Q : Whether salary Income of NRI accrued outside India from foreign Shiping company and received in NRE Account can be taxed in India ?
Salary income of an NRI could not be subjected to Indian taxes where service agreement was with a foreign shipping company to act as an employee and said company, in turn, had confirmed assessee’s employment and salary had accrued outside India
IN THE ITAT BANGALORE BENCH ‘B’
Income-tax Officer, (International Taxation), Ward-2(1), Bangalore
Dylan George Smith
AND GEORGE GEORGE K., JUDICIAL MEMBER
IT APPEAL NOS. 143 & 144 (BANG.) OF 2010
[ASSESSMENT YEARS 2003-04 & 2004-05]
MAY 20, 2010
Smt. V.S. Sreelekha, Addl. CIT for the Appellant. James Joseph, CA for the Respondent.
George George K, Judicial Member – These are appeals filed by the revenue and is directed against the consolidated order of the CIT(A)-IV, Bangalore dated 06-11-2009. The relevant assessment years are 2003-04 & 2004-05. Since identical issues are involved in these appeals, they are heard together and disposed of by this consolidated order for the sake of convenience and brevity.
2. The grounds raised in these two appeals are identical and hence, the grounds raised in relation to assessment years 2003-04 is re-produced below;
|“1.||The order of the ld.CIT(A) to be set aside, since it is contrary to law and facts of the case.|
|2.||During the AY: 2003-04, the assessee Mr. Dylan George Smith was employed on ship on the basis of contract of employment executed with M/s Eurasia International (L)Ltd., Hongkong C/o M/s Paramount Shipping & Management Pvt. Ltd., Mumbai.|
|3.||The assessee did not claim that the has paid taxes on the income assessed in any of the countries in the world.|
|4.||The salary earned by the assessee is remitted directly to his NRE account with Bank of India, Mumbai and thus to be treated ass income received or deemed to be received in India as per section 5(2) of the IT Act, 1961.|
|5.||The assessee though claimed that he used to get his wages on board and thereafter accordingly to his instructions only the certain amount remitted in his NRE account. No evidence was furnished before the AO in support of above claim.|
|6.||Thus, the Hon’ble CIT(A) has erred in holding that salary income of the assessee is not liable to tax in India. Though as a natural corollary to sec.10(6) such income is deemed to accrue or arise to him in India.|
3. Briefly stated the facts are as follows. The assessee is an individual. For the relevant assessment years he was a non-resident. The assessee is employed with a foreign company engaged in the management of crew and vessels namely M/s Eurasia International (L) Ltd., presently known as Bernhard Schulte Ship Management (hereinafter referred to as employer) having its office at Hongkong. For the assessment year 2003-04, the assessee filed return of income on 25-11-2003 admitting nil income by claiming exemption of US Dollars 12,869 u/s 10 r.w.s.6(1) and 6(6) of the IT Act for the salary earned in International Waters from a Shipping Company. The return was proceed and accepted u/s 143(1) of the Act. Later, the assessments were re-opened u/s 147 of the IT Act on the ground that exemption claimed u/s 10 was not applicable and accordingly, notice u/s 148 of the Act was issued.
4.For the assessment year 2004-05, the return of income was filed on 23-03-2006 declaring nil income by claiming exemption of US Dollars 12,869 u/s 10 r.w.s.6(1) & 6(6) of the Act in respect of the salary earned in International Waters from a Shipping Company. The return was processed u/s 143(1) of the Act. The assessments were re-opened u/s 147 on the ground that exemption claimed u/s 10(6) is not applicable on the facts of the case.
5. During the course of re-assessment, the AO observed that the assessee was working as third officer in a shipping company and received salary for the AY: 2003-04 amounting to Rs.3,64,514/- and for AY: 2004-05 amounting to Rs.4,85,115/- through his NRE account with the Bank of India, Bandra East Branch, Mumbai. Relying on the judgment of the Hon’ble Supreme Court o India in the case of Raghava Reddi v. CIT  44 ITR 720, the AO asked the assessee to explain as to why the said amounts of Rs.3,64,510/- and Rs.4,85,115/- received by the assessee in India during the AYs: 2003-04 & 2004-05 respectively should not be brought to tax under the provisions of sec.5(2) of the Act. The assessee furnished his explanation before the AO. The assessee submitted that he was not an employee of Paramount Shipping but of the Hong kong Shipping Company, Eurasia and that his income had accrued outside India and was also received outside India on board the ships belonging to the said Hon Kong Shipping Company. The AO however, rejected the explanation furnished by the assessee and concluded that the said income fell under the purview of Sec.5(2) of the Act for the following reasons.
|(i)||The contract of employment is executed with Paramount Shipping, an Indian agent for recruitment of personnel for various shipping companies. As the contract of employment determines as to where income accrues, such income accrues to the assessee in India.|
|(ii)||Income arises from the contractual obligation with the employer and not where he is deputed to work. Mere discharge of duties at another place for another will not alter the fact that the assessee remains an employee of Paramount Shipping.|
|(iii)||The receipt of assessee’s salary was routed through his bank account with the Bank of India, Bandra East Branch, Mumbai. The receipt of income refers to the first occasion when he gets the money under his control. Since the salary was remitted directly by the employer to the assessee’s NRE account. It is received or deemed to be received in India and is chargeable to tax in India under the provisions of sec.5(2) of the Act as held by the Hon’ble Supreme Court of India in the case ofRaghava Reddi (supra) cited above.|
6. Aggrieved by the order of assessment before the first appellate authority, it was stated that the employer of the assessee during the assessment years under appeal was a foreign company. The assessee submitted before the first appellate authority that salary was first received by him and thereafter, at his request, the same was remitted to the NRE account of the assessee with the Bank of India, Bandra East Branch, Mumbai, from on board the ship which is normal practice in the line of employment of assessee. The assessee has submitted that he used to withdraw from his wages account the money required on board for his expenses and only the balance was credited to his bank account under his instruction. It is contended by the assessee that the addition made by the AO is based on an erroneous appreciation of law. It is stated that salary income is taxable on accrual basis as envisaged u/s 15 of the Act i.e. salary due is taxable when it is receivable by the assessee regardless of the fact that the salary has been actually received or not. It is only advance salary that is taxable on receipt basis.
