The Commissioner Of Income-Tax Chennai v. Ravi Rajagopal

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM The Commissioner of Income-TaxChennai.. Appellant /Respondentvs.Ravi Rajagopal ... Respondent /Appellant Prayer: Appeal preferred under Section 260A of the Income-tax Act,1961 against the order of the Income-Tax Appellate Tribunal, "B"Bench, Chennai dated 27.4.2007 in I.T.A. No. 2854/Mds/2004 for theassessment year 2001 - 02 against the order of the Commissioner ofIncome Tax(A)XI, Chennai - 34 dated 3.9.2004 and made inITA.No.28 /2004-2005/A.XI for the Assessment year 2001-2002 againstthe order of Assistant Director of Income Tax(InternationalTaxation) Chennai dated 30.3.2004 and made in PAN/GIR No.809-R forthe Assessment year 2001-2002. For Appellant : Mr. K. Subramanian Sr. Standing Counsel for Income TaxFor Respondent : Mr. R. Venkatanarayanan for M/s Subbaraya Aiyer This Appeal is filed by the Revenue in respect of theassessment year 2001 - 02 against the order dated 27.4.2007 passedby the Income Tax Appellate Tribunal, "B" Bench, Chennai and wasadmitted on the following substantial questions of law: "1.Whether on the facts and circumstances of thecase, the Tribunal was right in holding thatthe assessee being an employee of a foreigncompany receiving a portion of salary in Indiais eligible for exemption under Articles 16(1)and 16(2) of the Double Taxation Agreementbetween India and UK, when the salary has beenpaid by the Indian subsidiary company. 2.Whether on the facts and circumstances of thehttps://hcservices.ecourts.gov.in/hcservices/case, the Tribunal was right in holding thatthe assessee is eligible for exemption underArticles 16(1) and 16(2) of the Double Taxation Agreement between India and UK, when suchincome has been received from an Indian companyand the salary certificate shows the disbursalof the salary and deduction of TDS in India?" 2.The facts leading to this appeal are that the respondentassessee, an employee of M/s Diego Company, UK, while filing hisreturn of income for the assessment year 2001 – 02, claimedexemption on salary to the tune of Rs.15,25,577/- under Articles 16(1) and 16(2) of the Double Taxation Avoidance Agreement(in short"DTAA") between India and UK and for short stay in India. Afterissuance of notice under Section 148 of the Income Tax Act, 1961(in short "the Act") to the assessee's Power of Attorney holder on10.02.2004 and, after hearing the assessee, the Assistant Directorof Income Tax (International Taxation), Chennai, passed theAssessment Order disallowing the exemption and brought the same totax as against which the assessee filed an appeal before theCommissioner of Income Tax (Appeals), who confirmed the order ofthe Assessing Officer holding that the contention of the assesseethat Article 16 of the DTAA is applicable to his case is nottenable, since he has not paid any tax in UK on this portion ofincome claimed. This order was carried in appeal to the IncomeTax Appellate Tribunal by the assessee. The Tribunal, afterconsidering various contentions raised before it, deleted theaddition by setting aside the order of the Commissioner of IncomeTax (Appeals). Aggrieved by the same, the Revenue has preferredthe present appeal. 3.Heard the learned counsel appearing for the parties andperused the materials on record. 3.Heard the learned counsel appearing for the parties andperused the materials on record. 4.The assessee has claimed the salary amounting toRs.15,25,577/- as exempt under Article 16(1) and 16(2) of the DTAAentered between the Government of India and the Government ofUnited Kingdom. According to the assessee, he was an employee ofone Diageo Plc. in U.K. and was working in their London office andthat he had also worked in India for about 20 days in thesubsidiary of Diageo Company known as UDV. Further, it is the caseof the assessee that that portion of the salary was payable inIndia and the said arrangement was made for the purpose ofpensionary benefits. Moreover, he claimed that the portion of asalary paid in India by a foreign employer cannot be brought to taxunder Article 16(2) of DTAA. The finding of the Assessing Officerafter considering the provisions of DTAA, was that the salary wasnot exempted as the conditions stipulated in Article 16 of DTAAwere not fulfilled by the assessee. 5.Article 16(1) and (2) of DTAA, being relevant, areextracted hereunder :- "Subject to the provisions of Article 17(Directors' fees), 18 (Artistes and athletes), 19(Governmental remuneration and pensions) 20 (Pensionsand annuities), 21 (Students and trainees) and 22https://hcservices.ecourts.gov.in/hcservices/(Teachers) of this Convention, salaries, wages andother similar remuneration derived by a resident of aContracting State in respect of an employment shall be taxable only in that State unless the employmentis exercised in other Contracting State. If theemployment is so exercised, such remuneration as isderived therefrom may be taxed in that other State." 