COMMISSIONER OF INCOME TAX Vs. PATTON S R

JUDGEMENT

(1.) These are connected cases. The Revenue is the applicant, at whose instance two questions of law have been referred for the decision of this Court in each of these cases. They are as follows:

(2.) The respondents in these cases - assessees - are foreign technicians. In I.T.R. No. 173 of 1985 M/s. Davy Power gas Inc., U.S.A., and FACT Ltd. had entered into an agreement with regard to Cochin Fertiliser Project Phase II expansion of the FACT. The services of the foreign technician (assessee) was made available to FACT. In I.T.R. Nos. 52 to 55 of 1985 FEDO entered into an agreement with M/s. Davy Powergas GmbH, West Germany (foreign company) for erection of equipment for Cochin Project Phase II of the FACT and as per the contract the foreign company sent the assessees in those four cases to India to supervise the erection of the equipment. The services of the assessees (foreign technicians) were made available to FACT. In I.T.R. No. 173 of 1985 we are concerned with the assessment year 1976-77. In I.T.R. Nos. 52 to 55 of 1985 we are concerned with the assessment years 1973-74 in one case and 1976-77 in the other three cases. The appointments of the various assessees (foreign technicians) were approved by the Government of India. The foreign technicians stayed in India for a short period. As per the terms of the agreement entered in to between the FACT Ltd. and the foreign companies in the above cases, substantial amounts were paid. From out of the above, the foreign companies paid to each of the assessees a definite sum as salary, which formed only a portion of the amount paid by FACT Ltd. to the foreign companies. The assessees were also given by FACT a living allowance. For example, in I.T.R. No. 173 of 1985 the FACT paid to the foreign company an amount of Rs. 6,82,460/-. The foreign company paid to the foreign technician (assessee) as salary Rs.1,72,656/-. The assessee was also paid a living allowance of Rs. 47,934/-. There were similar payments in varying sums in the other cases also. The income Tax Officer brought to tax the salaries and living allowances paid to the foreign technicians on the basis that they constituted salary earned in India. In the first appeals, in all the cases, the assessees placed reliance on the decision of the Gujarat High Court in Commissioner of Income Tax v. S. G. Pgnatale (124 ITR 391) and claimed that the salary and living allowance, did not constitute salary earned in India. In the appeal filed by the assessee, which is the subject matter of ITR 173 of 1985, the Commissioner of Income Tax (Appeals) rejected the said plea. In the other four cases, the Appellate Assistant Commissioner placed reliance on the decision of the Gujarat High Court reported in S. G. Pgnatale case (124 ITR 391) and held that the salaries received by the four assessees in those appeals were outside India from their employer and the said salary and the living allowance received in India from FACT or FEDO were not liable to tax. The assessee filed the appeal in the case arising from I.T.R. No. 173 of 1985 before the Tribunal. The Revenue filed appeals in the other cases - I.T.R. Nos. 52 to 55 of 1985. The Tribunal rejected the plea of the Revenue that the assessees were appointed by the FACT Ltd. It was also held that the salaries were paid by the foreign companies and not by FACT Ltd. The foreign technicians were deputed by the foreign company to supervise the work under the terms of agreement between the foreign company and FACT Ltd. In the fight of the decision of the Gujarat High Court in S. G. Pgnatale case (124 ITR 391) the Tribunal held that the salaries of the assessees were not earned in India. Following the same decision the Tribunal also held that the living allowance, though paid to the technicians directly by FACT Ltd., were given to the assessees only as a reimbursement, rather than as a personal advantage, and so the living allowance paid was not a perquisite. It was also not "salary" because it was neither a fee, nor commission, nor perquisite, in view of salary or wages and the amount received by way of living allowance by various foreign technicians was not assessable. The observations of the Gujarat High Court in S. G. Pgnatale case (124 ITR 291) was relied on to fortify the said view. It is thereafter, at the instance of the Revenue the two questions of law (extracted hereinabove) in the two sets of cases - one in I.T.R. No. 173 of 1985 and the other in I.T.R. Nos. 52 to 55 of 1985 -have been referred for the decision of this Court.

(3.) We heard counsel for the Revenue as also counsel for the assessee. It is common ground that the contract of service of the assessees had been approved by the Government of India for assessees had been approved by the Government of India for entitlement of exemption under S.10(6) of the Income Tax Act. The only question that arises for consideration is whether the salaries and living allowances received by the various assessees are taxable under S.9(1)(ii) of the Income Tax Act, 1961. S.9(1)(ii) of the Income Tax Act, 1961 (as it stood at the relevant time) is as follows: