CASE NO.: Appeal (civil) 351-355 of 2005 PETITIONER: Sedco Forex International Drill. Inc. & Ors. RESPONDENT: Commissioner of Income Tax, Dehradun & Anr. DATE OF JUDGMENT: 17/11/2005 BENCH: Ruma Pal & Tarun Chatterjee JUDGMENT:
J U D G M E N T
With
Civil Appeal Nos.375-426, 428-447, 462, 465-472,
474-476, 478, 480-481, 483-484, 545, 502-511,
513-521, 526-530, 534-544,546 of 2005
RUMA PAL, J
The appellant has filed these appeals as the agent of its
employees who are the assessees in the present case. The appellant
itself is a company which was incorporated in Panama. It entered
into a wet lease with the Oil and Natural Gas Commission (ONGC)
under which the appellant agreed to supply oil rigs and the
employees to man the rigs to enable ONGC to carry on offshore
drilling within the territorial waters of this country. The appellant also
entered into agreements (which were executed in the United
Kingdom) with each of its employees who are residents of the United
Kingdom. The schedule of work as specified in the agreements
envisaged 35 days or 28 days work in a foreign location (in this case
India) followed by 35 days or 28 days “field break” in the United
Kingdom (UK). “Field break” was defined in the agreements to
include, but was not limited to, undergoing training by attending
classes at such places as may be specified, on the spot
demonstration to update the knowledge in the latest techniques and
attending to the offshore drilling work on any project of the appellant
in any part of the world. The agreements further provided that such
assignments would be obligatory and compulsory and that the
employee would have no option to deny or reject the same. The
alternative schedule of time at location and at field breaks was to be
repeated continuously during the period of the agreements. The
employees were to be paid the same monthly salaries for the
alternating periods.
The issue is whether the salary of the employees of the
appellant payable for field breaks outside India would be subjected to
tax under Section 9(1)(ii) read with the Explanation thereto in the
Income Tax Act 1961 (hereinafter referred to as ‘the Act’) for the
Assessment years 1992-93, 1993-94.
The Assessing Authority assessed the employees of the
appellant including the salary for the field breaks as part of the total
income under Section 9 (1)(ii) of the Act. The Commissioner of
Income Tax dismissed the employees’ appeal. The Tribunal however
held that the addition of such salary was not justified and the same
was deleted. The Department’s appeal to the High Court was
allowed on the ground that the ‘Off period’ and ‘On periods’ formed
an integral part of the agreement between the appellant and its
employees and that it was not possible to give separate tax
treatment to the two periods. It was further held that during the field
breaks the employees had to remain fit and had to undergo
demonstration and training and all that had a nexus with the services
the assessees had to render in India. Construing Section 9(1)(ii), the
High Court rejected the submission that the phrase “income earned in
India” meant that in all cases where services were rendered outside
India, the salary could not be deemed to accrue in India, ipso facto.
The High Court held that the training during the period of field breaks
was directly connected with the works on the rigs in India, and as
such the salary for the ‘Off period’ was income “earned” in India
within the meaning of the phrase in Section 9(1) (ii) of the Act. The
third ground for reversing the view taken by the Tribunal was that the
assessment records showed that the employer company had paid the
salary of the employees including salary for the ‘Off period’ out of the
income of the Indian operations.
Assailing the decision of the High Court, the employees,
through the appellant, have submitted that the High Court had not
taken into account the statutory change effected to Section 9(1)(ii). It
was submitted that in 1999 the scope of the section was amended to
include salary for ‘Off periods’ outside India for the first time with
effect from 1st April, 2000. It was submitted that the impugned
decision in fact purported to give retrospective effect to the provisions
introduced in 1999 to cover the assessment years in question. It was
submitted that the scope of Section 9(1)(ii) after its amendment in
1999 had been clarified by a circular issued by the Central Board of
Direct Taxes (CBDT) as being prospective and this was binding on
the Department. It was contended that in any event the provisions of
the section must be construed in accordance with international
understanding and norms. According to the appellant during the field
breaks, its employees were kept on standby in the UK for serving
anywhere in the world which was not necessarily in India.
Appearing on behalf of the respondents, the Additional Solicitor
General submitted that the employees of the appellant company were
paid salary during the field breaks only as a consequence of and in
relation to the services rendered by them during the period that they
actually worked in India. It necessarily followed that the salary
received for the ‘Off period’ was taxable as arising out of services
rendered in India. There was a reasonable nexus between salary
earned for the ‘Off periods’ and the services rendered in India. It was
further submitted that the amendment to the Explanation to Section
9(1) (ii) was brought about by the Finance Act 1999 and was
retrospective since it was clarificatory. It was also stated that the
issue whether a statute is to be construed as being retrospective, if it
did not itself indicate either in terms or by necessary implication that it
was to operate retrospectively, has been referred to a Constitution
Bench. As far as the CBDT Circular is concerned, it was said that it
was not binding on the respondents.
