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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Before: Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM]
ORDER
Per Shri M. Balaganesh, AM:
This appeal by assessee is arising out of order of CIT(A)-22, Kolkata vide Appeal No. 102/CIT(A)-22/Kol/14-15 dated 02.11.2015. Assessment was framed by DDIT- 3(1) (IT), Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2010-11 vide his order dated 07.02.2013.
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.14,79,598/- 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 AY under appeal i.e. 2010-11 return was filed on 12.08.2010 declaring total income at Rs.3,95,099/-. The assessee is a Marine Engineer and was engaged with M/s. Great Offshore Ltd. and M/s. Bibby/Ship Management (Singapore) Pte. Ltd. in the capacity as a Marine Engineer. At the time of assessment proceedings the Ld. AO observed that the assessee worked in International Waters during the FY 2009-10 relevant to AY 2010-11 and received remuneration from two concerns i.e. (i) M/s. Great Offshore Ltd. Rs.26,73,772/- and (ii) M/s. Bibby Ship Management (Singapore) Pte. Ltd. Rs. 6,60,100/-. Out of the above receipts the assessee claimed following income as exempt: (i) M/s. Great Offshore Ltd. Rs.20,28,671/- 2 Tapas Kr. Bandopadhyay AY 2010-11 (ii) M/s. Bibby Ship Management (Singapore) Pte. Ltd. Rs. 6,60,100/- 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 u/s 5 of the Act. The Ld. AO 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 u/s. 5 of the Act. The Ld. AO issued show cause notice to the assessee as below: "It appears from the bank accounts submitted by you that you have received considerable amounts from persons outside India in your NRE accounts maintained in India. These amounts are taxable in India as per the provisions of section 5 of the Income-tax Act. Section 5 of the Income-tax Act states that the amount received in India is taxable in India for a non-resident. The relevant part of Section 5 is reproduced as under. 5(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or… It is therefore apparent that the amount received in India is taxable in India as per the Income-tax Act in case of Non-residents."
The assessee replied to the show cause notice as below: “That I am a marine engineer and left India during the financial year relevant to the assessment year 2010-11 for the purpose of employment and I was 'Non-Resident’ for the year in question as per provision of section 6 of the I.T. Act. That I have claimed exemption the income which were received by me from outside India in foreign currency as per provision of section 5 of the Act. That I have transferred my allotment, received in US$ from outside India to my NRE accounts in India with Axis Bank and RBS Bank, thus it is crystal clear that the entire amount of income in US$ were received by me from outside and that income in US$ shall not be deemed to received in India and it is also to be submitted that other than foreign currency any amount could not be deposited in NRE A/c. That therefore the amounts which are credited in my NRE A/cs in India were received outside and being "Non Resident' those income were not taxable U/s 5 of the Act.
3 Tapas Kr. Bandopadhyay AY 2010-11 That I have already filed the photocopy of the Bank statement of NRE & NRO A/cs with Axis Bank and the photocopy of RBS Bank (NRE) is enclosed herewith).”
The Ld. AO examined the reply of the assessee together with the bank statements of the assessee and observed that sums of Rs.7,11,872/- and Rs.7,67,726/- were directly credited to Royal Bank of Scotland NRE Account and Axis Bank NRE Account respectively totaling to Rs.14,79,598/-. The Ld. AO further observed that regarding the assessee’s contention that these amounts received in foreign currency is not taxable in India, it is stated that as per section 5(2)(a) of the Act, which deals with the scope of income arising to a Non-resident, any income of a Non-Resident received in India is taxable in India. The 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. 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 AO added a sum of Rs.14,79,598/- as income chargeable to tax in India.
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. Great Offshore Ltd. and Bibby Ship Management (Singapore) Pte. Ltd. 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 4 Tapas Kr. Bandopadhyay AY 2010-11 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 Ld. CIT(A) 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 Ld. CIT(A) not convinced with the arguments of the assessee upheld the addition made by the Ld. AO. 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 Ld.ClT(A) to uphold the addition made by the AO of Rs.1479598/- as income u/s 5(2) (a) of the Income Tax Act is erroneous and contrary to the material facts on record.
5 Tapas Kr. Bandopadhyay AY 2010-11 2. That on the facts and in the circumstances of the case the action of the Ld. CIT(A) to uphold the action of the AO to bring into tax an amount of Rs.1479598/- by treating it be received in India is based on incorrect assumption of facts and wrong application of law.
That on the facts and in the circumstances of the case the application of decision of Captain A.L.Fernandez vs. ITO 81 ITD 203 (Mum) (TM) by the Ld. CIT(A) to treat as income of Rs.1479598/- u/s 5(2) (a) of the Income Tax Act is based on incorrect application of case law and the addition is arbitrary and excessive.
