ISSUE FOR CONSIDERATION
Section 5 of the Income Tax Act, 1961 (“the Act”) lays down the scope of total income. Sub-section (2) of that section lays down the scope of the total income of a nonresident. It provides as under:
“(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) which accrues or arises or is deemed to accrue or arise to him in India during such year.”
Explanation 2 to this section clarifies that income, which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him, shall not again be so included on the basis that it is received or deemed to be received by him in India.
It is usual to come across cases where a person, not resident under the Act, receives some money in India, the income whereof has accrued outside India; for example, Indian citizens employed abroad, regarded as non-residents for the purposes of the Act, depositing their salary in India for the services rendered out of India . Similarly, crew of a foreign ship or an Indian ship who leave India on account of their employment on the ship, non-residents under the Act, depositing the salary In India, is another example.
Many such persons, may request their foreign employers to credit their salaries to their Non-Resident (External) bank accounts (“NRE accounts”) maintained with banks in India. An issue has arisen before different benches of the Income Tax Appellate Tribunal regarding the taxability in India of such foreign salaries credited to NRE accounts. While the Agra bench of the tribunal has taken the view that such salaries are not taxable in India, the Kolkata bench of the tribunal has recently taken a contrary view, holding that such salaries are taxable in India.
Arvind Singh Chauhan’s case
The issue first came up before the Agra bench of the tribunal in the case of Arvind Singh Chauhan vs. ITO 147 ITD 509.
In this case, the assessee was a crew member of a ship, who was employed with a Singapore company. His employment letter was issued by the foreign employer’s agent in India. He worked on merchant vessels and tankers plying on international routes. His salary was directly credited by his employer to his NRE account with HSBC Bank in Mumbai.
His stay in India during the relevant previous year was less than 182 days, and hence his residential status was nonresident. In the income tax return filed by the assessee, the salary received from the Singapore company was not offered to tax. However, his income from pension received from Government of India and interest were offered for taxation.
During the course of assessment proceedings, when the assessee was asked to show cause as to why the salaries received from the Singapore company for services rendered as a crew member of a ship should not be taxed in India, the assessee argued that since such salary was accruing and arising outside India, it was outside the scope of section 5(2).
As regards the fact that the salary was directly credited to a bank account in India, the assessee argued that salary income deposited in a bank account in India directly from the bank account of his employer outside India and as such was not taxable in India. Reliance was placed on the decisions in the cases of DIT vs. Prahlad Vijendra Rao 198 Taxmann 551 (Kar), DIT vs. Diglan George Smith 40(1) ITCL 419 and ITO vs. Lohitakshan Nambiar (ITA No 1045/Bang/09 dated 12.4.2010).
The AO did not accept the assessee’s explanation, on the ground that since the assessee’s status for income from pension and interest was that of resident, as a result his status for all sources of income was to be taken as a resident. In addition the AO held that the salary income accrued in India by relying on the Supreme Court decision in the case of CIT vs. Shri Govardhan Ltd 69 ITR 675, for the proposition that if an assessee acquires a right to receive income, the income is said to have accrued to him, even though it may be received later on its being ascertained. According to the AO by receiving the appointment letter in India from the agent of the foreign employer and details of salary to be paid, the assessee got the right to receive the salary. Importantly, the AO relied on the fact that the salary cheques were credited to the assessee’s account with HSBC bank in India and hence the income was received in India.
The Commissioner (Appeals) upheld the order of the AO, holding that the salary income accrued in India as well as was received in India, and was therefore taxable in India.
The Tribunal noted the fact that the AO had himself noted the number of days of the assessee’s stay outside India as per his passport, and categorically found that his status u/s. 6 was that of a non-resident. The tribunal held that the AO was wrong in holding that the assessee was a resident in India on account of the fact that he had offered interest and pension income in his taxable income, given the fact that both the pension and interest accrued and were received in India, the pension being payable by a former employer in India. The mere taxability of such pension and interest in India would not result in the inference that the assessee was a resident of India, since such incomes were taxable in India even in the case of a non-resident.
