Levy of interest under s. 234B was not justified when there were conflicting decisions of the Tribunal

0
93
interest 1

COMMISSIONER OF INCOME TAX & ANR. vs. SEDCO FOREX INTERNATIONAL DRILLING CO. LTD. & ORS.

HIGH COURT OF UTTARANCHAL

S.H. Kapadia, C.J. & Irshad Hussain, J.

IT Appeal Nos. 102, 301, 307, 308, 309, 311, 313, 315, 458, 558, 559, 561 & 562 of 2001; 57, 63, 64, 79, 81, 84, 85, 87, 92, 96 to 99 & 105 of 2002 and 60, 61 & 63 of 2003

9th October, 2003

(2003) 71 CCH 0822 UAHC

(2004) 186 CTR 0144 : (2003) 264 ITR 0320 : (2004) 134 TAXMAN 0109

Legislation Referred to

Sections 9(1)(ii), 17(2)(iii), 234B

Case pertains to

Asst. Year 1992-93

Decision in favour of:

Revenue Partly, Assessee Partly

Income deemed to accrue or arise in India—Salary for off period—Non-resident working on oil rigs on Bombay High—Contract for employment provides for alternating on period and off periods—Off period follows the on periods—Both the periods form an integral part of the contract—Hence, it is not possible to give separate tax treatment to on period and off period salaries—Even assuming that the period following the on period during which the non-resident assessee stayed in UK was a stand by arrangement and not a rest period, he was required to undergo training during the said period which has nexus with the services which he had to render in India—Therefore, salary for off period was income earned in India and was taxable in India under s. 9(1)(ii)

Held :

Sec. 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 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. 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’. Further, even assuming that the period following the on period was a stand by arrangement and not a rest period, 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. Even assuming that there was no rest period as alleged by the assessee and that payment was for stand by, 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 s. 9(1)(ii). Lastly, 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 s. 9(1)(ii).

(Paras 8 to 10)

Conclusion :

Salary paid to assessee, a non-resident working on oil rigs on Bombay High, both for on period and off period was taxable under s. 9(1)(ii) both the periods forming an integral part of the contract

In favour of :

Assessee

Salary—Perquisite—Free food, beverages and boarding on rig—Are a necessity and not a luxury—Same not a perquisite under s. 17(2)(iii)

(Paras 11 & 12)

Conclusion :

Free food, beverages and boarding provided to assessee on rig are a necessity and not a luxury and, therefore the same is not a perquisite under s. 17(2)(iii).

In favour of :

Assessee

Interest under s. 234B—Chargeability—Income subject to TDS and bona fide dispute—At the relevant time there were conflicting decisions of the Tribunal vis-a-vis taxability of off period salary due to non-resident assessee—Further, income-tax calculated under s. 209(1)(d) is to be reduced by the amount of tax deductible at source—Employer company failed to deduct tax at source for which assessee cannot be faulted—Thus charge of interest under s. 234B was not justified

Held :

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 in to to clarify the position by the Finance Act of 1999. In this connection, it is important to note that s. 234B imposes interest, which is compensatory in nature and not as a penalty. Secondly, although s. 191 is not overridden by ss. 192, 208 and 209(1)(a)(d), the scheme of ss. 208 and 209 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 s. 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 s. 209(1)(a) make the assessee estimate his current income and since a bona fide dispute was pending, imposition of interest under s. 234B was not justified without hearing and without reasons.

(Para 14)

Conclusion :

Levy of interest under s. 234B was not justified when there were conflicting decisions of the Tribunal vis-a-vis taxability of off period salary due to non-resident assessee at the relevant time and the employer company failed to deduct tax at source for which assessee cannot be faulted.

Cases referred:

CIT vs. S. G. Pgnatale (1980) 16 CTR (Guj) 337 : (1980) 124 ITR 391 (Guj)

Union Home Products Ltd. vs. Union of India (1995) 129 CTR (Kar) 217 : (1995) 215 ITR 758 (Kar)

Counsel appeared:

Smt. S. Kapila i/b S.K. Posti, for the Revenue : P.F. Kaka with Gulati i/b V.K. Bisht, for the Assessees

  1. H. KAPADIA, C.J.

Judgment

This batch of appeals involved a common question of law and fact and therefore they are decided all together by this common judgment.

  1. For the sake of convenience, we are mentioning hereinbelow the facts in ITA No. 57 of 2002.

Facts

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 AO it was contended, on behalf of the assessee, that off period salary was not exigible to tax under s. 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 AO rejected this contention. The order passed by the AO was confirmed by the CIT(A).

