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Facts
The assessee, a non-resident individual, received Rs. 76,46,473 in his NRE account, claiming it as non-taxable salary for services as a seafarer on a foreign ship, with his stay in India not exceeding 182 days. The Assessing Officer and CIT(A) taxed this amount, holding it as fees for technical services and deemed to accrue/arise or be received in India, noting that an Indian resident company (BSM) deducted tax u/s 194J.
Held
The Tribunal found serious gaps in the facts, particularly regarding the nature of the assessee's employment (salary vs. professional fees) and the role of BSM as the payer (employer vs. agent). It noted contradictions in the TDS deduction and the NRE account receipt. Therefore, the case was remanded back to the Assessing Officer for a fresh examination of the facts, including the employer-employee relationship, the role of BSM, and the applicability of relevant sections and circulars.
Key Issues
The key issues were the nature of the assessee's income (salary vs. fees for technical services), whether the income accrued/arose or was received in India for a non-resident seafarer, and the correct tax deduction at source given the complex relationship between the assessee, the foreign company, and the Indian agent.
Sections Cited
Section 143(3), Section 142(1), Section 143(2), Section 194J, Section 9(1)(vii)(b), Section 192, Section 195, Section 5(2)(a), Section 10(6)(viii)
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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri Sanjay Arora & Shri Aby T.Varkey
O R D E R Per: Sanjay Arora, AM This is an Appeal by the Assessee arising out of the Order dated 20.5.2022 by the Commissioner of Income Tax (Appeals), Bengaluru (‘CIT(A)’ for short), dismissing assessee’s appeal contesting it’s assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter "the Act") dated 21.3.2014 for assessment year (AY) 2011-12.
2. The assessee, an individual, filed his return of income for the relevant year on 25.3.2013, disclosing income at Rs.82,700/- by way of, in the main, pension from the Defence Department. On enquiry u/s. 142(1) of the Act, consequent to notice u/s.143(2) of the Act dated 12.8.2013, it was explained that Rs.76,46,473 received through telegraphic transfers in his non-resident (external) NRE account with ICICI 1 (AY: 2011-12) Suresh George vs. Asst. DIT Bank during the relevant year was not taxable under the Act as he was working as an Electro Technical Officer with a foreign company, and his stay in India during the year did not exceed 182 days. This was found not acceptable by the Assessing Officer (AO) as his duration of service as per the contract letter/s, specimen of one such, dated 06/12/2010, is placed on record (PB pgs. 12-13), was for a period of 4-6 weeks, so that it lackedan employer-employee relationship. There was no continuity of service, and a fresh contract would have to be necessarily entered into on the expiry of the earlier contract. The payer, M/s. Bibby Ship Management (India) Pvt. Ltd. (BSM), acting as an agent for it’s Principal, BJ Services Company Middle East Ltd. (‘the company’), had accordingly deducted tax at source u/s. 194J of the Act, which specifically speaks of TDS on professional and technical services. BSM is a tax resident of India, carrying on business in India, so that irrespective of the situs of rendering services, his remuneration is deemed to accrue or arise in India in terms of section 9(1)(vii)(b) of the Act. That apart, it is also received in India. The assessee, further, having not been subject to tax under the tax laws of any country, was not entitled to and, in fact, had not claimed any benefit under the Double Tax Avoidance Agreement (DTAA). The receipt of Rs.76.46 lakhs was accordingly brought to tax. The same found confirmation in first appeal inasmuch as that the assessee had failed to establish either the situs of the service rendered or of the same having not accrued or arisen in India. Both the TDS as well as the amount paid to the assessee, i.e., net of TDS, had been paid in India. Aggrieved, assessee is in second appeal.
