2003 (10) TMI 40 - HC - Income Tax

Off-period salary taxable under section 9(1)(ii); free onboard meals not taxable; section 234B interest quashed.

HC held that off-period salary formed an integral part of the contract and was taxable in India under section 9(1)(ii), as the off periods were linked to ... Taxability of off period salary under section 9(1)(ii) - Non-resident - contracts regarding on period and off period salary - Applicability of interest under section 234B for short payment of advance tax - free food and beverages and boarding constitutes perquisite or not - Held that:- It is well settled that in order to ascertain the intention of the contracting parties one has to study the terms and conditions of the contract and in appropriate cases one has to see the surrounding circumstances including the conduct of the parties. In this case the contract provides for on period and off periods. The contract is for two years. It refers to alternating time schedule. It covers both the periods. The off period follows the on periods. Therefore both the periods form an integral part of the contract. It is not possible to give separate tax treatment to on period and off period salaries. It is argued that the period following on period was not a rest period. We do not find any merit. After 35/28 days of hard work, the technician had to go back to the country of his residence. The off period followed the on period. They both formed part of an integral scheme. That even under the Finance Act of 1999 the new Explanation uses the term 'rest period/leave period'. For the above reasons we find merit in the arguments of the Revenue. Further, even assuming that the period following the on period was a stand by arrangement and not a rest period, we find that the assessee had to undergo training during the said period. It is important to note that the work on the oil rigs is hazardous. The assessee had to remain fit during the rest period. Hence, he had to undergo demonstrations and training but all that has a nexus with the services which he had to render in India. Hence, the payment which he received was for his services in India. In this connection it may be noted that the Explanation to section 9(1)(ii) introduced by the Finance Act of 1983 refers to what constitutes 'income earned in India'. Even assuming that there was no rest period as alleged by the assessee and that payment was for stand by we are of the view that training abroad during this period was directly connected with the work on the rigs in India. It made the assessee mentally and physically fit. Therefore, the payment of salary for off period was income earned in India, i.e., for services rendered in India under section 9(1)(ii). The assessment records show that from the income of the Indian operations the salary in its entirety (including salary for the off period) has been paid by the employer company. This conduct shows the intention of the contracting parties. Hence, the entire salary for both the periods was taxable in India under section 9(1)(ii). Assessee had to work on the rig. It was hazardous, arduous and continuous. Under such circumstances free food and beverages are a necessity. It is not a luxury. It is not a perquisite. Its value cannot be added to the income of the assessee. The words used under section 209(1)(a) make the assessee estimate his current income and since a bona fide dispute was pending, imposition of interest under section 234B was not justified without hearing and without reasons. Accordingly, we answer this question in the affirmative, i.e., in favour of the assessee and against the Department. Issues Involved:1. Taxability of off period salary under section 9(1)(ii) of the Income Tax Act.2. Classification of free food, beverages, and boarding as perquisites under section 17(2)(iii).3. Applicability of interest under section 234B for short payment of advance tax.Detailed Analysis:1. Taxability of Off Period Salary:Question: Whether the Tribunal was right in holding that off period salary was not taxable under section 9(1)(ii) read with the Explanation as it stood at the relevant timeRs.Answer: The court held in the negative, i.e., in favor of the Department and against the assessee.Reasons:- Section 4 of the Act is the charging section that imposes tax on the total income of the previous year of every person. Section 5(2) restricts the scope of total income of a non-resident to the income which is received or deemed to be received in India or which accrues or is deemed to accrue to him during such year.- Section 9(1)(ii) deems income under the head 'Salaries' to accrue in India if it is earned in India, regardless of the place of receipt or actual accrual.- The contract between the assessee and the company covered both on and off periods, forming an integral part of the employment terms. The court found no merit in the argument that the off period was not a rest period.- The court noted that even if the off period was a stand-by period, the assessee had to remain fit and undergo training, which had a direct nexus with the services rendered in India.- The Explanation to section 9(1)(ii) introduced by the Finance Act of 1983 was meant to clarify that income earned in India includes payments for services rendered in India, even if the contract is executed or the amount is payable outside India.- The assessment records showed that the entire salary, including the off period salary, was paid from the income of the Indian operations, indicating the intention of the contracting parties to treat the entire salary as taxable in India.2. Classification of Free Food, Beverages, and Boarding as Perquisites:Question: Whether the Tribunal was right in holding that free food, beverages, and boarding on the rig was not a perquisite under section 17(2)(iii)Rs.Answer: The court held in the affirmative, i.e., in favor of the assessee and against the Department.Reasons:- The court recognized that working on the rig was hazardous, arduous, and continuous. Under such circumstances, free food and beverages were deemed a necessity rather than a luxury.- Consequently, free food and beverages were not classified as perquisites, and their value could not be added to the income of the assessee.3. Applicability of Interest under Section 234B:Question: Whether the Tribunal was justified in deleting interest levied on the assessee under section 234BRs.Answer: The court held in the affirmative, i.e., in favor of the assessee and against the Department.Reasons:- Section 234B imposes interest, which is compensatory in nature and not a penalty. The court noted that there were conflicting decisions of the Tribunal on the interpretation of contracts regarding on and off period salary, leading to a bona fide dispute.- The scheme of sections 208 and 209 indicates that the assessee has to estimate his current income and calculate the tax, reducing it by the amount of tax deductible at source, which was not done by the employer company.- Given the bona fide dispute and the conflicting decisions, the imposition of interest under section 234B was not justified without a hearing and without reasons.Conclusion:The court ruled in favor of the Department on the issue of taxability of off period salary, in favor of the assessee on the classification of free food and beverages as non-perquisites, and also in favor of the assessee on the deletion of interest under section 234B. All the income-tax appeals were disposed of with no orders as to costs.