1991 (5) TMI 119 - AT - Income Tax

Applied To Carrying On Business Commercial Profit Double Taxation Avoidance Agreement Foreign Company Foreign Enterprise Permanent Establishment Technical Services

Summary

Issues Involved:
1. Applicability of Section 10(6)(vi) of the Income-tax Act.
2. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and France.
3. Definition and existence of a "permanent establishment" under the DTAA.
4. Classification of income as "industrial or commercial profits" versus "fees for technical services" under the DTAA.
5. Conditions for exemption of salaries under Article XIV of the DTAA.

Issue-Wise Detailed Analysis:

1. Applicability of Section 10(6)(vi) of the Income-tax Act:
The assessees claimed exemption from taxation under Section 10(6)(vi) of the Income-tax Act, which exempts the remuneration of an employee of a foreign enterprise for services rendered in India provided certain conditions are met:
- The foreign enterprise is not engaged in trade or business in India.
- The employee's stay in India does not exceed 90 days in the previous year.
- The remuneration is not deductible from the income of the employer chargeable under the Act.

The IAC (Assessment) rejected this claim, arguing that the foreign enterprise was engaged in trade or business in India by providing technical services to ONGC, thus failing the first condition. Furthermore, the remuneration was deductible in computing the foreign enterprise's income, failing the third condition.

2. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and France:
The assessees also claimed exemption under the DTAA between India and France. Article XVI of the DTAA provides that amounts paid for technical services shall not be subjected to tax in the first mentioned Contracting State except insofar as such amounts are attributable to activities actually performed in that State. The IAC (Assessment) and CIT (Appeals) held that the remuneration was deductible in computing the profits of the foreign enterprise chargeable to Indian tax, thus failing the conditions for exemption under the DTAA.

3. Definition and Existence of a "Permanent Establishment" under the DTAA:
The CIT (Appeals) and the Department argued that the foreign enterprise maintained a permanent establishment in India, which would subject it to Indian taxation. They cited the presence of Mr. M.K. Gandhi in Bombay and the operations carried out on the rig as evidence of a permanent establishment. However, the Tribunal found that the rig was owned by ONGC and not the foreign enterprise, and Mr. Gandhi did not have the authority to negotiate and enter into contracts on behalf of the foreign enterprise. Therefore, the Tribunal concluded that the foreign enterprise did not maintain a permanent establishment in India.

4. Classification of Income as "Industrial or Commercial Profits" versus "Fees for Technical Services" under the DTAA:
The Department treated the income as industrial or commercial profits under Article III of the DTAA, which would require a permanent establishment in India. However, the Tribunal noted that Article III excludes fees for technical services from industrial or commercial profits. The Tribunal concluded that the income in question was fees for technical services, which are governed by Article XVI and do not require a permanent establishment for taxation.

5. Conditions for Exemption of Salaries under Article XIV of the DTAA:
Article XIV of the DTAA provides conditions for exemption of salaries:
- The individual should not be present in India for more than 183 days in the taxable year.
- The remuneration should be paid by or on behalf of an employer who is not a resident of India.
- The remuneration should not be deducted in computing the profits of a permanent establishment chargeable to tax in India.

The Tribunal found that the assessees met the first two conditions. Since the foreign enterprise did not have a permanent establishment in India, the third condition was not applicable. Therefore, the salaries were exempt from taxation under Article XIV.

Conclusion:
The Tribunal concluded that the salaries received by the expatriate employees were not taxable in India. The provisions of the DTAA between India and France prevailed over the Income-tax Act. The Tribunal allowed the appeals, granting the claimed exemptions.