Income Tax Appellate Tribunal - Delhi
Ensco Maritime Limited As Agent Of Mr. ... vs Dcit, Spl. Range [Alongwith Ita Nos. ... on 26 July, 2004
Equivalent citations: [2004]91ITD459(DELHI)
ORDER
1. This batch of appeals involving identical issues and facts have been filed by M/s. Ensco, as agent of 31 assessees who are its employees deputed to India for drilling operations on offshore rigs of ONGC. Grounds of appeal raised in all the appeals comprising the batch are identically worded as under:
"Based on the facts and circumstances of the case, the appellant respectfully submits that the learned Commissioner of Income Tax (Appeals), Dehradun, erred in computing the assessment on the following ground:
(i) In upholding that the salary paid outside India to the Assessee, for the period the assessee was engaged out of India ('Off-period'), after very twenty eight days of service in India ('On-period'), forms part of salary earned for services rendered in India.
The appellant respectfully submits that the Learned CIT (A) erred in not applying the decision of the Income Tax Appellate Tribunal, Delhi bench 'C', New Delhi, 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 C.I.T. v. Madras Fertilizers Limited [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 - assesses are foreign technicians employed by M/s. Ensco Maritime Limited, a foreign company incorporated outside India (hereinafter referred to as Ensco). Ensco entered into a contract with ONGC for charter hire of rigs complete with all drilling and other equipments and tools required for the purposes of exploration of oil and gas, drilling the offshore well and performing the auxiliary operations of drilling operations and exploration of oil and gas on offshore rigs. The appellants filed returns of income for assessment years 1997-98 and 1998-99 showing nil income on the ground that their stay in India during the relevant assessment year was less than 183 days and salary income was not liable to tax as per the provisions of Article 16 of the Double Tax Avoidance Agreement (DTAA, for short). Exemption of salary income was claimed on the ground that -
(i) The appellants were present in India for less than 183 days during the relevant previous year;
(ii) The remuneration was paid Ensco which is non-resident for purposes of the Indian Income-tax;
(iii) The remuneration paid to the appellants was not borne by the permanent establishment which the employer had in India.
4. The Assessing Officer did not accept the contention of the appellants and held that the exemption in terms of Article 16 of the DTAA was not available on the ground that the conditions laid down in the said article were not cumulatively satisfied, more particularly sub-paragraph (c) of paragraph (2) thereof. According to the Assessing Officer, since the employer Ensco was assessed for the relevant assessment years under Section 44BB of the Income-tax Act at deemed profits @ 10%, it could not be said that the remuneration paid to the appellants was not borne by the permanent establishment in India. The Assessing Officer accordingly considered that salary as taxable in India.
5. In appeal, the ld. CIT (A) upheld the view of the Assessing Officer. CIT (A) has discussed the issue elaborately in his appellate order in the case of Shri Kevin Scott Chambliss and following the reasoning and finding of the said order, CIT (A) has upheld the addition of the salary income in the other cases of the appellants before us.
6. Aggrieved with the aforesaid orders of the ld. CIT (A), assesses have come up in appeal before us.
7. On behalf of the appellant - assesses, Shri Ajay Vohra, ld. Advocate appeared and made detailed arguments. Written submissions have also been filed by him. On behalf 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 assesses under Article 16(2)(c) of the DTAA between India and USA. Other issues raised are regarding the texability 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 assesses in India, the same is to be determine under the provisions of Article 16 of the DTAA between India and USA which deals with texation 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 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 as is derived therefrom may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first mentioned State if:
(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the relevant taxable year;
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
(c) the remuneration is not borne by a permanent establishment or a fixed base or a trade or business which the employer has in the other State...."
Article 16(1) of the DTAA provides that the salary derived by resident of USA in respect of employment shall be taxable in U.S.A. unless the employment is exercised in India. If the employment is exercised in India, the remuneration can be taxed in India. However, under Article 16(2) of the DTAA such remuneration shall not be taxed in India if the following conditions are cumulatively satisfied:
(i) The recipient is present in India for a period not exceeding in the aggregate 183 days in the relevant financial year.
(ii) the remuneration is paid by, or on behalf of an employer who is not a resident of India.
(iii) The remuneration is not borne by a permanent establishment or a fixed base, or a trade or business which employer has in India.
