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TMI Blog2004 (7) TMI 304X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Reading Bates Exploration Company as agent of Mr. Webb R. and others [ITA No. 4228/Del/93] on similar grounds and circumstances. (ii) In upholding the perquisite for boarding valued at Rs. 300 per day for the period the assessee was physically present in India. (iii) In upholding levy of interest under section 234B of the 'Act', even though tax was deductible on the entire income earned by the assessee and consequently no advance tax was payable under the 'provisions of section 208 of the Act'. This contention was upheld by the Honourable Madras High Court in the case of CIT v. Madras Fertilizers Limited [1984] 149 ITR 703. (iv) In upholding that the assessee does not qualify for exemption under article 16 of the DTAA between India and USA on the ground that the assessee does not satisfy clause (c) of the DTAA between India and USA." 2. Since facts and issues involved are common and these appeals have been heard together, these are being disposed of by a common order. 3. The appellant-assessees are foreign technicians employed by M/s. Ensco Maritime Limited, a foreign company incorporated outside India (hereinafter referred to as Ensco). Ensco entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Department, on the other hand, Shri Salil Gupta, ld. Senior DR argued the matter and also submitted written submissions before us. 8. The basic issue arising in this group of appeals is regarding claim of exemption of salary received by the assessees under article 16(2)(c) of the DTAA between India and USA. Other issues raised are regarding the taxability of the off period salaries perquisites for boarding and levy of interest under section 234B. 9. Regarding claim of exemption of salary for the services rendered by the assessees in India, the same is to be determined under the provisions of article 16 of the DTAA between India and USA which deals with taxation of income under the heads salaries. The said article reads as under: "Article 16 Dependent personal services 1. Subject to the provisions of article 17 (Director's Fees), 18 (Income Earned by Entertainers and Athletes), 19 (Remuneration and Pensions in respect of Government Service), 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (Payments received by Students and Apprentices) and 22 (Payments received by Professors, Teachers and Research Scholars), salaries, wages, and other similar rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , ld. Senior DR. argued that the first two conditions, contained under article 16(2)(a) and 16(2)(b), have not been shown by the assessees employees as satisfied by them and, therefore, the case of exemption denied by the Department would have to be considered in the larger perspective of non-fulfilment of either of the conditions as contained under article 16(2). In the written submissions, ld. Senior DR reiterated the same view and argued that the appellant assessees are not entitled to exemption of salary since- (a) it has not been established that actual stay of the assessees was less than 183 days during the relevant previous year; (b) it has not been established that the assessees are residents of USA and at no point of time during the assessment proceedings or at the appellate stage, it has been demonstrated that they are liable to tax in the USA in respect of their Indian salary. Ld. Senior DR further contended that condition contained under clause (c) of article 16(2) of the DTAA is in any case not satisfied. Since the foreign employer has admittedly a permanent establishment in India and the salary of the employee represents the expenditure of the permanent establishm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the employees, namely, Frank Edmund Res, involved in ITA No. 1537/Del/2000, would be governed by DTAA entered into by India with Australia wherein the corresponding article 15(2)(c) reads as under: "the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in that other State." Other assessees employees would be governed by article 15(2)(c) of the DTAA entered into by India with Indonesia which is worded in identical fashion as article 16(2)(c) with USA. Ld. Counsel raised strong objection at the very outset against the contentions of the ld. Senior DR regarding non-fulfilment of conditions as contained under clause (a) and clause (b) of article 16(2), as reproduced above. Ld. counsel submitted that the Assessing Officer while making the assessments in the cases of the assessee employees involved in the present group of appeals has proceeded on the basis that the assessee employees are non-residents of India in the relevant assessment year and further that the employer is not a resident of India. According to the ld. counsel, the Assessing Officer has made the assessment in the case of the emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocuments as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee. After the insertion of the aforesaid sub-section the non-resident can opt for computing its income either @ 10% as per sub-section (1) or he can claim lower profits and gains, if he keeps books of account and other documents as required under section 44AA of the Act. In such circumstances, where the non-resident employer is assessed under section 44BB of the Act on deemed profits without reference to actual net profits, it cannot be further deemed that the salaries paid to the appellant technicians have either been paid or borne by the permanent establishment which the employer has in India. The assessee had relied on the following decisions in support of the aforesaid proposition that where income of the non-resident employer was assessed to tax in India on deemed basis it could not be held that the remun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... USA Treaty] has been upheld. In that case, the employees were resident of Australia and the employer, an Australian company, was engaged in business of operation of helicopters on a world-wide basis. The employer had variety of helicopter operations relating to rigs. The income of the employer was held to be assessable under section 44BB of the Act by the AAR in the same decision. In that case, the dispute before the AAR revolved on the question whether the expatriate employees rendering services in India were liable to tax in India. The main controversy was whether it could be said that the remuneration paid to the expatriate employees, was deductible in computing profits of the permanent establishment which the employer had in India, considering that the employer was liable to tax in India on deemed profits under section 44BB of the Act. Article 15(2) of the Double Tax Treaty between India and Australia, subject of consideration before the Authority for Advance Rulings in the above-mentioned decisions reads as under: "Dependent personal services (2) Notwithstanding the provisions of paragraph (1), remuneration derived by an individual who is a resident of one of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on before us is whether the assessees employees fulfil the condition as contained under article 16(2)(c) of the DTAA with USA or article 15(2)(c) in the Tax Treaties with Indonesia and Australia. In the Treaties with Indonesia and USA, clause (c) reads as under: "The remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State". In the DTAA with Australia, the clause is worded as under: "The remuneration is not deductible in determining taxable profits of a permanent established or a fixed base which the employer has in that other