The Commissioner Of Income Tax, Dehradun And Another v. Reading & Bates Exploration Co., As Agent Of Mr. W. Major

Assessment Year 1992-93 IN THE HIGH COURT OF UTTARANCHAL AT NAINITAL Income Tax Appeal No. 27 of 2002 The Commissioner of Income Tax, Dehradun and another ............. Appellants Versus Reading & Bates Exploration Co.,As agent of Mr. W. Major, C/o Arthur Anderson & Co.,426, World Trade Centre, Barakhamba Lane, New Delhi ...............Respondent Mr. S.K. Posti, learned counsel for the Tax Department. Ms. Krishi Shukla, learned counsel for the respondent. Date: 20.07.2004 Hon'ble P.C. Verma, A.C.J.Hon'ble P.C. Pant, J. 1.This is an appeal under section 260A of the Income TaxAct, 1961 filed by the Revenue against the judgment and orderdated 23.02.2001 passed by the Income Tax Appellate Tribunal,New Delhi in I.T.A. Nos. 7442/Del/1995. 2.Mr. J. Malia, respondent is a non-resident foreigntechnician employed by a foreign company, Reading and BatesExploration Company which, in the year under consideration,executed contracts in India. During the year consideration,respondent was in employment of this company and thus derivedincome from 'salaries' from it. 3.The questions raised before us are as follows:- QUESTIONS: 1.Whether on the facts and in the circumstances of thecase, the Ld. ITAT was legally justified in holding that case, the Ld. ITAT was legally justified in holding that the salary paid to the assessee for the off period outsideIndia was not chargeable to Indian Income Tax Act interms of section 9(1)(ii) of the I.T. Act, 1961, whereasthe Ld. ITAT has itself held, vide order dated25.3.1992 in ITA No. 5649/D/92, dated 28.7.99 in ITA No. 1079/D/91, dated 24.1.2000 in ITA No. 411/D/93and dated 15.5.2000 in ITA No. 1648/D/94 that offperiod salary is taxable in India? 2.Whether on the facts and in the circumstances of thecase, the ITAT was legally correct in holding that freeboarding and lodging facilities provided by theemployer at the rig in high seas cannot be construed tobe perquisite? 3.Whether on the facts and in the circumstances of thecase, the Ld. ITAT was justified in law in allowing theappeal of the assessee on the issue of charging interestu/s 234B of the I.T. Act while admitting that chargingof interest u/s 234B is consequential?" 4.Heard learned counsel for the parties and perused therecord. 5.As this Court has discussed in Income Tax Act Appeal No.57 of 2002; The Commissioner of Income Tax, Dehradun &anther V/s SEDCO Forex International Drilling Co. Ltd. decidedon 9[th ]of Oct 2003 the reasoning regarding question No. 1 isgiven in the following paragraphs: 6.Section 4 of the Act is a charging section. It imposestax 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 otherhand, restricts the scope of total income of a non-resident to theincome which is received or deemed to be received in India or which accrues or which is deemed to have accrued to him duringsuch year. 7.Section 9(1)(ii) interalia lays down that income whichfalls under the head "Salaries", if it is earned in India, shall bedeemed to have accrued to the non-resident during such year.Therefore section 9 is a deeming section. It brings in certaintypes of incomes, which may not come u/s 5, into the definitionof "Total Income" u/s 2(45). Section 9(1)(ii) read withExplanation provides for an artificial place of accrual for incometaxable under the head "Salaries". It enacts that incomechargeable under the head "Salaries" is deemed to accrue inIndia if it is earned in India i.e. if the services under the contractfor employment is rendered in India. In such a case, the place ofreceipt or actual accrual of salary is immaterial. In this case weare concerned with application of law to the facts of this case. 7.Section 9(1)(ii) interalia lays down that income whichfalls under the head "Salaries", if it is earned in India, shall bedeemed to have accrued to the non-resident during such year.Therefore section 9 is a deeming section. It brings in certaintypes of incomes, which may not come u/s 5, into the definitionof "Total Income" u/s 2(45). Section 9(1)(ii) read withExplanation provides for an artificial place of accrual for incometaxable under the head "Salaries". It enacts that incomechargeable under the head "Salaries" is deemed to accrue inIndia if it is earned in India i.e. if the services under the contractfor employment is rendered in India. In such a case, the place ofreceipt or actual accrual of salary is immaterial. In this case weare concerned with application of law to the facts of this case. 8.It is well settled that in order to ascertain the intentionof the contracting parties one has to study the terms andconditions of the contract and in appropriate case one has to seethe surrounding circumstances including the conduct of theparties. In this cases the