10. The grounds adopted by the revenue authorities for rejecting the claim of exemption from taxation is that condition under Article 16(2)(c) has not been satisfied. According to the revenue authorities, the foreign employer company, namely, Ensco had admittedly a permanent establishment in India and assessment in the case of the said company has been made by invoking the provisions of Section 44BB treating 10% of the amount paid to the company as the profits and gains under the head 'business income'. The revenue held the view that while computing the business income remuneration of the assessee employees, has been allowed as deduction. However, during the course of arguments, Shri Salil Gupta, 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 Department would have to be considered in the larger perspective of non-fulfillment of either of the conditions as contained as contained under Article 16(2). In the written submissions, ld. Senior DR reiterated the same view and argued that the appellant that the appellant assesses 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 contented 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 establishment which is liable to be deducted while arriving at the attributable profits of the permanent establishment. According to the ld. Senior Dr, the fact that assessment of the employer company has been made by levy of presumptive rate of tax of 10% as per the provisions of Section 44BB would not by itself imply that remuneration of the employees is not borne by the permanent establishment. In support of his contention, ld. DR placed reliance on the view taken by the Authority for Advance Ruling in the case of Lloyd Helicopters International Pty. Ltd. reported in 249 ITR 162. According to the ld. DR, the said decision has been rendered in the context of Article 15(2)(c) of the DTAA between India and Australia which is analogous to Article 16(2)(c) of the DTAA between India and USA. Ld. Senior DR summarized his contentions vide para 15 of is note as under:
(a) The assessee cannot claim benefit of DTAA between India and USA since it has not been shown it is subject to tax in both India and US.
(b) Benefit of exclusion under Article 16(2)(a) cannot be allowed by the Tribunal as it is a fresh ground requiring determination on facts.
(c) Benefit of exclusion under Article 16(2) is admissible only if the assessee is a resident of USA. No material has been placed on record to this effect.
(d) On the contrary, available information shows that the assessee is a resident in India Under Section 6. Therefore, the benefit of exclusion under Article 16(2) of DTAA between India and USA cannot be availed of.
(e) Even on merits, benefit of Clause (a) & (c) of Article 16(2) is not available to the assessee.
(f) Case of the Department is squarely covered by the decision in the case of Lloyd Helicopters International Pty. Ltd. reported in 249 ITR 162 (AAR).
(g) Indian salary is to be taxed in India under Article 16 (1).
(h) The issue to taxability of the off period salary, perquisites for boarding and levy of interest under Section 234B have been decided by the jurisdictional High Court.
11. Per contra, Shri Ajay Vohra, ld. Counsel for the assessee strongly disputed the contentions of the ld. Senior DR and argued that since the assessees employees involved in this batch of appeals fulfilled the conditions, as contained under Article 16(2)(c) of the DTAA between India and USA, remuneration received by the employees is exempt from taxation under the Income-tax Act. Ld. Counsel further added that 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-fulfillment 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 employees assessee in the status of non-resident whereas in the case of the employer, assessment has been made as a non-resident company by invoking the provisions of Section 44BB. This clearly implied, according to the ld. Counsel, that conditions contained under Clause (a) and (b) of Article 16(2) are admitted by the Assessing Officer as fulfilled in the present appeals. Ld. Counsel made strong grievance of the fact that the revenue should not be allowed at this belated stage to set up an entirely new case contrary to facts which are admitted by the Assessing Officer himself. Ld. Counsel made written submissions and argued that the only objection raised by the Assessing Officer is regarding non-fulfillment of condition as contained under Article 16(2)(c) which provides that the remuneration is not borne by a permanent establishment or a fixed base or a trade or business which the employer has in the other state. According to the ld. Counsel, since the assessment in the case of the employer company has been made under Section 44BB of the Income-tax Act determining the income @ 10% of the aggregate of certain amount, it cannot be said that the remuneration paid to the employees is borne by the permanent establishment in India. The conditions of the ld. Counsel, as elaborated in the written submissions submitted by him, are being extracted hereunder:
"It has been held by the Courts that Section 44BB of the Act was introduced in the statute to compute profits and gains in connection with business of exploration of mineral oil, the said section is added in the Act as a measure of simplification providing for determination of income of such tax payers @ 10% of the aggregate of certain amount. Reliance in this regard is placed on the following:
(i) Oil India Limited v. CIT 212 ITR 225 (Orissa)
(ii) CIT v. ONGC 124 taxman 292 (Raj.)
(iii) Canara Bank v. JCIT 84 ITD 310 (Bang.)
