2007 (5) TMI 261 - AT - Income Tax

Summary

Issues Involved:
1. Assessee in default under Section 201 of the IT Act, 1961.
2. Applicability of Article 14(2) of the Double Tax Avoidance Agreement (DTAA) with France.
3. Misinterpretation of Article 14(2) provisions.
4. Application of Section 44BB in interpreting Article 14(2) of DTAA.
5. Non-claiming of salary deduction in accounts.
6. Inclusion of lodging and boarding as perquisites.
7. Inclusion of off-period salary in taxable income.
8. Charging of interest under Section 201(1A).

Detailed Analysis:

Assessee in Default Under Section 201:
The CIT(A) upheld the AO's order that the assessee is an "assessee in default" under Section 201 for non-deduction of taxes on employees' remuneration amounting to Rs. 47,60,458. The AO observed that though the salary was not debited in the P&L account, it was attributable to the Permanent Establishment (PE) in India, thus making the assessee liable for TDS.

Applicability of Article 14(2) of DTAA with France:
The assessee argued that the remuneration of expatriates was exempt under Article 14(2) of the DTAA with France, as the expatriates were in India for less than 183 days, and the salary was paid by a non-resident employer. The CIT(A) and AO disagreed, stating that the salary was attributable to the PE in India and thus taxable.

Misinterpretation of Article 14(2) Provisions:
The CIT(A) was accused of misinterpreting Article 14(2) by considering irrelevant and subjective factors. The assessee cited the Allahabad High Court's decision in their favor, which confirmed the applicability of Article 14(2) for exemption. The Tribunal noted that the assessee did not claim the remuneration in its P&L account, thus fulfilling the conditions of Article 14(2)(c).

Application of Section 44BB in Interpreting Article 14(2) of DTAA:
The CIT(A) applied Section 44BB, which presumes a 10% net profit, to interpret Article 14(2) of the DTAA. The Tribunal disagreed, stating that Section 44BB's deeming fiction cannot extend to interpreting Article 14(2), which requires actual deduction of remuneration.

Non-claiming of Salary Deduction in Accounts:
The assessee did not debit the salary of expatriates in the P&L account, arguing that it was neither paid nor incurred in India. The Tribunal agreed, stating that the salary not being claimed for deduction in the accounts does not make the assessee liable for TDS under Section 201.

Inclusion of Lodging and Boarding as Perquisites:
The CIT(A) upheld the inclusion of lodging and boarding provided by ONGC as perquisites for determining the tax liability of expatriates. The Tribunal did not specifically address this issue in detail, focusing more on the broader applicability of Article 14(2).

Inclusion of Off-Period Salary in Taxable Income:
The CIT(A) included off-period salary in the taxable income, stating that it was in the nature of earned leave and taxable under the Explanation to Section 9(1)(ii). The Tribunal noted that no documentary evidence was provided to show that off-period salary was for services rendered outside India, thus agreeing with the CIT(A).

Charging of Interest Under Section 201(1A):
The CIT(A) upheld the charging of interest under Section 201(1A) on the alleged tax deduction default. The Tribunal, however, ruled that since the assessee fulfilled all conditions for exemption under Article 14(2) of the DTAA, the interest charged was not justified.

Conclusion:
The Tribunal concluded that the assessee company cannot be treated as "assessee in default" under Section 201 for the remuneration of expatriates who fulfilled all the conditions of exemption under Article 14(2) of the DTAA with France. Other grounds raised by the assessee were deemed consequential. The appeal of the assessee was allowed.