Indians working in the merchant navy (commonly known as ‘Sailors’) form a large part of the expatriate community of India. These sailors work aboard ships owned by foreign companies, which sail in international waters and earn their salaries for the services rendered on such ships.
In the earlier times, the salaries were also paid to these sailors in cash aboard the ship itself. However, with the advance of times, the salaries are paid directly into the designated bank accounts of such sailors. Historically, these sailors have taken positions in their tax returns that their salaries are not taxable in India as the salaries are not accruing or arising in India and are also received by them aboard the ship outside India. The credit in the Indian bank account was considered only as a subsequent deposit of the salary i.e. application of money accrued and received outside India.
However, this settled position is now being challenged in cases where the salary of these sailors is transferred from the foreign employer’s bank account outside India directly in the sailor’s Non-resident External (NRE) account in India. The issue on hand in such cases is whether it can still be said that such salary is received outside India and only subsequently transferred to a bank account in India or is it a case of first receipt of salary in bank account in India itself.
Provisions of the Income-tax Act, 1961 (‘the Act’)
These sailors are generally Non-resident (NR) under the provisions of the Act because their stay in India does not exceed 182 days in a financial year. As per the provisions of the Act, the following incomes are taxable in India in case of NR taxpayers:
a) Income received or deemed to be received in India; or/ and
b) Income accruing or arising or deemed to be accruing or arising in India
It has been observed that while taking a position on non-taxability of their salaries, the sailors generally tend to concentrate more on the fact that the income is accruing or arising outside India. However, they lose sight of the manner in which the salary is received by them. The manner of receipt of income is equally important too because income which is not accruing or arising in India under point (b) can still be taxable under the Act if the same is ‘received’ or ‘deemed to be received’ in India under point (a).
While this issue is not relevant in cases where salary earned outside India is deposited in the Indian Sailor’s bank account outside India, there is a practical challenge in cases of Indian sailors who are not in a position to receive the salaries in a bank account outside India and are hence forced to receive the same directly in their NRE accounts in India.
The taxability of such receipt was discussed in the recent decision of the Kolkata Tribunal in the case of Tapas Kumar Bandopadhyay Vs. DDIT where it was held that remuneration received by the taxpayer from the foreign company directly in his NRE account was taxable in India as the same was ‘received’ in India and was not a case of ‘transfer’ of earned salary to India.
Decision of the Tribunal
While ruling on the matter against the taxpayer, the Tribunal held as under:
It is interesting to note that while the Kolkata Tribunal has relied on the Third Member bench of the Mumbai Tribunal in case of Captain Fernandes by treating the same at par with a Special bench decision, the Kolkata Tribunal has not discussed an earlier ruling of Kolkata Tribunal itself in the case of Ranjit Kumar Bose v. ITO.
In the case of Ranjit Kumar Bose, it was held that where salary earned from services provided outside India was received in India during the same year, the said salary would not be taxable in India. The rationale was that ‘salary’ is to be taxed in India on accrual basis whether received or not. The same can be taxed on receipt basis only if the same is received in advance. Since the taxpayer had provided services outside India and the said income was accruing outside India, the same was not taxable in India even if ‘received’ in India during the same year. In our view, the later decision of the Kolkata tribunal appears to be a better view as, if one adopts the earlier view , it would make section 5(1)(a) otiose. Further, in earlier decision Kolkata tribunal relied on the provisions of section 15 to come to conclusion that since salary is taxable on accrual basis, the place of receipt has no relevance. However, in our view, section 5 and section 15 operate in different field and one can not bring in provisions of section 15 into play to defeat the provisions of section 5.
After-math of the decision
The decision of the Kolkata Tribunal has come as a jolt to many Indian sailors who have been taking the positions of non-taxability of salary incomes in their tax returns. In fact, recent newspaper reports suggest that the income-tax department has begun issuing notices to such sailors asking them to pay taxes. With the option available to the income-tax authorities to reassess incomes of up to past 6 years, this action is expected to impact approximately 100,000 such sailors in India. The key here is to understand how the sailors have arranged their affairs and at what point of time they get control of the money. If they can demonstrate that the money was received outside India and what has been received in Indian bank account is merely “transfer” of money, then perhaps they can still take a position of non-taxability in India.
In this regard, attention is drawn to the judgment of the Karnataka High Court in the case of Director of Income tax Vs. Dylan George Smith where it was held that salary earned from services provided in international waters and received in NRE account in India was not taxable in India as the said amounts were received on board the ship and were only ‘allocated’ by the taxpayer in his NRE account in India. Accordingly, in this case, documentation seems to have helped the taxpayer defend his position of non-taxability of such salary income in India.
Considering the variation in views arising on this issue across Tribunals and the impact that the decision of the Kolkata Tribunal in case of Tapas Kumar Bandopadhyay would have on the Indian sailors and also possibly on the industry (if the sailors insist on higher salaries to negate such tax impacts), it is likely that this issue may be litigated further before the Courts to attain absolute clarity on the taxation of such incomes.
In the meanwhile, it is advisable that the sailors properly analyse the facts of their case before taking a position of non-taxability under the Act. If need be, the modality of receipt of salaries from foreign employers needs to re-evaluated to ensure that the sailors are not venturing into a voyage of uncharted tax territory!
 ITA No. 70/Kol/2016
  81 ITD 203 (Mum.) (TM)
 (2001)247 ITR 260 (Mum)
  18 ITD 230 (CAL.)
  11 taxmann.com 348 (Kar.)
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