Taxability of overseas employee salary and living allowance for India services under s 9(1)(ii) before 1 April 1979-held non-taxable.

For AYs prior to 1 April 1979, the Explanation to s 9(1)(ii) (effective from 1 April 1979) could not be applied retrospectively, since the Legislature confined its operation to a specified effective date; consequently, salary could not be brought to tax on the "service rendered in India" basis for the earlier period. For the pre-Explanation regime, "earned in India" in s 9(1)(ii) was construed as "accruing/arising in India", turning on where the liability to pay and payability arose, not merely the situs of services; accordingly, the salary was held not taxable. Living allowance was treated as reimbursement of necessary stay expenses, not a perquisite/salary; it was held non-taxable. The salary-payer finding was held factual, raising no question of law.

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Issues: (i) Whether the Tribunal was right in holding that the salary of the assessee was not paid by FACT/FEDO but by the foreign companies (Messrs. Davy Powergas Inc./GmbH)? (ii) Whether the salary and living allowance received by the assessees were assessable to tax under section 9(1)(ii) of the Income-tax Act, 1961?

Issue (i): Whether the salary was paid by FACT/FEDO or by the foreign employer.

Analysis: Evidence shows contracts between FACT/FEDO and foreign companies under which foreign technicians were deputed; payments from FACT/FEDO to foreign companies included sums allocated as salary paid by the foreign employers. The finding that the salary payment liability and payment originated with the foreign companies is factual and based on the contractual and payment structure; no substantive question of law arises from that factual conclusion.

Conclusion: The finding that the salary was paid by the foreign companies is affirmed in favour of the assessees.

Issue (ii): Whether the salary and living allowance received by the foreign technicians are taxable as "salary earned in India" under section 9(1)(ii) of the Income-tax Act, 1961.

Analysis: The Explanation to section 9(1)(ii) introduced by the Finance Act, 1983 applies only from April 1, 1979 and cannot be invoked for periods prior to that date. Prior to that effective date, section 9(1)(ii) must be construed in light of the statutory language and related provisions; the phrase "earned in India" is to be interpreted as meaning income which accrues or arises in India (i.e., liability to pay arises in India). Applying that construction and the principles in the Gujarat High Court decision in S. G. Pgnatale, the salaries in these cases arise from liability and payment by foreign employers outside India. Amounts paid as living allowance by FACT/FEDO constituted reimbursements for necessary expenditure, not perquisites conferring personal advantage, and thus were not salary within section 9(1)(ii) for the relevant periods.

Conclusion: The salary and living allowances are not assessable as salary earned in India for the periods in question; this conclusion is in favour of the assessees.

Final Conclusion: Questions (i) and (ii) are answered against the Revenue and in favour of the assessees; the Tribunal's determinations that the salaries were paid by the foreign employers and that the amounts were not taxable as salary earned in India are upheld for the periods before April 1, 1979.

Ratio Decidendi: For periods prior to April 1, 1979, "salary earned in India" under section 9(1)(ii) of the Income-tax Act, 1961 means salary which accrues or arises in India (liability to pay arises in India); payments by a foreign employer and reimbursements for living expenses do not fall within that clause as taxable salary where liability and payment arise outside India.

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