We have considered the rival contentions, and perused the material of record. 3.1 It is not in dispute that the assessee, a non-resident, is working on a sea borne vessel, and his remuneration is in respect of services as an Electro Technical Officer abroad a ship, i.e., as a seafarer. It is not clear if he is working on a foreign ship, which provides context to the ld. CIT(A) stating that the situs of service is not established. The same, as the AO states, referring to Explanation to section 9(1) of the Act, may be rendered immaterial where the services are consumed or utilized in 2 (AY: 2011-12) Suresh George vs. Asst. DIT India inasmuch as he is working for BSM, a resident company. The assessee, however, claims that section 9(1)(vii)(b) of the Act would not apply inasmuch as the remuneration received, despite being subject to TDS u/s. 194J of the Act, is not a fee for technical services, but salary, tax deduction at source on which – over which he though has no control,hadto be, if at all, u/s. 192 of the Act. We find merit in the argument as the assessee cannot,on the face of it,be said to be working as an independent professional. He has been assigned a specific task, essential to the running and maintenance of the vessel while on voyage and, rather, as we see it, as a part of the personnel on the ship. Sure, he would be required to, in discharge of his work, exercise professional judgement, bringing to bear his technical expertise, which he would employ in the best interest of the vessel he stands assigned or appointedto underClause 7 of the contract. That, however, would be so even in case of a contract of employment. He has to perform his work in tandem and harmony with the other members of the crew, as a part of a team, and subject to the management guidelines. In sum, under it’s supervision and control; Cl. 2 of the contract clearly specifying him to work in accordance with the STCW code or as per the directions of the Master/Chief Engineer. Vide cl. 8 he agrees to abide by the company’s service terms and conditions, annexed to the contract letter (cl. 2). He is also liable to be reimbursed ‘safety and huet’ by the company, through BSM, on production of receipts by the latter, upon successful completion of the third contract (cl. 9), which we understand to be a benefit, as a measure of incentive, that the company extends to those working for it for a period. Considered from this stand point, the contract, thus, is one of service, and not for service, i.e., of employment, akin to, if one may say so, that of a pilot of an aircraft or an engineer working on a project site, etc., so that the receipt of Rs.76.46 lacs acquires the character of salary accruing to the assessee from the vessel owner/s.
3.2 The foregoing, however, does not explain the payment of the said remuneration by BSM, an admitted fact; it being only an agent for it’s Principal –understandably a 3 (AY: 2011-12) Suresh George vs. Asst. DIT foreign shipping company, and in which capacity it has signed the contract letter dated 06.12.2010. The payment of salary would, after all, only be by the employer. Why would an employer require salary to it’s personnel be paid by another even if it had outsourced the hiring and contracting their services through it’s Agent? The employer-employee relationship is in fact imbued and fraught with several responsibilities, including as to payment – at the correct rate and time, being ordinarily a subject matter of legislation, as well as several incident compliances, including contribution to employee welfare funds and/or other statutory obligations. The TDS certificate/s would, for example, notwithstanding the payment being made by another, issued by the employer only, and tax deducted deposited under his TAN, while in the instant case, it is the name and TAN (MUMB 08953A) of BSM that is stated (in the asseseee’s return) in respect of the Employer! Why? That apart, payment of remuneration, it may be appreciated, has several aspects to it, requiring maintaining several records w.r.t.the terms and conditions of employment, as qua attendance, which would, in that case, be either also maintained by the Agent or, alternatively, require being transmitted to it each week/month, i.e., the payment frequency by the Employer, and which may not be practical. There is nothing on record, including the Agency agreement, to show of that being the case, i.e., of payment by BSM being for and on behalf of the employer-company, nor indeed a contention to that effect at any stage. Further, in such a case, the payment by BSM would be to all the personnel of the company. Why, again, one wonders, does the company specify the work hours per day as well as the remuneration rate (USD 64) in the contract letter? This is as, being a part of it’s regular staff, the remuneration as well as the work hours would be defined. Rather, all it needs to do, even assuming – for the sake of argument, offloading the chore of payment to BSM, issue the assessee, as it would to other employees, an appointment letter, clearly