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TMI Blog2005 (7) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... s to National Highways Development Projects, Delhi Water Supply and Sewerage Project etc. being executed in India. The POs derive income in the nature of fee for technical services from India. The income of the company is taxed on presumptive basis under Section 44D read together with Section 115A of the Income Tax Act, 1961` ("the Act"). Dutch BV sends its employees from Netherlands to India to work on various projects being executed by it in India. During their stay in India the employees continue to receive salary and allowances in the home country. Since Dutch BV in its capacity of an employer, is under an obligation to deduct taxes at source in India to the extent its employees salary is subject to tax in India , it is keen to know with certainty its liability towards taxes to be deposited on behalf of its employees. That the salary paid to an individual either in India or outside India in respect of services rendered by him in India will be chargeable to tax in India. However, in case an individual is also liable to pay taxes in his country of residence with which the Government of India has signed a Double Taxation Avoidance Agreement (DTAA) in accordance with section 90 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . There is nothing on record to demonstrate that these employees are liable to tax both in India and Netherlands. The benefit of Section 90 of the Indian Income Tax Act cannot be availed of if the tax-payer pays tax or is liable to pay tax under the law in force in one country alone. This view has been held by the Authority for Advance Rulings in the case of Cyril Eugene Pereira reported in 239 ITR 650(AAR). The applicant has further stated that the condition under Sub-Clause (C) of Clause 2 of Article 15 of the DTAA is satisfied in its case, since it is taxed on presumptive basis u/s 44D read with Section 115A of the Indian Income-tax Act. The contention of the applicant is that since it is liable to tax as prescribed u/s 115A on its gross receipts, none of the expenses incurred by it for its Indian operations are deductible in computing the taxable profits in India. That since the salary paid by it to its employees in Netherlands is not deductible while computing the taxable profits in India, such remuneration cannot be treated to have been 'borne by' the permanent Establishment of the applicant in India and hence the condition prescribed in Sub-Clause (C) of Clause 2 of Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the expression 'borne by' used in the DTAA is to be interpreted as to whether the remuneration paid by the employer in Netherlands, is deductible in computing the taxable profits of the PE in the source country (India) keeping in view the provisions of section 44D and 115A(3), which specifically stated that no deduction in respect of any expenditure or allowance shall be allowed under sections 28 to 44C and 57 in computing the income by way of fees for technical services received after the 31 st day of March, 1976. It was therefore, pleaded by the learned counsel that in view of this blanket prohibition under the Act, it cannot be said that expenses incurred towards remuneration of employees and paid by the employers in Netherlands were deductible while computing the profits of the PE in the source country. For this purpose, the learned counsel placed reliance on the decision of the Hon'ble Authority in the case of "Stanley Kieth Kinnett v. CIT 238 ITR 155 (AAR), Karamat Khan 58 ITR 642 (SC), Tirunelveli Motor 78 ITR 55 (SC). Referring to the case of Lloyds Helicopters, Shri Dastur stated that the conclusion drawn by the Hon'ble Authority in that case did not appear to be in acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mptive assessment does not dispense with the regular assessment as provided in accordance with section 28 to 44C. The learned counsel also relied heavily on the decision of the Hon'ble Authority for advance ruling in the case of "Lloyd Helicopters"-249 ITR 162(AAR) wherein it was held by the Authority that merely because the assessment is made on estimate basis would not mean that the expenses are not deductible. Relying on the decision of the Privy Council in CIT Vs Sir S.M. Chitnavis (1932) 6 ITC 453 (PC), the Authority held that in computation of profits, all proper outgoings have to be allowed as deduction irrespective of whether the statute contains a specific provision in this regard in the Act. Therefore, salary paid to the employees and indeed all other revenue expenses incurred for running a business will have to be taken into account in determining its profits irrespective of the provisions of sections 28 to section 43A. It was pleaded that this ruling is a direct authority on the issues raised in the present application and hence deserves to be followed. That the lower rate of tax prescribed under section 115A for technical fees received and higher rate for income (other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hment or a fixed base which the employer has in the other State. From the pleadings of the learned counsels for the applicant and the revenue, it is seen that the agreed statement of facts in respect of sub-clause(c) is that the expression 'borne by' means "deductible" or "liable to be deducted". Sub-clause (a) & (b) are factual in nature and the position has already been clarified by the learned counsel for the applicant as stated supra. It is also seen that similar provision for taxing the income of individual who is not a citizen of India are detailed in section 10(6)(vi) of the Act, which is reproduced hereunder:- "Income not included in total income. