SEDCO FOREX INTERNATIONAL DRILL. INC. AND ORS. versus COMMISSIONER OF INCOME TAX, DEHRADUN AND ANR.

Citation: [2005] SUPP. 5 S.C.R. 302 · Decided: 17-11-2005 · Supreme Court of India · Bench: RUMA PAL · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
SEDCO FOREX INTERNATIONAL DRILL. INC. AND ORS. 
B 
v. 
COMMISSIONER OF INCOME TAX, DEHRADUN AND ANR. 
NOVEMBER 17, 2005 
[RUMA PAL AND TARUN CHATTERJEE, JJ.] 
Income Tax Act, 1961; Ss. 4, 5(1) and (2) and 9(J)(ii); Explanation to 
Section 9(/){ii) introduced by the 1983 and 1999 Amendment Acts: 
C 
Works Contract between assessee-foreign company and an Indian 
company-Agreement between the assessee and its employees in a foreign 
country providing for 35128 days field break outside India-Income tax 
liability on salary to employees paid for field breaks-Held: Jn terms of 
Section 9(/){ii) of the Act the salary for the off period/field breaks can not 
D be termed as income earned/paid out of the income in lieu of the contract-
Salary paid to employees during field breaks was not for service rendered 
in India-Salary payable for a well earned rest is distinct from the liability/ 
payment of salary for field breaks-Salary for field break does not fall within 
the extended meaning given to the phrase "earned in India" in terms of the 
main provision-Further fiction by extending the meaning of the term so as 
E to include salary for the field breaks into it can not be created-Hence, 
salary paid for the field breaks outside India cannot be included in the 
income earned by the employee for levying income tax-Interpretation of 
Statutes. 
1999 Amendment in the Income Tax Act-Explanation to Section 
F 9(/){ii)-App/icability of-Held: Since 1999 Explanation as amended by 
1999 Amendment made effective from 1.4.2000 it could not be given effect 
retrospectively to the earlier assessment years-Interpretation of Statutes. 
G 
H 
Words and Phrases: 
'Income earned'-Meaning of in the context of Income Tax Act. 
The question which arose for consideration in these appeals was as to 
whether the salary payable to the employees of the appellant, a foreign 
company for field breaks outside India would be subjected to income tax under 
302 
SEDCO FOREX INTERNATIONAL DRILL INC. ''· COMMR. OF INCOME TAX, DEHRADUN 
3 oi 
Section 9(1 )(ii) of the Income Tax Act read with the Explanation appended A 
thereto. 
It was contended by the appellant-foreign company that in 1999 the 
scope of Section 9(1)(ii) of the Act was amended to include salary for 'Off 
periods' outside India for the first time with effect from 1st April, 2000; 
that the scope of Section 9(1)(ii) of the Act after its amendment in 1999 B 
had been given effect to prospectively by issuing a circular by the Central 
Board of Direct Taxes (CBDT) and this was binding on the Department; 
that in any event the provisions of the section must be construed iq 
accordance with international understanding and norms; and that during 
the field breaks, its employees were kept on standby in the UK for serving C 
anywhere in the world and not necessarily to serve in India. 
Respondents submitted that the employees of the appellant-foreign 
company were paid salary during the field breaks only as a consequence 
of and in relation to the services rendered by them during the period they 
actually worked in India. It necessarily followed that the salary received 
for the 'Off period' was taxable as arising out of services rendered in India; 
that there was a reasonable nexus between salary earned for the 'Off 
periods' and the services rendered in India; and that the amendment to 
the Explanation to Section 9(1) (ii) as brought about by the Finance Act 
1999 was retrospective in effect since it was clarificatory. 
Allowing the appeals, the Court 
HELD: 1. In the instant case, the High Court proceeded on the 
incorrect hypothesis that the field breaks were limited to the training of 
D 
E 
the employees to render them more fit for service in India. That was noti 
what the agreements between the appellant and its employees said and F 
there was no ground for the High Court to have assumed that it was. The 
High Court also did not address itself to the other aspects of the field break, 
namely the readiness of the employees for service anywhere at all. 
[309-F-G[ 
2.1. It is the receipt or accrual in India, whether deemed or actual, G 
which determines the taxability under the Act. Section 9 of the Act defines 
income "deemed to accrue or arise in India". By Clause (ii) of sub-section 
(1) of Section 9 "income which falls under the head 'Salaries' if it is earned 
in India" is included in such income. 1309-A, BJ 
2.2. In view of Explanation to Section 9(1 )(ii) of the Act, irrespective H 
304 
SU

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