1997-VIL-108-ITAT-MUM

Equivalent Citation: [1997] 61 ITD 453

Income Tax Appellate Tribunal MUMBAI

IT Appeal Nos. 4275, 4282 (Bom.) of 1990

Date: 19.01.1997

GALLOTTI RAOUL

Vs

ASSISTANT COMMISSIONER OF INCOME-TAX

For the Appellant : Dinesh Vyas, P. C. Tripathi
For the Respondent : Arvind Modi

BENCH

A. Kalyanasundharam (Accountant Member) And Nirmal Yadav (Judicial Member)

JUDGMENT

A. Kalyanasundharam (Accountant Member)

These are all appeals filed by various French nationals, who are all employees of Spie Capag, who have been assigned by their employer in France to carry out the various works relating to the contract of construction of Bandra and Worli Marine Outfalls for the Municipal Corporation of Greater Mumbai. All the appeals involve the identical issues, viz., (a) whether the salary for the period when the assessees were out of India should be treated as salary earned in India and brought to tax on that basis and (b) whether the social charges which these foreign nationals are liable to contribute in France should be treated as if the French national has an over-riding title on the income from salary of French nationals and thereby it is only the net of salary be taxed or the gross salary without adjustment of the social charges.

For the assessee, Senior Advocate, Mr. Dinesh Vyas argued and Mr. Arvind Modi, the learned Sr. Departmental Representative, represented the department’s point of view.

For the commonality of the issues involved, these appeals were grouped together and are being disposed of by this common order.

2. It is not disputed between the parties that insofar as the period for which the French nationals were not in India, the Tribunal in identical cases, had taken the view that the salary that is to be brought to tax in India is and should be limited to the period for which they worked in India. Mr. Modi, however, brought to our attention the order of the Tribunal, Mumbai Bench ‘B’ in the case of Warner Dahl [IT Appeal Nos. 2707 and 2708 (Bom.) of 1990 and few other dated 24-7-1995], who were from West Germany and were in connection with Maharashtra State Electricity Board in which the decision of the Tribunal was that for the period they were not working and were in Germany the salary paid for those holidays or working days, but connected to the work in India, should be brought to tax in India.

3. On this issue after considering the rival submissions and considering the order of the Tribunal in the identical cases dated 24-4-1996 and the other decision dated 24-7-1996, we are of the opinion that the issue is squarely covered by the decision of the Tribunal in identical cases in the order dated 24-4-1996. In this case, the foreign nationals were the employees of the same French Company and were in India in connection with the same contract and the same terms of employment applied to them as well and, therefore, for the sake of consistency and identical facts and circumstances, we respectfully follow the earlier decision dated 24-4-1996 and decide the issue in favour of the assessee, that is to say that the foreign nationals would be taxed in India only to the extent they worked in India. For the sake of ready reference, we would reproduce paragraph 6 of the said order :

"6. Now, we may usefully quote Article XIV of the ‘Agreement for Avoidance of Double Taxation with France’ which reads as under :

‘Article XIV(1) subject to the provisions of Article XII 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 other Contracting State may be taxed only in the Contracting State in which such services are rendered’. [Emphasis supplied]

The use of the word ‘in’ after ‘Contracting State’ clearly postulates the tax is leviable in the State ‘in which such services are rendered’. We are unable to agree with the CIT(A) that clause 9 of Contract between SC and the assessees overrides the DTAA simply because the contract was that the ‘employment will involve working primarily in India’. The word ‘primarily’ is the qualifying word. It is true that the primary work was for India but if some services were rendered in France the payment for that period can only be taxable under the French law. For instance, if there is a contract for repairing of an Indian ship and some work has been done in France by the technicians there, their salary cannot be taxed in India though primary work was for India. In our opinion, the words ‘in’ and ‘for’ are not synonymous. Nothing is on record to show that the impugned payments were leave salaries of the assessee-employees. Therefore, the natural finding is that they were salaries paid when work was done in France, more so, when the CIT(A) herself pointed out that visits to France and/or other countries were related to work for India. Therefore, we hold that the salaries of the assessees should be taxed in India only to the extent of the period of stay in India. We direct accordingly."

