The Hindu Business Line : Rigging through off-period income

IS INCOME earned offshore taxable under the Indian Income-Tax Act? This question had led to conflicts among several Tribunal Benches. The consequences of such conflict of opinion among judicial bodies administering a uniform tax law can be severe. For one, in respect of salary earners having offshore incomes, the principal officer responsible for ensuring tax deduction at source is unsure of the tax deductions to be made.

The recipient of the offshore income is in a quandary not knowing whether he should include or exclude such income for payment of advance tax. Failure to include the same will result in the levy of high interest under Section 234 B of the Act. These issues were considered at length by the Uttranchal High Court in two recent rulings.

CIT vs Sedco Forex

In this case (264 ITR 320), Ronald Grey entered into a contract for employment with Sedco Forex International Drilling Company incorporated in Panama. The assessee was the resident of the UK. Under the contract, he was required to work on oilrigs in Bombay High as per alternating time schedule of 35/28 days, that is, on-period, followed by 35/28 days of off-period in the UK.

Before the assessing officer (AO), it was contended on behalf of the assessee that off-period salary was not exigible to tax under Section 9(1)(ii) of the Act as it was not earned in India. It was argued that the field break which followed the on-period was not a rest period.

The AO rejected this contention. He assessed the income earned during the offshore period also and levied interest for short payment of advance tax. As the Tribunal allowed the assessee's appeal, the Revenue took the matter in appeal before the Uttranchal High Court arguing that every receipt which has a nexus with the service rendered in India rules out the dichotomy and separate tax treatment for on- and off-period salary.

According to the Revenue, the offshore income was taxable under Section 9(1)(ii). It was also contended that Section 234(B) did not rule out incomes falling under the head `salaries'. Sections 191, 208 and 234 (B) fell under Chapter XVII of the Act and, therefore, Sections 192 and 208 cannot rule out Section 191. If the payer fails to deduct tax at source, it was contended, the tax shall payable by the assessee directly. All these arguments were resisted by the counsel for the assessee.

The High Court referred to the amendment to Section 9(1)(ii) and the insertion of the Explanation by the Finance Act 1999 which refers to the term: `rest period/leave period'. It pointed out that the assessee had to undergo training during this period and had to remain fit during the rest period. All this had a nexus with the services to be rendered in India.

The Finance Act 1983 had introduced an Explanation to Section 9(1)(ii) defining what constituted income earned in India. In certain cases, even if services were rendered outside India, the income can still accrue or arise in India, depending on the facts of the case. Training abroad during the off-period was directly connected with the work on the rigs in India.

Therefore, the payment of salary for off-period was income earned in India under Section 9(1)(ii). The main question was, therefore, answered in favour of the Revenue and it was held that income which accrued during the off-period was assessable in India.

However, it is the answer to the next question about charging of interest under Section 234(B) that should be of interest to all taxpayers. Holding that such interest was not chargeable, the High Court made the following observations: "The decisions of the Tribunal on the interpretation of the contracts regarding on period and off period salary were conflicting. Ultimately, the Legislature has stepped into clarify the position by the Finance Act of 1999. In this connection, it is important to note that Section 234B imposes interest, which is compensatory in nature, and not a penalty (Union Home Products Ltd vs Union of India — 1995 215 ITR 758, 766 Karnataka).

Second, although Section 191 of the Act is not overridden by Sections 192, 208 and 209(1) (a) (d) of the Act, the scheme of Sections 208 and 209 of the Act indicates that in order to compute advance tax the assessee has to, inter alia, estimate his current income and calculate the tax on such income, by applying the rates in force.

That under Section 209(1)(d) the income-tax calculated is to be reduced by the amount of tax which would be deductible at source or collectible at source, which in this case has not been done by the employer company according to the law prevailing, for which, the assessee cannot be faulted. As stated, at the relevant time there were conflicting decisions of the Tribunal.

A bona fide dispute was pending. The assessee had to estimate his current income. The words used in Section 209(1)(a) make the assessee estimate his current income and since a bona fide dispute was pending, imposition of interest under Section 234 B was not justified without hearing and without reasons. Accordingly, we answer this question in the affirmative, that is, in favour of the assessee and against the Department.

The same issue arose for consideration once again in the CIT vs Halliburton Offshore Services Inc. (271 ITR 395) case and the High Court reiterated the same views. These rulings will be helpful in drafting offshore contracts and also in escaping from the consequences of interest under Section 234B in the case of salaried taxpayers.

(The author is a former chief commissioner of income-tax.)

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