State." Apart from the aforesaid clause (c), there are other two conditions contained in the DTAA entered into by India with Australia, Indonesia and USA etc. which are further required to be fulfilled for claiming exemption by an employee in respect of the remuneration received from the employer. Such conditions are - (a) the employee is present in India for a period not exceeding 183 days during the year; and (b) remuneration is paid by or on behalf of an employer who is not a resident of India. Insofar as these two conditions are concerned, we are inclined to concur with the contention of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits of a permanent establishment in the other contracting state, i.e., India. Article 7 is a corollary to article 5 whereunder the expression "permanent establishment" has been defined and, therefore, has to be read in continuation of that article. Article 7 elaborates upon the mode and manner of computation of profits attributable to permanent establishment which is liable to tax in the other contracting state. Paragraph 3 of article 7 provides for deduction of expenses and reads as under: "3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent establishment), whether incurred in the state in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State." 15. Paragraph 2 of article 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that no separate books of account have been maintained by the Indian Branch of Ensco and it appears to us that Ensco has not complied with the provisions of section 594 of the Indian Companies Act which makes it incumbent on the foreign business establishment to maintain books of account and furnish copies thereof to the Registrar. Under the provisions of Indian Companies Act, 1956, every foreign company has to maintain books of account relating to Indian business in the manner provided in section 209 thereof. In each year, it has to file its world account. It is also under obligation under section 594 to deliver three copies of its world account to the Registrar of Companies. Three copies of balance sheet of the Indian business accounts duly audited have also to be filed within nine months of the close of the financial year. The Indian account has to be drawn in Indian rupees. Thus, profit and loss account of the Indian business has to be prepared separately by a foreign company as per the requirement of the Indian Companies Act, 1956. It appears to us that no such account have been filed by the employer company before the Registrar of the Companies. No such accounts in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... context of facts and issues and do not in any manner advance the case of the assessee. In Tirunelveli Motor Bus Services Co. (P.) Ltd., the Tribunal had recorded a finding of fact that there was nothing on record to indicate that while estimating income for the earlier assessment year i.e. 1950-51, the ITO had made any allowance in respect of bonus. Therefore, remission of such liability in assessment year 1957-58 could not be treated as income under section 10(2A) of the Income-tax Act, 1922. The facts and issues involved are thus entirely distinguishable from what is sought to be contended before us by the ld. Counsel. Unless a claim of deduction of bonus is made in earlier assessment year and the same is specifically allowed by the revenue, remission of such liability in subsequent assessment years cannot obviously be brought to tax. This proposition, enunciated by the apex court, would not tantamount to laying down the proposition that business profits attributable to an establishment could be estimated without deducting the remuneration of the personnel who have rendered services in the business establishment. 20. The second decision rendered by M.P. High Court in Naubatram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n expression has not been defined in a Tax treaty, the same would have to be interpreted in harmony with the treaty read as a whole. Clause (c) in the DTAA would thus have to be construed in the context of various Articles of the Tax treaties read as a whole particularly Article 5 and Article 7 thereof which have a direct relevance with the interpretation of clause (c) of Article 16(2) in Indo-US DTAA and Article 15(2) of Treaties with Australia and Indonesia. Article 7 provides for determination of the Taxable profits of the permanent establishment being the profits attributable to the permanent establishment to be computed as per the basis indicated in the Article, reproduced by us hereinbefore. For determining the profits of the permanent establishment direct expenses of the establishment are necessarily to be taken into account and cannot be ignored. The construction of the word 'borne' made by the Supreme Court in CIT v. Dalhousie Properties Ltd. [1984] 149 ITR 708, cited by the ld. Counsel, is in the context of computation of income from house property under section 23(1) of the Income-tax Act, 1961. At page 711, Hon'ble Supreme Court observed as under: "The only point canv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Motor Bus Service Co. Pvt. Ltd. v. CIT [1970] 78 ITR 55 and Karamat Khan v. CIT [1965] 58 ITR 642 (All.). Interesting as these arguments are, the authority finds it difficult to accept them as well-founded. The decisions of the Supreme Court relate to the question whether certain items can be treated as having been allowed or actually deducted in the determination of the profits of an earlier year when the assessment made for that year was a best judgment assessment. Here the language used is "deductible" and the emphasis, therefore, lies not on the factum of their actual deduction but on their deductibility, in principle, in the computation of the applicant's income. It is difficult to agree to the proposition that the expenses in question should be held not to be deductible because the assessment is made on an estimated basis. It cannot be overlooked that though the section outlines a statutory basis of assessment, what is being assessed at the statutory rate is the "profits of the business", an expression which, as is well settled, has to be understood in a commercial sense. The opening words of the section make no difference to this concept. In the first place, it is well set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Counsel on the decision of Delhi Bench of the Tribunal in the case of B. Nakazono v. Asstt. CIT [2003] SOT 31, this decision is clearly distinguishable inasmuch as the undisputed fact of crucial relevance in this case was that the foreign employer company did not have permanent establishment in India and, therefore, in the absence of Indian connection, the salary of the non-resident employees in India was not taxable in India. 26. Ld. Counsel has further relief upon the decision of Authority for Advance Rulings in the case of Stanley Keith Kinnett v. CIT [1999] 238 ITR 155. The ruling given by the ld. A.A.R. does not bring out the detailed facts including, inter alia, terms of the agreement between the subsidiary, namely, Whirlpool India Holdings Limited with the parent company, namely, Whirlpool Corporation. There is no inkling in the decision as to the determination of taxable profits of the permanent establishment in India held by Whirlpool India Holdings Limited. In the absence of relevant facts, this decision cannot be cited as an authority in support of any legal proposition by the ld. Counsel. As against this, the decision rendered by Authority for Advance Rulings in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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