Sedco Forex International Drill, Inc v CIT (SC) - Salary paid outside India for field break in the UK NOT taxable in India

           In an important judgment delivered on November 17, 2005 in Sedco Forex International Drill, Inc v CIT, the Supreme Court has, reversing the judgment of the Uttaranchal Pradesh High Court, held that the salaries paid outside India (i.e., in the United Kingdom) by the Appellant-taxpayer to its employees (who were tax residents of the United Kingdom) in respect of periods of "field break(s)" undertaken outside India (i.e., in the United Kingdom) (which employees had, prior to undergoing such "field break(s)", rendered services in India under a wet lease of oil rigs by the Appellant-taxpayer to the Oil and Natural Gas Commission, India) were not chargeable to Indian income-tax in the hands of the concerned employees under Section 9(1)(ii) of the Income-tax Act, 1961 ("Act"), inasmuch as such salaries were not paid for "service rendered in India".

2.           The Supreme Court held that the first clause in the contracts entered into by the Appellant-taxpayer with the concerned employees relating to the payment of salaries for services to be rendered in India was distinct from the second clause relating to the payment of salaries for the "field break(s)". While the first clause clearly fell within the extended meaning given to the words "earned in India" in Section 9(1)(ii) of the Act, the second clause did not; accordingly, since the phrase "earned in India" is part of the statutory fiction created by Section 9(1)(ii), "(t)here is no question of introducing a further fiction by extending the Explanation" (i.e., the Explanation to that Section as such Explanation stood prior to its amendment with effect from April 1, 2000) "to include whatever has a possible nexus with service in India.". (emphases supplied)

3.           Although the High Court had not referred to the 2000 amendment to the Explanation aforesaid, the Supreme Court proceeded to deal with the question of whether such Explanation was clarificatory in nature and hence applicable with retrospective effect from the date on which the provision [Section 9(1)(ii)] to which it was an Explanation came into force, since that question was raised by the Respondent-Revenue. The Court ruled against the Revenue on this issue by holding that "(w)hen the Explanation seeks to give an artificial meaning (to the phrase) 'earned in India' and bring about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.". (emphasis supplied)

Discussion Paper on Tax Avoidance and Section 103 of the (South African) Income Tax Act, 1962 - South African Revenue Service

The South African Revenue Service ("SARS") has recently posted on its website, a "Discussion Paper on Tax Avoidance and Section 103 of the Income Tax Act, 1962 (Act No 58 of 1962)". The Background to, and the Purpose of, the Discussion Paper are best described in the following extract from the Introduction to the Paper :

"Section 103 of the Income Tax Act, 1962 (Act No. 58 of 1962), contains the Act's General Anti-Avoidance Rule (GAAR). In its current form, the GAAR has proven to be an inconsistent and, at times, ineffective deterrent to the increasingly complex and sophisticated tax "products" that are being marketed by banks, "boutique" structured finance firms, multinational accounting firms and law firms. ..... The pernicious effects of aggressive tax avoidance are manifold. They include not only the obvious short-term revenue loss, but longer term damage to the tax system and economy as well. These other effects include a corrosive effect upon the taxpayer compliance, the uneconomic allocation of resources, upward pressure on marginal tax rates, an unfair redistribution of the tax burden, and a weakening of the ability of Parliament and National Treasury to set and implement economic policy. Both SARS and National Treasury firmly believe that the vast majority of South Africans are honest, hard working and willing to pay their fair share of tax. ..... Unfortunately, those who engage in impermissible tax avoidance pose a problem for everyone else. It is the purpose of this Paper to start a discussion of these issues and of how best to address them on behalf of all South African taxpayers ..... ."

(emphasis supplied)

2. The Discussion Paper is a veritable treasure-trove of resources and materials on Tax Avoidance and has annexed to it, inter alia, the Australian GAAR, the Canadian GAAR, the New Zealand GAAR and the Spanish Anti-Avoidance Rule.

