The Commissioner Income-Tax Dehradun & Another v. Sedco Forex International Drilling Co. Ltd

IN THE HIGHT COURT OF UTTARANCHAL AT NAINITAL Chapter VIII, Rule 32(2) (b)Description of case INCOME TAX APPEAL NO. 57 of 2002 AND INCOME TAX APPEAL NO. 63 of 2002 AND INCOME TAX APPEAL NO. 64 of 2002 AND INCOME TAX APPEAL NO. 60 of 2003 AND INCOME TAX APPEAL NO. 63 of 2003 AND INCOME TAX APPEAL NO. 61 of 2003 AND INCOME TAX APPEAL NOs. 79,81,84,85,87,92,95,96,97,98,99,105 of 2002 AND INCOME TAX APPEALS NOs. 301,307,308,309,311,313,315 of 2001 AND INCOME TAX APPEAL NO. 458 of 2001 AND INCOME TAX APPEAL NO. 102 of 2001 AND INCOME TAX NOS. 558,559,561,562 of 2001 For the approval of: Hon'ble Chief Justice S.H. Kapadia. Hon'ble Mr. Justice Irshad Hussain. -Whether the order/judgement should be sent to the reporters for reporting? (Yes) -Whether the reporters be allowed to see thejudgement? (Yes) HN IN THE HIGHT COURT OF UTTARANCHAL AT NAINITAL INCOME TAX APPEAL NO. 57 of 2002 The Commissioner Income-tax Dehradun & another ---- Appellants Vs. SEDCO Forex International Drilling Co. Ltd. AND INCOME TAX APPEAL NO. 64 of 2002 The Commissioner Income-tax Dehradun & another ---- Appellants Vs. SEDCO Forex International Drilling Co. Ltd. ---- Respondent ANDINCOME TAX APPEAL NO. 60 of 2003The Commissioner Income-tax Dehradun & another ---- Appellants Vs.SEDCO Forex International Drilling Co. Ltd. ---- Respondent AND INCOME TAX APPEAL NO. 63 of 2003 The Commissioner Income-tax Dehradun & another ---- Appellants Vs.SEDCO Forex International Drilling Co. Ltd. ---- Respondent AND INCOME TAX APPEAL NO. 61 of 2003 The Commissioner Income-tax Dehradun & another ---- Appellants Vs.SEDCO Forex International Drilling Co. Ltd. ---- Respondent Mr. S.Kapila, Counsel i/b Mr. S.K. Posti, Advocate for the Appellants. Mr. P.F. Kaka with Mr. Gulati, Counsel i/b Mr. V.K. Bisht, Advocate for respondent. AND INCOME TAX APPEAL NOs. 79,81,84,85,87,92,95,96,97,98,99,105 of 2002 M/s Hughes Services (Far East) Pvt. Ltd. ---- Appellants Vs. Income Tax Appellate Tribunal & others ---- Respondents Mr. P.F. Kaka with Mr. Gulati, Counsel i/b Mr. V.K. Bihst, Advocate for appellant. Mr. S.K. Posti, Counsel for the respondents. AND INCOME TAX APPEAL NOs. 301,307,308,309,311,313,315 of 2001 ----M/s Hughes Services (Far East) Pvt. Ltd.Appellants Vs. ----Commissioner of Income-tax, MeerutRespondent Mr. P.F. Kaka with Mr. Gulati, Counsel i/b Mr. V.K. Bihst, Advocate for appellants. Mr. S.K. Posti, Counsel for the respondent. AND INCOME TAX APPEAL NO. 458 of 2001 Commissioner of Income-tax, Meerut And another Vs. ---- Appellants M/s Hughes Services Far East Pvt. Ltd. ---- Respondent Mr. S.K. Posti, Counsel for the Appellants. Mr. P.F. Kaka with Mr. Gulati, Counsel i/b Mr. V.K. Bihst, Advocate for respondent. AND INCOME TAX APPEAL NO. 102 of 2001 Commissioner of Income-tax, Meerut And another ---- Appellants Vs. M/s Hughes Services Pvt. Ltd. ---- Respondent Mr. S.K. Posti, Counsel for the Appellants. Mr. P.F. Kaka with Mr. Gulati, Counsel i/b Mr. V.K. Bihst, Advocate for respondent. AND INCOME TAX APPEAL NOs. 558,559,561,562 of 2001 Commissioner of Income-tax, Dehradun And another Vs. ---- Appellants M/s Hughes Services Pvt. Ltd. ---- Respondent Mr. S.K. Posti, Counsel for the Appellants. Mr. P.F. Kaka with Mr. Gulati, Counsel i/b Mr. V.K. Bihst, Advocate for respondent. Coram:Hon'ble S.H. Kapadia, C.J., Hon'ble Irshad Hussain,J. Date: 9[th ]October, 2003; ORAL JUDGMENT ( Hon'ble S.H. Kapadia, C.J.) AND INCOME TAX APPEAL NO. 102 of 2001 Commissioner of Income-tax, Meerut And another ---- Appellants Vs. M/s Hughes Services Pvt. Ltd. ---- Respondent Mr. S.K. Posti, Counsel for the Appellants. Mr. P.F. Kaka with Mr. Gulati, Counsel i/b Mr. V.K. Bihst, Advocate for respondent. AND INCOME TAX APPEAL NOs. 558,559,561,562 of 2001 Commissioner of Income-tax, Dehradun And another Vs. ---- Appellants M/s Hughes Services Pvt. Ltd. ---- Respondent Mr. S.K. Posti, Counsel for the Appellants. Mr. P.F. Kaka with Mr. Gulati, Counsel i/b