ORDER
R.C. Sharma, Accountant Member
1. This is an appeal filed by the assessee against the order of Commissioner (Appeals) dated 21-2-2003 for the assessment year1998-99, in the matter of order passed under Section 201(1) of the Income Tax Act, 1961 wherein following eight grounds of appeal have been raised:
1. That the learned Commissioner (Appeals) erred in law by upholding the order ofthe assessing officer that the assessee is “assessee in default” undersection 201 of the Income Tax Act, 1961, for non-deduction of taxes ofemployees amounting to Rs. 47,60,458 in spite of the fact that no tax waspayable on the remuneration of expatriates who fulfilled all the conditionsof exemption in terms of article XIV(2) of the Double Tax AvoidanceAgreement (DTAA) with France.
2. The learned Commissioner (Appeals) erred in law by committing grave juridical impropriety lapse by not following and applying the binding decision of Jurisdictional Allahabad High Court in assessees own case of Jean Souleer & Others for the assessment years 1984-85 to 1986-87 upholding the applicability of article XIV(2) of DTAA with France on the fulfilment of all conditions for exemption of tax on employees remuneration.
3. The Commissioner (Appeals) erred in law by misinterpreting the provision of article XIV(2) as based on irrelevant and subjective consideration instead D of actual corporate assessment which has been confirmed by Jurisdictional Allahabad High Court in assessees own case for the reassessment proceeding for the assessment years 1988-89,1989-90 and 1990-91 which became final binding decision after the rejection of SLP by Supreme Court.
4. The learned Commissioner (Appeals) erred in law by interpolating the presumptiveprofit provision of Section 44BB while interpreting the provisions of pArticle XIV(2) of DTAA by assuming a fiction of allowability of salariesdeemed to be indirectly covered in 10 per cent presumptive profit and byfurther creating fiction over fiction that for the purposes of article XIV(2) the salary is deemed to have been allowed and deemed to be have been deducted.
5. The learned Commissioner (Appeals) erred in law by misinterpreting the non-claiming the deduction of salaries and by non-debiting in accounts since these salaries were neither paid nor incurred in India by branch office by p’ way of subjective interpretation that such salaries related to the work carried in India and therefore attributable to permanent establishment which was not relevant for the interpretation and applicability of article XIV(2) of DTAA with France.
6. The learned Commissioner (Appeals) erred by upholding the addition of the lodging and boarding provided by ONGC on their drill ships for the expatriates as necessary conditions of deployment as perquisites for determining the tax liability of expatriates.
7. That the learned Commissioner (Appeals) erred in law by upholding the inclusion of off period salary of expatriates in the taxable income, which was neither paid nor earned by expatriates in India.
8. The Commissioner (Appeals) erred in law in upholding the charging of interest of Rs. 25,28,990 under Section 201(1A) on alleged tax deduction default of Rs. 47,60,438.
2. Rival contentions have been heard and record perused. At the out set, it is pertinent to mention here that the appeal was originally heard and decided by the ITAT vide its order dated 14-7-2005. Thereafter the assessee filed a miscellaneous petition adverting various mistakes in the order of the ITAT. Videorder dated 21-10-2005, the ITAT after discussing various mistakes in the order dated 14-7-2005, recalled the same after having the following observations :
We, therefore, recall the order dated 14-7-2005 and direct that the appeal be heard and decided afresh.
In pursuance of the above order of the Tribunal, the case was again fixed for hearing and the same has been heard by the Bench on 7-11 -2005.
Brief facts of the case are that the assessee is a non-resident company incorporated in France and during the financial year in question it executed three contracts with ONGC. During the year the assessee company continued to provide to ONGC the drilling services of its rig IDA and manning and managing contracts of ONGCs drillship Sagar Vijay & Sagar Bhushan under three separate contracts. The assessee has filed the return of income for assessment year 1988-89 on net income basis. In respect of management contracts, the assessee had given no objection to it being treated under article III of the DTAA against article XVI. In the order under Section 195(2) given by the assessing officer, he had considered 30 per cent as expenses before applying the provisions of Section 44D read with Section 115A. Further the inability by the NRC to produce details of expenses outside India in respect of services attributable to P.E. on account of management contracts were expressed at the assessment stage itself and so the income was assessed at the rate of 10 per cent of the invoices raised under the management contracts under article III of the DTAA. The assessing officer has further noted in the assessment order that these estimates of 10 per cent being made on management contracts would be fair and reasonable after due consideration of all expenses including salary of the expatriate employees as against net income as per profit and loss account claimed in the return of income. It was, however, noticed by the assessing officer that in the profit and loss account submitted along with the return of income the assessee had not debited salary of the expatriates working on the manning and management contracts. These details were subsequently provided and the assessing officer made assessment on the basis of details submitted and also treated the company as assessee in default under Section 201 and charged interest under Section 201(1A).
