Case Law Details

Case Name : Tarun Kumar Sarkar Vs Dy. DIT (ITAT Kolkata)
Appeal Number : ITA No. 69 (Kol.) of 2016
Date of Judgement/Order : 02/06/2017
Related Assessment Year : 2011-12
Courts : All ITAT (4421) ITAT Kolkata (280)

Tarun Kumar Sarkar Vs Dy. DIT (ITAT Kolkata)

A perusal of the Circular No. 13/2017  date 11-4-2017 (As Corrected by Circular No. 17/2017 (F dt. 26-4-2017) shows that salary accrued to a non-resident seafarer for services rendered outside India on a foreign going ship (with Indian flag or foreign flag) shall not be included in the total income merely because the said salary has been credited in the NRE account maintained with an Indian bank by the seafarer. Remittances of salary into NRE Account maintained with an Indian Bank by a seafarer could be of two types : (i) Employer directly crediting salary to the NRE Account maintained with an Indian Bank by the seafarer ; (ii) Employer directly crediting salary to the account maintained outside India by the seafarer and the seafarer transferring such money to NRE account maintained by him in India. The latter remittance would be outside the purview of provisions of section 5(2)(a) of the Act, as what is remitted is not “salary income” but a mere transfer of assessee’s fund from one bank account to another which does not give rise to “Income”. It is not clear as to whether the expression “merely because” used in the Circular refers to the former type of remittance or the latter. To this extent the Circular is vague.

In the instant case, the employer has directly credited the salary, for services rendered outside India, into the NRE bank account of the seafarer in India. In our considered opinion, the aforesaid Circular is vague in as much as it does not specify as to whether the Circular covers either of the situations or both the situations contemplated above. Hence we deem it fit to give the benefit of doubt to the assessee by holding that the Circular covers both the situations referred to above.

Full Text of the ITAT Order is as follows:-

This appeal by assessee is arising out of order of Commissioner (Appeals)-22, Kolkata vide Appeal No. 134/Commissioner (Appeals)-22/KOL/14-15, dt. 2-11-2015. Assessment was framed by DDIT, International Taxation 3 (1), Kolkata under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) for assessment year 2011-12 vide his order dated 29-1-2014.

2. The only issue to be decided in this appeal of assessee is as to whether the remuneration received by the assessee in the sum of Rs. 23,71,727 which was directly remitted from foreign to the NRE account of assessee by the foreign company could be brought to tax in the facts and circumstances of the case.

3. The basic facts are that the assessee is a non-resident individual and for the assessment year under appeal i.e., 2011-12, return was filed on 15-6-2011 declaring total income at Rs. 2,09,021. The assessee is a Marine Engineer and was engaged with M/s. Marcator Lines Ltd, Singapore in the capacity as a Marine Engineer. The assessee was paid Rs 23,71,727 on the following dates as under :–

5-4-2010 3,08,291 HSBC A/c No. 028-0077710006 (NRE A/c)
3-5-2010 4,32,578 HSBC A/c No. 028-0077710006 (NRE A/c)
2-8-2010 2,14,876 HSBC A/c No. 255010100019938 (NRE A/c)
2-9-2010 4,41,187 HSBC A/c No. 255010100019938 (NRE A/c)
11-1-2011 2,23,700 HSBC A/c No. 028-0077710006 (NRE A/c)
9-2-2011 4,01,850 HSBC A/c No. 028-0077710006 (NRE A/c)
11-3-2011 3,49,245 HSBC A/c No. 255010100019938 (NRE A/c)
TOTAL 23,71,727

4. The assessee stated that the above income was received from outside India in foreign currency and, therefore, claimed as exempt. The assessee stated that he used to get his contract to do service with Indian/foreign shipping company through Indian agent and that contract were executed in India duly signed by the agent in India and himself before joining the ship. But he has to float on foreign water to render services during the course of voyage and accordingly when he will stay more than 182 days outside India or on foreign water, his residential status will be treated as ‘Non-resident’ as per provision of law and his salary income which are received outside India in foreign currency also will not be taxable under section 5 of the Act. The learned assessing officer accepted the residential status of the assessee as non-resident after verification of copy of passport and other details submitted. The assessee claimed that as per provision of law, salary income, which is received outside India in foreign currency will not be taxable under section 5 of the Act. The learned assessing officer issued show cause notice to the assessee as to why the remuneration received in India should not be brought to tax in terms of section 5(2)(a) of the Act.