Mr. V.K. Bihst, Advocate for respondent. Coram:Hon'ble S.H. Kapadia, C.J., Hon'ble Irshad Hussain,J. Date: 9[th ]October, 2003; ORAL JUDGMENT ( Hon'ble S.H. Kapadia, C.J.) 1.This batch of appeals involve common question of law and factand therefore, they are decided all together by this common judgment. For the sake of convenience, we are mentioning hereinbelow thefacts in I.T.A. No. 57 of 2002. FACTS 2.Ronald Grey, the assessee, entered into a contract foremployment with Sedco Forex International Drilling Company(hereinafter referred to as the said Company) incorporated in Panama.Assessee was the resident of U.K. Under the contract he was requiredto work on oil rigs in Bombay High as per Alternating Time Scheduleof 35/28 days i.e. ON period followed by 35/28 days of OFF period in U.K. Before the Assessing Officer it was contended, on behalf of theassessee, that OFF period salary was not exigible to tax u/s 9(1)(ii) ofthe Act as it was not earned in India. It was argued that the field breakwhich followed the ON period was not a rest period. A.O. rejected thiscontention. The order passed by the A.O. was confirmed by CIT (A). Further, the A.O. held that free food and free beverages and freeboarding on the rigs, constituted a perquisite u/s 17(2)(iii). He addedtheir value to the income of the assessee. The A.O. also levied interestu/s 234B on the assessee for short payment of advance tax. The orderof the A.O. on all above points was confirmed by CIT (A). Beingaggrieved, the matter was carried in appeal to the Tribunal which tookthe view that field break i.e. the OFF period was not a rest period.That during the break the asessee had to stand by in U.K. andtherefore the OFF period salary was not payable for services renderedin India and therefore OFF period salary was not taxable u/s 9(1)(ii) ofthe Act. Consequently, the Tribunal deleted the levy of interest u/s234B of the Act. The Tribunal further took the view that free food andbeverages and boarding was not a perquisite. Being aggrieved, department has come by way of appeal u/s260A of the Act for the assessment year 1992-93. Arguments: 3.Smt. Kapila, learned counsel for the department, submitted thatevery receipt which has a nexus with the service rendered in Indiarules out the dichotomy and separate tax treatment for ON and OFFperiods salary. That since the work was arduous during the ONperiod, a break is given. That despite repeated opportunity, theassessee has failed to produce evidence of his work during the fieldbreak. That in the circumstances the A.O. was entitled to concludethat the field break was the rest period. It was further argued that thecontract covered both the periods. That the salary was paid under thecontract. That the assessment records indicate that the entire salary(including salary for the off period) has been debited to the P&Laccount of the Employer Company. That the said Company has paidthe entire salary to the assessee out of its income from IndianOperations. In the circumstances it was submitted that the payment ofsalary was for services rendered in India. That it represented income earned in India u/s 9(1)(ii) read with Explanation as it stood atrelevant time. earned in India u/s 9(1)(ii) read with Explanation as it stood atrelevant time. Learned Counsel for the department further contended that inthis case, section 234B was applicable. She contended that ITAT waswrong in holding that section 234B was not applicable to Incomesfalling under the head “Salaries”. It was submitted that u/s 191 of theAct, in cases of failure to deduct tax at source by the employer the taxhas to be paid by the assessee. It was contended that section 234Bdeals with levy of interest in cases of shortfall in payment of advancetax by assessee. That sections 192, 202 and 208 of the Act doesnot rule out sub section 191 of the Act. That the Tribunal was wrongin holding that as tax was deductible at source u/s 192 by theemployer, the assessee did not incur any liability to pay advance taxu/s 208 and since the assessee did not incur