2004 (7) TMI 304 - AT - Income Tax

Summary

Issues Involved:
1. Exemption of salary under Article 16(2)(c) of the DTAA between India and USA.
2. Taxability of off-period salaries.
3. Perquisites for boarding.
4. Levy of interest under section 234B of the Income-tax Act.
5. Exemption under Article 16 of the DTAA between India and USA.

Detailed Analysis:

1. Exemption of Salary under Article 16(2)(c) of the DTAA between India and USA:
The primary issue was whether the salary received by the assessees was exempt from taxation under Article 16(2)(c) of the DTAA between India and USA. The Tribunal examined the conditions under Article 16(2) which states that remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first mentioned State if:
- The recipient is present in the other State for a period not exceeding 183 days in the relevant financial year.
- The remuneration is paid by, or on behalf of an employer who is not a resident of the other State.
- The remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.

The Tribunal held that the third condition under Article 16(2)(c) was not fulfilled as the remuneration paid to the assessees was borne by the permanent establishment in India and represented deductible expenditure of the said establishment. The Tribunal rejected the contention that the remuneration paid in the USA would lead to the fulfilment of the condition under clause (c).

2. Taxability of Off-Period Salaries:
The Tribunal upheld the taxability of off-period salaries under section 9(1)(ii) of the Income-tax Act, 1961 read with Explanation. This decision was in line with the recent decision of the Uttaranchal High Court in the case of CIT v. Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320.

3. Perquisites for Boarding:
The Tribunal reversed the finding of the CIT(A) on the issue of perquisites for boarding and lodging on the rig. It held that these were not perquisites under section 17(2)(iii) of the Income-tax Act, 1961 and thus, not liable to be added under section 17(2)(iii).

4. Levy of Interest under Section 234B:
The Tribunal, following the decision of the Uttaranchal High Court, deleted the interest levied under section 234B. It reversed the finding of the CIT(A) on this issue.

5. Exemption under Article 16 of the DTAA between India and USA:
The Tribunal noted that the employer company, Ensco, had a permanent establishment in India and the business profits attributable to such permanent establishment were taxable in India. The Tribunal emphasized that the permanent establishment should be treated as an independent entity for the purposes of computing its profit, and such profits are liable to be taxed in India. The remuneration paid to the employees was considered deductible revenue expenditure, and thus, the third condition under Article 16(2)(c) was not fulfilled.

Conclusion:
The Tribunal dismissed the common ground regarding the exemption of salary under Article 16(2)(c) and held that the salary paid by the employer company, Ensco, was rightly taxable in India. The Tribunal upheld the taxability of off-period salaries, reversed the finding on the perquisites for boarding, and deleted the interest levied under section 234B. The group of appeals filed by the assessees was thus partly allowed.