Director of Income Tax and Another vs Dolphin Drilling Ltd.

Barin Ghosh, C.J.—Assessee entered into a contract with Alfa Crew. Under the contract, Alfa Crew became entitled to receive from the assessee a fixed fee of US $869 per day, salary of crew to be provided by Alfa Crew in US dollar as per invoices and handling charge of 5 per cent on such salary. Crew was provided by Alfa Crew to the assessee, whereupon assessee engaged all such crew as its own employee. Assessee, during the asst. yr. 2004-05, paid Rs. 92,99,899 to Alfa Crew on account of fixed fee and Rs. 1,32,27,988 on account of handling charges, aggregating to Rs. 2,03,73,617. There is no dispute that on the sum of Rs. 2,03,73,617, assessee deducted tax at source and deposited the same with the Department. Assessee paid to Alfa Crew a sum amounting to Rs. 26,45,59,780 on account of salary payable to those crew. It did not deduct any tax at source. In the return filed by the assessee, it claimed deduction of Rs. 2,03,73,617 paid on account of fixed fee and handling charges as well as of Rs. 26,45,59,780 on account of salary. The AO allowed deduction of Rs. 2,03,73,617, but did not allow deduction of Rs. 26,45,59,780 holding that the same was part of the fees for technical services, on which tax as was deductible at source was not deducted, and as the same is specifically not deductible in terms of s. 40(a)(i) of the IT Act (hereinafter referred to as the Act). Aggrieved thereby, assessee went before the CIT(A) and lost. Assessee then approached the Tribunal and succeeded before the Tribunal. Aggrieved thereby, appellants are before us. The Tribunal has recorded a finding, which finding is not in dispute, that the entire salary of Rs. 26,45,59,780 was paid to different people, who were foreigners and who earned those salaries by serving in India for a period of less than 90 days during the relevant assessment year. The fact remains that s. 192 of the Act deals with the obligation of the employer to deduct tax at source when salary is paid by the employer to its employees. If the payment, with which we are concerned, was salary, then it was obligatory on the part of the assessee to deduct tax on salary under s. 192 of the Act at the time of payment of salary. If the payment was not on account of salary, but on account of technical services, then the assessee was required to deduct tax at source in respect of such payment under s. 195 of the Act. The Tribunal, on facts, has come to a conclusion to the effect that the payment, with which we are concerned, was payment of salary and not payment on account of technical services. The facts, upon which the Tribunal has arrived at the said conclusion, are not being disputed in the appeal. If those facts are not disputed, then the one and the only conclusion would be that the payments, with which we are concerned, were payments of salary and not technical fees.

As aforesaid, under s. 192 of the Act, it was obligatory on the part of the assessee to deduct tax, but, as stated in s. 192 of the Act, on the estimated income of the employee. In the instant case, as stated above, the employees, being foreigners and they having earned those salaries while working in India during a period less than 90 days, those salaries, in view of s. 10(6)(viii) of the Act, are not income of the employees in India. Therefore, the assessee employer, in the instant case, could not deduct any tax on those salaries under s. 192 of the Act, though they were obliged to do so.

The question is, whether, having had not deducted tax at source on payment of such salary by the assessee, s. 40(a)(iii) of the Act will stand in the way of the assessee in obtaining deduction for payment of such salary. Sec. 40(a)(i) of the Act will not apply to the case of the assessee, in as much as, the payment, in the instant case, was neither royalty or fees for technical services or other sum chargeable under the IT Act. The AO and the first appellate authority proceeded on the basis that the payment, in question, is fees for technical services and, accordingly, brought the sum in question within the purview of s. 40(a)(i) of the Act, and in view of what has been stated by us above, in doing so, they erred. Sec. 40(a)(iii) of the Act is as follows:

Notwithstanding anything to the contrary in ss. 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession,--

(a) in the case of any assessee--

(iii) any payment which is chargeable under the head ''Salaries'', if it is payable--

(A) outside India; or

(B) to a non-resident,

and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B;

Sec. 40 of the Act is an exception to the rules contained in ss. 30 to 38. While ss. 30 to 38 allow deductions for the purpose of computing income under the head "Profits and gains of business or profession", s. 40 says that in the circumstances mentioned in the said section, deductions will not be allowed. It makes it absolutely clear that if payments have been made purporting to be salaries, but no deduction has been made of tax therefrom, deduction will not be allowed. We think that the words "chargeable under the head ''Salaries'' are of significance. In the event, payment is so chargeable and tax thereon has not been paid, payment will not be deducted for computing income chargeable under the head "Profits and gains of business or profession". The question, therefore, is, whether the payment, as was made in the instant case, is chargeable under the head "Salaries". As aforesaid, in view of s. 10(6)(viii) of the Act, the payment is not an income for the person, who received the same and, accordingly, is not chargeable under the head "Salaries".

Therefore, no sooner the Tribunal came to the conclusion that the payment in question was made on account of salary and not on account of royalty or fees for technical services and having noted the fact that the salary, so paid, was not chargeable under the head ''Salaries'', it should have held that s. 40 of the Act does not apply to the case of the assessee.

It may be possible that obligations arising out of s. 192 of the Act and other sections providing for rules to enforce such obligations may be intended to have been brought in "other sum chargeable under this Act" mentioned in s. 40(a)(i) of the Act. However, s. 192 of the Act applies only when there is an income chargeable under the head "Salaries" and, as aforesaid, the payment made by the assessee, in the instant case, and the income derived thereby by those, who received the same, was though regarded as salary but never regarded as salary chargeable under this Act, as the same was outside the purview of the provisions of the IT Act by reason of s. 10(6)(viii) of the Act. We, accordingly, refuse to interfere with the appeal. The appeal fails and the same is dismissed.