Uttarakhand High Court
Commissioner Of Income-Tax And Anr. vs Sedco Forex International Drilling Co. ... on 9 October, 2003
Equivalent citations: (2004)186CTR(UTTRANCHAL)144, [2003]264ITR320(UTTARANCHAL)
Author: S.H. Kapadia
Bench: S.H. Kapadia, Irshad Hussain
JUDGMENT S.H. Kapadia, C.J.
1. This batch of appeals involved a common question of law and fact and therefore they are decided all together by this common judgment.
2. For the sake of convenience, we are mentioning hereinbelow the facts in I. T. A. No. 57 of 2002.
Facts :
3. Ronald Grey, the assessee, entered into a contract for employment with Sedco Forex International Drilling Company (hereinafter referred to as the said company) incorporated in Panama. The assessee was the resident of the U. K. Under the contract he was required to work on oil rigs in Bombay High as per alternating time schedule of 35/28 days, i.e., on period followed by 35/ 28 days of off period in the U. K. Before the Assessing Officer it was contended, on behalf of the assessee, that off period salary was not exigible to tax under Section 9(1)(ii) of the Act as it was not earned in India. It was argued that the field break which followed the on period was not a rest period. The Assessing Officer rejected this contention. The order passed by the Assessing Officer was confirmed by the Commissioner of Income-tax (Appeals).
4. Further, the Assessing Officer held that free food and free beverages and free boarding on the rigs, constituted a perquisite under Section 17(2)(iii). He added their value to the income of the assessee. The Assessing Officer also levied interest under Section 234B on the assessee for short payment of advance tax. The order of the Assessing Officer on all the above points was confirmed by the Commissioner of Income-tax (Appeals). Being aggrieved, the matter was carried in appeal to the Tribunal which took the view that the field break, i.e., the off period was not a rest period. That during the break the assessee had to stand by in the U. K. and therefore the off period salary was not payable for services rendered in India and therefore off period salary was not taxable under Section 9(1)(ii) of the Act. Consequently, the Tribunal deleted the levy of interest under Section 234B of the Act. The Tribunal further took the view that free food and beverages and boarding was not a perquisite.
5. Being aggrieved, the Department has come by way of appeal under Section 260A of the Act, for the assessment year 1992-93.
Arguments :
6. Smt. Kapila, learned counsel for the Department, submitted that every receipt which has a nexus with the service rendered in India rules out the dichotomy and separate tax treatment for on and off periods salary. That since the work was arduous during the on period, a break is given. That despite repeated opportunity, the assessee has failed to produce evidence of his work during the field break. That in the circumstances the Assessing Officer was entitled to conclude that the field break was the rest period. It was further argued that the contract covered both the periods. That the salary was paid under the contract. That the assessment records indicate that the entire salary (including salary for the off period) has been debited to the profit and loss account of the employer company. That the said company has paid the entire salary to the assessee out of its income from Indian operations. In the circumstances it was submitted that the payment of salary was for services rendered in India. That it represented income earned in India under Section 9(1)(ii) read with the Explanation as it stood at the relevant time.
7. Learned counsel for the Department further contended that in this case, Section 234B was applicable. She contended that the Income-tax Appellate Tribunal was wrong in holding that Section 234B was not applicable to incomes falling under the head "Salaries". It was submitted that under Section 191 of the Act, in cases of failure to deduct tax at source by the employer the tax has to be paid by the assessee. It was contended that Section 234B deals with levy of interest in cases of shortfall in payment of advance tax by the assessee. That Sections 192, 202 and 208 of the Act do not rule out Section 191 of the Act. That the Tribunal was wrong in holding that as tax was deductible at source under Section 192 by the employer, the assessee did not incur any liability to pay advance tax under Section 208 and since the assessee did not incur any liability under Section 208, he was not liable to pay interest under Section 234B. It was argued that Sections 191, 208 and 234B all fall in Chapter XVII of the Act and therefore Sections 192 and 208 cannot rule out Section 191 of the Act which states that if the payer fails to deduct tax at source the tax shall be payable by the assessee directly.
