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Digest of Tribunal decisions

  1. French nationals employees of a French company working in India obliged to contribute certain percentage of salary to French Social Security Organisation –Whether deductible while computing assessees’ salary income in India

Gallotti Raoul vs. Assistant Commissioner of Income-tax [1997] 61 ITD 453 (Mumbai)

Assessees were French nationals working in India. In terms of French legislation, every French national is under obligation to affiliate with Social Security Organisation and contribute certain percentage of salary irrespective of where a French national is employed. Social Security Organisation in turn takes care of French nationals in various calamities. Social security charges paid are given as deduction in income-tax assessment in France. Assessees were paid salary after deduction of social security charges. Such Social Security Contribution made had to be deducted while computing salary income of assessees.

Facts

  1. The assessees were French nationals and employees of a French company who had taken contract of construction work at Mumbai.
     

  2. In terms of French legislation, every individual is to contribute social security charges. Social security charges had to be contributed to a Social Security Organisation, which guarantees the workers and their families against all types of risk susceptible to reduce or curtail their earning power/capacity including maternity and family costs.
     

  3. It covered all French nationals and their families including medical cost, family cost, etc., and assures the benefit of social insurance, work accidents, professional sickness, old age allowance, family allowance, etc.
     

  4. The assessees were paid salary after deduction of the charges payable by them to the social security organisation.
     

  5. The assessees claimed that the social security charges which they were liable to contribute in France should be treated as if the Social Security Organisation had an overriding title to the income from the salary of the assessees and thereby it was only the net of salary that was to be taxed after adjustment of the social security charges.

Decision

On Second Appeal, the Tribunal decided the issue in favour of the assessees and held as follows:

  1. The Social Security Organisation formed under a particular statute lays down a compulsion whereby all French nationals have to be affiliated to the social insurance regardless of their age, sex and even if they are pensioners, salaried employees, or working in any cadre, or place, for one or more employers, for whatever sum, or whatever type of remuneration, form, nature and validity of their contracts. This aspect has an important bearing, especially in the instant cases because all the appellants were French nationals.
     

  2. According to the above requirement of the social insurance, the French nationals have to be affiliated to the social insurance regardless of the fact whether they are working in France or in any other place. It was an undisputed fact that the French Tax Act allows full deduction of the social security contributions from the income and it is only on the net income that tax is levied.
     

  3. The concept of such compulsory contribution to social security is not prevalent in India. The various schemes that are prevalent in India are saving schemes, which would rather provide the country with funds with which they can carry out various needs of the country. This being the basic difference between the concept in India and France, the concept of social security payment, in the perspective in which it is existing in France, it is that every French national has to contribute to the social security regardless of his place of work and thereby the social security organisation could be treated as a working partner of all the French nationals. By this process the social security organisation derives or levies a prior charge on the income of its partner, viz., the French national. This treatment of contribution to the social security as a prior charge is so taken by considering that the organisation parallelly carries out various functions of taking over the responsibility of maintaining the French nationals. In other words, the said organisation maintains the various subjects of the French nationals, for which they contribute.
     

  4. Unlike the schemes in India which are saving schemes, the scheme of social security in France is not a saving scheme, but a scheme to protect the French nationals from various calamities.
     

  5. From this point of view, the amount that was contributed to the Social Security Organisation was a diversion of income by overriding title at the stage of earning point itself.
     

  6. The affiliation being compulsory, making the social security organisation an earning partner alongside of the assessee, i.e., the assessee earned not only for himself but also for the social security organisation, the extent of the amount relatable to social security organisation, the assessee had no right over it at all and thereby no domain on it.
     

  7. Hence, the social security charges were to be deducted from the salary income as a prior charge by overriding title and it was only the net salary after such deduction that should be treated as gross salary within the meaning of section 16.

