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Income Tax Appellate Tribunal, “D”BENCH, MUMBAI
Before: SHRI SAKTIJIT DEYAND SHRI G. MANJUNATHA
The aforesaid appeal has been filed by the Revenue challenging the order dated 15th March 2012, passed by the learned Commissioner of Income Tax (Appeals)–29, Mumbai, pertaining to the assessment year 2008–09.
Before we proceed further, it is necessary to put on record that this appeal was earlier heard and disposed off by a Bench of this 2 Metro Tunnelling Group Tribunal, vide order dated 15th September 2017. Subsequently, the Revenue filed an application under section 254(2) of the Act seeking rectification of order by stating that grounds no.4 and 5, raised in the memorandum of appeal have not been disposed off by the Tribunal. Finding the aforesaid claim/contention of the Revenue to be correct, the Tribunal, vide order dated 22nd February 2019, in M.A. no.451/ Mum./2018, recalled the earlier order for the specific purpose of disposing off grounds no.4 and 5. This is how the present appeal has come up for hearing before us.
The issue raised in grounds no.4 and 5, pertains to deletion of disallowance of ` 1,46,79,148, under section 40(a)(iii) of the Act.
Brief facts are, the assessee having the status of AoP (Association of Persons) was formed as a joint venture by five companies viz. L&T Ltd., IRCON, Shimizu Corporation, M/s. Samsung Corporation and Dywidag for executing the contract of construction of Metrol Rail awarded by Delhi Metro Rail Corporation. For execution of the work, each partner of the joint venture contributed finance, manpower, machinery, etc. As per the scope of work entrusted to the assessee, all the employees were designated for specific assignments, some of which have to be performed on site and some off site at Head Office abroad. The assignments to be executed abroad in Head Office
3 Metro Tunnelling Group included designing, planning, etc. While verifying the return of income and the financial statements furnished by the assessee during the assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of ` 1,46,79,148, to the Profit & Loss account towards reimbursement of salary paid to the employees of the partners of the joint venture. On further verification, he found that while making such payment, the assessee has not deducted tax at source. Therefore, he called upon the assessee to explain as to why the payment made towards salary should not be disallowed under section 40(a)(iii). In response to the query raised by the Assessing Officer, the assessee vide letter dated 20th February 2010, submitted its reply stating that since the employees of the members of the joint venture rendered services from the Head Office situated outside India and their salary cost was reimbursed on actual basis without any mark–up as per the monthly time sheets maintained, the income earned by the employees does not accrue and arise in India. In this context, the assessee specifically referred to the provisions contained under section 9(1)(ii) of the Act. Further, to substantiate its claim, the assessee submitted copy of the debit notes and time sheets. Without prejudice, the assessee further submitted that even as per the provisions of respective Double Tax Avoidance Agreement (DTAA) between India–Japan and India–South Korea, salaries, wages and 4 Metro Tunnelling Group other remunerations received by a resident of Japan and South Korea in respect of their employment shall be taxable in India only if such employment is exercised in India. Thus, it was submitted that the reimbursement of salary paid to the employees is not taxable in India either under the provisions of the Act or under the respective DTAAs. The Assessing Officer, however, did not find the submissions of the assessee acceptable. Referring to the provision of section 9(1)(i) of the Act, he observed, since business connection either directly or indirectly between the assessee and the partners of the joint venture as well as their employees is established, the salary income paid to the employees whether in India or abroad shall be deemed to accrue or arise in India. The Assessing Officer observed, since the services rendered by the employees are in connection with the Metro Rail Project in India, salary income would deemed to accrue or arise in India. Therefore, referring to the various judicial precedents, the Assessing Officer ultimately disallowed the amount of ` 1,46,79,148, under section 40(a)(iii) of the Act for non–deduction of tax at source. The assessee contested the aforesaid disallowance before the first appellate authority.