Examining the scope of total income in the case of a nonresident, the tribunal noted that it was only when one of the 2 conditions – i.e. income was received or was deemed to be received in India by or on behalf of the nonresident or income accrued or arose or was deemed to accrue or arise to the non-resident in India – was fulfilled, that the income of a non-resident could be brought to tax in India. The tribunal held that salary was compensation for services rendered by an employee, and therefore situs of its accrual was the situs of services being rendered, for which salary was paid. It noted that in the case of CIT vs. Avtar Singh Wadhwan 247 ITR 260, the Bombay High Court had held that income from salary, even in the case of crew of an Indian vessel operating in international waters, was to be treated as having accrued outside India. According to the tribunal, it was incorrect to assume that an employee got a right to receive the salary just by getting an appointment letter, because unless services were rendered, no right to receive salary accrued to an employee. Therefore, according to the tribunal, the assessee got the right to receive salary income when he rendered the services, and not when he received the appointment letter.
The tribunal next considered the aspect of whether the income was received in India, since the salary cheques were credited to the assessee’s account with HSBC, Mumbai. According to the tribunal, the law was clear that receipt of income for this purpose referred to the first occasion when the assessee got the money in his own control, real or constructive. What was material was the receipt of income in its character as income, and not what happened subsequently, once the income, in its character as such, was received by the assessee or his agent. An income could not be received twice or on multiple occasions. The bank statement of the assessee clearly revealed that these were US dollar denominated receipts from the foreign employer credited to the NRE account of the assessee with HSBC, Mumbai.
The tribunal noted that the assessee was in lawful right to receive those monies as an employee at the place of employment, i.e. at the location of his foreign employer. It was a matter of convenience that the monies were thereafter transferred to India. According to the tribunal, these monies were at the disposal of the assessee outside India, and it was in exercise of his rights to so dispose of the money, that monies were transferred to India. The tribunal referred to the decision of the Madras High Court in the case of CIT vs. A P Kalyanakrishnan 195 ITR 534, where the assessee’s pension from the Malaysian government was remitted by the Accountant General of Malaysia to the Accountant General, Madras, for onward payment to the assessee. While rejecting the contention of the revenue that the pension was to be regarded as having been received in India, the court in that case had observed that the pension payable to the assessee had accrued in Malaya, and only thereafter by an arrangement embodied in the letter…………, the pension had been remitted to the assessee in India and been made available to him. The Madras High Court had therefore held that the assessee had to be regarded as having received the income outside India and that the pension had been remitted or transmitted to the place where the assessee was living, as a matter of convenience, which would not constitute receipt of pension in India by the assessee.
According to the tribunal, once an income was received outside India, whether in reality or on constructive basis, the mere fact that it had been remitted to India would not be decisive on the question as to whether the income was to be treated as having been received in India. The tribunal observed that the connotation of an income, having been received and an amount having been received were qualitatively different. The salary amount was received in India in this case, but the salary income was received outside India. The tribunal further noted that it was elementary that an income could not be taxed more than once, but, if at each point of receipt, the income was to be taxed, it may have to be taxed on multiple occasions. The tribunal therefore held that in a situation in which the salary had accrued outside India, and thereafter, by an arrangement, salary was remitted to India and made available to the employee, it would not constitute receipt of salary in India by the assessee, so as to trigger taxability under section 5(2)(a). The tribunal therefore deleted the addition of the salary amount credited to the NRE bank account in India.
Tapas Kr Bandopadhyay’s case
The issue again came up recently before the Kolkata bench of the tribunal in the case of Tapas Kr Bandopadhyay vs. DyDIT 70 taxmann.com 50.
In this case, the assessee was a marine engineer, who was a non-resident. During the year, he was engaged with an Indian company and a Singapore company as a marine engineer, working in international waters, and received remuneration from both the companies. His contract of service with the Indian/foreign shipping company was executed in India with an agent, before joining the ship. His residential status was non-resident, on account of the fact that he was outside India for more than 182 days, sailing in international waters. The salary incomes were received by credit to the assessee’s NRE accounts with banks in India.
The assessee claimed that the salary incomes were exempt from tax, being received from outside India in foreign currency. The assessing officer accepted the residential status of the assessee as a non-resident, after verification of the passport and other details. He, however, asked the assessee to show cause as to why the incomes received in India by way of credit to the NRE accounts maintained in India should not be taxable, since the income received in India was taxable in case of nonresidents. The assessee responded by stating that the entire amount was received in foreign currency outside India and were credited to his NRE accounts in India, and that the amounts received in foreign currency could not be deemed to be received in India. It was also pointed out that only foreign currency could be deposited in NRE account, and hence the amounts credited to the NRE account were received outside India. The assessing officer rejected the assessee’s contention that amounts received in foreign currency were not taxable in India, and observed that any income received or deemed to be received in India was taxable in India, irrespective of the currency in which such amounts were received.