5. The assessee replied to the show cause notice stating that the payments have been made to the assessee as remuneration by M/s. Mercator Lines Ltd, Singapore as per the contract and the entire consideration was received in USD outside India and on request of the assessee, it was remitted to the Savings Bank NRE Account held with HSBC from time to time. It was also pleaded by the assessee that the entire amount of income in USD were received by him from outside India and that income in USD shall not be deemed to be received in India and it was also submitted that other than foreign currency, any amount could not be deposited in NRE A/c. It was stated that the amounts which were credited in his NRE A/cs in India were received outside and being “Non Resident” those income were not taxable under section 5 of the Act.

6. The learned assessing officer examined the reply of the assessee together with the bank statements of the assessee and observed that the provisions of section 5(2)(a) of the Act states that income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person shall be included in the total income of any previous year of such person. The learned assessing officer further observed that the said section does not mention anything about Indian currency or foreign currency. The section specifically stated that any income received or deemed to be received in India is taxable in India. The only exception to this taxability is due to the operation of Double Taxation Avoidance Agreements (DTAA). In the assessee’s case, the assessee was not a resident of any other state as already stated by him. Therefore, no DTAA is applicable on his income. He observed that the law states income received in India is taxable in India in all cases (whether accrued in India or elsewhere) irrespective of residential status of the assessee. He also observed that it is significant to know the meaning of income received in India. If the place, where the recipient gets the money (on first occasion) under his control, is in India, it is said to be income received in India. In the instant case all the income was remitted by the employer to the bank accounts of the assessee maintained in India. Therefore, the assessee got the money under its control for the first time in India. Accordingly, the assessing officer added a sum of Rs. 23,71,727 as income chargeable to tax in India. In support of his proposition, he placed reliance on the Third Member decision of Mumbai Tribunal in the case ofCapt. A.L. Fernandes v. ITO (2002) 81 ITD 203 (Mumbai) (TM) wherein it was held that the salary received by the assessee in India was taxable under section 5(2)(a) of the Act.

7. On first appeal, the assessee argued that he was a non-resident and no income was taxable in India as entire service was rendered outside India. It was argued that assessee was under employment of a foreign company i.e., M/s. Mercator Lines Ltd, Singapore and services were rendered outside India and shipping company does not have any permanent establishment in India. For the services rendered by the assessee outside India the entire payment of salary was made by the foreign company in US$ and remittance was made to the NRE account of the assessee in India. The assessee claimed that the meaning of the word ‘received in India’ within the meaning of section 5(2)(a) of the Act should be interpreted only in the context of income received in Indian currency in India. There is a distinction between receiving money and transfer of money. The distinction is that where a foreign company makes payment to the non-resident for services rendered outside India, the foreign company is transferring the money or remitting the money in foreign currency to the assessee who is a non-resident, and the money is being received by the assessee not in India as because the point of payment by the foreign company is in foreign land and the point of receipt by the assessee should be taken from the point of payment. Mere remittance or transfer of the payments by the foreign company in the NRE account of the assessee in India that also in foreign exchange shall not be considered as income received in India and any larger interpretation to the section would render it otiose. The various arguments of the assessee were summarized by the learned Commissioner (Appeals) as below :–

“(a) The assessee is a non-resident and rendering services outside India.

(b) The payments are being made by a foreign company outside India and the foreign company does not have any permanent establishment in India.

(c) The point of payment is to be taken into consideration for determining the provisions of clause 5(2)(a) of the Income Tax Act and the point of payment shall be considered as the point of receipt.