3. It was contended before the assessing officer that in the earlier years the assessments were made under Section 44D wherein no expenses are allowed, the assessee was under the impression that in this year also, the assessment would be made accordingly which in turn will help the assessee satisfy all the conditions laid down under article XIV of the DTAA with France and the employees will therefore earn exemption. It was pleaded that it was only during the assessment proceedings that the management and manning contracts with ONGC were treated as business profits instead of technical services. The assessee had further pleaded before the assessing officer that since salary of the expatriates was paidabroad, Section 192 was not attracted. However, after considering all the arguments of the assessee, the assessing officer chose to levy interest under Section 201 because the assessment on the company having been made under Section 44BB, while computing business profits, the salary of the expatriates was deemed to have been deducted and as such the company was liable to deduct tax at source from the salaries. However, q the assessing officer did not agree with the assessee’s contention and held the assessee liable under Section 201(1) of the Act.
4. By the impugned order, Commissioner (Appeals) confirmed the action of the assessing officer by observing that assessee has a P.E. in India and it filed its return of income on net income basis and not on the basis of Section 44D. Further the assessee in his P&L Account has not debited salary of expatriates on manning and management contracts just to avoid paying _taxes on their salaries though they are attributable to P.E. which the assessee has in India. It would not be out of place to mention that Assessing Officer had considered such salaries at the time of passing the order under Section 195(2) wherein 30 per cent was allowed as expenses before application of the provisions of Section 44D read with Section 115A and Article III/XVI of the DTAA. The Commissioner (Appeals) held that though ni/ salary has been debited in the profit and loss account, salaries in fact have been paid to the persons discussed and this salary is in relation to the works done in India and are attributable to P.E. in India. The DTAA clearly provides that where an enterprise of one contracting State carries on business in the other contracting State through a permanent establishment therein, there shall in each contracting State be attributed to that permanent establishment the profits which it might be expected to make as if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. This clearly means that irrespective of the fact that whether the salary is debited in the profit and loss account or not it shall be deemed to be attributed to the P.E. to calculate its profits under the DTAA. So simply not debiting the salary to the profit and loss account pertaining to Indian operations will not absolve the assessee from deducting TDS. Therefore, the assessee’s ground that salary was not taxable as the corporate assessments in earlier years were made under Section 44D do not hold good. As such since the employees do not satisfy all the conditions laid down in article XIV(2) of the DTAA, the assessing officer has rightly denied exemption and held the assessee as assessee in default under Section 201 of the Act.
5. The Commissioner (Appeals) further observed that the expenses claimed by the assessee in the profit and loss account are Rs. 66,86,364 and the amount of salaries worked out from the details submitted are Rs. 47,60,458. The total expenses thus work out to Rs. 1,14,46,822 while the gross receipts of these contracts are Rs. 4,47,63,046. The expenditure on percentage of gross receipts thus work out to 25.57 per cent. This shows that the assessing officer had considered the salaries on ad hoc basis at the time of issue of withholding tax order under Section 195(2) of the Act. Thus, the assessee now cannot fall back and say that there was no liability for deduction of tax at source under Section 192 read with Section 195A. The assessing officer has thus rightly held the assessee to be in default under Section 201(1) and this ground of appeal is rejected.
6. With regard to taxability of off period salary, the Commissioner (Appeals) observed that at the time of assessment, the assessee neither contended nor filed any documentary evidence to show that off period salary was paid to its employees for rendering services outside India. Even the contract of employment of employees do not stipulate any duty for the company during their off period and it was thus in the nature of earned leave. The books of account of the company/salary registers for the financial year 1987-88 were not produced for verification. Explanation to Section 9(1 )(ii) has been substituted by new Explanation by Finance Act, 1999 with effect from 1-4-2000 and by virtue of substitution by new Explanation in place of already existing Explanation the salary payable for off period or leave period which are preceded and succeeded by period of services rendered in India and form part of service contract in India shall be regarded as income earned in India. Explanation though has been made effective from 1 -4-2000, yet it is explanatory in nature and has retrospective effect. The Commissioner (Appeals) referred the order of ITAT Delhi Bench ‘B’ in the assessee’s own case for assessment years 1984-85 and 1986-87 vide order dated 28-7-1999 wherein, it was held that the salary for the off period was taxable. He, therefore, concluded that the assessing officer has rightly included off period salary in the taxable income for calculating the amount in default.
7. Aggrieved by the above order of the Commissioner (Appeals), the assessee is now in appeal before us. It was contended by the learned AR Shri S.P. Puri that all the expatriates were in India in the previous year for less than 183 days. Salary was paid to them by non-resident company. Salary was not paid by permanent establishment in India nor any claim for deduction of salary was made in the income-tax return of the employer. No salary was paid by permanent establishment in India nor such salary was deducted from the income returned, and no amount relating to salaries of such personnel was debited in the accounts of permanent establishment in India. The A proceeds received were taxed on presumptive net profit of 10 per cent applying the provisions of Section 44BB of the Income Tax Act, 1961.