The assessing officer observed that income received in India was taxable in all cases (whether accrued in India or elsewhere), irrespective of residential status of the assessee. According to the assessing officer, the meaning of the term “income received in India” was significant. If the place where the recipient got the money on the first occasion under his control was in India, it would be income received in India. In the case before him, since the income was remitted by the employer to the bank accounts of the assessee maintained in India, the assessee got the money under his control for the first time in India. The assessing officer, therefore, taxed the salaries for the services rendered overseas, received by the assessee by credit to his bank accounts from his employers.
Before the Commissioner (Appeals), on behalf of the assessee, it was argued that:
(a) The assessee was a non-resident rendering services outside India.
(b) The payments were being made by a foreign company outside India and the foreign company did not have any permanent establishment in India.
(c) The point of payment was to be taken into consideration for determining the provisions of section 5(2)(a) of the Income Tax Act and the point of payment should be considered as the point of receipt.
(d) It was immaterial that the payment was being transferred by the foreign company or remitted by the foreign company to the NRE accounts in foreign exchange in India, because payments had been made by the foreign company outside India and the point of payment was to be taken as the point of receipt.
(e) The amount which was received by the assessee from the foreign company was in foreign exchange and therefore income could not be said to have been received in India, where payment had been received in foreign currency.
(f) The provisions of section 5(2)(a) had to be interpreted in a manner that it did not render the section meaningless. If interpretation as made out by the Department was adopted, then definitely the section would be otiose and meaningless, because no benefit would be given to non-residents, even if all the conditions had been satisfied.
(g) The true interpretation of the provisions of section 5(2)(a) to be adopted for income received or deemed to be received in India, was that the payments had been made in India in Indian currency and the recipient of the payments had received payments in Indian currency.
The Commissioner (Appeals) rejected the assessee’s arguments, and upheld the order of the assessing officer.
Before the tribunal, on behalf of the assessee, reliance was placed on the decisions of the Karnataka High Court in the case of Prahlad Vijendra Rao (supra) and of the Bombay High Court in the case of Avtar Singh Wadhwan (supra). Reliance was also placed on the decision of the Agra bench of the tribunal in the case of Arvind Singh Chauhan (supra).
On behalf of the revenue, it was argued that income will get included in the total income of a non-resident through any of the four modes prescribed in section 5(2). All the four modes stood on their own legs, or else the enactment would be rendered redundant. There was no specific section in the Act, which dealt with income accruing or arising to any person only in India, though section 5(2) (b) used the term “accrues or arises to him in India”. The context of this term was provided by section 5(1)(c), which mentioned that total income of a person resident in India included all income from whatever source, which accrued or arose to him outside India. This was the reason that the main charging section, section 4, did not make any reference to the words “in India”, as it had to provide a basis of charge for both – income accruing or arising to a person in India as well as income accruing and arising to a person outside India. The charging section did not have a territorial bias. Similarly, section 15(a) also did not reflect any locational preference, as salary could become due to an assessee anywhere in the world. Salary due from an employer was taxable, whether paid or not.
Reliance was placed on the observations of the Supreme Court in the case of CIT vs. L W Russell 53 ITR 91, where the Supreme Court had held as under:
“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.”
Therefore, it was argued that taxation of salary was on the basis of the contractual right of the employee to receive his salary, and nothing else, and it had no relation with location or place of services rendered or to where the amount had become due. The place where it had become due and the place where service was rendered did not form a basis of charge u/s. 15.
It was further argued on behalf of the revenue that though the assessee had rendered services outside India, he had received salary in India by way of fund transfer from the foreign company directly to the NRE account of the assessee in India. It was argued that the receipt contemplated u/s. 5(2)(a) was actual receipt. Hence, such income was actually received in India and was taxable in India. Reliance was placed on the Third Member decision of the Mumbai bench of the tribunal in the case of Capt A L Fernandez vs. ITO 81 ITD 203, which was claimed to be directly on the point. The Bombay and Karnataka High Court decisions relied upon by the assessee were sought to be distinguished by the revenue, on the ground that they were rendered in the context of taxability u/s. 5(2)(b), and not section 5(2)(a), and that they did not frame any question of law.
The tribunal noted that the scheme of the Act was such that the charge of tax was made independent of territoriality, residency and currency. According to the tribunal, 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 had instructed the foreign employer to send the monies to his NRE account in India. The assessee’s argument was that what was brought into India was not the salary income, but only the salary amount. The tribunal, however, held that there was no evidence brought on record to prove that the assessee had control over his salary income in international waters.
