1991-VIL-129-ITAT-DEL

Equivalent Citation: ITD 046, 114,

Income Tax Appellate Tribunal DELHI

Date: 13.05.1991

BOUDIER CHRISTIAN.

Vs

INCOME-TAX OFFICER.

BENCH

Member(s)  : CH. G. KRISHNAMURTHY., S. S. MEHRA.

JUDGMENT

Per Krishnamurthy, President--These assessees are non-residents. By these separate appeals, they challenge various first appellate orders passed by the learned CIT (Appeals), Dehradun for the assessment years 1984-85, 1985-86 and 1986-87. Since parties, facts and issues are common, for the sake of convenience, we propose, to dispose of all the matters by a single order.

2. For detailed facts and discussion, we shall first take up ITA No. 7488/ Del/89 for the assessment year 1985-86 in the case of Mr. Machin Roy, since in this case, the assessment and the order of the first appellate authority are in detail and in the case of others, the conclusions arrived at here were merely followed.

3. By status assessee in this case is a non-resident individual whose accounting period was the year ending31-3-1985. Return is said to have been filed declaring nil income. M/s. Foramer France is a foreign company located in and operating fromFrance. Assessee at the relevant time was an employee of the said company. On4-2-1984, operating service an maintenance contract was entered into between the said foreign company and the ONGC of India. This Commission is a body corporate established under the Oil & Natural Gas Commission Act, 1959 (Act No. 43 of 1959) having its Head Office at Dehradun, India and its offshore project office at 12th Floor, Express Tower, Nariman Point, Bombay 400021. The Oil & Natural Gas Commission was the owner Jack-up rig named the "Sagar Pragati" deployed for drilling and exploration of oil & gas in offshore areas of Indian Waters. The foreign company was in the business of offshore drilling operations and was able to furnish to ONGC expatriate supervisory staff and personnel with expertise in operation and management of Jack-up rigs. The ONGC desired to utilise the services of the expatriate personnel for manning assisting in the operation and management of the Jack-up rigs "Sagar Pragati" for the exploration and development of oil and gas offshore India. An agreement was entered into on4-2-1984providing for the above, and also the terms and conditions they have agreed upon. The foreign company i.e., M/s. Foramer France pursuant to the agreement provided technicians for the exploration of oil and gas offshoreIndia. Thus under the said agreement, the assessee along with other personnel were sent to India to provide technical services for operation to the ONGC on the Jack-up rigs, owned by the Oil & Natural Gas Commission and located in the offshore areas beyond 12 nautical miles from Indian shores. AR of them are non-residents and are not employees of ONGC. These assessees filed their returns of income showing nil income (It appears furnishing of returns is not in response to any notice issued under the Act). The assessees claimed exemption of the salary income from taxation on two counts :

(a) That the case of the assessee was covered under section 10(6)(vi) of the Act ;

(b) That the case of the assessee was covered under the Double Taxation Avoidance Agreement betweenIndiaandFrance.

4. Section 10(6)(vi) of the Act provided that the remuneration of an employee of a foreign enterprise for services rendered by him inIndiawould be exempt from tax provided the following conditions are fulfiled :

(a) the foreign enterprise is not engaged in trade or business inIndia;

(b) his stay inIndiadoes not exceed in the aggregate a period of 90 days in such previous year and ;

(c) such remuneration is not liable to be deducted from the income of the employer chargeable under this Act. The IAC (Assessment) did not agree with this submission. He was of the opinion that in terms of section 2(13) of the Income-tax Act, business includes any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture and that the foreign enterprise by providing technical services to the ONGC in India was carrying on a trade or commerce, as in his opinion, the expression "business" embraced every kind of activity including providing for services. For this purpose, the IAC (Assessment) placed reliance on page 2 para 2 of the contract which provided that :

" Whereas the contractor is in the contract of offshore drilling business and is able to furnish to owner expatriate supervisory staff and personnel with expertise in operation and management of cantilever type jacket unit. "