any liability u/s 208, hewas not liable to pay interest u/s 234B. It was argued that sections191 & 208 & 234B all fall in Chapter XVII of the Act and thereforesections 192 & 208 cannot rule out section 191 of the Act which statesthat if the payer fails to deduct TDS the tax shall be payable by theassesseee directly. Mr. Porus Kaka, learned counsel for the assessee, on the otherhand contended that in the case of contract for employment the rightto receive accrues at the place where contract is entered into or wherethe amount is payable. He argued that the place where the right toreceive accrues would be the place where income becomeschargeable. That this is the position u/s 5 of the Act. That howeversection 9 is an extension to section 5. That u/s 9(1)(i) income fromBusiness Connections in India was taxable. Therefore u/s 9(1)(i) onlyincome from business operations in India, as far as non-residents areconcerned, is taxable. That similarly u/s 9(1)(ii) read with Explanation(introduced by Finance Act of 1983 w.e.f. 1.4.1979), income payablefor service rendered in India is regarded as “income earned in India”u/s 9(1)9(ii) of the Act. It was therefore contended that the intention ofthe legislature is to tax only a specific type of income which arises from operations in India u/s 9(1)(i) or which has nexus to servicesrendered in India u/s 9(1) (ii) read with above explanation. It wasfurther argued that under the contract in question Off Period did notrepresent Rest period. That during the off period, the assessee had tostand by. That, he could not move out of U.K. That, he could besummoned by the Company at any time. That, the salary received byhim for off period was therefore not taxable u/s 9(1)(ii) as it waspayable for services rendered outside India. That looking to the scopeof section 9(1)(ii) read with above explanation it was necessary todichotomize between what is payable for ON period vis-a-vis what ispayable for Off period and if so the said salary for Off period was nottaxable. It was further argued that if the assessee works for 28 days and resigns on the 29[th ]day he does not get salary for the off period. That the payment was against the field break and therefore the saidbreak did not represent rest period. That the field break did notrepresent rest period. That it was not for service rendered in India andtherefore it was not taxable. It was further argued that the departmentis seeking to tax the income earned by the assessee abroad during thebreak which was not permissible. Learned counsel for the assesseefurther argued that his interpretation finds support from the substitutedExplanation introduced by the Finance Act of 1999. It was furtherargued that the non-resident Company (employer) is taxable onnotional profits u/s 44BB of the Act and therefore there is no questionof that Company claiming deduction in respect of salary which it haspaid to the assessee. It was argued that the said Company was taxedon presumed income and therefore the question of that Companypaying salary from its income from India operations was irrelevant.On the question of levy of interest u/s 234B of the Act, it was arguedon behalf of the assessee that u/s 207, 208, 209(1)(a)(d) the assesseehad to estimate his current income u/s 234B and if the said Companyhad made short deduction of the tax at source then the said Companywas liable u/s 191 of the Act. That in such cases the department had aright to move against the employer Company u/s 201 for recovery of balance tax with interest u/s 201(1A). That where any income wasliable to TDS, Section 234 B was not applicable. That even assumingthat section 191 was applicable, no interest is chargeable u/s 234B onthe assessee for failure on the part of his employer to deduct TDS. 