specifying the remuneration or other variables, and which would bear an agreement by the appointee with the service rules, etc. of the company. Why, it just cannot be that the service (AY: 2011-12) Suresh George vs. Asst. DIT rules do not oblige the Employer to allow leaves, viz. medical, earned, casual, etc., to the Employees, inasmuch as it is integral and incident to employment, and which may again have a legislative support. There is, further, a clear contradiction between the payment of remuneration by BSM, a resident, and it being in foreign exchange. Then, again, it would be obliged to deduct tax at source, i.e., if at all, u/s. 195 or s. 192, and not u/s. 194Jof the Act, which, rather, would be the case even where BSM makes the payment to the assessee in it’s own right, i.e., not on behalf of another, inasmuch as, in either case, the payment, considered by the payer as taxable under the Act, is to a non-resident Indian. We may though hasten to add here that payment to the assessee by BSM in it’s own right is, however, incompatible and inconsistent with the contract letter issued by it to the assessee, which is only for and on behalf of the company, i.e., as it’s agent. Further, sec. 194-J entails a lower tax deduction vis-à-vis s. 192 or s. 195, and cannot be lightly viewed inasmuch short deduction of tax at source has serious legal implications, presumably not attracted in the instant case.
3.3 There are thus serious gaps in the explanation/s furnished w.r.t. the facts of the case, none of which stands explained with reference to the material on record, or even otherwise, in which latter case, the issue, duly explained, could be adjudicated upon subject to verification by the assessing authority of the explanation furnished, satisfactorily concluding the matter. We have already expressed non-clarity about as to why does the company need to enter into a separate contracts with persons, as the assessee, stipulating a defined period of work per day (12 hrs./cl. 3) and daily rate of remuneration (USD 64), where he is it’s regular employee, as contended, albeit without a job guarantee. If the company is not certain of the continuity of services, implying reasonable assurance as to availability of the vessels/voyages, the same would extend not only to some persons, as the assessee, but to almost the entire crew. In any case, it could design a separate contract of employment where it reserves the right not to pay remuneration in case of some eventualities over which it has no control, in the interest of the company, else it itself may not survive. We highlight 5 (AY: 2011-12) Suresh George vs. Asst. DIT these aspects as the position may well be different where the assessee is engaged by BSM. It being required to provide services in relation to running and maintenance of a sea borne vessel, by it’s owner, hires the services of people, as the assessee, representing the human resource, in discharge of it’s obligation under the contract therefor, who are then deputed from time to time to work on different vessels at a fixed remuneration, to be paid by it, the hiring agency, i.e., BSM, with which the owner of the ship has little concern, except perhaps an overarching concern that the wage rate is in keeping with the prevalent industry rate with a view to ensure smooth conduct of the operations. In such a case, it could be either salary or fee for technical services, attracting sec. 9(1)(vii)(b). The basis of such an inference is the payment to the assessee by BSM, i.e., in it’s own right, which is apparently dichotomous, and needs to be reconciled with the fact of the contract letter/shaving been issued by it for and on behalf of it’s Principal as well as of the payment by it being in foreign exchange and under it’s TAN. The stated status of BSMas an employer, i.e., per the assessee’s return, needs to be clarified.
4.1 There is yet another aspect of the matter. Even assuming that the income does not accrue or arise to the assessee in India, or is deemed as so u/s. 9(1) of the Act, it is, without doubt, received in India, so that it is taxable in India in view of section 5(2)(a) of the Act, adverted to both by the AO and the ld. CIT(A), and even otherwise a part of the well-settled law (Raghav Reddi v. CIT [1962] 44 ITR 720 (SC); Turner Morrison Co. Ltd. v. CIT [1953] 23 ITR 152 (SC), to cite two). Toward this, Sh. Varma, the ld. counsel for the assessee, would submit that the receipt being in his NRE account, it is not to be regarded as receipt in India, referring to Board Circular 13/2017 dated 11.4.2017 (PB pg. 56). Also, the salary of all seafarers is exempt under section 10(6)(viii) of the Act. Both the said provisions, as well as the Board Circular, carefully perused, are reproduced for ready reference: - (AY: 2011-12) Suresh George vs. Asst. DIT Scope of total income 5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which— (a) to (c)
(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 (b) accrues or arises or is deemed to accrue or arise to him in India during such year.”