2. Notwithstanding the provisions of paragraph 1of this Article, remuneration derived by a residentof a Contracting Stat in respect of any employmentexercised in the other Contracting State shall not betaxed in that other State if:a. He is present in that other State for a periodof not exceeding in the aggregate 183 daysduring the relevant fiscal year; b.the remuneration is paid by, or on behalf of, anemployer who is not a resident of that otherState; and c.the remuneration is not deductible in computingthe profits of an enterprise chargeable to taxin that other State."6.The aforesaid provisions contained in DTAA make it clearthat if the remuneration is received by a resident of thecontracting State in respect of employment exercised in the othercontracting State, then such remuneration is not subjected to taxin that State, if his stay does not exceed 183 days andremuneration is paid by the employer, who is not also a resident ofthe other State and the remuneration is not tax deductible from theprofits chargeable to tax in that State. b.the remuneration is paid by, or on behalf of, anemployer who is not a resident of that otherState; and c.the remuneration is not deductible in computingthe profits of an enterprise chargeable to taxin that other State."6.The aforesaid provisions contained in DTAA make it clearthat if the remuneration is received by a resident of thecontracting State in respect of employment exercised in the othercontracting State, then such remuneration is not subjected to taxin that State, if his stay does not exceed 183 days andremuneration is paid by the employer, who is not also a resident ofthe other State and the remuneration is not tax deductible from theprofits chargeable to tax in that State. 7.Though there was some dispute initially with regard tothe first condition regarding stay of 183 days, after production ofadditional documents by the assessee, the appellate authority aswell as the Tribunal had concurrently held that the first conditionhas been satisfied. However, the dispute revolves round theConditions (b) & (c). So far as the conditions (b) & (c) areconcerned, the authorities, namely, the Assessing Officer and theAppellate Authority have concurrently held that with regard to theactivity outside United Kingdom, the assessee's headquarters wastreated as India and the salary was paid by the Indian concerntreating the assessee as its employee and may be that the Indianconcern recovers the same from the parent company or associateconcern UDV., London. The authorities, after coming across thecontradiction in producing the salary certificate from the Indianemployer and claiming that the same was paid by the foreigncompany, prima facie, opined that such salary certificate waswrongly issued and it has to be ignored as there is no such lettereither from the assessee company or from the Indian company. Theauthorities have also found after verification of the return filedabroad that this portion of the salary paid in India through theIndian concern was claimed as exempt in United Kingdom and the samewas not subjected to tax. The Tribunal has reversed the aforesaidhttps://hcservices.ecourts.gov.in/hcservices/factual finding of the authorities by holding that the certificateproduced by the assessee had shown that it was a part of thearrangement and UDV India Ltd. was only acting as a postman and such money was being recovered from the holding Company i.e.,Diageo Plc, U.K., and it was further held that the salary amountwas never claimed as expenditure by UDV India Ltd. 8.The amount in question is the portion of the assessee'ssalary received and retained in India as per the terms of the DTAA.It is not in dispute that the said amount claimed by the assesseeas exemption under Article 16(2) is not taxed either in U.K., or inIndia. The payment has been made through the Indian based companyby the U.K. company. If it is the contention of the assessee thathe was an employee of the UDV London alone, the payment would havebeen made by the said foreign company and not by the Indiancompany. Therefore, the condition stipulated in Article 16(2)(b)is not fulfilled in so far as the Indian company treated theassessee as its employee and issued a salary certificate deductingTDS. The concurrent finding arrived at by the authorities oughtnot to have been interfered by the Tribunal without appraising thefacts of the case in the manner known to law. The Tribunal hasfailed to see that the condition laid down in Article 16(2)(b) wasnot fulfilled by the assessee and, therefore, the finding of theTribunal is to be interfered with. For all these reasons, the order of the Commissioner is upheldand the order of the Tribunal is set aside and the issue isanswered in favour of the Revenue. No costs. Sd/Assistant Registrar/true copy/Sub Asst.Registrar For all these reasons, the order of the Commissioner is upheldand the order of the Tribunal is set aside and the issue isanswered in favour of the Revenue. No costs. Sd/Assistant Registrar/true copy/Sub Asst.Registrar griTo1.The Commissioner of Income-TaxChennai2.The Income-Tax Appellate Tribunal, "B" Bench, Chennai3. The Commissioner of Income Tax(A)XI Chennai - 34.4. The Assistant Director of Income Tax, (International Taxation) Chennai 1 cc To Mr.R.Venkatanarayanan, Advocate, SR.297991 cc To Mr.K.Subramaniam, Sr.StandingCounsel for the Income Tax Department, SR.29582