Treaty exemption for employment income applied where salary cost was not borne by the Indian permanent establishment.

Employment remuneration of non-resident employees was held not taxable in India under article 16(2)(c) of the India-Italy tax treaty because the treaty conditions had to be cumulatively satisfied and the salary cost was not borne by the employer's permanent establishment or fixed base in India. The salaries were paid in Italy, and the Indian receipts were not used for salary payments, so the exemption applied. The domestic deeming rule under section 9 did not override the treaty, as the agreement prevailed under section 90. The argument based on section 17(2)(iv) was also rejected.

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Issues: Whether, on the facts and in the circumstances of the case, the remuneration paid to the non-resident employees was taxable in India under article 16(2)(c) of the India-Italy Double Taxation Avoidance Agreement, and whether the tax collected from O.N.G.C. on behalf of the employer could be treated as a taxable perquisite in the hands of the employees.

Analysis: The conditions in article 16(2) of the treaty had to be cumulatively satisfied for the remuneration to escape taxation in India. The factual finding was that although the employer had a permanent establishment or fixed base in India, the salary expenditure was not borne by that establishment, because the salaries were paid in Italy and the Indian receipts were not used for salary payments. Since clause (c) was not attracted, the treaty exemption operated. The statutory deeming under section 9 did not prevail because the case was governed by the Double Taxation Avoidance Agreement, which had overriding force under section 90. The plea based on section 17(2)(iv) was also rejected.

Conclusion: The remuneration was not taxable in India under article 16(2)(c), and the question was answered in favour of the assessees and against the Revenue.

Ratio Decidendi: Where treaty conditions for exemption of employment income are cumulatively satisfied and the remuneration is not borne by the employer's permanent establishment or fixed base in the source State, the treaty prevails over the domestic charging provision and the income is not taxable in that State.

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