Full Judgment
1. The Income Tax Appellate Tribunal, New Delhi, has referred the following question of law under section 256(1) of the Income Tax Act, 1961, hereinafter referred to as the Act, for opinion to this Court.
'Whether on facts and in the circumstances of the case the Income Tax Appellate Tribunal was right to hold that the expenditure in question on payment of salaries was not borne by the permanent establishment in India and so the employee in question would not be exigible to Indian Taxation in terms of article 16(2)(c) of the Tax Avoidance Agreement?'
The present reference relates to assessment years 1985-86 and 1986-87.
2. Briefly stated the f acts giving rise to the present reference are follows:
All the respondents-assessees are non-residents working in India for Elitos S.P.A. They claimed before the assessing officer that all their cases are covered by Double Taxation Avoidance Agreement between India and Italy and their respective salaries were not taxable with reference to article 16(2)(c) of the said agreement. According to this article, it was claimed that M/s. Elitos S.P.A. did not have a permanent establishment or fixed base in India. The Income Tax Officer had rejected the contention and had held that the employer M/s. Elitos S.P.A. had both a permanent establishment and a fixed base in India. According to the assessing officer, since condition in clause (c) of article 16(2) of the Double Taxation Avoidance Agreement was not fulfilled, the salaries so received along with perquisites of tax paid by the employer, was taxable in their respective hands and accordingly the assessments were framed, which order was upheld by the Commissioner (Appeals). However, in further appeal the Tribunal had held that the employer did have a permanent establishment or a fixed base in India in terms of article 5(1). It had held that the remuneration of the employees in question is not borne by the permanent establishment or fixed place which the employer had in India. The salaries to the non-residents technicians were paid in Italy and hence the same were not borne by the permanent establishment in India and, therefore, the respondents-assessees were not exigible to Indian Taxation in terms of article 16(2)(c) of the Double Taxation Avoidance Agreement. It had also rejected the plea that the tax collected from O.N.G.C. on behalf of M/s. Elitos S.P.A., the employer company as a taxable perquisite in the hands of the employees under section 17(2)(iv) of the Act.
We have heard Sri Shambhoo Chopra, learned Standing counsel appearing for the revenue. Nobody has appeared on behalf of the respondents.
3. Learned Standing counsel submitted that the Tribunal has found that the employer, namely, M/s. Elitos S.P.A. had a permanent establishment and a fixed base in India. 0.N.G.C. had collected tax on behalf of M/s. Elitos S.P.A. in respect of the payment made in India. According to him, in view of the Explanation 2 to section 9 of the Act the salary paid by the respondents-assessees was liable to tax in India in terms of the Double Taxation Avoidance Agreement. In support of his submission he has relied upon a decision of the Bombay High Court in the case of CIT v. Estienne Andre : [2000]242ITR422(Bom) .
4. We have given our anxious consideration to the plea raised by the learned Standing counsel and we find that under article 16 of the Double Taxation Avoidance Agreement entered into between India and Italy, the salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State. However, clause (2) of article 16 which starts with a non obstante clause provides certain exceptions. Article 16 of the Agreement is reproduced below:
'Article 16: Dependent personal services.-(1) Subject to the provisions of articles 17, 18, 19 and 20 salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other State.
(2) Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first mentioned State if:
(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerning;
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.
(3) Notwithstanding the preceding provisions of this article, remuneration in respect of an employment exercised aboard a ship or aircraft in international traffic, may be taxed in the Contracting State in which the place of effective management of the enterprise is situated.'
From a perusal of the aforesaid article it is seen that all the conditions mentioned in sub-clause (2) of article 16 of the Agreement is to be fulfilled in case the salaries, wages and other remunerations derived by the respondents is to be held not liable to tax in India. It is not in dispute that the conditions mentioned in sub-clauses (a) and (b) of clause 2 of article 16 are fulfilled in the present case. So far as the condition mentioned in sub-clause (c) of clause 2 is concerned we find that the Tribunal has recorded a finding that the respondents-assessees had received only 7 per cent of the amount which became due to the employer company and that 7 per cent which it has received has not been utilised for making payment of salary to the employees. The salaries are all paid in Italy by the Head Office of the company. Total receipts in India as per the working given was in terms of Indian currency Rs. 8.49 lakhs only as against which expenses incurred by it in India on fooding, transport charges and hotel charges etc. of the employees aggregated to Rs. 11.92 lakhs. Salaries of pilots/engineers paid in Italy amount to Rs. 59,18,000 and, therefore, expenditure in question on payment of salary was not borne by the permanent establishment in India.
5. In the case of Estienne Andre (supra) which has been relied by the learned Standing Counsel, the Bombay High Court had dismissed the reference application made under section 256(2) of the Act on the ground that no question of law arose out of the order of the Tribunal granting relief under Double Taxation Avoidance Agreement between India and France. The aforesaid decision is of no assistance.
6. It may be mentioned here that under section 90 of the Act the Central Government has been empowered to enter into an agreement with the Government of any country outside India for granting relief for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country.
7. On the basis of the finding recorded by the Tribunal that the expenses on salaries were not borne by the permanent establishment or fixed base in India, the provisions of clause 2 of article 16 of the Double Taxation Avoidance Agreement comes into play and, therefore, the salary received by the respondents-assessees is not liable to tax in India. Explanation 2 to section 9 of the Act was not attracted in the present case as it is covered by the Double Taxation Avoidance Agreement and in view of the section 90 of the Act it would have an overriding effect.
8. In view of the foregoing discussion, we answer the question referred to us in the affirmative i.e., in favour of the assessees and against the revenue. However, there shall be no order as to costs.