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-(6)(vi) the remuneration received by him as an employee of a foreign enterprise for services rendered by him during his stay in India, provided the following conditions are fulfilled- • the foreign enterprise is not engaged in any trade or business in India ; • his stay in India does not exceed in the aggregate period of ninety days in such previous year; and • such remuneration is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hargeable to tax under the various heads is computed on a net basis, i.e., after allowing deduction for admissible costs and expenses. The determination of the taxable income on net basis in the case of non-resident tax payers, however, creates practical difficulties. The non-resident taxpayer is not always sure of the type and extent of expenses which would be admissible under our tax laws and the nature of evidence which will be called upon to produce in support of his claim for expenses. Income-tax Officers are also handicapped as, in the absence of account books of the foreign tax payer which are kept outside India , they are not in a position to carry out any worthwhile scrutiny of these claims. A step towards, simplifying and rationalizing the assessments of non-residents was taken last year when a special provision was made through the Financial Act, 1975, for computing the shipping profits in the case of non-residents. The Bill seeks to advance this process further by making special provisions for taxation of dividends, royalties and fees for technical services and for determination of head office expenses in the case of non-residents."• Page 186 (Statute) of 102 ITR Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. As against this portion, rates of tax for other income is much higher e.g. for assessment year 2004-05 being 40%. The lower rate of tax prescribed under section 115A is clearly due to the fact that tax on such income is computed on gross basis whereas for other income (other than royalty and fees for technical services) of a foreign company, tax is computed on net basis. Providing for lower rate of tax under section 115A as compared with the rates prescribed in the Finance Act is clearly for allowing margin for the deduction of expenses which include remuneration paid to employees working in India. Profits or gains of business connote excess of receipts over expenditure. Gross receipts cannot by any stretch of imagination be considered as income. This would be blatant negation of basic accounting principles as well as logic and commonsense. Accrual of revenues and cost is the most fundamental assumption of accounting standards which underlie preparation and presentation of financial accounts. Such fundamental premise is deeply ingrained in the Indian as well as International Accounting Standards. Laws of domestic taxation as well as Tax Treaties are invariably in consonance wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce on the ruling of AAR in the case of Stanley Keith Kinnett v. CIT(1999) 238 ITR 155(AAR), the decision has been given on entirely different facts and issues involved, and therefore, is of not any assistance in the case of the applicant. As already stated, the applicant has raised in this application a purely legal issue regarding presumptive taxation as per section 44D read with 115A. Whereas no such issue was involved in the Stanley 's case. There taxability of the salary of the employees was in question. In that case Stanley Keith Kinnett was an employee of Whirlpool Corporation USA whereas he rendered services in India in the branch office of Whirlpool India Holdings for a short period of 76 days. The employer company reimbursed the salary paid by the Indian Branch Office. The American Company had no PE in India and, therefore, there was no question of salary expenses being borne by PE of the employer in India . Reliance has also been placed on the decision of the Supreme Court in Tirunelveli Motor 78 ITR 55 (SC) and Karamat Khan vs. CIT 58 ITR 642 (All). The decision of Hon'ble Supreme Court relates to the question whether certain items can be treated as having been allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Netherlands for the employment in India for the PE, to earn fees for technical services rendered in the source country. Cost incurred for rendering technical services is clearly deductible while determining the taxable profits of the applicant. We, therefore, concur with the conclusion of the Authority recorded in the case of Lloyds Helicopters - 249 ITR 162 (AAR). However, in view of the decision of Hon'ble Supreme Court in Azadi Bachao Aandolan and another [263 ITR 706(SC)], we are unable to agree with the reasoning given in the Lloyds' case that the non payment of tax by the applicant in India as well as in the other contracting state can be a decisive factor. 10. Before parting it would be apposite to refer to the opinions of international commentators on the subject. i) " The phrase "borne by" must be interpreted in the light of the underlying purpose of subparagraph c) of the Article, which is to ensure that the exception provided for in paragraph 2 does not apply to remuneration that could give rise to a deduction, having regard to the principles of Article 7 and the nature of the remuneration, in computing the profits of a permanent establishment situated in the State in ..... 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