Further, the AO held that free food and free beverages and free boarding on the rigs, constituted a perquisite under s. 17(2)(iii). He added their value to the income of the assessee. The AO also levied interest under s. 234B on the assessee for short payment of advance tax. The order of the AO on all the above points was confirmed by the CIT(A). 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 standby 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 s. 9(1)(ii) of the Act. Consequently, the Tribunal deleted the levy of interest under s. 234B of the Act. The Tribunal further took the view that free food and beverages and boarding was not a perquisite.

Being aggrieved, the Department has come by way of appeal under s. 260A of the Act, for the asst. yr. 1992-93.

Arguments

  1. 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 AO 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 P&L a/c 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 s. 9(1)(ii) r/w the Explanation as it stood at the relevant time.
  2. Learned counsel for the Department further contended that in this case, s. 234B was applicable. She contended that the Tribunal was wrong in holding that s. 234B was not applicable to incomes falling under the head “Salaries”. It was submitted that under s. 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 s. 234B deals with levy of interest in cases of shortfall in payment of advance tax by the assessee. That ss. 192, 202 and 208 of the Act do not rule out s. 191 of the Act. That the Tribunal was wrong in holding that as tax was deductible at source under s. 192 by the employer, the assessee did not incur any liability to pay advance-tax under s. 208 and since the assessee did not incur any liability under s. 208, he was not liable to pay interest under s. 234B. It was argued that ss. 191, 208 and 234B all fall in Chapter XVII of the Act and therefore ss. 192 and 208 cannot rule out s. 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.
  3. 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 s. 5 of the Act. That however s. 9 is an extension to s. 5. That under s. 9(1)(i) income from business connections in India was taxable. Therefore, under s. 9(1)(i) only income from business operations in India, as far as non-residents are concerned, is taxable. That similarly, under s. 9(1)(ii) r/w the Explanation (introduced by the Finance Act of 1983, w.e.f. 1st April, 1979), income payable for service rendered in India is regarded as “income earned in India” under s. 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 s. 9(1)(i) or which has nexus to services rendered in India under s. 9(1)(ii) r/w 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 standby. 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 s. 9(1)(ii) as it was payable for services rendered outside India. That looking to the scope of s. 9(1)(ii) r/w 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 s. 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 s. 234B of the Act, it was argued on behalf of the assessee that under ss. 207, 208 and 209(1)(a)(d) the assessee had to estimate his current income under s. 234B and if the said company had made short deduction of the tax at source then the said company was liable under s. 191 of the Act. That in such cases the Department had a right to move against the employer company under s. 201 for recovery of balance tax with interest under s. 201(1A). That where any income was liable to tax deducted at source, s. 234B was not applicable. That even assuming that s. 191 was applicable no interest is chargeable under s. 234B on the assessee for failure on the part of his employer to deduct tax deducted at source.
  4. 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 s. 9(1)(ii) r/w 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

  1. Sec. 4 of the Act is a charging section. It imposes tax on the total income of the previous year of every person. Under s. 4(2), tax is deducted at source or paid in advance, where it is so deductible or payable. Sec. 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.
  2. Sec. 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, s. 9 is a deeming section. It brings in certain types of incomes, which may not come under s. 5, into the definition of “total income” under s. 2(45). Sec. 9(1)(ii) r/w 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.
  3. 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 provide 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 period. 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 s. 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, w.e.f. 1st April, 1979, to get over the judgment of the Gujarat High Court in CIT vs. S. G. Pgnatale (1980) 16 CTR (Guj) 337 : (1980) 124 ITR 391 (Guj) in which it was held that in order to attract s. 9(1)(ii) of the Act, liability to pay must arise in India. By the said Explanation, the original intention under s. 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 standby 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 s. 9(1)(ii).
  4. 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 s. 9(1)(ii).
  5. 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 s.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

  1. 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.
  2. 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 s. 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

  1. 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 s. 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 in to clarify the position by the Finance Act of 1999. In this connection, it is important to note that s. 234B imposes interest, which is compensatory in nature and not as a penalty [see Union Home Products Ltd. vs. Union of India (1995) 129 CTR (Kar) 217 : (1995) 215 ITR 758, 766 (Kar)]. Secondly, although s. 191 of the Act is not overridden by ss. 192, 208 and 209(1)(a)(d) of the Act, the scheme of ss. 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 s. 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 s. 209(1)(a) make the assessee estimate his current income and since a bona fide dispute was pending, imposition of interest under s. 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.

Accordingly, all the above income-tax appeals are disposed of with no orders as to costs.

 

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