He was also of the opinion that even clause (c) of section 10(6)(vi) extracted above is satisfied because the remuneration received by the employee was deducted in computing the income of the foreign enterprise when an assessment was made on it through ONGC. The assessment was made on the foreign enterprise by applying a net profit rate of 7.5 per cent. This meant that all the expenditure incurred including those under the head salaries which included the payments made to these expatriate employees was allowed as a deduction in computing the income of the foreign enterprise. Having held that section 10(6)(vi) did not apply, the IAC (Assessment) examined the claim whether under the Double Taxation Avoidance Agreement betweenIndiaandFrance, the case of the assessees would fall. The claim of the assessee was based upon article XVI of the Double Taxation Avoidance Agreement betweenIndiaand theUnited Kingdom. Sub-clause (c) of cluase 2 of article XVI reads as under :

" the remuneration is not 'deductible' in computing the profits of an enterprise chargeable to Indian Tax " (Emphasis provided).

Applying the same argument as applied in the case of the application of clause (c) of section 10(6)(vi), the ITO held that the requirement of this clause was not satisfied. The IAC (Assessment) thus negatived the claim of the assessee on both the counts as mentioned above. He also held that the agreement provided payment of taxes on behalf of the employees by the employer and since the employer namely ONGC had paid the taxes, the tax liability of the employee was not discharged by the employee himself. Therefore, holding that neither under the Double Taxation Avoidance Agreement nor under section 10(6)(vi) the salary received by the assessee was exempt from tax, the ITO brought the salary as certified in the certificate issued by the foreign company to tax. That was how the assessments in all these cases were made by the IAC (Assessment) on varied sums of salaries. We are not refering to the figures inasmuch as the principle applied for bringing the salaries to tax was the same and in this case, we are deciding only the principle.

5. The assessee then appealed to the CIT (Appeal), Dehradun and repeated the same contentions by adducing evidence wherever necessary. The CIT (Appeals) agreed with the ITO's assessment and confirmed the levy. In addition to the points raised by the ITO in his order, the CIT (Appeals) examined two other aspects. He held that the foreign company was not only providing technical services inIndiabut it was also carrying on business by referring to the operations carried on by the foreign company inIndiawhich according to him amounted to business. He discussed elaborately in his order and gave reference to the decision of the Supreme Court wherever necessary to justify his conclusion. He was also of the opinion that the foreign concern had full control over the execution of the contract and that the foreign company was held responsible for the results. Relying upon clause 4.15 of the Agreement, he held that the foreign concern was acting as an independent contractor with full right to direct the performance of the details of the working. He also placed reliance on clause 18 of the contract to support this argument. He agreed that the stay of the expatriate inIndiawas for less than 90 days in all the cases. Nonetheless the satisfaction of that condition was not sufficient to earn exemption of the salary income from taxation because the other conditions were satisfied. Having held that the foreign concern was carrying on business in India, he had to decide whether the foreign company was maintaining a permanent establishment in India because unless a permanent establishment in India was maintained by the foreign enterprise, the profits of the foreign enterprise from such a business could not be taxed in India under the Treaty for Avoidance of Double Taxation entered into between India and France. In order to decide whether the foreign enterprise maintained a permanent establishment in India, the CIT examined the provisions of the contract and found that under the terms of the agreement, the duplicate copies of all the instructions including details of import licence which were sent by ONGC to the foreign enterprise were to be forwarded to one Mr. M. K. Gandhi at Bombay at their address which was the address of foreign enterprise in India and, therefore, that established conclusively that the foreign enterprise maintained in India a permanent establishment. The counsel of the assessee had admitted during the course of assessment proceedings that the foreign enterprise maintained an office inBombayto deal with the travel arrangements of its employees. This was noted on the order sheet entry under dated6-8-1986. From this entry, it was inferred that there was an admission by the assessee that the foreign enterprise maintained a permanent establishment inIndia. Since the foreign enterprise was to provide supervisory staff in the management of Jack-up rigs and manage the operation of the unit on the drilling ship, the Commissioner of Income-tax opined that the foreign company had a place of management situated on the rig itself and, therefore, it amounted to maintaining a permanent establishment inIndia. The attention of the CIT was drawn to a judgment of the Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 wherein the expression "maintenance of permanent establishment in India" under the Treaties of this kind was explained in great detail. Relying upon this judgment, it was pointed out to the CIT that what was maintained inIndiaby way of an office to look after the travel arrangements of the employees did not amount to maintaining a permanent establishment inIndianor the provision of technical services on the rig. But the CIT did not agreee with this submission.

