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TMI Blog2007 (7) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... sdictional Hon ble Uttaranchal High Court in the case of CIT v. Sedco Forex International Drilling Co. 264 ITR 320. The said clause of France DTAA is identical with the clause ( c ) to para (2) of Article-15 of DTAA between Indian and Russian Federation. 1.2 That the ld. CIT(A) has failed in considering the affidavit submitted before him evidencing the payment of tax in Russian Federating on remuneration earned by the appellant during his stay period in India under the applicable provisions of Russian Income-tax Act. This affidavit was filed in support of applicability of the interpretation of clause ( c ) to para (2) of Article-15 of the DTAA given by the Hon ble Uttaranchal High Court in Sedco ( supra ) case. In particular stating that the appellant is statutorily liable to pay tax in Russia as per law of Russian Federating extract thereof was filed before the ld. CIT(A) and has also paid the said tax and had filed the Income-tax return in Russian Federation. 1.3 That the ld. CIT(A) has dismissed this ground of appeal of the appellant by taking into account various presumptions which are contrary to the facts of the case. 1.4 That the ld. CIT(A) has erred in deeming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ays in the years under consideration. For remuneration payable to them returns were filed by Zarubezhneft at Nil income which were processed under section 143(1). Later on these cases were selected for scrutiny and in response to notice Zarubezhneft has filed a letter requesting therein that it may be treated as an agent of the assessee and accordingly Zarubezhneft was considered the agent of present assessees and assessment was accordingly framed. It was the contention of the assessee that the remuneration received by them, for their work in India is not taxable in view of article 15 of Double Taxation Avoidance Agreement between the Republic of India and the Russian Federation (DTAA). Article 15 reads as under : "Article 15: Dependent personal services 1. Subject to the provisions of articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. 2. Notwithstanding the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Act, 1961 at a deemed profit rate of 10 per cent. Under Section 44BB of the Act, 10 per cent of receipts of the NRC are deemed to be its income, meaning thereby, that the balance 90 per cent is deemed expenditure of the PE of the company in India. This deemed expenditure includes salary payments made by the NRC to its employees working in India. Hence, the remuneration paid to the assessee by M/s. Zarubezhneft was borne by the PE which it had in India and was deductible in computing its taxable profit. In fact, such expenses have a direct and proximate connection with the business receipts of the PE and unless such direct expenses are deducted, profit of the PE cannot possibly be arrived at even under the Double Taxation Avoidance Agreement. The fact of salary being paid outside India does not matter, since PE existed in India and the assessee employee worked for this PE. Accordingly, the claim of exemption of salary under the Double Taxation Avoidance Agreement is hereby disallowed. Reliance is placed on the judgment of Hon ble High Court of Uttaranchal at Nainital in the case of (1) Sedco Forex International Inc. (2) Sedco Forex International Drilling Inc. [200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to be fulfilled simultaneously. The assessee company is assessable in respect of its business profit on the basis of profit and loss account to be drawn up by crediting all receipts/income attributable to the activities carried on by the PE and deducting all expenses incurred in connection with such activities. He observed that though there is no denying of the fact that salaries of the ex-patriate specialists although had been paid outside India but it was an element of cost debitable against income/receipts received from Zarubezhneft for the services rendered by them. It is only due to the provisions of section 44BB(1), a PE was having the prerogative to have its income computed within the limitation of section 44BB(1) that too remains an assessment under Article 7 of DTAA. He further observed that assessee has chosen to compute its profits at maximum 10 per cent despite of the enabling provision contained in sub-section (3) of section 44BB which allows it an opportunity to get assessed at a lower quantum. In this way it is established that PE had income higher than 10 per cent of its gross receipts even after availing permissible deductions including salary expenses of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... patriates with regard to services rendered in India was deductible in computing the profit chargeable to tax in Russia. Thus it was pleaded that condition laid-down in clause ( c ) has also been fulfilled. Thus it was pleaded that the assessee is liable to get exemption with respect to remuneration received by ex-patriates in India. 8. On the other hand, it was pleaded by the ld. DR that employer who has been treated as the agent of assessees has PE in India which has been assessed under the provisions of section 44BB of the Act wherein the receipts have been taxed on the presumptive basis by taking the income @ 10 per cent. He contended that assessee has not shown anywhere that remuneration paid to the ex-patriates was not borne by PE of the employer. He contended that ld. CIT (A) was right in holding that in absence of such proof or evidence it cannot be said that the assessee has fulfilled the condition laid down in clause ( c ). He pointed out that clause ( c ) as interpreted by their Lordships in the case of Sedco Forex International Inc. ( supra ) and as appearing in Russian DTAA differs materially. Thus he contended that the interpretation of clause ( c ) in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dable on the fact that the same was chargeable to tax in the country where the employee is resident. The position in the present case is converse. Here according to clause ( c ) of relevant DTAA, the employee to claim exemption from tax in India has to establish that his remuneration is not borne by the PE or fixed base which the employer has in India. Thus the fact that the remuneration received by employee in India was taxable in Russia has no relevance for determining the taxability or otherwise of the same in India. It will be one of the three essential conditions for the assessee to show that the remuneration received by him in India were not borne by the PE or fixed base of the employer in India. Thus the contention of the assessee that interpretation of clause ( c ) as done in the case of Sedco Forex International Inc. ( supra ) has to be adopted while interpreting clause ( c ) of Article 15 the DTA Agreement of Republic of India with Russian Federation is not found to be acceptable. There is no dispute to the extent that all the three conditions as laid down in Article 15.2 have to be fulfilled to claim exemption in respect of remuneration received by the ex-patriate in I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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