TMI Blog2010 (10) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... In favour of assessee. - ITA No. 980 of 2009 - - - Dated:- 19-10-2010 - A.K. Sikri, Suresh Kait, JJ. C.S. Aggarwal and Prakash Kumar for the Appellant Sanjeev Sabharwal for the Respondent ORDER A.K. Sikri, J:- 1. Admit. 2. The following substantial question of law arises for determination:- "Whether the Income Tax Appellate Tribunal was justified in law in reversing the order of the Commissioner of Income Tax (Appeals) and thereby upholding the disallowance of Rs.1,929,632 made by the assessing officer under section 40(a)(iii) of the Act, representing the amount of salaries paid in foreign currency to the employees at Netherlands, who were non-residents, without appreciating the same was not chargeable to tax under the provisions of the Income Tax Act, 1961 by virtue of Article 15 of the Double Taxation Avoidance Agreement (DTAA) between Indian and Netherlands?" 3. Filing of paper book is dispensed with. 4. With the consent of the learned counsel for the parties, we have heard the matter finally at this stage itself. 5. The aforesaid question of law has to be answered in the following factual background. 6. The appellant is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Income Tax (Appeals). 10. The Commissioner of Income Tax (Appeals) by an order dated 6th December, 2005 disposed of the appeal of the appellant. The CIT (A) deleted the addition of Rs.19,29,632 on account of disallowance made by the Assessing Officer being salary paid to non-resident staff outside India (i.e. in Netherlands), u/s 40(a)(ii) of the Act. For the sake of convenience the relevant portion of the order of the Commissioner of Income Tax (Appeals) dated 6th December, 2005 is being reproduced as under:- "2.5 I have gone through the facts of the matter in relation to this issue. Reasoning given by the AO and the contentions of the assessee have been duly considered. In the facts and circumstances of the case I agree with the argument of the assessee that the provisions of TDS would not be applicable when the basic requirement is not fulfilled i.e. the sum paid should have been chargeable to tax in India in accordance with provisions of section 40(a)(iii) of the Act read with section 5(2) and section 9(1)(iii) as contended by the assessee co., in the preceding para. Reliance placed by the assessee on explanation 1 to section 5(2) is quite relevant here as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year 1995-96, the amounts of such usance interest in computing the business income by virtue of the provisions about disallowance contained in section 40(a)(i) of IT Act. In view of our detailed discussion it is held that as the salaries of Rs.1,929,632 has been paid by the assessee Indian Company outside India on which no tax has been deducted at source by the assessee, the AO has rightly disallowed such payments claimed by the assessee as per provisions of section 40A(iii) of the Income Tax Act. Accordingly, the order of the CIT (A) in this regard is reversed and that of the AO is upheld and ground of appeal taken by the Revenue is allowed." 12. It is against this order, present appeal is preferred which has given rise to the question of law formulated by us as above. 13. After hearing the counsel for the parties we are of the opinion that the Tribunal has committed a manifest error in law in reversing the order of the CIT (A). The admitted facts are that the salaries were paid in foreign currency to the employees who are in foreign country i.e. in Netherlands and even these employees are non-residents. It is also admitted at the Bar that the salary paid to these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remuneration. 15. In view of the above, provisions of section 40(a)(iii) of the Act were not applicable in the instant case. As per that section certain amounts are not allowed as deductions in computing the income chargeable under the head 'profits and gains of business or profession'. Sub-Clause (iii) of clause (a) of section 40 includes those payments which are chargeable under the head 'salaries' if the same is payable outside India and if the tax is payable thereon, there is no question of deducting tax therefrom under Chapter XVII-B. Chapter XVII relates to tax deduction at source. Those provision would be applicable only when the salary paid is chargeable to tax in India and the question of deduction of tax at source arises. The question as to whether such salary paid outside India is exigible to tax in India or not would be governed by section 5 of the Act. This provision reads as under:- "5. SCOPE OF TOTAL INCOME. ...(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) Is received or is deemed to be received in India in such year by or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining chargeability of the tax, no tax would be payable on the salary received on the services rendered outside India. While laying down this principle, the court made following pertinent observation:- "On the other hand, section 5(2) indicates the meaning of accrual of income. It states, inter alia, that the total income of any previous year of a non-resident shall include all income from whatever source derived which is received by him in India or which accrues to him in India. In other words, broadly, in the case of a resident Indian all income which accrue to him whether in or outside India is taxable whereas in the case of a non-resident only income which accrues to him in India or which is received by him in India is taxable. Therefore, consequently, in the case of a non-resident if income accrues outside India, the same is not taxable. Section 6 indicates the meaning of residence in India. Section 6 lays down that for the purposes of the Income-tax Act, an individual is said to be a resident in India if he is in India for a prescribed period. Therefore, section 6 emphasises physical presence of the person in India. Under section 9(1)(ii), it is laid down as to what type ..... X X X X Extracts X X X X X X X X Extracts X X X X
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