8. Mr. Porus Kaka, learned counsel for the assessee, on the other hand, contended that in the case of a contract for employment the right to receive accrues at the place where contract is entered into or where the amount is payable. He argued that the place where the right to receive accrues would be the place where income becomes chargeable. That this is the position under Section 5 of the Act. That however Section 9 is an extension to Section 5. That under Section 9(1)(i) income from business connections in India was taxable. Therefore, under Section 9(1)(i) only income from business operations in India, as far as non-residents are concerned, is taxable. That similarly, under Section 9(1)(ii) read with the Explanation (introduced by the Finance Act of 1983, with effect from April 1, 1979), income payable for service rendered in India is regarded as "income earned in India" under Section 9(1)(ii) of the Act. It was, therefore, contended that the intention of the Legislature is to tax only a specific type of income which arises from operations in India under Section 9(1)(i) or which has nexus to services rendered in India under Section 9(1)(i) read with the above Explanation. It was further argued that under the contract in question off period did not represent rest period. That during the off period, the assessee had to stand by. That, he could not move out of the U. K. That, he could be summoned by the company at any time. That, the salary received by him for off period was therefore not taxable under Section 9(1)(i) as it was payable for services rendered outside India. That looking to the scope of Section 9(1)(i) read with the above Explanation it was necessary to dichotomize between what is payable for on period vis-a-vis what is payable for off period and if so the said salary for off period was not taxable. It was further argued that if the assessee works for 28 days and resigns on the 29th day he does not get salary for the off period. That the payment was against the field break and therefore the said break did not represent rest period. That the field break did not represent rest period. That it was not for service rendered in India and therefore it was not taxable. It was further argued that the Department is seeking to tax the income earned by the assessee abroad during the break which was not permissible. Learned counsel for the assessee further argued that his interpretation finds support from the substituted Explanation introduced by the Finance Act of 1999. It was further argued that the non-resident company (employer) is taxable on notional profits under Section 44BB of the Act and therefore there is no question of that company claiming deduction in respect of salary which it has paid to the assessee. It was argued that the said company was taxed on presumed income and therefore the question of that company paying salary from its income from Indian operations was irrelevant. On the question of levy of interest under Section 234B of the Act, it was argued on behalf of the assessee that under Sections 207, 208 and 209(1)(a)(d) the assessee had to estimate his current income under Section 234B and if the said company had made short deduction of the tax at source then the said company was liable under Section 191 of the Act. That in such cases the Department had a right to move against the employer company under Section 201 for recovery of balance tax with interest under Section 201(1A). That where any income was liable to tax deducted at source, Section 234B was not applicable. That even assuming that Section 191 was applicable no interest is chargeable under Section 234B on the assessee for failure on the part of his employer to deduct tax deducted at source.
9. The first question which arises for determination is as follows :
Question : Whether, the Tribunal was right in holding that off period salary was not taxable under Section 9(1)(i) read with the Explanation as it stood at the relevant time ? Answer : In the facts and circumstances of this case, our answer is in the negative, i.e., in favour of the Department and against the assessee. Reasons :
10. Section 4 of the Act is a charging section. It imposes tax on the total income of the previous year of every person. Under Section 4(2), tax is deducted at source or paid in advance, where it is so deductible or payable. Section 5(2), on the other hand, restricts the scope of total income of a non-resident to the income which is received or deemed to be received in India or which accrues or which is deemed to accrue to him during such year.
11. Section 9(1)(ii), inter alia, lays down that income which falls under the head "Salaries", if it is earned in India, shall be deemed to accrue to the non-resident during such year. Therefore, Section 9 is a deeming section. It brings in certain types of incomes, which may not come under Section 5, into the definition of "total income" under Section . Section 9(1)(ii) read with the Explanation provides for an artificial place of accrual for income taxable under the head "Salaries". It enacts that income chargeable under the head "Salaries" is deemed to accrue in India if it is earned in India, i.e., if the services under the contract for employment are rendered in India. In such a case, the place of receipt or actual accrual of salary is immaterial. In this case we are concerned with application of law to the facts of this case.