6. There was a tax assessment made on one Mr. Bernard Deschamps for the period he was inIndiafrom7-6-1983to19-5-1984. He was deputed to work inIndiain that period by the foreign concern as base manager to help execute the contract with ONGC and coordinate the activities. From this fact, it was again inferred that there was a permanent establishment inIndia, negativing the argument that he was only a consultant and merely because he happened to be inIndiato help sign the agreement it did not mean that the foreign concern was maintaining a permanent establishment inIndia. Thus the CIT confirmed the view taken by the IAC and denied exemption of the salary.

7. We have heard the parties at length, perused the documents, the agreements and the orders passed by the revenue authorities. We are of the opinion that the assessees are entitled to succeed by operation of the Treaty for Avoidance of Double Taxation entered into betweenIndiaandFrance. All the Treaties that are entered into for Avoidance of Double Taxation derive their authority for operation, from sections 90 & 91 of the Indian Income-tax Act. These agreements, it is now well settled, prevail over the provisions of the Income-tax Act in our country unless otherwise provided in the Treaty. The Treaty entered into between the Government of India and Government of French Republic provided as to how the income arising in each country, either from business or from industrial or commercial activities or salaries or dividends, property income etc. are to be taxed. Article III of the Agreement provided for the taxation of income arising from industrial or commercial profits i.e. business income. This article provided :

" Article III. (1) The industrial or commercial profits (excluding the profits derived from the operation of ships or aircraft) of an enterprise of one of the Contracting States shall not be subjected to tax in the other Contracting State unless the enterprise has a permanent establishment situated in that other Contracting State. If it has such a permanent establishment the profits attributable thereto shall be subjected to tax only in that otherContractingState.

(2) Where an enterprise of one of the Contracting States has a permanent establishment situated in the otherContractingState, there shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to derive in that otherContractingState. If it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing on an independent basis with the enterprise of which it is a permanent establishment.

(3) In determining the industrial or commercial profits of a permanent establishment, there shall be allowed as deductions all expenses, wherever incurred reasonably allocable to such permanent establishment, including executive and general administrative expenses so allocable.

(4) In a case where the ascertainment of the correct amount of the industrial or commercial profits of a permanent establishment present difficulties, such profits may be reasonably estimated with reference to the extent to which the activities of such permanent establishment have contributed to earning of profits.

(5)The term 'industrial or commercial profits as used in this Article, shall not include income in the form of dividends, interest, rents, royalties, and similar payments as referred to in paragraph (2) of Article VII, capital gains, remuneration for personal services, or fees for technical services. "

It will be seen from the above that the industrial or commercial profits of an enterprise of a foreign State inIndiashall not be taxed unless the foreign enterprise has a permanent establishment maintained inIndia. If there is no permanent establishment inIndiaof a foreign enterprise, no tax can be levied on the industrial or commnercial profits. It will also be seen that sub-clause (5) of article III defined the term "industrial or commercial profits" as used in this Article. It will be seen from the definition quoted above that it excludes all income in the form of dividends, interest, rents, royalties and similar payments as referred to in paragraph (2) of Article VII, capital gains, remuneration for personal services or fees for technical services from the purview of commercial profits. In other words. the income falling under these categories is not to be treated as industrial or commercial profits. The Department treated these profits as industrial or commercial profits by invoking the provisions of Article III. For that purpose, it has become essential for the Department to establish that the foreign concern was maintaining a permanent establishment inIndia. It was only with that end in view that so much of exercise was done to establish that the activities carried on by the foreign enterprise inIndiaamounted to maintaining a permanent establishment inIndia.

