TMI Blog2005 (7) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... nds and is engaged in the business of providing consultancy services in the areas of highways, transportation, water supply and waste water, urban development, environment, agricultural, natural resources etc. Dutch BV has set up several Project Offices in India (hereinafter collectively referred to as 'the POs') to carry out its activities in India. Dutch BV, through the POs, is currently providing consultancy services to National Highways Development Projects, Delhi Water Supply and Sewerage Project etc. being executed in India. The POs derive income in the nature of fee for technical services from India. The income of the company is taxed on presumptive basis under Section 44D read together with Section 115A of the Income Tax Act, 1961` ("the Act"). Dutch BV sends its employees from Netherlands to India to work on various projects being executed by it in India. During their stay in India the employees continue to receive salary and allowances in the home country. Since Dutch BV in its capacity of an employer, is under an obligation to deduct taxes at source in India to the extent its employees salary is subject to tax in India , it is keen to know with certainty its liability to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable to tax in India. However, in case an individual is resident of a country with which Government of India has signed a Double Taxation Avoidance Agreement (DTAA) in accordance with section 90 of the Act then the individual is entitled to claim benefit under the provisions of the DTAA. However, no evidence has been given regarding the residence of these employees in Netherlands and their liability to tax in that State. There is nothing on record to demonstrate that these employees are liable to tax both in India and Netherlands. The benefit of Section 90 of the Indian Income Tax Act cannot be availed of if the tax-payer pays tax or is liable to pay tax under the law in force in one country alone. This view has been held by the Authority for Advance Rulings in the case of Cyril Eugene Pereira reported in 239 ITR 650(AAR). The applicant has further stated that the condition under Sub-Clause (C) of Clause 2 of Article 15 of the DTAA is satisfied in its case, since it is taxed on presumptive basis u/s 44D read with Section 115A of the Indian Income-tax Act. The contention of the applicant is that since it is liable to tax as prescribed u/s 115A on its gross receipts, none of the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, endured, etc. Used attrib. Chiefly in such constructions as 'patiently borne injuries', 'the breeze-borne note'. Black's Law Dictionary - Bear - To support, sustain, or carry; to give rise to, or to produce, something else as an incident or auxiliary. To render, to manage, or direct, or to conduct, to carry on, or maintain; to be answerable for, and to defray". It was stated by the learned counsel that in the present context the expression 'borne by' used in the DTAA is to be interpreted as to whether the remuneration paid by the employer in Netherlands, is deductible in computing the taxable profits of the PE in the source country (India) keeping in view the provisions of section 44D and 115A(3), which specifically stated that no deduction in respect of any expenditure or allowance shall be allowed under sections 28 to 44C and 57 in computing the income by way of fees for technical services received after the 31 st day of March, 1976. It was therefore, pleaded by the learned counsel that in view of this blanket prohibition under the Act, it cannot be said that expenses incurred towards remuneration of employees and paid by the employers in Netherlands were deductible while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1961 as made on behalf of the applicant is entirely misconceived and confusing and runs contrary to the settled legal position as enumerated by Hon'ble Supreme Court in the case of V.A.Sanyasi Rao 219 ITR 330 (SC). While considering the validity of section 44AC and section 206C, it was held by the Hon'ble Court that these two sections are only machinery provisions and not charging sections. The Hon'ble Court further held that presumptive assessment does not dispense with the regular assessment as provided in accordance with section 28 to 44C. The learned counsel also relied heavily on the decision of the Hon'ble Authority for advance ruling in the case of "Lloyd Helicopters"-249 ITR 162(AAR) wherein it was held by the Authority that merely because the assessment is made on estimate basis would not mean that the expenses are not deductible. Relying on the decision of the Privy Council in CIT Vs Sir S.M. Chitnavis (1932) 6 ITC 453 (PC), the Authority held that in computation of profits, all proper outgoings have to be allowed as deduction irrespective of whether the statute contains a specific provision in this regard in the Act. Therefore, salary paid to the employees and indeed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of one of the States in respect of an employment exercised in the other State shall be taxable only in the first mentioned State if: • the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned; and • the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and • the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. From the pleadings of the learned counsels