(d) It is immaterial that the payment is being transferred by the foreign company or remitted by the foreign company to the NRE account in foreign exchange in India as because payment have been made by the foreign company outside India and the point of payment is to be taken as the point of receipt.

(e) Without prejudice to the above the amount which is received by the assessee from the foreign company is in foreign exchange and therefore income cannot be said to have been received in India where payments have been received in foreign currency.

(f) The provisions of section 5(2)(a) has to be interpreted in the manner that it does not render the section meaningless. If interpretation as made out by the department is adopted, then definitely the section would be otiose and meaningless as because no benefit would be given to the non residents even if all the conditions have been satisfied.

(g) The true interpretation to the provisions of section 5(2)(a) is that the meaning which is to be adopted for income received or deemed to be received in India, that the payments have been made in India in Indian currency and the recipient of the payments has received the payments in Indian currency.”

8. The learned Commissioner (Appeals) not convinced with the arguments of the assessee upheld the addition made by the learned assessing officer. Aggrieved, assessee is in appeal before us on the following grounds:

“1. That on the facts and in the circumstances of the case the action of the learned Commissioner (Appeals) to uphold the addition made by the assessing officer of Rs. 2371727 as income under section 5(2)(a) of the Income Tax Act is erroneous and contrary to the material facts on record.

2. That on the facts and in the circumstances of the case the action of the learned Commissioner (Appeals) to uphold the action of the assessing officer to bring into tax an amount of Rs. 2371727 by treating it be received in India is based on incorrect assumption of facts and wrong application of law.

3. That on the facts and in the circumstances of the case the application of decision ofCaptain A.L. Fernandez v. ITO 81 ITD 203 (Mum.) (TM)by the learned Commissioner (Appeals) to treat as income of Rs. 2371727 under section 5(2)(a) of the Income Tax Act is based on incorrect application of case law and the addition is arbitrary and excessive.

4. That the order of the learned Commissioner (Appeals) upholding the order of the assessing officer is arbitrary, excessive and unjustified and bad in law.

5. That the above grounds of appeal will be argued in details at the time of hearing and the appellant craves leave to submit additional grounds of appeal, if any, at or before the time of hearing.”

9. The learned Authorised Representative reiterated the submissions made before the lower authorities. He argued that the facts in the present case are squarely covered by the following decisions :–

(i) DIT (International Taxation) v. Prahlad Vijendra Rao (2011) 198 Taxman 551 (Kar.),

(ii) CIT v. Avtar Singh Wadhwan (2001) 247 ITR 260 (Bom.) He stated that the issue is now squarely covered in favour of the assessee by the CBDT Circular No. 13/2017, dt. 11-4-2017 wherein it has been categorically clarified by CBDT that the subject mentioned receipt is not taxable as income under section 5(2)(a) of the Act.

10. In response to this, the Learned Departmental Representative argued that as per section 5 of the Act, so far as non-residents are concerned, total income includes all income from whatever source derived which :–

(i) is received in India (section 5(2(a)), or

(ii) is deemed to be received in India (section 5(2(a)), or

(iii) accrues or arises to him in India (section 5(2(b)), or

(iv) is deemed to accrue or arise to him in India (section 5(2(b)).