8. Now under Article II of the Agreement, the term "permanent establishment" was defined in the following terms :

" (i) the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on :

(aa) The term 'fixed place of business' shall include a place of management, a branch, an office, a factory, a workshop, a warehouse, a mine, a quarry or other place of extraction of natural resources :

(bb) an enterprise of one of the Contracting States shall be deemed to have a fixed place of business in the otherContractingStateif it carries on in that otherContractingStatea construction, installation or assembly project or the like :

(cc) the use of mere storage facilities or the maintenance of a place of business exclusively for the purchase of goods or merchandise and not for any processing of such goods or merchandise in the country of purchase, shall not constitute a permanent establishment ;

(dd) a person acting in one of the Contracting States for or on behalf of an enterprise of the other Contracting State shall be deemed to be a permanent establishment of that enterprise in the first mentioned Contracting State, if :

1. he has and habitually exercises in the first mentioned Contracting State, a general authority to negotiate and enter into contracts for or on behalf of the enterprise, unless the activities of the person are limited exclusively to the purchase of goods or merchandise for or on behalf of the enterprise, or

2. he habitually maintains in the first mentioned Contracting State a stock of goods or merchandise belonging to the enterprise from which the person regularly fulfils orders for or on behalf of the enterprise, or

3. he habitually secures orders in the first mentionedContractingStateexclusively or almost exclusively, or the enterprise itself or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it. A person from one of the Contracting States who is present in the otherContractingStatefor not more than three months in the taxable year for the purpose of securing orders shall not be deemed to be habitually securing orders within the meaning of this sub-paragraph. "

According to the revenue, the fixed place of business referred to in clause (aa) of sub-clause (i) of Article II is the rig. It is very difficult to appreciate this argument much less to accept because the rig is owned by ONGC and not by the foreign enterprise. The rig can neither be called as a place of management nor as a branch nor as an office nor as a factory nor as a workshop nor as a warehouse, nor as a mine, or other place of extraction of natural resoures, inasmuch as, the foreign enterprise was not engaged in the extraction of any natural resources except to provide assistance and training to the personnel of the ONGC in managing the Jack-up rig. The agreement clearly provided that the foreign enterprise which is in business of oil exploration has some trained personnel to spare whom the ONGC wanted to employ for the purpose of exporation of oil inIndia. In this context, a reference can be made to the agreement entered into between ONGC and the foreign concern. The Preamble of the agreement provided as under :

" Whereas, the owner is owner of Jack-up rig named the 'Sagar Pragati' deployed for drilling and exploration of oil and gas in offshore areas of Indian Waters (hereinafter referred to as the Unit).

Whereas, Contractor is in the business of offshore drilling operations and is able to furnish to owner expatriate supervisory staff and personnel with expertise in operation and management of Jack-up rig.

And whereas, owner desires to utilize the services of such expatriate personnel of Contractor as listed in Exhibit 'A' for manning, assisting in the operations and management of the Jack-up rig 'Sagar Pragati' for the exploration and development of oil and gas offshore India. "

It clearly shows that the contractor namely the foreign enterprise was in the business of offshore drilling operations and was able to furnish expatriate supervisory staff and personnel with expertise in operation and management of Jack-up rig and since ONGC desired to utilise those services for manning and assisting in operation of the Jack-up rig, the agreement was entered into for employing the services of such expatriate personnel. This was interpreted by the Department as meaning or even establishing that the foreign enterprise was in the business of offshore drilling operations inIndia. From the Preamble extracted above, it is clear that the foreign enterprise because of itself being in the business of offshore drilling operations acquired the expertise and was able to furnish expatriate supervisory staff and personnel in operation and management of Jack-up rig. It is also clear that the foreign enterprise itself was not carrying on the business of offshore drilling operations in India, and that the agreement was only describing the nature and competence of the foreign enterprise to provide personnel who are well trained in operation and management of Jack-up rig. Thus it is clear that the foreign enterprise was only providing technical services. Therefore, it is dffficult to agree with the view expressed by the Department that the foreign enterprise was engaged in the business of offshore drilling operations inIndia. That is far from truth.