German Remedies Ltd v DyCIT (Bom) - Duty of Authority Granting Sanction under Section 151 of Income-tax Act, 1961

By a judgment dated October 28, 2005 in the case of German Remedies Ltd v DyCIT (in Writ Petitions No 621 of 2005 and 619 of 2005), the Bombay High Court has held that, while granting sanction under Section 151 of the Income-tax Act, 1961 ("Act") for the issue of a Notice under Section 148 of the Act [ for reopening an income-tax assessment under Section 149(1)(b) of the Act ], it was obligatory on the part of the the sanctioning income-tax authority to --

(i) "..... verify whether there was any failure on the part of the assessee to disclose full and true relevant facts in the return of income filed for the assessment of income of that assessment year ....." and

(ii) "..... consider whether or not power to reopen is being invoked within a period of 4 years from the end of the assessment year to which they relate .....".

2. Since, in the above case, the sanctioning income-tax authority had failed to carry out its obligations aforesaid, the High Court held that such failure was "..... sufficient to justify the contention raised by the petitioner that the approval granted suffers from non-application of mind .....". Accordingly, on account of such failure as also for other reasons, the High Court quashed and set aside the Notices issued under Section 148.

Britannia Industries Ltd v CIT (SC) (October 5, 2005) - Guest-House Expenses Disallowable under Section 37(4) - Not Allowable under Sections 30 to 36

In a judgment delivered on October 5, 2005 in the case of Britannia Industries Ltd v CIT, the Supreme Court of India has given a quietus to the following long-standing controversy in Indian Business Taxation, viz. :

Whether expenditure by way of rent and repairs incurred on the maintenance of, or depreciation allowance relating to, guest-houses are allowable under Sections 30 and 32, respectively, inspite of the provisions of Section 37(4) whereunder all expenditure incurred on such maintenance and depreciation allowance in respect of guest-houses and assets therein are specifically made disallowable ?

The Court (speaking through Altamas Kabir, J) has answered the above question in the negative, i.e., against the taxpayer.

The Pension Fund Regulatory and Development Authority Bill, 2005 - Twenty-First Report of Parliamentary Standing Committee on Finance

[ Although off-topic, I am nonetheless making this post, in view of the importance of its contents ]

The 21st Report ( of the Parliamentary Standing Committee on Finance) on The Pension Fund Regulatory and Development Authority Bill, 2005 has recently been posted on the Net. The Full Text of the Bill is to be found in the "APPENDIX" to the Report.

The National Tax Tribunal Bill, 2004 - Eleventh Report of Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice

          The  11th Report  (of the Department Related Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice) on  The National Tax Tribunal Bill, 2004  has just been published on the Net.

2.           The Committee has taken note of the strong opposition to the Bill of several witnesses who deposed before the Committee as well as of the members of the Committee. The Committee has not bought the explanation of the Secretary,  Department of Legal Affairs,  Ministry of Law and Justice, Government of India and has proceeded to ".......... place on record reservations regarding the setting up of National Tax Tribunal ..........". Having done so, the Committee states that, ".......... in the event of the Government being very keen to go ahead with this Bill, it should take into consideration the observations/recommendations of the Committe on the clauses of the Bill ..........".

3.           Among the significant recommendations of the Committee on the Bill are the following :

(i)      Clause 6(2)  should be modified so that Chief Commissioners of Income-tax are also entitled to become Members of the National Tax Tribunal. [ This recommendation is founded on the Committee's feeling that these Chief Commissioners ".......... should be given encouragement towards the fag end of their career by giving them an opportunity to become Members ..........". This feeling is, in turn, based on the Committee's having noted that these Chief Commissioners ".......... pass appellate orders while adjudicating upon the assessment orders .........." and ".......... take a lot of risk while conducting search and seize operations against the tax evaders." ]

(ii)      Clause 13(1)  should be modified so as to ensure that ".......... only qualified persons such as Advocates, Company Secretaries, Chartered Accountants, Cost and Works Accountants may be authorised to appear before the National Tax Tribunal.".

