Important point
It is the receipt or accrual in India, whether deemed or actual, which determines the taxability under Income Tax Act and words “earned in India occurring in clause (ii) of Section 9 of the Act must be interpreted as “arising or accruing in India” and not “from service rendered in India”.

Headnote:Income Tax Act, 1961—Section 9(1)(ii)—Appellant agreed to supply oil rigs and employees to man the rigs to enable ONGC to carry on offshore drilling within territorial waters of India—Employees of appellant who were residents of united kingdom as per agreement with appellant were to work 35 days or 28 days in India followed by 35 days or 28 days “field break” in U.K. —Issue whether salary of employees of appellant payable for field breaks outside India would be subject to tax u/s 9(1)(ii) of Income Tax? No—It is the receipt or accrual in India, whether deemed or actual, which determined taxability under the Act—Words “earned in India” must be interpreted “arising or accruing in India” and not “from service rendered in India”—High Court proceeded on incorrect hypothesis that field breaks were limited to training of employees to render them more fit for service in India—Salary paid for field breaks in U.K. was not for “service rendered in India”—1999 Explanation could not apply to assessment years as it was not retrospective—Impugned order holding salary for field break period taxable was liable to be set aside.
       Held : 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. (Paras 6 and 7)
       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 of India [CIT vs. Moon Mills Ltd.: AIR 1966 SC 870; M.P. Ahmed vs. Kuthiravattam Estate Receiver : AIR 1997 SC 208, 214]. 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. (Para 10)

Judgment

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.

2. 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.

3. 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.

4. 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

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2005 Supreme(SC) 1495

Cases Referred (9)