9. Let us see whether the foreign enterprise maintained a permanent establishment inIndia, though it is not necessary in view of our conclusion that the foreign enterprise was not carrying on any business inIndiawithin the meaning of Article III of the Treaty. The Department considered that by engaging M. K. Gandhi to whom reference was made in the contract between ONGC and the foreign enterprise, that foreign enterprise maintained a permanent establishment inIndia. Again when we look at the agreement, clause 3.4.2 provided that ONGC shall place irrevocable orders on the foreign enterprise in duplicate giving all necessary despatch instructions including details of import licence. The original copy of order shall be sent to the foreign enterprise inFranceand duplicate copy shall be sent to Mr. M. K. Gandhi, C/o. INDEP,NirmalBuilding, Ground Floor. Nariman Point,Bombay. The address of Shri M.K. Gandhi was given in the agreement entered into for operating service and maintenance contract dated1-2-1983and not in the other agreement entered on5-2-1984. (There are two agreements entered into for providing personnel). It will be seen from the clause in the agreement that only the duplicate copies of the irrevocable orders containing despatch instructions should only be served on Shri M.K. Gandhi and Mr. M.K. Gandhi is not to do anything thereafter under the agreement.

10. Now reverting to the definition of "permanent establishment" as extracted above from the Double Taxation Avoidance Agreement, the person acting in one of the Contracting States for or on behalf of the enterprise of the other Contracting State would be deemed to be a permanent establishment of that enterprise if such person has habitually exercised in the first mentioned Contracting State i.e., in India, a general authority to negotiate and enter into contracts for or on behalf of the enterprise unless the activities of the person are limited exclusively to the purchase of the goods or merchandise for or on behalf of the enterprise. Mr. M. K. Gandhi did not have any general authority to negotiate and enter into contracts for or on behalf of the foreign enterprise. Nor was there any evidence to show that he had negotiated and entered into the contracts for or on behalf of the foreign enterprise nor is there any evidence to show that he has ever exercised habitually a general authority to negotiate and enter into contracts on behalf of the foreign enterprise. Unless this condition is satisfied without any reservation or blemish or clog, it cannot be said that M. K. Gandhi was a person who habitually exercised a general authority to negotiate and enter into contracts on behalf of the foreign enterprise. Mere service of duplicate copies of the orders does not make him a person who habitually exercised a general authority to negotiate and enter into contracts on behalf of the foreign enterprise. This is a job of a Post Office, nothing more and nothing less. The Department, is therefore, wrong in treating Shri M.K. Gandhi as a person possessing the requisite authority to negotiate and enter into contracts on behalf of the foreign enterprise and, therefore, this requirement cannot be deemed to have been satisfied. The Department laid much store and stress by this fact, to justify its conclusion that the foreign enterprise maintained a permanent establishment in India meaning that it has a fixed place of business in which the business or the enterprise was wholly or partly carried. Since we have shown that the foreign enterprise did not have a fixed place of business as defined in the Article referred to above, nor did it have a person with the authority to negotiate and enter into contracts, it cannot be said, that the foreign enterprise was carrying on any business with a fixed place of business in India nor had any permanent establishment.

11. Now the next question would be whether the operations carried on by the foreign enterprise inIndiaamount to carrying on of business or not. The contract as we have seen above provided for service and maintenance and towards this process the foreign enterprise had only agreed to send personnel on daily wage basis. This is clearly provided in para 2.1 of the contract which said that beginning with the commencement date and continuing for a period of 340 days, the contractor, i.e. the foreign enterprise agreed to provide those expatriate personnel designated in Exhibit 'A' during operation of the Unit for a consideration of US$ 3,450 per day. Clause 3 provided a training programme and other services. Clause 4 clearly provided that the personnel furnished by the contractor i.e. the foreign enterprise shall be its employees who shall be responsible for payment of all compensation to said personnel including the fringe benefits and cost of personal taxes. ONGC reserved the right to request the foreign enterprise to replace any of the contractor's personnel whose behaviour and technical competence was found unsatisfactory. Clause 4.1 provided that the contractor shall comply with all of Owner's i.e. ONGC's safety regulations and with the requirements of the Government of India and shall maintain proper barriers, guard rails and other safety devices to reduce the hazards during the operations.

