2007 (7) TMI 437 - AT - Income Tax

Summary

Issues Involved:
1. Denial of exemption under Article 15 of the DTAA between India and Russian Federation.
2. Non-allowance of exemption under Section 10(6)(vi) of the Income-tax Act, 1961.
3. Grossing up of income of salary by adding the amount of tax payable by the employer in India.
4. Alleged procedural unfairness and lack of opportunity for the appellant to be heard.

Detailed Analysis:

1. Denial of Exemption under Article 15 of the DTAA:
The primary issue revolves around whether the remuneration earned by the assessees, who are technicians employed by a Russian company, during their stay in India, is exempt from tax under Article 15 of the DTAA between India and the Russian Federation. The conditions under Article 15.2(c) require that the remuneration should not be borne by a permanent establishment (PE) or fixed base in India. The Assessing Officer and CIT(A) concluded that since the employer, Zarubezhneft, had a PE in India and was assessed under section 44BB of the Income-tax Act, the remuneration was borne by the PE. The appellant argued that the remuneration was not borne by the PE and cited the case of Sedco Forex International Inc. v. CIT [2005] 279 ITR 11 (Uttaranchal) to support their claim. The Tribunal found that the interpretation of Article 15.2(c) in the DTAA with Russia differs from that in the DTAA with France, as interpreted in the Sedco case. Therefore, the Tribunal directed the CIT(A) to re-examine whether the remuneration was indeed borne by the PE, giving the appellant an opportunity to prove their claim.

2. Non-Allowance of Exemption under Section 10(6)(vi) of the Income-tax Act, 1961:
The appellant contended that the remuneration received during their stay in India, which did not exceed 90 days, should be exempt under Section 10(6)(vi) of the Income-tax Act. However, the CIT(A) did not allow this exemption. Since the main issue regarding Article 15 of the DTAA was restored to the CIT(A) for re-determination, the Tribunal did not adjudicate on this issue separately. It noted that this issue would be relevant only if the main issue was decided against the assessee.

3. Grossing Up of Income of Salary:
The appellant challenged the CIT(A)'s decision to gross up the salary income by adding the amount of tax payable by the employer in India. The CIT(A) presumed that as per international norms, expatriates are protected from tax liability by their employer. The appellant argued that they were personally liable to pay tax on the remuneration received. The Tribunal did not decide on this issue separately, as it was contingent on the resolution of the main issue regarding the DTAA exemption.

4. Procedural Unfairness and Lack of Opportunity:
The appellant claimed that the CIT(A) dismissed their contention without giving them an opportunity to be heard, thus violating the principles of natural justice. The Tribunal acknowledged this procedural lapse and directed the CIT(A) to provide the appellant a reasonable opportunity to present their case and prove that the remuneration was not borne by the PE in India.

Conclusion:
The Tribunal restored the main issue regarding the DTAA exemption to the CIT(A) for re-determination, instructing the CIT(A) to allow the appellant to prove that the remuneration was not borne by the PE in India. The Tribunal did not adjudicate on the other issues, noting that they would be relevant only if the main issue was decided against the appellant. The appeals were considered allowed for statistical purposes in the manner directed.