(iv) Saipam SPA v. DCIT 88 ITD 212 TM (Delhi) It is further to point out that with effect from 1.4.2004 Sub-section (3) has been added to provide an alternate basis for computing the profits and gains in such cases. The said Sub-section is reproduced herein below:
(3) Notwithstanding anything contained in Sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that Sub-section, if he keep and maintains such books of account and other documents 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 remuneration paid to the foreign technicians was borne by the permanent establishment that such an employer had in India.
Elitos S.P.A. v. CIT (A) : ITA No. 6172 to 6201/Del/90 for the A.Y. 87-88 (page 6-14 of paper book) Stanley Keith Kinnet : 238 ITR 155/154 B Nakazono v. ACIT : (2003) SOT 3 (Del) The assessee also sought to draw an analogy from the provisions of Section 41(1) of the Act which deems remission or cessation of any trading liability to be the income chargeable to tax, provided the liability was allowed deduction in any earlier year(s). In the context of Section 41(1) of the Act, the Courts have held that where the assessment in the earlier year(s) was framed on estimate basis, the provisions of Section 41(1) of the Act could not be applied to bring to taxation any remission or cessation of liability on the ground that such liability must have been allowed in computing the income of the earlier year(s).
It has been held in the following cases that it was for the department to show that the liability had actually been allowed deduction in the earlier year(s) before invoking Section 41(1) of the Act to bring to tax deemed income on account of remission of such liability.
Triunelvedi Mota Bus Servies Co. Pvt. Ltd. v. CIT 78 ITR 55 (SC) Nanbatram Nandram v. CIT 86 ITR 805 (MP) CIT v. Bhawan v. Path Nirman (Bohra) Co. (No. 2) : 126 Taxman 210 (Raj.) From a perusal of the aforesaid judgment, it will kindly be noticed that the Courts have observed that where assessment of assesses have been made on estimated basis in earlier years, it cannot be assumed that particular item of expense or trading liabilities has been considered and allowed as a deduction or has been rejected as not allowable."
12. With regard to the reliance placed by the ld. DR on the decision of the Authority for Advance Ruling in the case of Lloyd Helicopters International Pty. Limited (supra), ld. Counsel submitted in the note of written submissions as under:
"The departmental Representative has placed reliance on the decision of Authority for Advance Rulings (AAR) in the case of Lloyd Helicopters International Pty Ltd. 249 ITR 162 wherein as per the ld. DR on identical facts and on interpretation of DTAA between India and Australia the Department's view on applicability of Article 15(2)(c) of DTAA (corresponding Article to 16(2)(c) in 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 Contracting States in respect of an employment exercised in the other Contracting State shall be taxable only in the first mentioned State if:
(a) the recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in a year of income of that other State:
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other State; and"
The AAR interpreting the meaning of word "deductible" held that though Section 44BB provide a statutory basis of assessment and the assessment is being made on an estimate basis, what are being assessed under that Section are profits of the business and, therefore, the remuneration paid to the employees of the Australian company who were residents of Australia is to be treated as expenses deductible in determining the taxable profits of the permanent establishment of the applicant in India.
The double Tax Treaty between India and US, subject of consideration in the present appeal, is materially different from the Double Tax Treaty between India and Australia, subject of consideration of the AAR in the above referred case. The language used in Article 16(2)(c) of the Indo-US DTAA reads as "the remuneration is not borne by a permanent establishment", whereas the corresponding Article 15(2)(c) of the Indian-Australia DTAA reads as "the remuneration is not deductible in determining taxable profits."
The interpretation placed by the AAR on Article 15(2)(c) of the India-Australia DTAA is confirmed of the specific language employed therein and cannot be extended to interpretation of Article 16(2)(c) of the Indo-US DTAA which is couched in altogether different language. The decision of the AAR relied upon by the learned Departmental Representative has, therefore, no application to the present case. Even otherwise, the decision of the AAR is confined to the facts of the specific case before the AAR and is not regarded as a binding precedent, much less for an altogether different provision of a different Double Tax Treaty."