8. Learned AR further contended that Section 44BB has a non obstante clause and has a limited application with one deemed fiction of presumptive net profit of 10 per cent of gross proceeds, no further deeming fiction can be introduced for interpretation of article XIV(2) of. DTAA with France. There cannot be fiction over fiction more so when there cannot be assumption of deeming salary as having been deducted with the language of article XIV(2)(c) is very specific and provides of actual deduction of remuneration. The expression ‘deduction’ means factum factual deduction and ostensibly deducted in computing the profits of permanent establishment and therefore the expression ‘deduction’ cannot be equated to ‘borne’ or ‘deductible’ or ‘deemed to be deducted’. It was also contended that there cannot be any estoppel against the statutory provisions and the agreed assessment is without any meaning when the tax department was merely following the instructions of C.B.D.T. and applying the provisions of Section 44BB read with Section 90(2) of the Income Tax Act, 1961 initially of taxing the proceeds as fees for technical services. On the other hand Learned CIT (DR) Shri Pandey relied on the orders of lower authorities and submitted that deeming provisions of Section 44BB not only aim at estimation of income but by necessary application allow the deduction of remuneration payable to expatriates._
9. We have considered the rival contentions carefully gone through the orders of the authorities below as well as relevant provisions of the law with reference to Double Taxation Avoidance Agreement (DTAA) with France. We had also deliberated on the case law referred by lower authorities in their respective orders as well as cited by Learned AR and DR during the course of hearing before us, in the context of factual matrix of the case. The assessee-company being a French Company, the provisions of agreement for avoidance of double taxation between India and France ^ are applicable. Under article III of the Treaty, tax can be charged only on the net income derived by the company through a permanent establishment situated in India. Even fees for technical services can be charged to tax only on the net income as per article XVI of the Treaty. The provisions of Indo-French Treaty override the provisions of the Income Tax Act, 1961, including Sections 44BB and 44D. As per the Treaty, tax can be charged only on the net profit, if any, derived from operations in India. j-There being a net loss as per assessee’s computation of income, it was claimed that the tax amounting to Rs. 1,76,56,052 deducted at source by ONGC on payments made to the company be refunded. The controversy relates to payment of salary to the expatriates deputed under manning and management contracts for services rendered on ONGC rigs Sagar Vijay and Sagar Bhushan. The assessee.has claimed exemption in respect of expatriates whose stay in India did not exceed 183 days during the previous year. The technical services rendered through expatriates under 571 management and manning contract are taxable as per article XVI. Article XVI which read as under :
Article is as under :
Article XIV(1): Subject to the provisions of article XII, salaries wages orother similar remuneration for services as an employee performed in oneof the contracting States by an individual who is a resident of the othercontracting State may be taxed only in the contracting State in which hisgservice is rendered.
(2) Notwithstanding the provisions of paragraph (1) of this article salaries, wages or other similar remuneration paid to an individual who is a resident of one of the contracting States for services performed in that other contracting State shall not be subjected to tax in that other contracting State and may be subjected to tax in the former contracting State, if,
(a) He is present in that other contracting State for a period or periods not exceeding in the aggregate 183 days in the taxable year concerned and
(b) The remuneration is paid by or on behalf of an employer who is not a resident of that other contracting State and
(c) The remuneration is not deducted in computing the profits of a permanent establishment chargeable to tax in that other contracting State.
Thus, under article XVI(2) three conditions are required to be satisfied and satisfied cumulatively for earning exemption from levy of tax on salaries and wages.