contract provides for ON period andOff periods. The contract is for two years. It refers toAlternating Time Schedule. It covers both the periods. The Offperiod follows the ON periods. Therefore both the periods forman integral part of the contract. It is not possible to give separatetax treatments to On periods and Off period salaries. It is arguedthat period following ON period was not a rest period. We donot find any merit. After 35/28 days of hard work, thetechnician had to go back to the country of his residence. TheOff period followed the ON period. They both formed part ofan Integral scheme. That even under the Finance Act of 1999the new explanation uses the term "Rest period/Leave period".For above reasons we find merit in the arguments of the revenue. Further even assuming that the period following ONperiod was a standby arrangement and not a Rest period, we findthat the assessee had to undergo training during the said period. Itis important to note that the work on the oil rigs is hazardous.The assessee had to remain fit during the rest period. Hence hehad to undergo demonstrations and training but all that has anexus with the services which he had to render in India. Hencethe payment which he received was for his services in India. Inthis connection it may be noted that the Explanation to section9(1)(ii) introduced by Finance Act of 1983 refers to whatconstitutes "income earned in India". This Explanation wasintroduced by Finance Act of 1983 w.e.f. 1.4.1979 to get overthe judgment of the Gujarat High Court in 124-ITR-391 inwhich it was held that in order to attract section 9(1)(ii) of theAct, liability to pay must arise in India. By the saidExplanation, the original intention u/s 9(1)(ii) has been revived.It explains the expression "income earned in India" to meanpayment for the services in India even if the contract is executedoutside India or amount is payable outside India. However, fromthe said Explanation it is not possible to infer the corollary vizthat in all cases where services are rendered outside India, thesalary cannot be deemed to accrue in India, ipso facto. Incertain cases, even if the services were rendered outside India,the income can still accrue or arise in India. It would depend onfacts, of each case. In this case even assuming that there was norest period as alleged by the assessee and that payment was forstand by, we are of the view that training abroad during thisperiod was directly connected with the work on the rigs in India.It made the Assessee mentally and physically fit. Therefore thepayment of salary for OFF period was income earned in India i.e. for services rendered in India u/s 9(1)(ii). We would like topoint out that in this case the assessment records show that fromthe income of the Indian operations the salary in its entirety (including salary for the off period) has been paid by theemployer Company. This conduct shows the intention of thecontracting parties. Hence the entire salary for both the periodswas taxable in India u/s 9(1)(ii). 9.The reasoning regarding question No. 2 is as under: In this case, assessee had to work on the rig. It washazardous, arduous and continuous. Under such circumstancesfree food and beverages is a necessity. It is not a luxury. It is nota perquisite. Its value cannot be added to the income of theassessee. 10.The reasoning regarding question No. 3 is as under: It is important to note that section 234B imposesinterest, which is compensatory in nature and not as a penalty(See Union Home Products Vs Union of India reported in 215-ITR-758 at page 766). Secondly, although section 191 of theAct is not over-ridden by section 192, 208 & 209(1)(a)(d) ofthe Act, the scheme of sections 208 & 209 of the Act indicatesthat in order to compute advance tax the assessee has tointeralia estimate his current income and calculate the tax onsuch income by applying the rates in force. That u/s 209(1)(d)the income-tax calculated is to be reduced by the amount of taxwhich 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 wereconflicting decisions of the Tribunal. A bonafide dispute waspending. The assessee had to estimate his current income. Thewords used u/s 209(1)(a) makes the Assessee estimate hiscurrent income and since a bonafide dispute was pending,imposition of interest u/s 234B was not justified without hearingand without reasons. Accordingly, we answer this question in the affirmative i.e. in favour of the assessee and against thedepartment. 11.For the reasons aforesaid, we answer the first question inthe negative i.e. in favour of the department and against theassessee and the other two questions are answered in theaffirmative i.e. in favour of the assessee and against thedepartment. 12.Appeal disposed of accordingly. No order as to costs. (P.C. Pant, J.) (P.C. Verma, A.C.J.) H.Negi