Tax Ruling: Employee Taxability vs. Applicant; Dutch BV Taxation in India

DHV Consultants BV Laan., In re

DHV Consultants BV Laan., In re - 277 ITR 97 (AAR), 147 TAXMANN 521 Issues Involved:
1. Tax liability of Dutch BV's employees under the Double Taxation Avoidance Agreement (DTAA) between India and Netherlands.
2. Interpretation of 'borne by' in Article 15(2)(c) of the DTAA.
3. Applicability of Section 44D and Section 115A of the Income Tax Act, 1961, for presumptive taxation.
4. Deductibility of remuneration paid to employees in computing taxable profits.

Detailed Analysis:

1. Tax Liability of Dutch BV's Employees under the DTAA:
The applicant, Dutch BV, sought clarity on its tax liability concerning the salaries paid to its employees working in India. According to the DTAA between India and the Netherlands, remuneration paid to an employee for employment exercised in India would be exempt from tax in India if:
- The employee's stay in India does not exceed 183 days in a tax year.
- The remuneration is paid by an employer who is not a resident of India.
- The remuneration is not borne by a permanent establishment or fixed base in India.

2. Interpretation of 'Borne by' in Article 15(2)(c) of the DTAA:
The applicant argued that since the salary paid to its employees in the Netherlands is not deductible while computing taxable profits in India, it should not be considered as 'borne by' the permanent establishment (PE) in India. The term 'borne by' was interpreted by the applicant to mean 'deductible' from the PE's taxable profits. However, the Authority disagreed, stating that the concept of presumptive taxation under Section 44D and Section 115A does not exclude expenses attributable to such income as non-deductible merely because the statute fixes a percentage for taxation.

3. Applicability of Section 44D and Section 115A of the Income Tax Act, 1961, for Presumptive Taxation:
The applicant contended that under Section 44D and Section 115A, the taxable profit is determined as a fixed percentage of gross receipts, and therefore, expenses such as salaries paid to employees should not be considered deductible. The Authority clarified that these sections are computation provisions and do not negate the charging section of the Income Tax Act. The lower rate of tax prescribed under Section 115A is for allowing a margin for the deduction of expenses, including remuneration paid to employees.

4. Deductibility of Remuneration Paid to Employees in Computing Taxable Profits:
The Authority emphasized that profits or gains of a business are the excess of receipts over expenditure. Gross receipts cannot be considered as income without deducting expenses connected to earning that income. The Authority referred to the decision in CIT vs. Sir S.M. Chitnavis, which stated that all proper outgoings must be allowed as deductions to ascertain true profits. Therefore, salaries paid to employees are deductible while determining the taxable profits of the PE in India.

Conclusion:
The Authority ruled that the condition specified under sub-clause (c) of clause 2 of Article 15 of the DTAA relates to the taxability of employees and not the applicant. Therefore, it is not relevant when Dutch BV is taxed in India on a presumptive basis under Section 44D and Section 115A of the Act. The ruling was pronounced on July 15, 2005.