he stayed in India for less than 60 days, qualifying as a non-resident under Indian tax law for assessment year 2017-18, and he held a valid UK tax residency certificate issued by Her Majesty’s Revenue and Customs. The Indian entity paid him approximately Rs 16.17 lakh as per-diem to cover living expenses, which the Income Tax Department sought to tax in India, raising the total dispute to Rs 17.25 lakh including other adjustments. The department invoked Section 5(2) of the Income Tax Act, arguing that since the payment emanated from an Indian employer, it constituted income accruing or arising in India and was thus taxable.

The tribunal’s decision reinforces the primacy of treaty provisions over domestic law when a DTAA exists and the taxpayer is a genuine non-resident. Article 16 of the India-UK treaty stipulates that 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 state. In this case, the employee was a resident of the UK under the treaty tie-breaker rules, and his employment was performed entirely in the UK. Therefore, the UK had exclusive taxing rights on his employment income, including the per-diem component. The ITAT held that per-diem, being an amount paid for daily subsistence while working abroad, is an integral part of employment income and not a separate source. The tribunal also noted that the employee had already declared and paid tax on this income in the UK, eliminating the risk of double non-taxation.

This ruling carries profound implications for globally mobile employees and multinational corporations. It provides judicial clarity on the treatment of assignment-related allowances, which often become a contentious area between taxpayers and revenue authorities. For Indian companies sending employees on cross-border assignments, the decision underscores the importance of structuring secondments to establish non-resident status and obtain a valid tax residency certificate from the host country. Payroll and tax withholding practices will need to align with this interpretation, as failure to do so could expose employers to withholding tax disputes and employees to cash-flow burdens from tax demands. The ruling also aligns with India’s commitment to treaty obligations, reducing uncertainty for foreign investors and expatriates.