13. We have given our thoughtful consideration to the rival submissions and also perused the orders of the tax authorities below. Written submissions filed by the ld. Representatives on both sides as well as string of judicial authorities relied upon before us have also been gone through by us. The basic question which falls for determination before us is whether the assessees employees fulfill 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 years and (b) remuneration is paid by or on behalf of an employer who is not a resident of India. In so far as these two conditions are concerned, we are inclined to concur with the contention of the ld. Counsel that no dispute whatsoever has been raised by the tax authorities below. The Assessing Officer has made the assessments of the assessee employees adopting the status as non-resident. The employer company, namely, Ensco has also been treated as non-resident and assessment has been made by the Assessing Officer by taking recourse to the provisions of Section 44BB. We feel that contentions of the ld. Senior DR raised before us concerning the non-fulfillemnt of these two conditions, namely, 16(2)(a) and 16(2)(b) is at variance with the stand taken by the Assessing Officer himself while making the assessment in the cases of the assessee employees as well as the employer company, namely, Ensco. No dispute ahs been raised by the revenue authorities below regarding the fulfillemtn of the first two conditions contained vide Caluse (a) and Clause (b) of Article 16(2) in Indo US Treaty and Article 15(2) in the Treaties with Indonesia and Australia. We, therefore, propose to consider the only issue concerning the fulfillment of condition contained under Clause (c) of Article 16(2) in the DTAA with USA and Article 15(2) in the Treaties with Indonesia and Australia. There is no dispute that the employer company has a permanent establishment in India and the business profits attributable to such permanent establishment are taxable in India. Article 5 in the DTAA is a definition article and defines the expression "permanent establishment". The business profits of an enterprise of another country can be taxed in India if it carries a business through a permanent establishment. Permanent establishment postulates the existence of substantial element of an enduring and permanent nature of a foreign enterprise in India. This can be attributed to fixed place of business through which the business of the enterprise is carried on in India. Enterprise is economic activity carried on by an entrepreneur who is a person conducting professionally an organised economic activity for the production or exchange of goods or services. It is an organisation of capital and labour with a view to making a profit by participating in the market activities. It has following features:
(i) The activity must be exercised in an independent manner;
(ii) It must consists of repetition of well defined actions; and
(iv) It must have economic character.
14. Article 7 deals with the business 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 conveys the underlying assumption that the permanent establishment is treated as if it were an independent entity for the purposes of ascertaining profits which are liable to tax in the other contracting state. This necessarily implies that the transactions between it and the head office are determined at arms length and thus, the profits such an independent enterprises might be expected to derive are to be computed for the purposes of taxation in the other contracting state.
16. From the aforesaid discussion of the various articles as contained in the DTAA, it is manifestly clear that the permanent establishment in India held by Ensco is to be treated as an independent entity for the purposes of computing its profit and such profits are liable to be taxed in India. Obviously while computing the profits, expenses paid by way of remuneration to the employees who have rendered services in the matter of performance of drilling operations and exploration of oil and gas on offshore rigs are necessarily liable to be deducted. Such expenses have a direct and proximate connection with the business receipts of the permanent establishment and unless such direct expenses are deducted, profits of the permanent establishment cannot possibly be arrived t as envisaged under Article 7 of the DTAA. Such expenses paid by way of remuneration are unquestionably deductible revenue expenditure on the basis of well accepted principles of accounting as laid down by the recognized accounting standards in India as well as international fiscal scene. Such expenses are also deductible business expenditure for the purpose of computing the taxable profits of the permanent establishment under the Income-tax Act. We have, therefore, no hesitation to hold that the third condition contained under Article 16(2)(c) of the DTAA with USA as well as 15(2)(c) of the DTAA with Indonesia and Australia has not been fulfilled in the instant case inasmuch as the remuneration paid to the assessee employees had been borne by the permanent establishment in India and represents the deductible expenditure of the said establishment. The contention of the ld. Counsel before us that the remuneration has been paid to the assessee employees in the USA would not, in our opinion, lead to the fulfillment of the condition contained under Clause (c) as above. In response to query from the Bench, ld. Counsel stated 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 of the Indian business of the employer company appear to have been submitted before the tax authorities below. Nothing is on record as to whether there was any agreement of the foreign company with its Indian enterprise laying down the conditions governing supply of technicians personal or other equipment etc.
17. The contention of the ld. Counsel before us is that since the assessment of the employer company has been made by computing its profit @ 10% of the receipt in accordance with Section 44BB of the Income-tax Act, the remuneration paid to the employee technicians, who are the assessees before us, has not been specifically allowed by way of deduction and, therefore, Article 16(2)(c) clearly applies for claiming exemption by the employees. We are unable to accede to the contention of the ld. Counsel. Section 44BB is merely a computation provision and does not in any manner derogate from the Articles contained under the DTAA including, inter alia, Article 5 and Article 7. The basic premise flowing from the DTAA that a foreign enterprise is liable to be taxed on so much of its business profits as it is attributable to its permanent establishment in India is not in any manner diluted or ousted by the computation provision inserted by the legislature under Section 44BB whereby 10% of the receipts would be treated as profits attributable to the permanent establishment in India. The expenses of the permanent establishment incurred on remuneration to the assessee technicians who have rendered services in the matter of oil exploration have a direct nexus with the profits of the establishment and are liable to be deducted for arriving at taxable profits in India.
