2005 (11) TMI 25 - SC - Income Tax

Appeals allowed: pay for overseas field breaks not 'earned in India' under Section 9(1)(ii); explanations not retrospective

SC allowed the appeals and set aside the HC decision, holding that salary paid to non-resident employees for field breaks in the U.K. was not 'earned in ... Non-resident - Taxability of salary for field breaks outside India under section 9(1)(ii) - offshore drilling work - term 'earned in India' - HELD THAT:- The employees in this case had not in fact 'served' in India during the field break period but they earned the income in U.K. as U.K. residents the consideration for the salary being the undergoing of training or updating of knowledge and being in a state of readiness to serve anywhere at all. The contract does not mention that the salary was for a well earned rest. That was a presumption which the High Court raised but which was based on no evidence. Besides, the clause in the contract relating to salary for service in India was distinct from the clause relating to payment of salary for field breaks. The first clause clearly fell within the extended meaning given to the words 'earned in India' in the main provision. But the second clause relating to the salary paid by the appellants to its U.K. employees for the field break was not 'earned in India', since it did not fall within the phrase. The phrase is part of the statutory fiction created by section 9(1). There is no question of introducing a further fiction by extending the Explanation to include whatever has a possible nexus with service in India. Therefore the salary paid for the field breaks in the U.K. was not for 'service rendered in India' within the meaning of the 1983 Explanation to section 9(1)(ii) of the Act. The Finance Act, 1999, which followed the Bill incorporated the substituted Explanation to section (9)(1)(ii) without any change. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [1989 (12) TMI 8 - KERALA HIGH COURT], while following the Gujarat High Court's decision in CIT v. S.G. Pgnatale [1980 (2) TMI 62 - GUJARAT HIGH COURT] to hold that the Explanation was not declaratory but widened the scope of section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in section 9(1)(ii) of the Act, it did not operate in respect of periods which were prior to April 1, 1979. It was held that since the Explanation came into force from April 1, 1979, it could not be relied on for any purpose for an anterior period. There was and is no ambiguity in the main provision of section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word 'earned' had been judicially defined in S.G. Pgnatale by the High Court of Gujarat, in our view, correctly, to mean income 'arising or accruing in India'. The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, 'income payable for service rendered in India'. When the Explanation seeks to give an artificial meaning to 'earned in India' and bring about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively. Even if it were to be held that the 1999 Explanation to section 9(1)(ii) were applicable to the facts of the present case, it is doubtful whether in the facts of this case the activity of the employees in the U.K. could be said to be 'rest' period or 'leave' period within the meaning of the words in clause (b) of the 1999 Explanation. However, it is not necessary to decide the issue as we are satisfied that the 1999 Explanation would 'not apply to the assessment years in question. The decision of the High Court is set aside and the appeals are allowed. Issues Involved:1. Taxability of salary for field breaks outside India under section 9(1)(ii) of the Income-tax Act, 1961.2. Interpretation of the term 'earned in India' within section 9(1)(ii).3. Applicability and retrospective effect of the 1999 amendment to section 9(1)(ii).Issue-wise Detailed Analysis:1. Taxability of Salary for Field Breaks Outside India:The central issue was whether the salary paid to employees for field breaks outside India should be taxed under section 9(1)(ii) of the Income-tax Act, 1961. The assessing authority included the salary for field breaks in the total income, which was upheld by the Commissioner of Income-tax but overturned by the Tribunal. The High Court reinstated the inclusion, reasoning that the 'off period' and 'on periods' were integral parts of the employment agreement, and the field breaks had a nexus with the services rendered in India. The Supreme Court, however, disagreed, stating that the High Court's assumption about the field breaks being limited to training for Indian services was incorrect. The employees were on standby for global assignments, not specifically for India.2. Interpretation of the Term 'Earned in India':The High Court interpreted 'earned in India' to include salary for training during field breaks, considering it directly connected to services on the rigs in India. The Supreme Court clarified that the term 'earned in India' should be understood as per the statutory fiction in section 9(1). The 1983 Explanation to section 9(1)(ii) stated that income payable for services rendered in India is regarded as 'earned in India,' regardless of where the contract was made or payment received. The Supreme Court emphasized that the salary for field breaks did not fall under this definition as it was not for services rendered in India.3. Applicability and Retrospective Effect of the 1999 Amendment:The High Court did not explicitly refer to the 1999 amendment, but the respondents argued its applicability. The Supreme Court noted that the 1999 Explanation, effective from April 1, 2000, expanded the scope to include salary for rest or leave periods preceded and succeeded by services in India. However, this amendment was prospective and did not apply to the assessment years in question (1992-93 and 1993-94). The court cited previous judgments affirming that tax laws apply as they exist in the relevant assessment year unless explicitly stated otherwise. The Central Board of Direct Taxes' circular also confirmed the prospective nature of the 1999 amendment.Conclusion:The Supreme Court set aside the High Court's decision, concluding that the salary for field breaks outside India was not taxable under section 9(1)(ii) for the relevant assessment years. The 1999 amendment did not have retrospective effect, and the salary for field breaks did not constitute income 'earned in India' as per the statutory definition. The appeals were allowed with no order as to costs.