2004 (12) TMI 26 - HC - Income Tax

Whether Tribunal was right to hold that the expenditure in question on payment of salaries was not borne by the permanent establishment in India and so the employee in question would not be exigible to Indian taxation in terms of article 16(2)(c) of the tax avoidance agreement? - expenses on salaries were not borne by the permanent establishment or fixed base in India, the provisions of clause 2 of article 16 of the Double Taxation Avoidance Agreement come into play and, therefore, the salary received by the respondents-assessees is not liable to tax in India. Explanation 2 to section 9 of the Act was not attracted in the present case as it is covered by the Double Taxation Avoidance Agreement and in view of section 90 of the Act it would have an overriding effect. In view of the foregoing discussion, we answer the question referred to us in the affirmative, i.e., in favour of the assessees and against the Revenue

Summary

Issues:
Interpretation of Double Taxation Avoidance Agreement between India and Italy regarding taxation of salaries paid to non-resident employees working in India.

Analysis:
The case involved a reference made by the Income-tax Appellate Tribunal regarding the taxation of salaries paid to non-resident employees working in India under the Double Taxation Avoidance Agreement between India and Italy. The primary issue was whether the expenditure on payment of salaries was borne by the permanent establishment in India, making the employees exigible to Indian taxation as per the agreement.

The respondents, non-resident employees working in India for a foreign company, claimed that their salaries were not taxable in India based on the agreement's provisions. The Assessing Officer initially held that the employer had a permanent establishment in India, thus making the salaries taxable. However, the Tribunal later ruled that the salaries were paid in Italy and not borne by the permanent establishment in India, hence not exigible to Indian taxation under the agreement.

The Tribunal's decision was based on the conditions outlined in the agreement, specifically focusing on whether the salaries were borne by a permanent establishment or fixed base in India. It was found that the salaries were paid in Italy by the employer's head office, and the expenses incurred in India were higher than the amount received, indicating that the expenditure on salaries was not borne by the permanent establishment in India.

The High Court analyzed the relevant clauses of the Double Taxation Avoidance Agreement and emphasized that all conditions must be fulfilled for the salaries to be exempt from taxation in India. Since the conditions related to the payment of salaries were met, the salaries received by the non-resident employees were deemed not liable to tax in India under the agreement.

The Court dismissed the Revenue's arguments based on Explanation 2 to section 9 of the Income-tax Act, highlighting that the agreement's provisions prevailed. Referring to a previous Bombay High Court decision, the Court reiterated that no question of law arose concerning the relief granted under the agreement between India and France.

Ultimately, the High Court ruled in favor of the assessees, stating that the salaries were not liable to tax in India as per the Double Taxation Avoidance Agreement. The decision was based on the Tribunal's finding that the expenditure on salaries was not borne by the permanent establishment in India, aligning with the agreement's provisions and overriding any conflicting provisions in the Income-tax Act.