Thus, total income of a non-resident can consist of income from any source which is derived by way of any of these four modes. This means, first of all, there has to be a source of income (the term ‘in India’ is not mentioned in the context of such source of income) and then, income from such a source will only get included in the total income of the non-resident person through any of the four modes as described in section 5(2) of the Act. It is evident that all the four modes stand on their own legs, otherwise the enactment will be rendered redundant. Section 5(2)(b) mentions the term ‘accrues or arises to him in India’. There is no specific section in the Act which deals with any income which accrues or arises to any person only in India. In other words, there is no section in the Act which provides for a charge on any income derived from any source on the basis of its accruing or arising specifically ‘In India’. The context of this term is provided by section 5(1)(c) which, inter alia, mentions that the total income of a person resident in India includes all income from whatever source which ‘accrues or arises to him outside India’. This is the reason that the main charging section, i.e., section 4, does not make any reference to the words ‘in India’ as it has to provide a basis of charge for both–income which is accruing or arising to a person in India as well as income which is accruing and arising to a person outside India. The charging section does not have a territorial bias. This is also the reason that neither does section 4 qualify a person as being resident or non-resident, nor does the definition of ‘person’ given in section 2(31) of the Act qualifies it as such. Thus, the charging section does not have a bias based on residency also. It will be shown below that the separate charging sections for each head of income provided in the Act also follow the same scheme as does the main charging section (section 4). It was further argued by the Learned Departmental Representative that the main point of contention here, is whether the language of the statute as contained in section 15(a) reflects any locational preference. There is no such preference in section 15(a). Salary can become due to an ‘assessee’ anywhere in the world. The moot question here is the meaning of the phrase ‘due from an employer … whether paid or not’. This phrase was present in section 7(1) of the 1922 Act also. Hon’ble Supreme Court of India had occasion to determine the meaning of this phrase in the case of CIT v. L.W. Russel (1964) 53 ITR 91. Hon’ble Apex Court held that :–

“The expression ‘due’ followed by the qualifying clause ‘whether paid or not’ shows that there shall be an obligation on the part of the employer to pay that amount and a right on the employee to claim the same.”

Thus, as explicitly and unequivocally determined by the Hon’ble Apex Court, the term “due” as qualified by the phrase “whether paid or not” is connected with the contractual right of the employee to receive his salary and nothing else. It has no relation with location or place of services rendered or to where the amount has become “due”. Thus, what is important for charging an amount to tax under section 15(a) is whether it is in the nature of salary and whether it has become due to the assessee (whatever may be his status — resident or non-resident) and it has no relation to the place where it has become due. The place where it has become due and the place where service has been rendered do not form a basis of charge under section 15 of the Act. Had the Parliament thought it relevant, the statute would have taken a form which reflected such thought.

10.1. The learned Departmental Representative further argued that the assessee was only trying to introduce one more layer to the entire transaction that the assessee had the control over his money in the form of salary income in international waters and for the sake of convenience, he instructed the foreign employer to send the monies to his NRE account in India. He stated that the argument of the assessee that what was brought into India is not the salary income but only the salary amount to India. Moreover, the learned Authorised Representative had also not brought any material on record to prove that the assessee had the control over his salary income in international waters. He argued that if this argument of the assessee is to be accepted, then the assessee goes scot free from not paying tax anywhere in the world on this salary income. The provisions of section 5(2)(a) of the Act are probably enacted keeping in mind that income has to suffer tax in some tax jurisdiction.

10.2. The learned Departmental Representative argued that this issue is decided in favour of the revenue by the order of this tribunal in the case of Tapas Bandhopadhyay v. Dy. DIT (2016) 159 ITD 309 (Kol. Trib), dt. 1-6-2016 on the very same set of facts. He also argued that the Circular relied upon by the learned Authorised Representative would make the provisions of section 5(2)(a) of the Act itself unworkable and redundant.

11. We have heard the rival submissions and perused the materials available on record. We find that the decision relied upon by the learned Departmental Representative , which was authored by the undersigned , was rendered by placing reliance on the Third Member decision of Mumbai Tribunal in the case ofCapt. A.L. Fernandes (supra) . This decision clearly lays down that the receipt in India of salary for services rendered on board a ship outside the territorial waters of any country would be sufficient to give the country where it is received the right to tax the said income on receipt basis. Such a provision is found in section 5(2)(a) of the Act which was applied in the aforesaid decision. It is trite that decision of a Third Member would be equivalent to a decision of a Special Bench and thereby would become a binding precedent on the division bench. However, we find that the impugned issue has been duly addressed by the CBDT Circular No. 13/2017, dt. 11-4-2017 as rightly relied upon by the learned Authorised Representative. For the sake of convenience, the said Circular is reproduced hereunder :–