The tribunal further observed that if this argument of the assessee were to be accepted, then the assessee went scot-free, not paying tax anywhere in the world on this salary income. According to the tribunal, the provisions of section 5(2)(a) were probably enacted keeping in mind that income has to suffer tax in some tax jurisdiction. The tribunal observed that it believed that such provisions would exist in tax legislation of all countries.
The tribunal held that if the argument of the assessee were to be accepted, it would make the provisions of section 5(2)(a) redundant. A statutory provision was to be interpreted to make it workable rather than redundant. In case of non-residents, the scope of total income had four modes, one of which was receipt in India from whatever source derived. If this was 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 u/s. 5(2)(a), then section 5(2)(a) would lose its independence and would become a subset of section 5(2)(b). There would then not be any need for having section 5(2)(a) on the statute.
The tribunal noted that the issue before the Bombay High Court in the case of Avtar Singh Wadhwan (supra) was about the place of accrual of income, and the court held that income accrued in the place where the services were rendered, which in that case, was admittedly outside India. According to the tribunal, the Bombay High Court did not deliberate upon the fact whether the receipt of the income was in India, as the issue was only about the place of accrual of income in the context of section 5(2) (b). This decision was followed by the Karnataka High Court in case of Prahlad Vijendra Rao (supra).
Addressing the argument of the assessee that salary was received on the high seas, and by way of convenient arrangement, was directed to be deposited in the NRE account of the assessee in India, the tribunal raised the question whether a person could receive salary on high seas. According to the tribunal, the only possibility of receiving salary on board a ship on high seas was to receive it in physical currency. The tribunal observed that it was not the assessee’s case that the physical currency got deposited in the NRE account. The money was transferred from the employers account outside India to the assessee’s NRE account in India.
Referring to the decision of the Agra bench of the tribunal in the case of Arvind Singh Chauhan (supra), the Kolkata tribunal observed that this decision was based on the decision of the Madras High Court in the case of Kalyanakrishnan (supra). In that case, the facts were distinguishable from the facts of the case before it, as the income in that case was taxable in Malaysia. In the case before the Kolkata tribunal, the income 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 was the first point of receipt by the assessee, and according to the tribunal, prior to that, it could not be said that the assessee had control over the funds that had been deposited in the NRE account by the employer. Based on the Madras High Court decision, the Agra bench had held 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 his foreign employer, and it was a matter of convenience that the monies were thereafter transfer to India. The Kolkata tribunal observed that in section 5(2) (a), right to receive salary was not the relevant criterion, but the relevant criterion was the receipt of payment, which was admittedly in India. The Kolkata tribunal therefore expressed its doubts as to the applicability of the Madras High Court decision in Kalyanakrishnan’s case to the facts before it.
Finally, the Kolkata tribunal placed reliance on the Third Member decision of the Mumbai tribunal in the case of Capt A L Fernandes (supra), where the Mumbai tribunal held that there was a clear finding and there was no dispute that the salary was received in India. Since the ships were not regarded as part of India, the services were rendered outside India. However, since the salary was received in India, it was held to be taxable in India u/s. 5(2)(a). According to the Kolkatta tribunal, this decision clearly laid down that 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 was received, the right to tax the income on a receipt basis. The Kolkatta tribunal also noted that the Third Member decision was not brought to the notice of the Agra tribunal, when it decided the issue.
Since a Third Member decision was equivalent to a Special Bench decision, the Kolkata tribunal followed the Third Member decision, holding that salary was received in India by credit to the NRE account of the employee was taxable in India by virtue of the provisions of section 5(2)(a).
Observations
The issue really is whether the assessee can be said to have obtained control over his salary at the place where his employer is located, and therefore whether the receipt of the salary is outside India. While the Agra bench of the tribunal was of the view that the assessee obtained control over his salary at the place where his employer was located, as he had a right to receive the salary at that location, the Kolkatta bench was of the view that the assessee had not obtained control over his salary at the location of the foreign employer merely on account of the contract of employment.
Interestingly, the Supreme Court in the cases of Raghava Reddi vs. CIT 44 ITR 720 and Standard Triumph Motor Co Ltd v CIT 201 ITR 391, has held that crediting the account of the assessee in the books of the payer Indian company amounted to a receipt by the foreign company in India.