12. It is well settled that in order to ascertain the intention of the contracting parties one has to study the terms and conditions of the contract and in appropriate cases one has to see the surrounding circumstances including the conduct of the parties. In this case the contract provides for on period and off periods. The contract is for two years. It refers to alternating time schedule. It covers both the periods. The off period follows the on periods. Therefore both the periods form an integral part of the contract. It is not possible to give separate tax treatment to on period and off period salaries. It is argued that the period following on period was not a rest period. We do not find any merit. After 35/28 days of hard work, the technician had to go back to the country of his residence. The off period followed the on period. They both formed part of an integral scheme. That even under the Finance Act of 1999 the new Explanation uses the term "rest period/leave period". For the above reasons we find merit in the arguments of the Revenue. Further, even assuming that the period following the on period was a stand by arrangement and not a rest period, we find that the assessee had to undergo training during the said period. It is important to note that the work on the oil rigs is hazardous. The assessee had to remain fit during the rest period. Hence, he had to undergo demonstrations and training but all that has a nexus with the services which he had to render in India. Hence, the payment which he received was for his services in India. In this connection it may be noted that the Explanation to Section 9(1)(ii) introduced by the Finance Act of 1983 refers to what constitutes "income earned in India". This Explanation was introduced by the Finance Act of 1983, with effect from April 1, 1979, to get over the judgment of the Gujarat High Court in C/T v. S. G. Pgnatale [1980] 124 ITR 391 in which it was held that in order to attract Section 9(1)(ii) of the Act, liability to pay must arise in India. By the said Explanation, the original intention under Section 9(1)(ii) has been revived. It explains the expression "income earned in India" to mean payment for the services in India even if the contract is executed outside India or amount is payable outside India. However, from the said Explanation it is not possible to infer the corollary, viz., that in all cases where services are rendered outside India, the salary cannot be deemed to accrue in India, ipso facto. In certain cases, even if the services were rendered outside India, the income can still accrue or arise in India. It would depend on the facts of each case. In this case even assuming that there was no rest period as alleged by the assessee and that payment was for stand by we are of the view that training abroad during this period was directly connected with the work on the rigs in India. It made the assessee mentally and physically fit. Therefore, the payment of salary for off period was income earned in India, i.e., for services rendered in India under Section 9(1)(ii).
13. Lastly, we would like to point out that in this case the assessment records show that from the income of the Indian operations the salary in its entirety (including salary for the off period) has been paid by the employer company. This conduct shows the intention of the contracting parties. Hence, the entire salary for both the periods was taxable in India under Section 9(1)(ii).
14. The next question which has arisen for determination is as follows :
Question : Whether the Tribunal was right in holding that free food, beverages and boarding on the rig was not a perquisite under Section 17(2)(iii) ? Answer : On facts of this case we answer this question in the affirmative, i.e., in favour of the assessee and against the Department. Reasons :
15. In this case, the assessee had to work on the rig. It was hazardous, arduous and continuous. Under such circumstances free food and beverages are a necessity. It is not a luxury. It is not a perquisite. Its value cannot be added to the income of the assessee.
16. The last question, referred to us for our opinion is as follows :
Question : Whether, the Tribunal was justified in deleting interest levied on the assessee under Section 234B ? Answer : In view of the facts and circumstances of this case our answer is in the affirmative, i.e., in favour of the assessee and against the Department. Reasons :
17. Although we agree with the conclusions of the Tribunal, we prefer to give our own reasons in support of our conclusion that on the facts and circumstances of this case, levy of interest under Section 234B on the assessee is not justified. Firstly, the decisions of the Tribunal on the interpretation of the contracts regarding on period and off period salary were conflicting. Ultimately, the Legislature has stepped into clarify the position by the Finance Act of 1999. In this connection, it is important to note that Section 234B imposes interest, which is compensatory in nature and not as a penalty (see Union Home Products ltd, v. Union of India [1995] 215 ITR 758, 766 (Karn)). Secondly, although Section 191 of the Act is not overridden by Sections 192, 208 and 209(1)(a)(d) of the Act, the scheme of Sections 208 and 209 of the Act indicates that in order to compute advance tax the assessee has to, inter alia, estimate his current income and calculate the tax on such income by applying the rates in force. That under Section 209(1)(d) the income-tax calculated is to be reduced by the amount of tax which would be deductible at source or collectible at source, which in this case has not been done by the employer company according to the law prevailing for which the assessee cannot be faulted. As stated above at the relevant time there were conflicting decisions of the Tribunal. A bona fide dispute was pending. The assessee had to estimate his current income. The words used under Section 209(1)(a) make the assessee estimate his current income and since a bona fide dispute was pending, imposition of interest under Section 234B was not justified without hearing and without reasons. Accordingly, we answer this question in the affirmative, i.e., in favour of the assessee and against the Department.
18. Accordingly, all the above income-tax appeals are disposed of with no orders as to costs.