Treaty exemption for expatriate remuneration requires actual deduction; presumptive income fiction cannot create deemed deduction

Expatriate remuneration paid by a non-resident employer was treated as exempt under article 14(2) of the India-France treaty because the employees were in India for less than 183 days and there was no actual deduction of their salary in computing the profits of the permanent establishment. A presumptive computation under section 44BB could not be used to create a deemed deduction, since a legal fiction cannot be extended beyond its limited purpose. The treaty required actual deduction, and the treaty position prevailed over the domestic deeming provision, so the assessee was not treated as an assessee in default for the covered remuneration.

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Issues: Whether the assessee could be treated as an assessee in default under section 201 of the Income-tax Act, 1961, in respect of expatriate remuneration claimed to be exempt under article 14(2) of the Double Taxation Avoidance Agreement with France.

Analysis: The expatriate employees were present in India for less than 183 days and their remuneration was paid by a non-resident employer. The remaining condition under article 14(2)(c) was whether the remuneration was deducted in computing the profits of a permanent establishment chargeable to tax in India. The accounts and return did not show any actual claim or deduction of such expatriate salary while computing the Indian taxable profits. The deemed profit computation under section 44BB could not be used to import a further fiction that the salary had been deducted, because a legal fiction is confined to the purpose for which it is created and cannot be extended by another fiction. The treaty language required actual deduction, not deemed deduction, and the treaty governed over the domestic provision.

Conclusion: The assessee was not an assessee in default under section 201 for the expatriate remuneration covered by article 14(2) of the treaty; the exemption applied in the assessee's favour.

Ratio Decidendi: A deeming provision for presumptive business income cannot be extended to treat salary as deducted for the separate purpose of treaty exemption where the treaty requires actual deduction in computing permanent establishment profits.

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