4. The other common issue is the social charges which the foreign nationals are stated to be under compulsion to contribute from out of their income in France. The facts are that this social security charges had to be contributed to a social security organisation which guarantees the workers and their families against all types of risk susceptible to reduce or curtail their earning power/capacity including maternity and family costs. It also covers all French nationals and their families including medical cost, family cost, etc., and assures the benefit of social insurance, work accidents, professional sickness, old age allowance, family allowance, etc. Mr. Vyas, the learned Sr. Advodate, referring to pages 6 and 7 of the paperbook, which is the extract of the requirement of social securities, submitted that all French nationals have to compulsorily contribute to the social security organisation failing which they are punishable by fine and it also covers individuals who are self-employed to contribute to the social security failing which they would be attracting fines, etc. The employers have been authorised to deduct the social security contributions from out of the remuneration payable each month. It further provides that notwithstanding the fact that the salaries are not paid to the employees, that is to say it is not actually received by the employees does not debar contributions to the social security charges. Considering the above compulsory nature of contribution, in France the amount of such contribution is adjusted from out of the salary income and it is only the balance that is paid and brought to tax. He submitted that this contribution to the social security has to be made by every French national notwithstanding the fact that he is not in France or that he may be working elsewhere. He further submitted that these various French nationals who were working in India to comply with the contract entered into by their employer in France, were receiving their salaries in France and part of it for their maintenance in India. Their employer, viz., Spie Capag was contributing on behalf of the employees to the social security charges each month, covering the period for which they were working in India. It was insisted by the learned Sr. Advocate that the amount that was contributed by the employer to the social security was similar to a primary charge existing on the income and thereby the social security organisation had a prior charge making it an overriding title on the salary income of the employees. He submitted that the concept of overriding charges has been appreciated by the Supreme Court in CIT v. Sitaldas Tirathdas (1961) 41 ITR 367. He submitted that the Court had observed that overriding charge means that it is an amount which never reaches the assessee, that is to say even before the assessee could claim his salary, the social security charge is set apart for being handed over to the social security organisation and thereby the employee never has the chance of even touching it. He submitted that it is not an obligation on the part of the employee to apply the income but the social security organisation earmarks the amount that is receivable by it from out of the salary income and to that extent the income of the employee got reduced. He submitted that the Karnataka High Court in CIT v. Pompei Tile Works (1989) 175 ITR 1/(1988) 41 Taxman 181had an occasion to consider the overriding title concept and had observed that it is something that is diverted at the stage of earning itself. He submitted that the Bombay High Court in CIT v. Bombay State Road Transport Corpn. (1977) 106 ITR 303was considering the contributions that were made under the statutory provisions whether the same was deductible in computing the income and the Court ruled that the contributions are made under a statutory rule and hence are deductible from the revenue income. The Karnataka High Court in CIT v. Pandavapura Sahakara Sakkare Karkhane Ltd. (1988) 174 ITR 475considered the contributions made by a co-operative society to an education fund under the provisions of Karnataka Co-operative Societies Act and had concluded that such contribution was diversion by overriding title. A similar view was taken by the Madhya Pradesh High Court in Keshkal Co-operative Marketing Society Ltd. v. CIT (1987) 165 ITR 437/ 30 Taxman 437. The Karnataka High Court followed its earlier decision in identical case in Pandavapura Sahakara Sakkare Karkhane Ltd. (supra). The Bombay High Court in Somaiya Orgeno-Chemicals Ltd. v. CIT (1995) 216 ITR 291considered credit to a fund by a statutory order while manufacturing rectified spirits, the amount of contribution to be utilised for particular purpose, whether such contribution was diversion of income by overriding title and had held that the assessee had no right or control over it and thereby it is not a part of his income, but income that is diverted by overriding title.

5. The Departmental Representative referred to the various provisions of French Laws and vehemently insisted that it was a contribution similar to the Provident Fund, Life Insurance, etc., that are prevalent in India. He referred to the Bombay High Court decision in Life Insurance Corpn. of India v. CIT (1979) 119 ITR 900where the issue considered was whether the payment of surplus to the Central Government was diversion by overriding title and it was held that it was only an application of income. He referred to the Supreme Court decision is Vibhuti Glass Works v. CIT (1989) 177 ITR 439/ 44 Taxman 182where there was an arrangement by which the State Government ran the business for which half share of the profit was to go to the Government when the profit exceeded a particular prescribed limit, the question was whether such payment to the State Government was diversion by an overriding title and the Court ruled that it was an application of income only. He also drew our attention to the Madras High Court decision in CIT v. South Arcot District Co-operative Supply & Marketing Society Ltd. (1981) 127 ITR 467and submitted that here also the Co-Operative Societies Act provided for contribution of a portion of the profits to the education fund and the Court ruled that such contribution was nothing but application of income. Mr. Modi submitted that the contribution that is to be made to the social security organisation being not related to the receipt of income goes to show that it was in the nature of contribution from out of the income indicating that it was only after the receipt of income that such contributions to the social security organisation are made.