Cases referred to

  1. Warner Dahl [IT Appeal Nos. 2707 and 2708 of 1990 dated 24-7-1995],

  2. CIT vs. Sitaldas Tirathdas [1961] 41 ITR 367 (SC),

  3. CIT vs. Pompei Tile Works [1989] 175 ITR 1/ (Kar.),

  4. CIT vs. Bombay State Road Transport Corpn. [1977] 106 ITR 303 (Bom.),

  5. CIT vs. Pandavapura Sahakara Sakkare Karkhane Ltd. [1988] 174 ITR 475 (Kar.),

  6. Keshkal Co-operative Marketing Society Ltd. vs. CIT [1987] 165 ITR 437/(MP),

  7. Somaiya Organo-Chemicals Ltd. vs. CIT [1975] 216 ITR 291 (Bom.),

  8. Life Insurance Corpn. of India v. CIT [1979] 119 ITR 900 (Bom.),

    9.

  9. Vibhuti Glass Works vs. CIT [1989] 177 ITR 439/44 Taxman 182 (SC) and

  10. CIT vs. South Arcot District Co-operative Supply & Marketing Society Ltd. [1981] 127 ITR 467 (Mad.).

[Editorial Note: Though this decision is an old one and relates to A.Y. 1986-87 & 1987-88, it is still relevant and important as large number of foreign nationals are working in India and millions of Indians are working abroad and are subject to social security contributions. Hence, this decision is now reported.]

  1. Non deduction of TDS from overseas salary paid to the assessee Co’s managing director –Levy of tax and interest u/ss. 201(1) & 201(1A) upheld

Kinetic Technology (India) Ltd. vs. ITO, TDS Ward 28(4) [2005] 96 ITD 441 (Delhi)

Assessing Officer having found that assessee-company had not deducted tax at source from overseas salary paid to its managing director for services rendered by him to it in India, levied tax as well as interest under sections 201(1) and 201(1A) upon assessee. Since assessee itself agreed to be treated as an assessee in default and made full payments of demand, order passed by Assessing Officer was good in accordance with provisions of Act. Salaries paid overseas to managing director for services rendered by him in India would fall under the head ‘salaries’ as income earned in India and chargeable to tax and, consequently, section 192 would apply.

Facts

  1. The assessee was a company incorporated in India in which a non-resident company had 50 per cent shareholding. The non-resident company had deputed one ‘H’ as managing director of the Indian company.
     

  2. Pursuant to a survey operation at the assessee’s business premises, the Assessing Officer found that the assessee-company had not deducted tax at source from the overseas salary paid to the managing director through said non-resident company, for the services rendered by him to assessee-company in India.
     

  3. The Assessing Officer passed order under sections 201(1) and 201(1A) in relation to unpaid tax as well as interest on such unpaid tax. The Commissioner (Appeals) upheld the order of the Assessing Officer.
     

  4. On Second Appeal, the assessee contended that ‘H’ had never brought the fact of salaries being paid to him overseas to the notice of the assessee-company as he was required to do under the provisions of section 192(2), and further, the order made by the Assessing Officer was not justified under sections 9(1)(ii) and 163(1) because no notice had been served upon the assessee for being treated as ‘agent’ of the non-resident company.

Decision

The Tribunal held as follows:

  1. The impugned orders under sections 201(1) and 201(1A) were good orders both in terms of the provisions of section 192 as well as under the provisions of Explanation to section 9(1)(ii) read with section 163(1). ‘H’ was managing director of the assessee-company and, therefore, his having received the salary overseas in respect of services rendered by him in India to the assessee-company, from non-resident company instantaneously came to the knowledge of the assessee-company. The fact that ‘H’ did not formally communicate it in writing to the assessee-company might be considered a mitigating circumstance only for the purpose of the penal provisions of the Act.
     

  2. As to the provisions of Explanations appended to section 9(1)(ii), the provisions are quite clear. As long as ‘H’ was paid salaries overseas for services rendered in India, such payments fell under the head ‘Salaries’ as income earned in India and chargeable to income-tax. Consequently, the provisions of sections 192(1) & 192(2) would apply.
     