18. Ld. Counsel has next contended that where assessments of assessee has been made on estimated basis in earlier years, it cannot be assumed that particular item of expenses or trading liabilities has been considered and allowed as deduction or whether the same has been rejected as not allowable. In support of this contention, reliance has been placed on the following decisions:
Triunelvedi Mota Bus Services Co. Pvt. Ltd. v. CIT 78 ITR 55 (SC) Nanbatram Nandram v. CIT 86 ITR 805 (MP) CIT v. Bhawan va Path Nirman (Bohra) Co. (No. 2) : 126 Taxman 210 (Raj.)
19. We have gone through these decisions and find that these decisions have been rendered in entirely different context of facts and issues and do not in any manner advance the case of the assessee. In Triunelvedi Mota Bus Services Co. Pvt. Ltd. v. CIT (supra), 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 Nanbatram Nandram v. CIT 86 ITR 805 relied upon by the ld. Counsel deals with the remission of lease amount received subsequently by the assessee. The Court held that such amount cannot be deemed as profits under Section 10(2A) in the subsequent year since there is nothing on record to establish that the lease money was in fact allowed as an allowance for deduction as business expenditure in the assessment of profits for the earlier year. The decision is again distinguishable in view of entirely different set of facts and issues involved therein.
21. The third decision cited by the ld. Counsel has been rendered by Rajasthan High Court in the case of CIT v. Bhawan va Path Nirman (Bohra) Co. (supra). For the reasons discussed above, this decision is also based on entirely different set of facts and issues and does not help assessees before us.
22. Ld. Counsel has construed the language used in Article 16(2)(c) of Indo US DTAA "the remuneration is not borne by a permanent establishment" to mean that the permanent establishment is not liable for the salaries paid to ex-parte technician working in India. According to him, since no such salary is debited in the books of project office in India, such liability cannot be said to be borne by the permanent establishment. In support of his contention, he has cited the decision of Calcutta High Court in the case of CIT v. Dalhousie Properties Ltd. 116 ITR 289 wherein the word "borne by" has been interpreted by their Lordships. Before we deal with this contention, it would be necessary to bear in mind that the tax treaties should be interpreted unconstrained by the technical rules of law or precedents on the broad principles of general expectation. The process of interpretation should take into account the fact that the language of the treaty has not been chosen by parliamentary draftsman. Treaties have been drafted by diplomats who do not use language in a precise legislative manner as the legal draftsman do while drafting the statutes. The treaty results from negotiations and compromise with the two conflicting interest and such compromise is not necessarily drafted in the legalistic jargon. Interpretation of such treaties must depend upon the text and the context. If the text is the texture, context is what gives the colour. That interpretation is the best which makes the textual interpretation match contextual one. Where an 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. 149 ITR 708, cited by the ld. Counsel, is in the on text 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 canvassed before the High Court and before us is whether the expression "borne by the owner" would refer to the amount of tax which the owner was liable to pay or the amount of tax which he had actually paid in discharge of the said liability. It is true that the expression "borne" may refer to either the liability which a person is liable to discharge or the actual sum paid by him in discharge of that liability. But we agree with the High Court that in the present context it should be construed as referring to the former, namely, the amount of tax which the owner is liable to discharge as stated in the proviso to Section 23(1) of the Act and not the latter one. The reason for taking this view flows from the scheme of the Act itself." (Underlined for emphasis) In the case before the Supreme Court the expression 'borne' has been interpreted in the context of scheme of Section 23 of the Income-tax Act, 1961, which provides that the expression "annual value" is the notional figure and it does not refer to any actual receipt. The Supreme Court held that the expression "borne" may refer to either the liability which a person is liable to discharge or the actual sum paid by him in discharge of that liability. In the present case before us, as we have already mentioned, there is no dispute that according to the commercial principles, the liability for payment of remuneration devolves upon the permanent establishment and same is, therefore, to be deducted from the profits of the establishment. Even otherwise, services have been rendered to the permanent establishment and expenses thereof are clearly the expenses incurred by the permanent establishment. On this basis also, remuneration of the assessee employees is borne by he permanent establishment in India. The decision in dalhousie Properties Ltd. case rather supports the view taken by us.