That the order of the Ld. CIT(A) upholding the order of the AO 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 Ld. AR 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) Anr. Vs. Prahlad Vijendra Rao reported in 239 CTR 107(Kar), ii) CIT Vs. Avtar Singh Wadhwan reported in 247 ITR 260 (Bom) In response to this, the Learned DR 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
6 Tapas Kr. Bandopadhyay AY 2010-11 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 DR 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 vs L. W. Russel (1964), 53 ITR 91(SC). 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
7 Tapas Kr. Bandopadhyay AY 2010-11 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.
We have heard the rival submissions and perused the materials available on record. The scheme of the Act is such that charge of tax is made independent of territoriality and residency and currency. The Ld. DR argued that the assessee though rendered services outside India had received salary in India by way of fund transfer from foreign company in abroad directly to NRE account of the assessee in India. The character of receipt of salary does not change according to Ld. DR. He argued that the receipt contemplated u/s. 5(2)(a) of the Act is actual receipt. Hence, income which is actually received in India is taxable in India u/s. 5(2)(a) of the Act and hence, the Third Member decision relied on by the Ld. CIT(A) is directly in favour of the revenue. When the decisions of both Bombay and Karnataka High Courts were put across to the Learned DR , he argued that both the Courts did not frame question of law and it was rendered in the context of taxability u/s. 5(2)(b) of the Act and not section 5(2)(a) of the Act. The Learned DR on the reliance placed by the Learned AR on the decision of Agra Bench of ITAT in the case of Arvind Singh Chauhan, supra argued that the said decision had not considered the Third Member decision, cited supra and hence to be ignored.
10.1. We find 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. It was argued by the assessee that income was actually earned by the assessee outside India and assessee had only brought those amounts into India. In other words, what was brought into India is not the salary income but only the salary amount. But we find that no evidence has been brought on record to prove that the assessee had the control over his salary income in international waters. Moreover, we find that if this argument of the assessee is to be 8 Tapas Kr. Bandopadhyay AY 2010-11 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 . We believe that such provisions would exist in tax legislation of all countries. We hold that if the argument of the assessee is accepted, then it would make the provisions of section 5(2)(a) of the Act redundant. It is only elementary that a statutory provision is to be interpreted ut res magis valeat quam pereat, i.e. to make it workable rather than redundant. From the provisions of section 5(1) of the Act, in the case of a resident, the global income is taxable in India. In case of non-residents, the scope of total income has four modes, one of which is receipt in India, 'from whatever source derived'. If this is construed to mean that income from whatever source, should first accrue or arise in India and then it should be received in India to be included under section 5(2)(a), then section 5(2)(a) will lose its independence and will become a subset of section 5(2)(b) and there would not be any need for having section 5(2)(a) on the statute.
10.2. We find that heavy reliance has been placed by the Learned AR on the decision of the Hon’ble Bombay High Court in the case of CIT vs Avtar Singh Wadhwan reported in 247 ITR 260 (Bom) which was in turn followed by Hon’ble Karnataka High Court in the case of DIT (Intl Taxn) vs Prahlad Vijendra Rao reported in 239 CTR 107 (Kar). We find that the question before the Hon’ble Bombay High Court was to decide the place of accrual of income. The Court held that the income accrues in the place where the services were rendered which was admittedly outside India. We find that the Court did not have an occasion to deliberate upon the fact that the receipt of the income has been in India as the issue decided by them was only the place of accrual of income in the context of section 5(2)(b) of the Act. Hence the decision relied upon by the Learned AR are factually distinguishable.
