1997 (1) TMI 539 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of salary earned by French nationals while out of India.
2. Treatment of social charges contributed by French nationals in France.

Summary:

Issue 1: Taxability of Salary Earned by French Nationals While Out of India
The primary issue was whether the salary earned by French nationals, employees of Spie Capag, while they were out of India should be taxed in India. The Tribunal referenced its earlier decisions and the "Agreement for Avoidance of Double Taxation with France," specifically Article XIV(1), which states that salaries for services performed in one contracting state by a resident of the other contracting state may be taxed only in the state where such services are rendered. The Tribunal concluded that the salary should be taxed in India only for the period the employees worked in India, following the precedent set in identical cases. The Tribunal emphasized that the term "in" the contracting state is crucial, indicating that tax is applicable only where the services are rendered. Consequently, the salary earned for work done outside India should not be taxed in India.

Issue 2: Treatment of Social Charges Contributed by French Nationals in France
The second issue concerned whether the social charges that French nationals are required to contribute in France should be considered an overriding title on their salary income, thus only the net salary should be taxed in India. The Tribunal examined the compulsory nature of these contributions, which cover various social security benefits and are deducted from the salary before it is received by the employees. The Tribunal referenced several judicial precedents, including the Supreme Court's decision in CIT v. Sitaldas Tirathdas, which defined the concept of overriding title as an amount that never reaches the assessee as income. The Tribunal concluded that the social security contributions in France represent a diversion of income by overriding title at the earning stage itself. Therefore, these contributions should be deducted from the gross salary, and only the net salary should be taxed in India. The Tribunal directed the Assessing Officer to assess the salary income accordingly.

Conclusion:
The appeals were allowed, with the Tribunal ruling in favor of the assessees on both issues. The salary earned by French nationals while out of India should not be taxed in India, and the social charges contributed in France should be deducted from the gross salary, with only the net salary being subject to tax in India.