2005 (11) TMI 25 - SC - Income Tax

Non-resident - appellant has filed these appeals as the agent of its employees who are the assessees in the present case. The appellant itself is a company which was incorporated in Panama - whether the salary of the employees of the appellant payable for field breaks outside India would be subjected to tax under section 9(1) (ii) read with the Explanation thereto - held that the 1999 Explanation would not apply to the assessment years in question.

Summary

Issues Involved:
1. Taxability of salary for field breaks outside India under section 9(1)(ii) of the Income-tax Act, 1961.
2. Interpretation of the term "earned in India" within section 9(1)(ii).
3. Applicability and retrospective effect of the 1999 amendment to section 9(1)(ii).

Issue-wise Detailed Analysis:

1. Taxability of Salary for Field Breaks Outside India:
The central issue was whether the salary paid to employees for field breaks outside India should be taxed under section 9(1)(ii) of the Income-tax Act, 1961. The assessing authority included the salary for field breaks in the total income, which was upheld by the Commissioner of Income-tax but overturned by the Tribunal. The High Court reinstated the inclusion, reasoning that the "off period" and "on periods" were integral parts of the employment agreement, and the field breaks had a nexus with the services rendered in India. The Supreme Court, however, disagreed, stating that the High Court's assumption about the field breaks being limited to training for Indian services was incorrect. The employees were on standby for global assignments, not specifically for India.

2. Interpretation of the Term "Earned in India":
The High Court interpreted "earned in India" to include salary for training during field breaks, considering it directly connected to services on the rigs in India. The Supreme Court clarified that the term "earned in India" should be understood as per the statutory fiction in section 9(1). The 1983 Explanation to section 9(1)(ii) stated that income payable for services rendered in India is regarded as "earned in India," regardless of where the contract was made or payment received. The Supreme Court emphasized that the salary for field breaks did not fall under this definition as it was not for services rendered in India.

3. Applicability and Retrospective Effect of the 1999 Amendment:
The High Court did not explicitly refer to the 1999 amendment, but the respondents argued its applicability. The Supreme Court noted that the 1999 Explanation, effective from April 1, 2000, expanded the scope to include salary for rest or leave periods preceded and succeeded by services in India. However, this amendment was prospective and did not apply to the assessment years in question (1992-93 and 1993-94). The court cited previous judgments affirming that tax laws apply as they exist in the relevant assessment year unless explicitly stated otherwise. The Central Board of Direct Taxes' circular also confirmed the prospective nature of the 1999 amendment.

Conclusion:
The Supreme Court set aside the High Court's decision, concluding that the salary for field breaks outside India was not taxable under section 9(1)(ii) for the relevant assessment years. The 1999 amendment did not have retrospective effect, and the salary for field breaks did not constitute income "earned in India" as per the statutory definition. The appeals were allowed with no order as to costs.