10.3. The argument of Learned AR was that the salary was received on the high seas and by way of a convenient arrangement , the same was directed to be deposited in the NRE account of the assessee in India. The question that arises for consideration is can a person receive salary on high seas. The only possibility of receiving salary on board of 9 Tapas Kr. Bandopadhyay AY 2010-11 a ship on high seas is to receive in hot currency. It is not the case of the assessee that the hot currency got deposited in the NRE account. On the other hand, the money was transferred from the employer’s account outside India to the assessee’s NRE account in India. In such circumstances, it is difficult to accept the contention of the Learned AR that salary was not received in India. The decision rendered by the Agra Tribunal in the case of Arvind Singh Chauhan vs ITO in ITA Nos. 319 & 320/Agra/2013 dated 14.2.2014 is based on the decision rendered by the Hon’ble Madras High Court in the case of CIT vs A.P.Kalyankrishnan 195 ITR 534 (Mad) . The facts before the Hon’ble Madras High Court were that the assessee in that case received pension from the Malaysian Govt and claimed it as not taxable. The AO found that the assessee received the pension in India through the Accountant General Madras directly and hence the pension received is liable to tax in India on receipt basis. The first appellate authority found that the pension amount received by the assessee had been subjected to assessment in Malaysia in the status of non-resident and that clearly pointed out that the pension had accrued to the assessee only in Malaysia. It was further held that pension had accrued to assessee only in Malaysia and the Accountant General Madras was merely authorized to arrange for the payment of pension to the assessee rendering the amount of pension received in India by the assessee not liable to tax. On further appeal by the revenue, the Tribunal found that there was a letter dated 23.6.1969 addressed by the Accountant General of the Federation of Malaya to the Accountant General Madras and that letter indicated an arrangement for payment in India and the circumstance that the pension of the assessee had also been assessed to tax in Malaya in the status of non- citizen and non-resident would clearly establish that the pension of the assessee had been remitted to India by arrangement with the Accountant General Madras. On further appeal, the Hon’ble Madras High Court firstly held that the Malaysian Govt had assessed the assessee to income tax on the pension. The Hon’ble High Court also found that the Malaysian Govt had deducted tax at source which clearly indicated that the income had accrued to assessee in Malaysia and therefore not assessable in the hands of the assessee in India. The Hon’ble Court found that the accrual of pension and receipt of pension had already been taken place in Malaya. The Hon’ble Court held that the letter dated 23.6.1969 addressed by the Accountant General Federation of Malaya Kuala Lumpur to the Accountant General Madras was only intended as an arrangement for the 10 Tapas Kr. Bandopadhyay AY 2010-11 payment of pension to the assessee and the said letter was couched in the form of a request , requesting payment to the assessee to be made at the nearest treasury and the rate of exchange was also indicated therein. Further the letter also stated that the payment requested to be made was in respect of the pension payable to the assessee and at the rate of exchange indicated therein and the amount so paid, should , according to the letter, be charged to the Govt of Federation of Malaya in the usual manner. Taking note of the contents of the aforesaid letter, the Hon’ble Court held that payment in India was only an arrangement to ensure the prompt payment of pension which had already suffered tax in India. The Hon’ble High Court therefore held that the income should be construed as having been received outside India and the fact that the pension had been remitted or transmitted to the place where the assessee was living was a matter of convenience and that would not constitute receipt of pension in India by the assessee falling within section 5(1)(a) of the Act.
10.3.1. The above explanation would clearly prove that the facts before the Hon’ble Madras High Court (supra) are distinguishable from the facts of the present case in as much as the income in the present case did not suffer tax in any other jurisdiction nor was it received in any other tax jurisdiction. The receipt in the NRE account in India is the first point of receipt by the assessee and prior to that it cannot be said that the assessee had control over the funds that had deposited in the NRE account from the employer.
10.4. The facts in the case decided by the Agra Tribunal supra were that the assessee received salary cheques by way of credit to his bank account with HSBC Mumbai. The Agra Tribunal took the view that the assessee had a lawful right to receive the salary as an employee at the place of employment i.e at the location of its foreign employer and it was a matter of convenience that the monies were thereafter transferred to India. As we have already seen that in section 5(2)(a) of the Act, right to receive salary is not the relevant criterion but the relevant criterion is the receipt of payment which is admittedly in India. Therefore, we have our own doubts as to the applicability of the decision of 10.5. Now what we are left with is the decision relied upon by the Learned DR on the Third Member decision of Mumbai Tribunal in the case of Captain A. L. Fernandez Vs. ITO reported in 81 ITD 203 (TM ) wherein it was held as below:-
In my opinion, the salary is includible in the assessment under s. 5(2)(a) of the Act, which says that any income received by a non-resident in India is taxable in India. There is a clear finding in the order of the learned AM, that there is no dispute that the salary was received in India. This should put an end to the controversy. I may add, that the Ld. AM has not disputed the correctness of the Ld. JM’s finding that under International law, the floating island theory has undergone a change and it is no longer correct to regard the Indian ships as floating islands. Therefore, the position accepted by the learned members is that the services were rendered outside India, the ships not being considered as part of India. However, since the salary was received in India, it was rightly held taxable in India under section 5(2)(a). I agree with the Ld. AM in this respect.
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.
10.6. We may also point out that the decision of the Third Member in the case of Capt A.L. Fernandes supra was not brought to the notice of the Agra Tribunal. We therefore prefer to follow the decision of the Third Member case in the facts and circumstances of the present case.
12 Tapas Kr. Bandopadhyay AY 2010-11 10.7. To sum up, the facts of the instant case directly fits into the facts of the Third Member decision relied upon by the Learned DR supra and respectfully following the same , we hold that the salary received in India is taxable in India in terms of section 5(2)(a) of the Act and accordingly dismiss the grounds raised by the assessee .
In the result, appeal of assessee is dismissed.
Order is pronounced in the open court on 01.06.2016