In our view, the opinion of the High Court is contrary to the
legislative history, context and construction of Section 9(1)(ii). Under
Section 4(1) of the Act the total income of the previous year of every
person is subject to income tax. Section 5(2) defines the scope of
total income as far as non residents are concerned, “as all income
from whatever source derived which
a) is received or deemed to be received in India by or on behalf of
such person or
b) accrues or arises or is deemed to accrue or arise to him in
India in such year”.
In other words it is the receipt or accrual in India, whether
deemed or actual, which determines the taxability under the Act.
Section 9 of the Act defines income “deemed to accrue or arise in
India”. By Clause (ii) of sub-section (1) of Section 9 “income which
falls under the head ‘Salaries’ if it is earned in India” is included in
such income. In 1980 the Gujarat High Court in Commissioner of
Income-Tax vs. S.G. Pgnatale :([1980] 124 ITR 391 held that the
words ‘earned in India” occurring in Clause (ii) must be interpreted as
“arising or accruing in India” and not “from service rendered in India”.
Therefore as long as the liability to pay the amount under the head
“salaries” arose in India, Clause (ii) could be invoked. But if the
liability to pay arose out of India and the amount was payable outside
India, Clause (ii), as it stood then, could not be invoked.
To overcome this decision, Section 9 (1) (ii) was amended by
the Finance Act, 1983 with effect from 1.4.1979 to include an
Explanation to Section 9(1)(ii) which read as follows:-
“ExplanationFor the removal of doubts, it is hereby
declared that income of the nature referred to in this
clause payable for service rendered in India shall be
regarded as income earned in India.”
Therefore with this Explanation, irrespective of where the
contract was entered into or where the liability to pay arose or where
the payment was actually received, if the service was rendered in
India, the salary for such service was exigible to tax as income under
the Act.
The High Court proceeded on the incorrect hypothesis that the
field breaks were limited to the training of the employees to render
them more fit for service in India. That was not what the agreements
between the appellant and its employees said and there was no
ground for the High Court to have assumed that it was. The High
Court also did not address itself to the other aspects of the field break
namely the readiness of the employees for service anywhere at all.
The employees in this case had not in fact ‘served’ in India during
the field break period but they earned the income in UK as UK
residents the consideration for the salary being the undergoing of
training or updating of knowledge and being in a state of readiness to
serve anywhere at all. The contract does not mention that the salary
was for a well earned rest. That was a presumption which the High
Court raised but which was based on no evidence. Besides, the
clause in the contract relating to salary for service in India was
distinct from the clause relating to payment of salary for field breaks.
The first clause clearly fell within the extended meaning given to the
words ‘earned in India’ in the main provision. But the second clause
relating to the salary paid by the appellants to its UK employees for
the field break was not ‘earned in India’. Since it did not fall within the
phrase. The phrase is part of the statutory fiction created by Section
9(1). There is no question of introducing a further fiction by extending
the Explanation to include whatever has a possible nexus with
service in India . Therefore the salary paid for the field breaks in the
UK was not for “service rendered in India” within the meaning of 1983
Explanation to Section 9(1)(ii) of the Act.
The High Court did not refer to the 1999 Explanation in
upholding the inclusion of salary for the field break periods in the
assessable income of the employees of the appellant. However the
respondents have urged the point before us.
In our view the 1999 Explanation could not apply to
assessment years for the simple reason that it had not come into
effect then. Prior to introducing the 1999 Explanation, the decision in
CIT vs. S.G. Pgnatale (supra) was followed in 1989 by a Division
Bench of the Gauhati High Court in Commissioner of Income Tax
vs. Goslino Mario reported in [2000] 241 ITR 314. It found that the
1983 Explanation had been given effect from 1.4.1979 whereas the
year in question in that case was 1976-77 and said :
“..it is settled law that assessment has to be made with
reference to the law which is in existence at the relevant
time. The mere fact that the assessments in question
has(sic) somehow remained pending on April 1, 1979,
cannot be cogent reason to make the Explanation applicable
to the cases of the present assessees. This fortuitous
circumstance cannot take away the vested rights of the
assessees at hand”.
The reasoning of the Gauhati High Court was expressly
affirmed by this Court in Commissioner of Income Tax vs. Goslino
Mario [2000] 241 ITR 312 at 314] These decisions are thus
authorities for the proposition that the 1983 Explanation expressly
introduced with effect from a particular date would not effect earlier
assessment years.