12. Clause 4.15 provided that in the performance of the work, the contractor will function as an independent Contractor with full right to direct the performance of the details thereof. It also provided that the safety of the units shall be under the control of contractor and under the direction of the ONGC. It is this agreement that was again interpreted by the Department as an aid to come to the conclusion that the foreign enterprise was an independent entity carrying on business inIndia. But clause 4.15 ensures independence to the foreign enterprise only because the foreign enterprise was made responsible for its safety and for all other purposes. When safety was made the responsibility of the foreign enterprise, he must be given independence to manage the work and rendering of technical service in such a way that no untoward event takes place. This does not mean, in our opinion, that the foreign enterprise was an independent contractor carrying on business inIndia.

13. We have seen from the above that the contract did not provide for the carrying on of any business as such inIndiaby the foreign enterprise except providing for technical services. Now the treaty by Article XVI provided for the taxation of technical services furnished by an enterprise in oneContractingStateto an enterprise in the otherContractingState. Article XVI is in the following terms :

" Article XVI--Amounts paid by an enterprise of one of the Contracting States for technical services furnished by an enterprise of the otherContractingState shall not be subjected to tax in the first mentionedContractingState except insofar as such amounts are attributable to activities actually performed in the first mentionedContractingState. In computing the income so subjected to tax, there shall be allowed as deductions the expenses incurred in the first mentioned Contracting State in connection with the activities performed in that Contracting State. "

This will clearly show that the agreement for Avoidance of Double Taxation provided for the taxation of income arising from carrying on of business as distinguished from technical services because as we have seen above, the term industrial or commercial profits' as used in Article III which was applied by the revenue to bring the salaries to tax, provided specifically for the exclusion of the fees for technical services from the purview of industrial or commercial profits. Thus when industrial or commercial profits did not include technical services, the fees for technical services could not be taxed under Article III and one has to go only to Article XVI for the purpose of levy of tax as fees for technical services. If we turn to Article XVI, which we have extracted above, that Article does not require a permanent establishment inIndiafor the purpose of levy of tax or fees for technical services. The only requirement is that the fees must be attributable to activities actually performed inIndia. It is not in dispute that the activities of technical services were performed inIndia. Therefore, it is under article XVI of the agreement that the fees for technical services are to be taxed and not under Article III as was supposed by the Department. When the Department brought article III into operation for the purpose of levy of tax on the salaries, it clearly overlooked the definition of the industrial or commercial profits which in terms excluded fees for technical services from its purview. Since there is no need for having a permanent establishment for the purpose of taxation of fees of technical services, reference to Article III, in our opinion is totally unnecessary. If reference to Article III became unnecessary, then we will have to see whether the requirements of Article which provided for exemption of salaries and wages received inIndiaare satisfied. This Article is Article XIV which is as under :

" Article XIV. (1) Subject to the provisions of Axticle XIV, salaries, wages or other similar remuneration for services as an employee performed in one of the Contracting States by an individual who is a resident of the otherContractingState may be taxed only in theContractingState in which such services are 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 the 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 otherContractingState, and

(c) the remuneration is not deducted in computing the profits of a permanent establishment chargeable to tax in that otherContractingState.

(3) Notwithstanding the provisions of paragraphs (1) and (2) of this article remuneration for personal services performed abroad a ship or aircraft operated by an enterprice of one of the Contracting States in international traffic shall be taxed only in thatContractingState. "

Under sub-clause (2) of this article, three conditions are to be satisfied and satisfied cumulatively for earning exemption from levy of tax on the salaries and wages. The first condition is that the expatriate should not be present inIndiain the aggregate for more than 183 days. By a chart filed before us, the duration of the presence of each of these assessees was furnished, according to which the presence of each of these employees inIndiawas less than 183 days. There is no dispute over this point. Therefore, condition No. 1 is satisfied.

