• Lohitakshan Nambiar („tax payer‟) was employed by a Malaysian Company – Barber Ship (employer / company) and was working on board an ocean liner owned by the company.
• During the tax year 2005-06, the tax payer had stayed outside India for 222 days. Hence, he was a non-resident for Indian tax purposes.
• The employer had paid the salary to the tax payer, on board the ocean liner and at his request credited a portion of the salary to the tax payer‟s NRE bank account in India.
• Assessing Officer (AO) held that the amount of ` 944,450/- credited to the bank account in India was taxable u/s 5(2) of the Income-tax Act („Act‟) since it was received in India. The AO also that since the tax payer was not a resident of any country in the said tax year, he could not avail any relief either under a Double Tax Avoidance Agreement („DTAA‟) or the Act.
• The Commissioner of Income-tax (Appeals) ruled in favor of the taxpayer citing that services were rendered outside India and income accruing outside India was not taxable in India.
• Aggrieved by the above order, the revenue preferred an appeal before the Tribunal.
Issue before the Tribunal
• Whether salary credited to a bank account in India for services rendered there by a non-resident was taxable in India?
Observations and Ruling of the Tribunal
• The AO has wrongly interpreted the provisions of section 5(2)(a) to conclude that salary income received in India was taxable therein.
• Salary is taxable on accrual basis with the exception of advance salary that is to be taxed on receipt.
• The place of accrual of salary and not receipt that determines its taxability in India.
• The salary accrued to the taxpayer outside India and was payable overseas.
• Salary credited to the Indian bank account on instructions from the tax payer was not taxable in India.
• The Bangalore Tribunal has consistently held on the same lines in decisions1 bearing similar fact pattern.
The above decision presupposes that salary would be taxable if the accrual of income is in India. However, in India, salary income has been taxed either if it accrued or was received in India. Being a Tribunal decision, this it would be binding in the jurisdictional location though it is to be seen whether the principles laid therein will be endorsed by the courts to have a wider impact.
Source: ITO (International Taxation) Ward -1(3), Bangalore Vs. Lohitakshan Nambiar (Bangalore ITA T) (ITA No. 1045/ Bang /2009)[2010-TII-201-ITA T-BANG-NRI]