Madras H.C : the assessee being an employee of a foreign company receiving a portion of salary in India is eligible for exemption under Articles 16(1) and 16(2) of the Double Taxation Agreement between India and UK

High Court Of Madras

CIT, Chennai vs. Ravi Rajagopal

Assessment Year : 2001-02

Section : 90

Elipe Dharma Rao And M. Venugopal, JJ.

Tax Case (A) No. 150 Of 2008

April 27, 2011

JUDGMENT

1. This Appeal is filed by the revenue in respect of the assessment year 2001-02 against the order dated 27-4-2007 passed by the Income-tax Appellate Tribunal, “B” Bench, Chennai and was admitted on the following substantial questions of law :

“1. Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee being an employee of a foreign company receiving a portion of salary in India is eligible for exemption under Articles 16(1) and 16(2) of the Double Taxation Agreement between India and UK, when the salary has been paid by the Indian subsidiary company.

2. Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee is eligible for exemption under Articles 16(1) and 16(2) of the Double Taxation Agreement between India and UK, when such income has been received from an Indian company and the salary certificate shows the disbursal of the salary and deduction of TDS in India?”

2. The facts leading to this appeal are that the respondent assessee, an employee of M/s. Diego Company, UK, while filing his return of income for the assessment year 2001-02, claimed exemption 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. After issuance of notice under section 148 of the Income-tax Act, 1961 (in short “the Act”) to the assessee’s Power of Attorney holder on 10-2-2004 and, after hearing the assessee, the Assistant Director of Income-tax (International Taxation), Chennai, passed the Assessment Order disallowing the exemption and brought the same to tax as against which the assessee filed an appeal before the Commissioner of Income-tax (Appeals), who confirmed the order of the Assessing Officer holding that the contention of the assessee that Article 16 of the DTAA is applicable to his case is not tenable, since he has not paid any tax in UK on this portion of income claimed. This order was carried in appeal to the Income-tax Appellate Tribunal by the assessee. The Tribunal, after consi-dering various contentions raised before it, deleted the addition by setting aside the order of the Commissioner of Income-tax (Appeals). Aggrieved by the same, the revenue has preferred the present appeal.

3. Heard the learned counsel appearing for the parties and perused the materials on record.

4. The assessee has claimed the salary amounting to Rs. 15,25,577 as exempt under Article 16(1) and 16(2) of the DTAA entered between the Government of India and the Government of United Kingdom. According to the assessee, he was an employee of one Diageo Plc. in U.K. and was working in their London office and that he had also worked in India for about 20 days in the subsidiary of Diageo Company known as UDV. Further, it is the case of the assessee that that portion of the salary was payable in India and the said arrangement was made for the purpose of pensionary benefits. Moreover, he claimed that the portion of a salary paid in India by a foreign employer cannot be brought to tax under Article 16(2) of DTAA. The finding of the Assessing Officer after considering the provisions of DTAA, was that the salary was not exempted as the conditions stipulated in Article 16 of DTAA were not fulfilled by the assessee.

5. Article 16(1) and (2) of DTAA, being relevant, are extracted here-under:—

“Subject to the provisions of Article 17 (Directors’ fees), 18 (Artistes and athletes), 19 (Governmental remuneration and pensions), 20 (Pensions and annuities), 21 (Students and trainees) and 22 (Teachers) of this Convention, 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 other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.”

2. Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a resident of a Contracting State in respect of any employment exercised in the other Contracting State shall not be taxed in that other State if :

a. He is present in that other State for a period of not exceeding in the aggregate 183 days during the relevant fiscal year;

b. the remuneration is paid by, or on behalf of, an employer who is not a resident of that other State; and

c. the remuneration is not deductible in computing the profits of an enterprise chargeable to tax in that other State.”

6. The aforesaid provisions contained in DTAA make it clear that if the remuneration is received by a resident of the contracting State in respect of employment exercised in the other contracting State, then such remuneration is not subjected to tax in that State, if his stay does not exceed 183 days and remuneration is paid by the employer, who is not also a resident of the other State and the remuneration is not tax deductible from the profits chargeable to tax in that State.

7. Though there was some dispute initially with regard to the first condition regarding stay of 183 days, after production of additional documents by the assessee, the appellate authority as well as the Tribunal had concurrently held that the first condition has been satisfied. However, the dispute revolves round the Conditions (b) & (c). So far as the conditions (b) & (c) are concerned, the authorities, namely, the Assessing Officer and the Appellate Authority have concurrently held that with regard to the activity outside United Kingdom, the assessee’s headquarters was treated as India and the salary was paid by the Indian concern treating the assessee as its employee and may be that the Indian concern recovers the same from the parent company or associate concern UDV., London. The authorities, after coming across the contradiction in producing the salary certificate from the Indian employer and claiming that the same was paid by the foreign company, prima facie, opined that such salary certificate was wrongly issued and it has to be ignored as there is no such letter either from the assessee-company or from the Indian company. The authorities have also found after verification of the return filed abroad that this portion of the salary paid in India through the Indian concern was claimed as exempt in United Kingdom and the same was not subjected to tax. The Tribunal has reversed the aforesaid factual finding of the authorities by holding that the certificate produced by the assessee had shown that it was a part of the arrangement 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 amount was never claimed as expenditure by UDV India Ltd.

8. The amount in question is the portion of the assessee’s salary received and retained in India as per the terms of the DTAA. It is not in dispute that the said amount claimed by the assessee as exemption under Article 16(2) is not taxed either in U.K., or in India. The payment has been made through the Indian based company by the U.K. company. If it is the contention of the assessee that he was an employee of the UDV London alone, the payment would have been made by the said foreign company and not by the Indian company. Therefore, the condition stipulated in Article 16(2)(b) is not fulfilled insofar as the Indian company treated the assessee as its employee and issued a salary certificate deducting TDS. The concurrent finding arrived at by the authorities ought not to have been interfered by the Tribunal without appraising the facts of the case in the manner known to law. The Tribunal has failed to see that the condition laid down in Article 16(2)(b) was not fulfilled by the assessee and, therefore, the finding of the Tribunal is to be interfered with.

For all these reasons, the order of the Commissioner is upheld and the order of the Tribunal is set aside and the issue is answered in favour of the revenue. No costs.

[Citation : 342 ITR 22]

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