2007 (5) TMI 261 - AT - Income Tax

Tribunal rules in favor of assessee on tax deduction issue under Section 201

The Tribunal ruled in favor of the assessee, determining that they were not in default under Section 201 for failing to deduct taxes on employees' ... Article 14(2) of the IndoFrench DTAA - assessee in default under section 201 - actual deduction as condition for exemption - deeming fiction under section 44BB - treaty provision overriding domestic lawArticle 14(2) of the IndoFrench DTAA - actual deduction as condition for exemption - deeming fiction under section 44BB - assessee in default under section 201 - Whether the assessee was an assessee in default under section 201 for nondeduction of tax on salaries of expatriate employees where exemption was claimed under Article 14(2) of the IndoFrench DTAA. - HELD THAT: - The Tribunal found that Article 14(2) prescribes three cumulative conditions for exemption, including that the remuneration must not be deducted in computing the profits of a permanent establishment in the other Contracting State. The assessee had not claimed or actually deducted the expatriates' salaries in its audited profit and loss account or incometax return relating to the Indian PE. Section 44BB contains a non obstante clause and creates a limited legal fiction by deeming 10% of receipts as presumptive profit for the employercompany; that fiction applies to computation of the foreign employer's profits and does not operate to alter the clear meaning of 'deducted' in Article 14(2)(c). The Tribunal held that 'deducted' in the treaty means actually deducted (or ostensibly deducted) in computing PE profits and cannot be extended to mean 'deemed to have been deducted' by virtue of section 44BB. Reliance was placed on the principle that a legal fiction must be confined to its purpose and not extended by importing another fiction, and on authorities distinguishing actual allowance from notional allowance. Because the assessee had not actually deducted the salaries in computing PE profits, the condition in Article 14(2)(c) was not satisfied and the exemption could not be claimed; conversely, where Article 14(2) conditions are satisfied, the assessee cannot be treated as in default. The Tribunal therefore concluded that section 44BB's deeming provision cannot be used to negate the treaty requirement of actual deduction and that the assessee could not be regarded as an assessee in default in respect of remuneration of expatriates who fulfilled the conditions of Article 14(2). Other grounds were treated as consequential. [Paras 13, 14, 15, 16, 17]Assessee not an assessee in default under section 201 in respect of expatriate remuneration that fulfils Article 14(2) of the IndoFrench DTAA; appeal allowed.Final Conclusion: The Tribunal allowed the appeal for asst. yr. 199899, holding that the treaty exemption under Article 14(2) applies only where remuneration is actually deducted in computing PE profits and that the deeming fiction in section 44BB cannot be used to treat such remuneration as deducted; consequently the assessee was not an assessee in default under section 201 in respect of expatriate salaries which met Article 14(2) conditions. Issues Involved:1. Assessee in default under Section 201 of the IT Act, 1961.2. Applicability of Article 14(2) of the Double Tax Avoidance Agreement (DTAA) with France.3. Misinterpretation of Article 14(2) provisions.4. Application of Section 44BB in interpreting Article 14(2) of DTAA.5. Non-claiming of salary deduction in accounts.6. Inclusion of lodging and boarding as perquisites.7. Inclusion of off-period salary in taxable income.8. Charging of interest under Section 201(1A).Detailed Analysis:Assessee in Default Under Section 201:The CIT(A) upheld the AO's order that the assessee is an 'assessee in default' under Section 201 for non-deduction of taxes on employees' remuneration amounting to Rs. 47,60,458. The AO observed that though the salary was not debited in the P&L account, it was attributable to the Permanent Establishment (PE) in India, thus making the assessee liable for TDS.Applicability of Article 14(2) of DTAA with France:The assessee argued that the remuneration of expatriates was exempt under Article 14(2) of the DTAA with France, as the expatriates were in India for less than 183 days, and the salary was paid by a non-resident employer. The CIT(A) and AO disagreed, stating that the salary was attributable to the PE in India and thus taxable.Misinterpretation of Article 14(2) Provisions:The CIT(A) was accused of misinterpreting Article 14(2) by considering irrelevant and subjective factors. The assessee cited the Allahabad High Court's decision in their favor, which confirmed the applicability of Article 14(2) for exemption. The Tribunal noted that the assessee did not claim the remuneration in its P&L account, thus fulfilling the conditions of Article 14(2)(c).Application of Section 44BB in Interpreting Article 14(2) of DTAA:The CIT(A) applied Section 44BB, which presumes a 10% net profit, to interpret Article 14(2) of the DTAA. The Tribunal disagreed, stating that Section 44BB's deeming fiction cannot extend to interpreting Article 14(2), which requires actual deduction of remuneration.Non-claiming of Salary Deduction in Accounts:The assessee did not debit the salary of expatriates in the P&L account, arguing that it was neither paid nor incurred in India. The Tribunal agreed, stating that the salary not being claimed for deduction in the accounts does not make the assessee liable for TDS under Section 201.Inclusion of Lodging and Boarding as Perquisites:The CIT(A) upheld the inclusion of lodging and boarding provided by ONGC as perquisites for determining the tax liability of expatriates. The Tribunal did not specifically address this issue in detail, focusing more on the broader applicability of Article 14(2).Inclusion of Off-Period Salary in Taxable Income:The CIT(A) included off-period salary in the taxable income, stating that it was in the nature of earned leave and taxable under the Explanation to Section 9(1)(ii). The Tribunal noted that no documentary evidence was provided to show that off-period salary was for services rendered outside India, thus agreeing with the CIT(A).Charging of Interest Under Section 201(1A):The CIT(A) upheld the charging of interest under Section 201(1A) on the alleged tax deduction default. The Tribunal, however, ruled that since the assessee fulfilled all conditions for exemption under Article 14(2) of the DTAA, the interest charged was not justified.Conclusion:The Tribunal concluded that the assessee company cannot be treated as 'assessee in default' under Section 201 for the remuneration of expatriates who fulfilled all the conditions of exemption under Article 14(2) of the DTAA with France. Other grounds raised by the assessee were deemed consequential. The appeal of the assessee was allowed.