Section 5 of The Income Tax Act, 1961–Income–Accrual of–Clarification Regarding Liability To Income Tax in India for a Non-Resident Seafarer Receiving Remuneration in NRE (Non-Resident External) Account Maintained with an Indian Bank

Circular No. 13/2017 (F.No. 500/07/2017-FT & TR-V), dt. 11-4-2017 (As Corrected by Circular No. 17/2017 (F.No. 500/07/2017-FT & TR-V), dt. 26-4-2017)

Representations have been received in the Board that income by way of salary, received by non-resident seafarers, for services rendered outside India on-board foreign ships, are being subjected to tax in India for the reason that the salary has been received by the seafarer into the NRE bank account maintained in India by the seafarer.

2. The matter has been examined in the Board section 5(2)(a) of the Income Tax Act provides that only such income of a non-resident shall be subjected to tax in India that is either received or is deemed to be received in India. It is hereby clarified that salary accrued to a non-resident seafarer for services rendered outside India on a foreign going ship (with Indian flag or foreign flag) shall not be included in the total income merely because the said salary has been credited in the NRE account maintained with an Indian bank by the seafarer.

Section 5 of the Income Tax Act, 1961–Income–Accrual of–Clarification Regarding Liability to Income Tax in India for a Non-Resident Seafarer Receiving Remuneration in NRE (Non-Resident External) Account Maintained with an Indian Bank–Corrigendum to Circular No. 13/2017 (F.No. 500/07/2017-FT & TR-V), dt. 11-4-2017

Circular No. 17/2017 (F.No. 500/07/2017-FT & TR-V), dt. 26-4-2017

In line 4 of Paragraph No. 2 of the captioned circular, the word “foreign ship” may be read as “foreign going ship (with Indian flag or foreign flag)”.

11.1. A perusal of the Circular referred to above shows that salary accrued to a non-resident seafarer for services rendered outside India on a foreign going ship (with Indian flag or foreign flag) shall not be included in the total income merely because the said salary has been credited in the NRE account maintained with an Indian bank by the seafarer. Remittances of salary into NRE Account maintained with an Indian Bank by a seafarer could be of two types : (i) Employer directly crediting salary to the NRE Account maintained with an Indian Bank by the seafarer ; (ii) Employer directly crediting salary to the account maintained outside India by the seafarer and the seafarer transferring such money to NRE account maintained by him in India. The latter remittance would be outside the purview of provisions of section 5(2)(a) of the Act, as what is remitted is not “salary income” but a mere transfer of assessee’s fund from one bank account to another which does not give rise to “Income”. It is not clear as to whether the expression “merely because” used in the Circular refers to the former type of remittance or the latter. To this extent the Circular is vague.

11.2. In the instant case, the employer has directly credited the salary, for services rendered outside India, into the NRE bank account of the seafarer in India. In our considered opinion, the aforesaid Circular is vague in as much as it does not specify as to whether the Circular covers either of the situations or both the situations contemplated above. Hence we deem it fit to give the benefit of doubt to the assessee by holding that the Circular covers both the situations referred to above. The result of such interpretation of the Circular would be that the provisions of section 5(2)(a) of the Act is rendered redundant. Be that as it may, it is well settled that the Circulars issued by CBDT are binding on the revenue authorities. This position has been confirmed by the Hon’ble Apex Court in the case of Commissioner of Customs v. Indian Oil Corpon. Ltd. (2004) 267 ITR 272 (SC) wherein their Lordships examined the earlier decisions of the Apex Court with regard to binding nature of the Circulars and laid down that when a Circular issued by the Board remains in operation then the revenue is bound by it and cannot be allowed to plead that it is not valid or that it is contrary to the terms of the statute. Accordingly, the grounds raised by the assessee are allowed.

12. In the result, the appeal of the assessee is allowed.

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