Jurisdiction of (Indian) Income-tax Appellate Tribunal to Sit In On — and Pass On — the Validity of Subordinate Legislation or Executive Decisions

Until now,  a controversy has raged as to whether the (Indian) Income-tax Appellate Tribunal is empowered to sit in on — or pass on — the validity of subordinate legislation or executive decisions.

2.          The nearest that the Tribunal has come to holding that it has the power to apply the doctrine of  ultra vires  was in  Amar Dye-Chem Ltd v ITO [1983] 3 SOT 384 (Bom)(SB),  in which a 5-Member Special Bench held that if a statutory provision has been declared to be  ultra vires  by a court of competent jurisdiction (i.e.,  any of the High Courts or the Supreme Court),  the Tribunal has to respect the law so laid down by that court,  with the result that  the statutory provision declared to be  ultra vires  has to be ignored by the Tribunal.  In other words,  the Tribunal stopped short of holding that it had jurisdiction to strike down as being  ultra vires,   any statutory provision.  

3.          However,  the Mumbai Bench of the Tribunal had recently,  in the case of  Reliance Industries Ltd v DDI (International Taxation) [2005] 3 SOT 501 (Mum),  occasion to consider this issue.  In that case,  the Government of India in its Ministry of Finance had,  vide  a communication of July 21,  1997,  conveyed to the taxpayer —
(i)     its approval of a loan agreement under which the taxpayer had agreed to borrow moneys from sources outside India and
(ii)     that,  consequent to such approval,  the interest,  commission and fees payable by the taxpayer on the moneys so borrowed by it was exempt from withholding tax under Section 10(15)(iv)(f) of the Income-tax Act,  1961.  
Subsequently,  vide a letter dated April 12,  1999 addressed by the Deputy Director (ECB) of the  Government of India in its  Ministry of Finance to the taxpayer,  the exemption from withholding tax aforesaid was effectively withdrawn,  in the following terms :
     
“
          ……….

2.     Further,  it has been noted that the ECB funds raised above had not been utilized for the specified end uses which is one of the essential terms of the ECB approval for availing relevant exemptions under section 10(15)(iv)(f) of Income-tax Act,  1961.  You are,  therefore,  not entitled to any tax benefit in terms of the above provision of the Income-tax Act,  1961.
……….
”

The issue before the Tribunal was whether the executive was empowered to impose a condition (viz.,  the condition of “end use”) not laid down in the statute.  In what can only be described as a path-breaking ruling,  the Tribunal held as follows :

          “
     17.     ……….  On careful reading of the above decisions it is implicit that the Tribunal does have the power to deal with the validity of such rules or notification and by applying the doctrine of “reading down” can strike down such rules if held to be in contradiction with the provisions of the statute itself.  The gist of all the above decisions is that the rules are made only for the purpose of carrying out the provisions of the Act which cannot be taken away or whittle down the effect conferred by the statute.  With the result we hereby agree with the contentions of ld. A.R. that the ITAT has both,  the power and duty,  to deal with such rules or notification and decide whether the same are in agreement with the main provisions of the statute.  In view of above discussion,  in the present appeal,  now we have to decide the validity of the withdrawal of exemption as has been done by the subordinate competent authority.  ……….
”

4.          Consequent to its above ruling,  the Tribunal proceeded to hold,  inter alia,  that,  “considering the totality of the facts,  circumstances,  conditions of the scheme,  evidences of utility of the funds and the legal matrix of the case;  the withdrawal of the exemption was unwarranted”.

5.          Of course,  it might be argued that the above ruling is  obiter,  at least insofar as subordinate legislation is concerned,  having regard to the fact that the issue before the Tribunal was whether the Tribunal was empowered to strike down as invalid,  an executive decision which was inconsistent with the statutory enactment under which such decision was purportedly made.  However,  even if such an argument is upheld,  the ruling will nonetheless strengthen the hands of a future Bench for holding that the Tribunal is invested with the jurisdiction to strike down as  ultra vires,  even subordinate legislation.