for the applicant and the revenue, it is seen that the agreed statement of facts in respect of sub-clause(c) is that the expression 'borne by' means "deductible" or "liable to be deducted". Sub-clause (a) (b) are factual in nature and the position has already been clarified by the learned counsel for the applicant as stated supra. It is also seen that similar provision for taxing the income of individual who is not a citizen of India are detailed in section 10(6)(vi) of the Act, which is reproduced hereunder:- "Income not included in total income. In computing the total income of a previous year of any person, any income falling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 44AE, section 44AF, section 44B, section 44BB, section BBA, section 44BBB, section 44C and section 44D have been engrafted by the legislature from time to time by way of presumptive taxation so as to simplify the computation and enhance tax compliance. In Finance Bill, 1976, while introducing section 44D, it was explained by the government in the Notes on clauses accompanying the bill: "Under the existing provisions of the Income Tax Act, 1961, income chargeable to tax under the various heads is computed on a net basis, i.e., after allowing deduction for admissible costs and expenses. The determination of the taxable income on net basis in the case of non-resident tax payers, however, creates practical difficulties. The non-resident taxpayer is not always sure of the type and extent of expenses which would be admissible under our tax laws and the nature of evidence which will be called upon to produce in support of his claim for expenses. Income-tax Officers are also handicapped as, in the absence of account books of the foreign tax payer which are kept outside India , they are not in a position to carry out any worthwhile scrutiny of these claims. A step towards, simplifying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of foreign companies Section 4 which is the charging section, provides that tax shall be charged for any assessment year as per rates prescribed in the Finance Act. For royalty and fees for technical services received by a foreign company in pursuance of an agreement made after 1 st April, 1976 and before 31 st May, 1997, tax payable on such income as per section 115A is 30% of gross receipts and for agreements made after 31 st May, 1997, 20% of such receipts. As against this portion, rates of tax for other income is much higher e.g. for assessment year 2004-05 being 40%. The lower rate of tax prescribed under section 115A is clearly due to the fact that tax on such income is computed on gross basis whereas for other income (other than royalty and fees for technical services) of a foreign company, tax is computed on net basis. Providing for lower rate of tax under section 115A as compared with the rates prescribed in the Finance Act is clearly for allowing margin for the deduction of expenses which include remuneration paid to employees working in India. Profits or gains of business connote excess of receipts over expenditure. Gross receipts cannot by any stretch of imagina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e construction suggested on behalf of the revenue would lead to a wholly unreasonable result which could never have been intended by the Legislature." The above decision clearly supports the fact that section 44D and Section 115A cannot be read as treating gross receipts of fees for technical services without allowing deduction on account of expenses incurred for earning the same as income, as defined under section 2(24) of the Act. 8. The applicant has placed reliance on the ruling of AAR in the case of Stanley Keith Kinnett v. CIT(1999) 238 ITR 155(AAR), the decision has been given on entirely different facts and issues involved, and therefore, is of not any assistance in the case of the applicant. As already stated, the applicant has raised in this application a purely legal issue regarding presumptive taxation as per section 44D read with 115A. Whereas no such issue was involved in the Stanley 's case. There taxability of the salary of the employees was in question. In that case Stanley Keith Kinnett was an employee of Whirlpool Corporation USA whereas he rendered services in India in the branch office of Whirlpool India Holdings for a short period of 76 days. The employer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nowhere in terms authorizes the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains." In view of the forgoing, it is clear that the salaries are paid by the applicant in Netherlands for the employment in India for the PE, to earn fees for technical services rendered in the source country. Cost incurred for rendering technical services is clearly deductible while determining the taxable profits of the applicant. We, therefore, concur with the conclusion of the Authority recorded in the case of Lloyds Helicopters - 249 ITR 162 (AAR). However, in view of the decision of Hon'ble Supreme Court in Azadi Bachao Aandolan and another [263 ITR 706(SC)], we are unable to agree with the reasoning given in the Lloyds' case that the non payment of tax by the applicant in India as well as in the other contracting state can be a decisive factor. 10. Before parting it would be apposite to r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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