23. We are further fortified in our view by the decision of Authority for Advance Rulings (A.A.R.) in the case of Lloyd Helicopters International Pty Ltd. 249 ITR 162 relied upon by the ld. Senior DR before us. This decision squarely supports the case of the revenue. In this decision, Clause 15(2)(c) in the Indo Australia DTAA has been interpreted by the authority as under:
"In support of his contentions, counsel has referred to the dictionary meanings of the expression "deductible" and has also placed reliance on the decision of the supreme Court in Tirunelveli 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 settled that in the computation of profits, all proper outgoings have to be allowed as a deduction, irrespective of whether the statute contains a specific provision in this regard or not (see CIT v. Chitnavis [1932] 2 Comp Cas 464; [1932] 6 ITC 453 (PC). Salaries paid to employees - and indeed all revenue expenditure incurred - for running a business will have to be taken into account in determining its profits, irrespective of the provisions of Section 28 to 43A. Secondly, the provisions in Sections 30 to 43A are primarily intended to restrict or qualify the extent of deduction in regard to certain categories of expenses that would have been normally allowable in the computation. This is indeed clear from the omnibus nature of deductions permissible under Section 37. Hence, in a commercial sense, the concept of profits determined under Section 44BB or 44BBA, though arrived at on a statutory basis, cannot be considered to exclude such expenses as non-deductible merely because the statute fixes a percentage in this regard. The fixation of a rate so low as five per cent of the gross receipts as the net assessable profit indicates a statutory attempt at estimating the expenses normally likely to be incurred in such business."
24. Regarding the reliance placed by the ld. Counsel on the decision of the Delhi Tribunal in the case of M/s. Elitos S.P.A., this decision has been rendered in the context of facts of the case, as enumerated by the Tribunal at page 7 of the order. The Tribunal observed that the funds available in India were very meager and were not sufficient to meet the expenditure on payment of salaries. For assessment years 1985-86 and 1986-87, the amount receivable in India in rupee terms aggregated to Rs. 14,40,000/- only. After payment of commission, the balance amount received by the foreign company came to Rs. 8.49 lacs only. The salaries of pilots/engineers amounted to Rs. 59,18,000/-. In the backdrop of these facts, the Tribunal held that the expenditure on payment of salaries could not be said to have been borne by the permanent establishment in India. In view of the specific facts of the case before the Tribunal, which are clearly distinguishable from the facts in the present appeals, this decision does not support the case of the assessees before us.
25. Regarding the reliance placed by the ld. Counsel on the decision of Delhi Bench of the Tribunal in the case of B. Nakazono v. ACIT 2003 SOT (Del), 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 relied upon the decision of Authority for Advance Rulings in the case of Stanley Keith Kinnet v. CIT 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, Whirilpool 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 case of Lloyd Helicopters International Pty Ltd. cited by the ld. Senior DR, which is a latter decision, discusses at length facts and issues involved and the view taken by the ld. Authority is based on elaborate and exhaustive exposition of the legal position, as per the extract reproduced by us above.
26. For the aforementioned reasons, we hold that condition contained under Clause 16(2)(c) in Indo US Treaty and Clause 15(2)(c) in treaties entered with Indonesia and Australia are not fulfilled by the assessee technicians and, therefore, salary paid by the employer company, Ensco, has been rightly held as taxable in India by the ld. CIT(A). The common ground in the group of appeals is, therefore, dismissed.
27. The remaining common grounds in the group of appeals, as enumerated hereunder, are squarely covered by the recent decision of Uttranchal High Court in the case of CIT v. Sedco Forex International Drilling Co. Ltd. 264 ITR 320. Since the said decision has been rendered by the jurisdictional High Court and squarely applies in the facts of the present appeals, as fairly conceded by both the parties before us we respectfully follow the aforesaid decision and decide the remaining grounds as under:
(i) Off-period salary is taxable under Section 9(1)(ii) of I.T. Act, 1961 read with Explanation and we hold accordingly. The finding of the ld. CIT(A) on the issue is, therefore, upheld;
(ii) Prequisite for boarding and lodging on the rig was not a perquisite under Section 17(2)(iii) of the Income-tax Act, 1961 and the same is, therefore, not liable to be added under Section 17(2)(iii). The finding of the ld. CIT(A) on the issue is, therefore, reversed and the common ground is allowed;
(iii) With regard to levy of interest under Section 234B, respectfully following Uttranchal High Court's decision, we delete the interest. The finding of the CIT(A) on the issue is,therefore, reversed.
28. The group of appeals filed by the assessees are thus partly allowed as above.