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 u/s 9(1)(ii)read with the Explanation as it stood at the relevanttime?" Answer: In facts and circumstances of this case, ouranswer is in the Negative i.e. in favour of thedepartment and against the assessee. REASONS Section 4 of the Act is a charging section. It imposes tax onthe total income of the previous year of every person. Under section4(2), tax is deducted at source or paid in advance, where it is sodeductible or payable. Section 5(2), on the other hand, restricts thescope of total income of a non-resident to the income which isreceived or deemed to be received in India or which accrues or whichis deemed to accrue to him during such year. " Whether, the Tribunal was right in holding that"OFF Period Salary" was not taxable u/s 9(1)(ii)read with the Explanation as it stood at the relevanttime?" Answer: In facts and circumstances of this case, ouranswer is in the Negative i.e. in favour of thedepartment and against the assessee. REASONS Section 4 of the Act is a charging section. It imposes tax onthe total income of the previous year of every person. Under section4(2), tax is deducted at source or paid in advance, where it is sodeductible or payable. Section 5(2), on the other hand, restricts thescope of total income of a non-resident to the income which isreceived or deemed to be received in India or which accrues or whichis deemed to accrue to him during such year. Section 9(1)(ii) interalia lays down that income which fallsunder the head "Salaries", if it is earned in India, shall be deemed toaccrue to the non-resident during such year. Therefore section 9 is adeeming section. It brings in certain types to incomes, which maynot come u/s 5, into the definition of "Total Income" u/s 2(45).Section 9(1) (ii) read with Explanation provides for an artificial placeof accrual for income taxable under the head "Salaries". It enacts thatincome chargeable under the head "Salaries" is deemed to accrue inIndia if it is earned in India i.e. if the services under the contract foremployment is rendered in India. In such a case, the place of receiptor actual accrual of salary is immaterial. In this case we areconcerned with application of law to the facts of this case. It is well settled that in order to ascertain the intention of thecontracting parties one has to study the terms and conditions of thecontract and in appropriate cases one has to see the surroundingcircumstances including the conduct of the parties. In this cases thecontract provides for ON Period and Off periods. The contract is fortwo years. It refers to Alternating Time Schedule. It covers both theperiods. The Off period follows the ON periods. Therefore both theperiods form an integral part of the contract. It is not possible to giveseparate tax treatments to On periods and Off period salaries. It isargued that period following ON period was not a rest period. We donot find any merit. After 35/28 days of hard work, the technician hadto go back to the country of his residence. The Off period followed theON period. They both formed part of and Integral scheme. Thateven under the Finance Act of 1999 the new explanation uses theterm "Rest period/Leave period". For above reasons we find merit inthe arguments of the revenue. Further even assuming that the periodfollowing ON period was a standby arrangement and not a Restperiod, we find that the assessee had to undergo training during thesaid period. It is important to note that the work on the oil rigs ishazardous. The assessee had to remain fit during the rest period.Hence he had to undergo demonstrations and training but all that hasa nexus with the services which he had to render in India. Hence thepayment which he received was for his services in India. In thisconnection it may be noted that the Explanation to section 9(1)(ii)introduced by Finance Act of 1983 refers to what constitutes "incomeearned in India". This Explanation was introduced by Finance Act of1983 w.e.f. 1.4.1979 to get over the judgment of Gujarat HighCourt in 124-ITR-391 in which it was held that in order to attractsection 9(1)(ii) of the Act, liability to pay must arise in India. By thesaid Explanation, the original intention u/s 9(1)(ii) has been revived.It explains the expression "income earned in India" to