Incomes not included in total income 10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included— (1) to (5) ……. (6) in the case of an individual who is not a citizen of India,— (i) to (viia) …… (viii) any income chargeable under the head "Salaries" received by or due to any such individual being a non-resident as remuneration for services rendered in connection with his employment on a foreign ship where his total stay in India does not exceed in the aggregate a period of ninety days in the previous year; Circular No. 1312017 F. No: 500/0712017-FT & TR-V Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes Foreign Tax & Tax Research - II FT & TR-V Division New Delhi, dated 11.04.2017 Subject: 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. (AY: 2011-12) Suresh George vs. Asst. DIT 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.
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 ship 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.
(Subhash Jangala) Under Secretary (FT&TR-V) 4.2 Section 10(6)(viii) is applicable only to non-citizens. Where he is indeed so, and the receipt is by way of salary qua employment on a foreign ship, sec. 10(6)(viii) would get triggered where his stay in India during the relevant year does not exceed 90 days. There is nothing on record to bear out these aspects, being conditions precedent, and which may also vary from year to year. In fact, the assessee, a retired defence personnel, appears to be an Indian citizen. Even his return for AY 2022-23 (at PB-II, pgs. 29-32), states him to be a ‘not ordinarily resident’ (s. 6(6)), which category, perhaps valid for the current year as well, is applicable only to Indian citizens. There has been no enquiry or finding in the matter, which would accordingly have to be looked into. At this juncture, ShriVarma was specifically asked by the Bench about the residence of the assessee while not on high seas, to which he replied ‘in India’. Now, we could understand that the assessee, a resident of another country which he, an Indian by origin, adopts as the country of his residence, maintains an NRE account with an Indian Bank. However, when such is not the case, how can he possibly maintain an NRE account? He cannot possibly be a resident of the sea? As it appears to us, though not a tax resident in India, he is domiciled in India, holding an Indian passport. "NRE account" means a Non-Resident External account referred to 8 (AY: 2011-12) Suresh George vs. Asst. DIT in clause (i) of sub-regulation (1) of regulation 5 of the Foreign Exchange Management (Deposit) Regulations, 2000 (FEDR). Schedule-I to these Regulations, placed on record by the assessee (PB-I, pgs. 49-53), specifies the scheme whereunder an authorized dealer can accept deposits in such an account from a non-resident. Cl. 3thereof delineates the permitted credits in such an account. Sub-cl. (f) reads as under: ‘current income in India due to the account holder, subject to payment of applicable taxes in India.’ It is thus permissible for a non-resident to deposit his current income, taxable in India, in such an account. Nothing, in such a case, would thus turn on the receipt of income in India being deposited in the non-resident assessee’s NRE account. Cl. 3(a) of the said Schedule refers to proceeds of remittances to India in any permitted currency. A remittance implies transfer of monies already received, so that it is only a capital transfer, and could not, for that reason, be regarded as a receipt in India, which signifies, quite clearly, and in terms of the settled law, the first receipt (Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 (SC)).