14. The second condition is that the remuneration was paid by or on behalf of an employer who is not a resident of the otherContractingState. This condition also was satisfied.

15. The third condition according to the Department was the condition which was also satisfied. The argument of the Department as we have explained above was the profits of the foreign enterprise were taxed in the hands of ONGC by applying a net profit rate of 7.5 per cent on the aggregate receipts which meant that all deductions in arriving at the business income were allowed which included the salaries paid. Thus indirectly the remuneration paid to these employees was deducted in computing the profits of the permanent establishment inIndia, but without going into the question whether an indirect deduction was contemplated by the sub-clause as urged by the revenue. We have held that there was no permanent establishment inIndiaof the foreign enterprise nor any business was carried on by it inIndia. When there was not permanent establishment of the foreign enterprise inIndia, and business, the question of computing its profits for the purpose of taxation inIndiaand allowing of the remuneration as a deduction in computing those profits would not simply arise. Therefore, on the mere showing that there was no permanent establishment of the foreign enterprise inIndia, the question of satisfying clause (c) does not arise. In other words, application of clause (c) would not arise and, therefore, we have got to confine to the satisfaction of clauses (a) and (b). If the conditions in clauses (a) and (b) are satisfied and if clause (c) is not attracted, it must be held that all the conditions laid down in Article XIV were satisfied. Therefore, if the conditions in Article XVI are all satisfied as we have explained above, then those salaries and wages earn exemption from the levy of tax inIndiaby operation of Article XVI. It is now well settled as we have observed earlier that between the Income-tax Act and the provisions of Avoidance of Double Taxation Agreement, the provisions of Double Taxation Agreement prevail over the provisions of the Income-tax Act. Therefore, we have got to apply the provision of Article XVI for the purpose of finding out whether the salaries received by the expatriate employees are liable to tax in India or not and not the provisions of Income-tax Act. In our opinion and for the reasons given above, the provisions of the Avoidance of Double Taxation Agreement, particularly article XVI are satisfied and, therefore, these salaries earn exemption. To sum up neither the Department is right in holding that the foreign enterprise is having a permanent establishment inIndianor is it right in saying that the income that arose to the foreign enterprise is income from carrying on of business inIndia. Therefore, Article III of the Double Taxation Avoidance Agreement was not at all attracted. It were Articles XVI and XIV that were attracted and Article XVI provided for the exemption of salaries, subject to the satisfaction of certain conditions and all those conditions were satisfied except clause (c) which was not attracted. Therefore, the salaries earn exemption.

16. For the above reasons, we hold that the reference to the decision of the Andhra Pradesh High Court in order to appreciate the meaning of the permanent establishment in Indid does not really become necessary although that is a beckon light in understanding the meaning of the expression 'permanent establishment' used in all treaties for Avoidance of Double Taxation.

17. As we have mentioned above, the attempt of the Department has been to somehow bring this case under Article III of the Agreement ignoring the provisions of Article XVI, whereunder the necessity of having a permanent establishment inIndiais not at all called for. But in our opinion, the Article that applied to the facts of instant case was Article XVI as the amount received by the foreign enterprise was fees for rendering the technical services which was specifically excluded from industrial or commercial profits from the purview of Article III.

18. For these reasons, we agree with the contentions advanced on behalf of the assessee that the salaries received by the expatriate employees of the foreign enterprise are not taxable inIndia. In this view of the matter, we think it unnecessary to discuss the application of the provisions of section 10(6)(vi) for the very simple reason which we have given above namely that between the provisions of the Income-tax Act and the provisions of the Double Taxation Avoidance Agreement, the provisions of Double Taxation Avoidance Agreement would prevail. Appeals allowed

 

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