In this state of the law, on 27th February, 1999 the Finance Bill,
1999 substituted the Explanation to Section 9 (1) (ii) (or what has
been referred to by us as the 1999 Explanation). Section 5 of the Bill
expressly stated that with effect from 1st April, 2000, the substituted
Explanation would read:
“ExplanationFor the removal of doubts, it is hereby
declared that the income of the nature referred to in
this clause payable for
(a) service rendered in India; and
(b) the rest period or leave period which is
preceded and succeeded by services rendered
in India and forms part of the service contract
of employment, shall be regarded as income
earned in India.”
The Finance Act 1999 which followed the Bill incorporated the
substituted Explanation to Section (9)(1)(ii) without any change.
The Explanation as introduced in 1983 was construed by the
Kerala High Court in Commissioner of Income tax vs. S.R. Patton
[1992] 193 ITR 49, while following the Gujarat High Court’s decision
in S.G. Pgnatale (supra), to hold that the Explanation was not
declaratory but widened the scope of Section 9(1)(ii). It was further
held that even if it were assumed to be clarificatory or that it removed
whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not
operate in respect of periods which were prior to 1.4.1979. It was held
that since the Explanation came into force from 1.4.1979, it could not
be relied on for any purpose for an anterior period.
In the appeal preferred from the decision by the Revenue
before this Court, the Revenue did not question this reading of the
Explanation by the Kerala High Court, but restricted itself to a
question of fact viz., whether the Tribunal had correctly found that the
salary of the assessee was paid by a foreign company. This Court
dismissed the appeal holding it was a question of fact.
[Commissioner of Income tax vs. S.R. Patton (1998) 8 SCC 608].
Given this legislative history of Section 9(1)(ii), we can only
assume that it was deliberately introduced with effect from 1.4.2000
and therefore intended to apply prospectively . It was also
understood as such by the CBDT which issued Circular No. 779
dated 14th September, 1999 containing explanatory notes on the
provisions of the Finance Act, 1999 in so far as it related to direct
taxes. It said in paragraphs 5.2 and 5.3.
5.2 The Act has expanded the existing Explanation
which states that salary paid for services rendered in
India shall be regarded as income earned in India, so
as to specifically provide that any salary payable for
rest period or leave period which is both preceded and
succeeded by service in India and forms part of the
service contract of employment will also be regarded as
income earned in India.
5.3 This amendment will take effect from 1st April,
2000, and will accordingly, apply in relation to the
assessment year 2000-2001 and subsequent years”.
The Departmental understanding of the effect of the 1999
amendment even if it were assumed not to bind the respondents
under Section 119 of the Act, nevertheless affords a reasonable
construction of it, and there is no reason why we should not adopt it.
As was affirmed by this Court in Goslino Mario (supra), a
cardinal principle of the tax law is that the law to be applied is that
which is in force in the relevant assessment year unless otherwise
provided expressly or by necessary implication. [See also: Reliance
Jute and Industries vs. CIT (1980) 1 SCC 139]. An Explanation to
a statutory provision may fulfil the purpose of clearing up an
ambiguity in the main provision or an Explanation can add to and
widen the scope of the main section . If it is in its nature clarificatory
then the Explanation must be read into the main provision with effect
from the time that the main provision came into force . But if it
changes the law it is not presumed to be retrospective irrespective of
the fact that the phrase used are ‘it is declared’ or ‘for the removal of
doubts’.
There was and is no ambiguity in the main provision of Section
9(1)(ii). It includes salaries in the total income of an assessee if the
assessee has earned it in India. The word “earned” had been
judicially defined in S.G. Pgnatale (supra) by the High Court of
Gujarat, in our view, correctly, to mean as income “arising or accruing
in India”. The amendment to the section by way of an Explanation in
1983 effected a change in the scope of that judicial definition so as to
include with effect from 1979, “income payable for service rendered in
India”.
When the Explanation seeks to give an artificial meaning
‘earned in India’ and bring about a change effectively in the existing
law and in addition is stated to come into force with effect from a
future date, there is no principle of interpretation which would justify
reading the Explanation as operating retrospectively.
Even if it were to be held that the 1999 Explanation to
Section 9(1)(ii) were applicable to the facts of the present case, it is
doubtful whether in the facts of this case the activity of the employees
in the UK could be said to be “rest” period or “leave” period within the
meaning of the words in Clause (b) of the 1999 Explanation.
However, it is not necessary to decide the issue as we are satisfied
that the 1999 Explanation would not apply to the assessment years in
question.
For the reasons aforesaid, the decision of the High Court is set
aside and the appeals are allowed. There will be no order as to
costs.