mean paymentfor the services in India even if the contract is executed outside Indiaor amount is payable outside India. However, from the said Explanation it is not possible to infer the corollary viz that in all caseswhere services are rendered outside India, the salary cannot bedeemed to accrue in India, ipso facto. In certain cases, even if theservices were rendered outside India, the income can still accrue orarise in India. It would depend on facts of each case. In this caseeven assuming that there was no rest period as alleged by the assesseeand that payment was for stand by, we are of the view that trainingabroad during this period was directly connected with the work on therigs in India. It made that Assessee mentally and physically fit.Therefore the payment of salary for OFF period was income earnedin India i.e. for services rendered in India u/s 9(1)(ii). Lastly, we would like to point out that in this case theassessment records show that from the income of the Indianoperations the salary in its entirety (including salary for the offperiod) has been paid by the employer Company. This conductshows the intention of the contracting parties. Hence the entire salaryfor both the periods was taxable in India u/s 9(1)(ii). 5.The next question which has arisen for determination is asfollows:- Question: "Whether, the Tribunal was right in holding thatfree food, beverages and boarding on the rig wasnot a perquisite u/s 17(2)(iii)?" Answer: On the facts of this case we answer this question in theaffirmative i.e. in favour of the assessee and againstthe department. REASONS In this case, assessee had to work on the rig. It washazardous, arduous, and continuous. Under such circumstances freefood and beverages is a necessity. It is not a luxury. It is not aperquisite. Its value cannot be added to the income of the assessee. 6.The last question, referred to us for our opinion is asfollows:- Question: "Whether the Tribunal was justified in deletinginterest levied on the assessee u/s 234B?" Answer: In view of the facts and circumstances of this caseour answer is in the affirmative i.e. in favour of theassessee and against the department. REASONS Although we agree with the conclusions of the Tribunal, weprefer to give our own reasons in support our conclusion that onfacts and circumstances of this case, levy of interest u/s 234B on theassesse is not justified. Firstly, the decisions of the Tribunal on theinterpretation of the contracts regarding ON period and OFF periodsalary were conflicting. Ultimately the legislature has stepped in toclarify the position by Finance Act of 1999. In this connection it isimportant to note that section 234B imposes interest, which iscompensatory in nature and not as a penalty (See Union HomeProducts Vs Union of India reported in 215-ITR-758 at page 766).Secondly, although section 191 of the Act is not over-ridden bysections 192, 208 & 209(1)(a)(d) of the Act, the scheme of sections208 & 209 of the Act indicates that in order to compute advance taxthe assessee has to interalia estimate his current income and calculatethe tax on such income by applying the rates in force. That u/s209(1)(d) the income-tax calculated is to be reduced by the amount oftax which would be deductible at source or collectible at source,which in this case has not been done by the employer companyaccording to the law prevailing for which the assessee cannot befaulted. As stated above at the relevant time there were conflictingdecisions of the Tribunal. A bonafide dispute was pending. Theassessee had to estimate his current income. The words used u/s209(1)(a) makes the Assessee estimate his current income and since abonafide dispute was pending, imposition of interest u/s 234B wasnot justified without hearing and without reasons. Accordingly, weanswer this question in the affirmative i.e. in favour of the assesseeand against the department. 7.Accordingly, all the above Income Tax Appeals are disposedof with no orders as to cost. (Irshad Hussain, J.) (S.H. Kapadia, C.J.) HN