Expatriate salaries not taxable in India; living allowance exempt under section 10(14).

The Tribunal held that salaries payable to expatriate employees by a foreign company outside India do not accrue or arise in India, thus not taxable under relevant provisions. Living allowance paid to expatriates was deemed exempt under section 10(14) as it was granted to meet expenses incurred in the performance of duties. The Tribunal dismissed appeals for the assessment year 1978-79 and partly allowed the appeal for the assessment year 1979-80.

---

---

Issues Involved:
1. Taxability of salary payable to expatriate employees.
2. Taxability of living allowance paid to expatriate employees.

Detailed Analysis:

1. Taxability of Salary Payable to Expatriate Employees:
- Background: IFFCO entered into an agreement with KIL for advisory services, leading to the deputation of KIL's expatriate personnel to India. The taxability of salaries paid to these expatriates for the assessment year 1978-79 was in question.
- Relevant Provisions: Section 4 of the Income-tax Act, 1961 is the charging section. Section 5(2) deals with the total income of non-residents, specifically clause (b) which includes income accruing or arising in India. Section 9(1)(ii) states that income under the head 'Salaries' earned in India shall be deemed to accrue or arise in India. An Explanation added by the Finance Act, 1983, effective from 1-4-1979, clarifies that income for services rendered in India is regarded as earned in India.
- Gujarat High Court Decision: In CIT v. S. G. Pgnatale [1980] 124 ITR 391, it was held that 'earned in India' means 'arising or accruing in India' and not merely from 'services rendered in India'. Liability to pay must arise in India for the income to be taxable.
- ITO's Stand: The ITO distinguished the present case from the Gujarat High Court decision, arguing that the expatriates were in permanent employment of KIL and had created a debt in their favor by rendering services in India. Thus, the salary was taxable under section 5(2)(b) read with section 9(1)(ii).
- Commissioner (Appeals) Decision: The Commissioner (Appeals) found no material distinction from the Gujarat High Court case and followed the principle that salary payable outside India does not accrue or arise in India.
- Tribunal's Conclusion: The Tribunal agreed with the Commissioner (Appeals) and held that the salary payable to expatriates by KIL outside India is not deemed to accrue or arise in India and thus not taxable under section 4 read with section 5(2). The Explanation to section 9(1)(ii) effective from 1-4-1979 does not apply retrospectively to the assessment year 1978-79.

2. Taxability of Living Allowance Paid to Expatriate Employees:
- Background: Living allowance was paid by IFFCO directly to expatriates at Rs. 106 per day. The ITO taxed this under section 56 as income from other sources.
- Commissioner (Appeals) Decision: The Commissioner (Appeals) rejected the exemption claim under section 10(14) but held the allowance non-taxable based on the Gujarat High Court decision in S.G. Pgnatale's case.
- Tribunal's Conclusion: The Tribunal examined the applicability of section 10(14) and its Explanation. It concluded that the expatriates did not ordinarily reside in India, and their ordinary place of duties was outside India. Therefore, the living allowance was a special allowance granted to meet expenses wholly, necessarily, and exclusively incurred in the performance of duties and was exempt under section 10(14). This conclusion aligns with the Supreme Court of Canada's decision in Percy Walker Thomson v. Minister of National Revenue.

Final Outcome:
- Appeals for the assessment year 1978-79 were dismissed.
- The appeal for the assessment year 1979-80 was partly allowed.

---