  3. The non-resident company was 50 per cent shareholder of the assessee-company at the relevant time and had considerable interest in the business of the assessee-company and, therefore, the assessee was natural agent of the non-resident company within the meaning of section 163(1).
     

  4. The assessee argued that the assessee-company could not be treated as agent of the non-resident company within the meaning of section 163(1) without having been served a notice of the Assessing Officer’s intention to appoint the assessee as an agent. Though the provisions of section 163(1) do not make a formal notice mandatory, a reasonable opportunity of being heard must be afforded before any person is treated as an agent of a non-resident within the meaning of section 163(1). Therefore, the matter was to be restored to the file of the Assessing Officer to grant the assessee such opportunity in the first instance and thereafter, pass fresh orders in accordance with law.
     

  5. But during the course of proceedings under section 201(1), the assessee-company itself agreed to be treated as an assessee in default and had made full payments of the demands. There was not even a whisper of an objection on the part of the assessee against being treated the assessee in default during the course of the proceedings under sections 201(1) and 201(1A) conducted by the Assessing Officer.
     

  6. Those facts had been duly recorded by the Assessing Officer and during the course of proceedings either before the Commissioner (Appeals) or before the Tribunal, there was no refuter on the part of the assessee. There was no question of want of opportunity to the assessee when the assessee himself conceded the issue. As a matter of fact, the assessee’s appeals were liable to be dismissed on that short ground alone. At any rate, on merits and substance also, the order passed by the Assessing Officer was good order in accordance with the provisions of the Act.

  1. Scope of section 44BB r/w sec. 9(1)(i) – Non- resident sub-contractor rendering services to another foreign company in the continental shelf – Liability to tax in India

McDermott ETPM Inc. vs. DCIT [2005] 92 ITD 385 (Mum.)

Assessee, a non-resident company was engaged in various activities part of which consisted of mobilization/de-mobilization and transportation of marine spread to off-shore India, which was done outside India and installation of structures and pipelines at oilfield in continental shelf and/or Exclusive Economic Zone of India Since assessee was a sub-contractor and was not itself engaged in exploration and/or production of mineral oil nor in providing services/facilities in connection with exploration/production of mineral oil in terms of CBDT’s Notification dated 31-3-1983 and there being no direct or immediate nexus between work carried on by assessee and activities of main contractors, said notification would not apply to assessee and no tax could be levied on assessee under Act, so far as income of assessee from such contracts was concerned. Income in question could not be said to be a deemed income under section 9(1)(i) just because agreement was signed in India or income had been received in India and thus, there was no taxable income to be computed and section 44BB was inapplicable. Only a part of mobilization/demobilization work, which was attributable to operations carried out by assessee in India, was taxable in India.

Facts

  1. The assessee, a non-resident company, was engaged in the business of designing, fabrication, construction and installation of platforms, decks, pipelines, jackets and various other similar activities. A part of the said work consisted of mobilization/de-mobilization and transportation of marine spread to off-shore India and installation of structures and pipelines at Oilfield in the Continental Shelf and/or Exclusive Economic Zone of India.
     

  2. During the assessment year 1993-94, the assessee had received monies in respect of contract with a foreign company.
     

  3. The assessee submitted that it carried on activities as sub-contractor of the main contractor and income from work carried out in the continental shelf and the Exclusive Economic Zone of India was not covered under the Notification No. GSR 304(E)/(5147)/F. No. 188(7)/82 TPL dated 31-3-1983 since that notification related to the activities of prospecting for exploration and/or production of mineral oil, which it was not engaged in; that in respect of income from work done outside India, only 1 per cent of gross receipts in respect of such work could be taxable in India in terms of Explanation to section 9(1)(i).
     

  4. The assessee also referred to the CBDT Circular issued in the year 1987 clarifying that in case of work carried out outside India, only 1 per cent of the gross receipts would be attributable to the activity in India.
     