7. The CIT(A) for his detailed reasoning in paragraph – 4.3 to 4.3.3 of his order allowed the appeal of the assessee.
8. The revenue being aggrieved for redressal is in appeal before us. The learned DR strongly relied on the findings of the AO. She also stated that the Tribunal decision relied on by the CIT(A) in IT Appeal No. 1137 (Bang.) of 2008, dated 26-6-2009 in the case of ITO v Prahlad Vijendra Rao has not attained the finality and the revenue has filed appeal u/s 260A of the Act before the Hon’ble High Court.
9. Per contra, the learned AR for the assessee had submitted that the issue in question is squarely covered by the decision of the Hon’ble Tribunal in the case of Prahlad Vijendra Rao (supra), wherein identical facts were considered and the Tribunal after elaborately considering the precedent on the subject dismissed the appeal filed by the revenue. The AR had also filed paper book containing 114 pages.
10. We have heard the rival submissions and perused the material on record. During the assessment under appeal, the assessee was an employee of Eurasia, the Hong Kong based ship management company. The assessee never had any contractual relationship with any India company, including Eurasia International (L) Ltd., C/o M/s Paramount Shipping and Management Pvt.Ltd., Mumbai as observed by the AO in his assessment order. The assessee during the assessment years under appeal had received salary from Eurasi, Hong Kong for services rendered in their agent’s ship, namely M.V.Vergina and M.T.Tamyara in international territorial waters. Payments towards salary was first received by the assessee on board the ship and later, as per his instruction, remittance of a portion of salary in the form of “allocation” had been made to the NRE account of the assessee in India. The details of the salary received by assessee on board the ship, the amounts remitted by the assessee in his NRI account in India are narrated in para 4.3.2 of the CIT(A)’s order.
10.1 To substantiate the above fact, during the course of assessment proceedings and appellate proceedings, the assessee had submitted the following evidences.
|a.||Service agreement with Eurasia as an agent for and on behalf of foreign shipping companies namely Demena Shipping Co.Ltd., and Rupert Trading Corp. A copy of the same is enclosed in page 100 & 101 of the paper book.|
|b.||Conformation of employment from Eurasia, Hong Kong stating that the assessee was engaged by them in their various vessels during the assessment years under appeal. A copy of the same is enclosed at page 54 to 57 of the paper book.|
|c.||Portage bill and final wage bill of Eurasia confirming that Eurasia has paid the salary to the assessee on board in international waters. A copy of the same is enclosed at page 41 to 53 of the paper book.|
|d.||Salary certificate by Eurasia in the4 name of the assessee. A copy of the same is enclosed at page 40 of the paper book.|
10.2 The AO failed to appreciate the fact that Paramount Shipping and Management Pvt.Ltd., Mumbai was acting as only an recruitment agent of their principal namely, Eurasia, Hong Kong and not as an employer of the assessee. A confirmation to this effect is enclosed in page No.97 of the paper book.
10.3 Even otherwise, the AO has failed to apply the test laid down by the Hon’ble Supreme Court in the case ofPiyare Lal Adishwar Lal v CIT  40 ITR 17 to find out whether Paramount Shiping & Management Pvt.Ltd., Mumbai had control and supervision over the work of the assessee in the vessels of assessee’s employer so as to create a contractual relationship of employee-employer and thereby bring the salary income subject to India taxes.
10.4 Moreover, the Tribunal in the case of Prahlad Vijendra Rao (supra) in identical circumstances has held as follows:
“We have heard the rival submission and perused the material on record. We are of the view that AO has wrongly construed the provision of section 5(2)(a) of the Act while holding that the salary income was received in India and hence taxable. Salary income is taxable on accrual basis under section 15 of the Act. In other words, salary due is taxable when it is receivable by the assessee regardless of the fact that the salary has been actually received or not. It is only advance salary that is taxable on receipt basis as an exception to the ruling that salary is taxable on accrual basis. The assessee has rendered services to M/s Live Stock Transport and Trading Company, which is a Kuwait company. The assessee has rendered the services on board the Ocean Liner to the said company and assessee was staying outside India for more than 182 days. The salary payable to the assessee is on broad the Ocean Liner and the salary is not payable in India. It is only the receipt of the salary that is in India on instructions of the assessee to credit the salary in the bank account of the assessee in India. In this context, Hon’ble ITAT Calcutta Bench in the case ofRanjit Kumar Bose v. ITO  18 ITD 230 under similar factual matrix has held that the salary accrued outside India cannot be taxed in India merely because it is received in India. The ratio of the said decision is squarely applicable to the facts of the present case”.
The facts being similar, respectfully following the co-ordinate bench of the Tribunal cited supra, we hold that the order of the CIT(A) is correct and in accordance with law and no interference is called for.
11. In the result, the appeals filed by the revenue are dismissed.