10. As per the material on record as discussed above, there is no dispute to the fact that duration of stay of expatriate employees in India was less than 183 days as per the details furnished before lower authorities. The remuneration was also paid by or on behalf of employer who is not resident of other contracting State. The assessing officer has declined the assessee’s claim on the plea that conditions (c) with regard to remuneration having been deducted in computing the profit of permanent establishment chargeable to tax in that other contracting State, was not satisfied. It is quite evident from the computation of total income placed on record as well as the copy of the audited P&L account and balance sheet filed before the lower authorities, that assessee has not claimed any deduction of salary and remuneration of expatriate employees with respect to activities carried out at Sagar Vijay and Sagar Bhushan. While framing the assessment, the assessing officer has applied provisions of Section 44BB and taken presumptive net profit of 10 per cent on manning and management contract instead of as fee for technical services following the C.B.D.T. instructions. The claim for non-taxability of remuneration was made under Section 201 proceedings with reference to article XIV(2) of DTAA with France. Article XIV(2)(c) provides for twin conditions that there must be permanent establishment and the remuneration must be, deducted in computing the profit of PE in India. As the assessee has not A claimed the remuneration in its audited P&L account nor in the return of income filed along with the income-tax returns, then Sub-clause (c) is negatively fulfil to enable the assessee to claim exemption from liability to tax in respect of salary of such expatriate employees. The remuneration having not been claimed by the assessee in its P&L account prepared with reference to its permanent establishment in India, has not been disputed either by the assessing officer nor by the Commissioner (Appeals). The only plea of lower authorities were that Section 44BB assumes deducibility and liability of all the expenses including remuneration paid to expatriate. As per our considered view Section 44BB has a non obstante clause and has a limited application with one deemed fiction presumptive net profit of 10 per cent of gross proceeds, no deeming fiction can be introduced for interpretation of article XIV(2) of DTAA with France. The expression “deducted” as used in article XIV(2)(c), mean “actually deducted” and “ostensively deducted” while computing the profit of permanent establishment.
It cannot be equated or extended by fiction to “deeming to have been deducted”. As no salary was actually claimed in audited accounts in India while computing the chargeable profit, it cannot be deemed to be deducted when no claim was made for such deduction. Even while confirming the action of the assessing officer for treating the salary having been allowed while taking 10 per cent profit under Section 44BB, the CIT (Appeals) has observed that although no salary was claimed for deduction in the P&L account nor claimed in the income-tax returns, it does not make a difference since salary has been paid for work done in India and attributable to PE.
11. Section 44BB provides for special provision for the taxation of foreign(employer) company with regard to mineral oil operations by introducing a non obstante clause provides that provisions for deduction of expenses as per Sections 28 to 41, 43 and 43A are inapplicable and are overridden E and by further providing a legal fiction by deeming 10 per cent of proceeds as presumptive net profits in computing the income from business. The cumulative effect of non obstante clause and legal fiction is that no expenses incurred in the business of earning the income shall be allowed for deduction in computing the business profits and 10 per cent of proceeds irrespective of actual results shall be deemed to be presumptive 10 per cent profits of business chargeable to tax, where an assessment is p. made on estimated basis or on the basis of rate applied as per legal fiction, there is no assumption that the expenses for each head had been considered and allowed much less said to be deducted.
12. Hon’ble Apex Court in CIT v. Mahendra Mills has laid down that the claim for depreciation is for the benefit of the assessee and if he does not avail of that benefit for some reasons the benefit cannot be forced upon him. Similarly it was held “actually allowed” does not mean “notionally allowed”. If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing is “allowed” when it is claimed. A suitable distinction is there when we examine the language used in Section 16 and Sections 34 and 37 of the Act. It was rightly said that a privilege cannot be said to a disadvantage and an option cannot be become an obligation. The assessing officer cannot grant depreciation allowance when the same is not claimed by the assessee.
13. While interpreting a legal fiction, Hon’ble Supreme Court has held in case of Mancheri Puthusseri Ahmed v. Kuthiravattam Estate Receiver , that “in interpreting a provision creating a legal fiction the court is to ascertain for what purpose the fiction is created, and after as certaining this, the court is to assume all those facts and consequences which are incidental or inevitable corollaries to the giving effect to the fiction. But in so construing the fiction it is not to be extended beyond the purpose for which it is created, or beyond the language of the section by which it is created. It cannot also be extended by importing another fiction.
14. Moreover, the provisions of Section 44BB are applicable to the computation of profits of the (employer) foreign company and the fiction contained in the said section cannot be applied for interpreting the provisions of article XIV(2) which are applicable to the personnel. It is quite clear that the provisions of the DTAA override the provisions of Income Tax Act and even if there is a legal fiction provided in Section 44BB it cannot restrict the meaning and ambit of exemption provisions of article XIV(2) of DTAA with France. Moreover, the Apex Court have repeatedly laid down that if the language of the statute is clear and unambiguous, words must be understood in their plain meaning. The wordings of the DTAA must be constructed according to its literal and grammatical meaning whatever the result may be. The word “deducted” cannot be equated with the word “deductible” or interpreted as deemed to be deducted or borne by Permanent Establishment. The Apex Court has again clearly laid down in CIT v. Moon Mills Ltd. that the word “received” cannot be equated to “receivable” even though under mercantile system of accounting “receivable” also means receipt as per system of accounting.
15. In view of the above discussion, we are inclined to agree with the learned AR Shri S.P. Puri that assessee-company cannot be treated as “assessee in default” under Section 201 of the Act, in respect of remuneration of the expatriate who fulfilled all the conditions of exemption in terms of article XIV(2) of DTAA with France. Other grounds taken by the assessee are consequential in nature.
16. In the result, the appeal of the assessee is allowed.