6. The rival contentions have been very carefully considered. The social security organisation formed under a particular statute lays down a compulsion whereby all French nationals have to be affiliated to the social insurance regardless of their age, sex, and even if they are pensioners, salaried employees, or working in any cadre, or place, for one or more employers, for whatsoever sum, or whatever type of remuneration, form, nature or validity of their contracts. This aspect has an important bearing especially in the instant cases because all the appellants are French nationals. According to the above requirement of the social insurance, the French nationals have to be affiliated to the social insurance regardless of the fact whether they are working in France or in any other place. It is an undisputed fact that the French Tax Act allows full deduction of the social security contributions from the income and it is only on the net income that tax is levied. As has been stated by the assessees and not disputed by the department, the social security is to cover various aspects, costs, etc., including medical, old age, professional sickness and the like. The compulsory nature of the affiliation was insisted by the learned Sr. Advocate as the social security organisation having a prior charge in the income of any person, who is a French national. In so far as the concept of such compulsory contribution to social security is concerned, it is not prevalent in India. The various schemes that are prevalent in India are saving schemes, which would rather provide the country with funds with which they can carry out various needs of the country. This being the basic difference between the concept between India and France, the concept of social security payment, in the perspective in which it is existing in France, is that every French national has to contribute to the social security regardless of his place of work and thereby the social security organisation could be treated as a working partner of all the French nationals. By this process the social security organisation derives or levies a prior charge on the income of its partner, viz., the French national. This treatment of contribution to the social security as a prior charge is so taken by considering that the organisation parallely carries out various functions of taking over the responsibility of maintaining the French nationals. In other words, the said organisation maintains the various subjects of (France, viz.) the French nationals, for which they contribute. As pointed out earlier, unlike the schemes in India which are saving schemes, the scheme of social security is not a saving scheme, but a scheme to protect the French nationals from various calamities. From this point of view, we are of the opinion that the amount that is contributed to the social security organisation is a diversion of income by overriding title at the stage of earning point itself. The concept of overriding title has been aptly defined by the Supreme Court in Sitaldas Tirathdas’ case (supra) and this is reproduced for the sake of facility :

". . . The true test for the application of the rule of diversion of income by an overriding charge, is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied."

The Supreme Court in Vibhuti Glass Works’ case (supra) was considering a situation where the company which was suffering losses, the financial institutions came forward to grant a loan and the State Government took over the responsibility of running the glass factory with the condition that as and when the company starts deriving profits beyond a particular limit, half share of the profits would go to the Government. It was because of this contractual arrangement that the Supreme Court came to the conclusion that there was no diversion by overriding title but a mere sharing of the profits if and when it is so earned and that too beyond a particular limit. Therefore, this particular case has no relevance to the present issue that is before us. Likewise the case of Bombay High Court in Life Insurance Corpn. of India’s case (supra) has no application to the facts of the case before us because in that case too it was appropriation of the profits that was involved. The Madras High Court in South Arcot District Co-Operative Supply & Marketing Society Ltd.’s case (supra) was considering a similar situation of societies contributing 2 per cent of the net profits to the Co-Operative Education Fund and it was for this reason that the Court had come to the conclusion that it was an application of income. The Karnataka High Court in Pompei Tile Works’ case (supra) had appreciated the concept of diversion by overriding title. The Bombay High Court in Somaiya Orgeno-Chemicals Ltd.’s case (supra) had brought out the concept that the assessee had lost domain on the income. In instant case before us the affiliation being compulsory, making the social security organisation an earning partner alongside of the assessee, i.e., the assessee earns not only for himself but also for the social security organisation, the extent of the amount relatable to social security organisation, the assessee has no right over it at all and thereby no domain on it.

7. For the foregoing reasons, we find the submissions of the learned Sr. Advocate having considerable force and accordingly we hold that hence the social security charges are to be deducted from the salary income as a prior charge by overriding title and it is only the net salary after such deduction that should be treated as gross salary within the meaning of section 16 of the I.T. Act. We accordingly direct the Assessing Officer to assess the salary income on the basis of our directions as above.

8. In the result, the appeals are allowed.

 

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