  5. However, the Assessing Officer was of the view that the assessee’s business consisted of provision of services/facilities as referred to in section 44BB and, accordingly, assessed 10 per cent of the gross receipts of the work carried out by the assessee outside India as taxable in India.
     

  6. On appeal, the Commissioner (Appeals) while upholding the assessment observed, inter alia, that the CBDT Circular was operative for 3 years and that period had long elapsed and that articles of contract entered into by the assessee indicated that the assessee was itself aware of the fact that it was covered by the provisions of the Act.

Decision

On Second Appeal, the Tribunal held as follows:

  1. The activities carried on by the assessee comprised none of the activities as contained in notification dated 31-3-1983. The assessee was engaged in the business of designing, fabrication, construction and installation of platforms, decks, pipelines, etc. It was not engaged in exploration and/or production of mineral oil nor in providing services/facilities in connection with exploration/production of mineral oil.
     

  2. Income of a non-resident person, which is taxable in India is his income which has accrued or arisen or deemed to have accrued, arisen or received in India. The scope of section 44BB encompasses only receipts paid or payable either in India or abroad, for services rendered in India, and where the services are rendered outside India, the receipts by the non-resident in India.
     

  3. The assessee’s contention was that it was a sub-contractor for the companies which were engaged in the activity of providing services or facilities or supplying ships, aircraft, machinery or plant in connection with any activity for prospecting or extraction or production of mineral oil.
     

  4. Moreover, it was sub-contractor activities, which were not covered under the notification in question, which were carried out by the assessee beyond 12 nautical miles from the Indian Coastal Line. Therefore, those activities were not covered under the Act.
     

  5. There was no direct or immediate nexus between the work carried on by the assessee and the activities of the main contractors. That being so, the notification was not applicable to the assessee. Once that was not so, no tax could be levied on the assessee under the Act, so far as the income of the assessee from such contracts was concerned. Besides, a part of the assessee’s income, which was taxable in India in the assessment of the main contractor, was passed on to the assessee under such sub-contracts. No tax could be levied once again on the same income in the hands of the assessee. Only 1 per cent of the gross receipts from the work of mobilization/demobilization and transportation might be subjected to tax in India.
     

  6. In holding that the entire gross receipts from the work carried out by the assessee outside India, was taxable as per section 44BB, the provisions of the Explanation to section 9(1)(i) had to be contravened. As per the CBDT Circular/Instruction No. 1766 also, 10 per cent of such gross receipts as attributable to activities inside India, was taxable in accordance with section 44BB.
     

  7. As per Explanation (a) to section 9(1)(i), where part of the operations of business are carried out outside India, only part of the income reasonably attributable to operations carried out in India shall be deemed to accrue or arise in India. The use of the word ‘shall’ in the said Explanation is unequivocally indicative of the legislative mandate contained therein. The Explanation, in no uncertain terms, envisages only such type of income to be deemed to accrue or arise in India, under section 9(1)(i).
     

  8. Thus, the income presently under consideration could not be said to be deemed income just because either the agreement was signed in India or the income had been received in India. The requirements of the Explanation to section 9(1)(ii) having not been met, the income was not deemed income.
     

  9. Since the income in question could not even be construed to be deemed income of the assessee, there was no taxable income to be computed and so section 44BB was inapplicable.
     

  10. Therefore, the order of the Commissioner (Appeals) was not sustainable in the eye of law and was to be cancelled. Only a part of mobilization/demobilization work, which was attributable to the operations carried out by the assessee in India, was taxable in India.

Cases referred to

Micoperi S.P.A. Milano vs. Dy. CIT [2002] 82 ITD 369 (para 11) and Asstt. CIT vs. Jindal Drilling Leasing of Term Companies [IT Appeal No. 6452 (Bom.) of 1991, dated 30-4-1998].

Circulars and Notifications – CBDT’s Notification No. GSR 304(E) (5147)/ F. No. 188(7)/82-TPL, dated 31-3-1983.
 

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