After considering the submissions of the assessee in the context of the facts and material on record, learned Commissioner (Appeals) observed, for the purpose of bringing the salary income of a non–
5 Metro Tunnelling Group resident for taxation in India, the conditions of section 9(1)(ii) have to be fulfilled. Referring to the said provision, he observed, salary income is taxable in India only if it is earned in India for services rendered in India and which also would include the rest period/leave period preceding and succeeding the services rendered in India. He observed, since the employees rendered services outside India and payments were also made outside India, the provisions of section 9(1)(ii) of the Act would not be applicable. Thus, he held that when the specific provision relating to taxability of salary income is not applicable, the Assessing Officer could not have brought such income to tax by referring to the provision of section 9(1)(i) of the Act. Thus, ultimately, he deleted the disallowance made by the Assessing Officer.
The learned Departmental Representative strongly relying upon the observations of the Assessing Officer submitted, undisputedly, the employees who received the salary income were rendering services for the Metro Rail Project in India. Therefore, the business connection is established. That being the case, the salary received by the employees shall be deemed to have accrued and arising in India. She submitted, learned Commissioner (Appeals) has erred in granting relief to the assessee ignoring the deeming fiction of section 9(1)(i) of the Act.
6 Metro Tunnelling Group
The learned Authorised Representative submitted, the amount claimed as deduction was paid towards reimbursement of actual salary paid to the employees located outside India and towards services rendered outside India. Therefore, in terms of section 9(1)(ii) of the Act, such income is not taxable in India. Without prejudice, the learned Authorised Representative submitted, as per the provisions of the respective DTAAs, salary income in case of a non–resident is not taxable unless the employment is exercised in the source country. Thus, she submitted, the decision of learned Commissioner (Appeals) should be sustained.
We have considered rival submissions and perused the material on record. The core issue arising for our consideration is, whether the reimbursement of salary on actual basis to the non–resident employees of the joint venture partners can be deemed to have accrued or arisen in India either under the provisions of the Act or under the respective DTAAs. As far as the factual aspect of the issue is concerned, there is no dispute that the non–resident employees to whom salary was paid were located in the respective Head Offices of the partner companies in Japan and south Korea and they were performing their services while located at Head Office. Though, such services were rendered in connection with the Metro Rail Project in India. Therefore, it requires to be examined whether the salary paid to 7 Metro Tunnelling Group non–residents towards services rendered in course of their employment in the country of a residence can be deemed to accrue or arise in India. In this context, we may refer to clause (ii) of section 9(1) which is a deeming provision. As per the aforesaid provision, the income falling under the head salary is deemed to accrue or arise in India if it is earned in India. Explanation to this provision further clarifies that the salary income referred to must be payable for services rendered in India and will also include the rest/leave period which is preceded and succeeded by service rendered in India. If we keep the facts of the present case in juxtaposition to the conditions enshrined in section 9(ii), it can be seen that the salary income earned by the non–resident individuals were for the services rendered out side India and not in India. Therefore, such salary income cannot be deemed to have accrued or arisen in India as per section 9(ii) of the Act. In our considered opinion, the Assessing Officer in his anxiety to bring the salary income to tax in India has completely overlooked the impact of section 9(1)(ii) of the Act. The attempt on the part of the Assessing Officer to rope in the reimbursement of salary payment under section 9(1)(i) of the Act is completely misconceived.
Having held so, taxability or otherwise of the income under the respective Tax Treaty provisions needs to be examined. We must hasten to add, neither the Assessing Officer nor learned Commissioner
8 Metro Tunnelling Group (Appeals) has examined the issue from the aforesaid angle. As per Article 15 and 16 of the Tax Treaty between India–Japan and India– South Korea respectively, in case of a non–resident, salary income received from employment exercised in the country of residence would be taxable in that country. However, if income is derived from exercise of employment in the source country, such income would be taxable in the source country. In the facts of the present case, undisputedly, the non–resident employees to whom the salary has been paid have exercised their employment in their respective countries of residence. Therefore, any income derived by them is taxable only in their country of residence and not in India. Therefore, the Treaty provisions being more beneficial as per section 90(2) of the Act, will override the provisions of the Act. Therefore, there is no need for the assessee to deduct tax at source while reimbursing the salary expanses. In view of the aforesaid, we are inclined to uphold the decision of learned Commissioner (Appeals) on the issue. Grounds raised are dismissed.
In the result, appeal is dismissed as indicated above. Order pronounced in the open Court on 20.03.2020