4.3 Coming to Board Circular# 13/2017 (supra), the same is to be read not a laying down the law, but as giving effect to and in agreement with the incident provisions of law, and not as either dehors or in derogation thereof. The powers of the Board are constrained by the terms of its grant, which is toward proper administration of the Act, being, rather, specifically proscribed u/s. 119(1) to require any income tax authority to make a particular assessment or dispose of a case in a particular manner, or to otherwise interfere with the discretion of the first appellate authority. That is, operates within the framework of law. The law in the matter is well-settled, toward which, we may for ready reference, cite some decisions, as in CIT v. Greenworld Corporation [2009] 314 ITR 81 (SC); Kerala Financial Corporation v. CIT [1994] 210 ITR 129 (SC). The cited Board Circular does not refer to the provision of law under which the stated income of the non-resident seafarer is tax-exempt, so that 9 (AY: 2011-12) Suresh George vs. Asst. DIT impliedly it is so for the reason of having been neither accrued nor arisen in India nor deemed to be so, on which aspect, where so, there is, and neither can be, any quarrel. It is under such circumstances, clarified by the Board, that the said income would not be liable to be taxed in India merely because it stands credited to the non-resident seafarer’s NRE account. The reason, again not clarified, as we see it, is simple. NRE account is ‘foreign exchange’ by definition, which is liable to be, at any time till the account holder retains his non-resident status under FEMA, 1999, though denominated in Indian currency, liable to be converted into foreign exchange, and taken out of India without any permission from any authority. Cl. 3(a) of Schedule-I to FEDR refers to proceeds of remittances to India in any permitted currency. The same is, thus, regarded as a remittance, i.e., after being received by the NRI, with a view to avail the benefits attached to such accounts, and should not, for that reason, disturb the taxable status of the income. This, we understand to be the purport of the Circular, and not as whittling down or interpreting any provision of the Act, much less which form its edifice. The Circular, equally, cannot also be read to mean that income, otherwise taxable, becomes not so where it stands credited to the assessee’s NRE account.
The matter, in view of the foregoing, would therefore necessarily have to be considered in light of the relevant provisions of law, being section 5(2)(a)r.w.s. 9(1)(vii)(b) and s. 10(6)(viii) of the Act and, further, qua the entire amount under reference, as the findings would have to necessarily extend thereto. The matter is, accordingly, and as was the common ground before us, remitted back to the file of the AO for adjudication afresh, determining the issues arising for factual determination, after allowing the assessee opportunity to present his case and leading evidences to substantiate his case before him. The receipt under reference being a remuneration for services, it’s nature as income, the burden to show which is on the Revenue, is discharged. The burden to establish that it is exempt u/s. 10(6)(viii) of the Act, or, in the alternative, is not taxable, despite being received from a resident, remains to be 10 (AY: 2011-12) Suresh George vs. Asst. DIT discharged. Why, section 10(6)(viii) of the Act itself shows that, but for the same, the receipt is taxable in India. We make it clear that all contentions are open to the assessee and, further, that we may not be construed as having expressed any final opinion in the matter, even as we have surely highlighted different aspects of the matter, both legal and factual, for being addressed.
Before parting, we may finally refer to another aspect of the matter. The remuneration, to the extent deducted by way of tax at source, is paid to the account of the Central Government by the payer for and on behalf of the assessee on account of TDS provisions. The same poses no issue where the income is indeed taxable in India on accrual basis, so that the tax deduction meets the assessee’s tax liability to that extent. So, however, where not so, the same, being only a part of income (s. 198), stands yet received in India inasmuch as it is paid to the account of Central Government. Would it therefore be liable to tax under the Act u/s.5(2)(a) of the Act? In our clear view, though surely received in India, the answer is clearly in the negative. The character of tax deducted at source is only tax (s. 4(2)). Tax is a concomitant of the chargeability of income to tax under the Act and, therefore, cannot by itself become a determinant of tax. That would amount to putting the cart before the horse. The income represented by the sum deducted as tax at source would not accordingly be subject to a separate charging provision/s, as section 4 r.w.s. 5(2)(a) of the Act, but to the same provision/s as the income of which it is a part. There is, as such, no scope for bringing the tax deducted at source (rs. 22.12 lacs) on the impugned sum to tax even as it is without doubt received in India in Indian currency. Further, it is, for that reason, also open for the assessee to insist on refund of TDS in his NRE account.
We decide accordingly. (AY: 2011-12) Suresh George vs. Asst. DIT