In Raghava Reddi’s case, the Supreme Court observed:
“This leaves over the question which was earnestly argued, namely, whether the amounts in the two account years can be said to be received by the Japanese company in the taxable territories. The argument is that the money was not actually received, but the assessee firm was a debtor in respect of that amount and unless the entry can be deemed to be a payment or receipt, clause (a) cannot apply. We need not consider the fiction, for it is not necessary to go to the fiction at all. The agreement, from which we have quoted the relevant term, provided that the Japanese company desired that the assessee firm should open an account in the name of the Japanese company in their books of account, credit the amounts in that account, and deal with those amounts according to the instructions of the Japanese company. Till the money was so credited, there might be a relation of debtor and creditor; but after the amounts were credited, the money was held by the assessee firm as a depositee. The money then belonged to the Japanese company and was held for and on behalf of the company and was at its disposal. The character of the money changed from a debt to a deposit in much the same way as if it was credited in bank to the account of the company. Thus, the amount must be held, on the terms of the agreement, to have been received by the Japanese company, and this attracts the application of section 4(1)(a). Indeed, the Japanese company did dispose of a part of those amounts by instructing the assessee firm that they be applied in a particular way. In our opinion, the High Court was right in answering the question against the assessee.”
In Standard Triumph Motor Co Ltd’s case, royalty income payable to the assessee was credited by the Indian company to the account of the assessee in its books of account at the end of each year. The Supreme Court observed:
“the credit entry to the account of the assessee in the books of the Indian company does amount to its receipt by the assessee and is accordingly taxable and it is immaterial when did it actually receive it in the UK.”
Therefore, where the foreign employer were to credit the account of the employee in its books of account in respect of the liability to pay salary, and were then to remit the money to India, it would amount to receipt of the salary income outside India in the first place on credit of the salary to the employee’s account.
One of the aspects, which needs to be borne in mind, is the issue of non-taxability of such income in any country, if it is not taxed on a receipt basis in India. Today, one of the major issues which countries are seeking to tackle is the issue of double non-taxation, through amendment of tax treaties. The Kolkata tribunal, in a way, seeks to address this aspect through its decision, though no tax treaties were involved in this case.
In the case of Capt A. L. Fernandes, the other issue which was decided by the Mumbai tribunal was that the salary income actually accrued or arose in India, on account of the contract of employment being signed in India, and all rights flowing from that also being enforceable in India, and therefore the concept of deemed accrual u/s 9(1) was irrelevant for the purpose. Therefore, the corollary of sections 9(1)(ii) and 9(1)(iii) could not be applied for the purpose. Interestingly, the Kolkata tribunal did not refer to or follow this aspect of the decision, when deciding the case before it, though in the facts of the case before it, the contracts of employment were signed in India.
Possibly, this is on account of the fact that the Bombay High Court had clearly held in the case of Avtar Singh Wadhwan (supra) that the relevant test to be applied to decide if income accrued to a non- resident in India or outside India, is where services are rendered, and not where the contract is signed. The Karnataka High Court also, in the case of Prahlad Vijendra Rao (supra), held that u/s. 15 of the Act, even on accrual basis, salary income is taxable i.e., it becomes taxable irrespective of the fact whether it is actually received or not; only when services are rendered in India it becomes taxable by implication. However, if services are rendered outside India, such income would not be taxable in India.
Lastly, while perhaps the view of the Kolkata Tribunal does seem to be the better position based on a strict reading of the provisions, one also needs to consider the fact that in both the cases, the salaries were credited to an NRE account with a bank in India. For all practical purposes, under the Foreign Exchange Management Act, such an account is treated as the equivalent of a foreign bank account of the depositor outside India – transfers from Non-Resident Ordinary accounts (which are nonrepatriable) to such NRE accounts are governed by the procedures applicable to repatriation of funds overseas, transfer of funds from such accounts overseas is freely permissible, interest on such accounts is not taxable, etc. Given this situation, should amounts received in such NRE bank accounts not be regarded as having been received outside India? What purpose would be served by having Indian citizens open overseas bank accounts to receive their foreign salaries in the first instance, just to save on tax on such salaries?
The CDBT has come out with clarifications in the past, regarding the residential status of seafarers operating on ships in international waters, and taxability of their salary. In order to avoid further litigation, and unnecessary reduction of inflows into NRE accounts, it would be better for the CBDT to clarify that such foreign salaries credited to NRE accounts of seafarers or other NRIs would not be regarded as having been received in India.
