Accrual of income in India: Salary: Section 5: Assessee a non-resident Indian, was employee of a Hong Kong-based ship management company: For services rendered in international waters outside country he was paid salary which was received by him on board of ship: As per his instructions, a portion of his salary, in form of ‘allocation’, had been remitted to NRE account of assessee in India: No portion of salary liable to tax in India.

The assessee was an individual. For the relevant years i.e., A.Ys. 2003-04 and 2004-05 he was a non-resident Indian. He was employed with a foreign company engaged in the management of crew and vessels. He was working on the ships of the foreign company. Payments towards salary was first received by the assessee on board the ship and later on as per his instructions, remittance of a portion of salary in the form of ‘allocation’ had been made to the NRE account of the assessee in India. The assessee claimed that his income had accrued outside India and was also received outside India on board the ships belonging to the Hong Kong Company and as the income had not arisen within India, he was not liable to pay tax in India. The Assessing Officer rejected the assessee’s claim and held that the income fell under the purview of section 5(2) of the Act. The CIT(A) and the Tribunal accepted the assessee’s claim. The Tribunal held that the assessee was an employee of the Hong Kongbased ship management company. He never had any contractual relationship with any Indian Company. He received the salary from Hong Kong for services rendered in their agent’s ships, namely, M V Vergina and M T Tamyara in international territorial waters. Payments towards salary was first received by the assessee on board the ships and later on as per his instructions, remittance of a portion of salary in the form of ‘allocation’ had been made to the NRE account of the assessee in India. The Tribunal followed its order in ITA 1137(B)/2008 that the salary accrued outside India could not be taxed in India merely because it was received in India.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“(i) In the instant case, though the assessee was an Indian, at the relevant point of time he was a non-resident. He was working for a foreign company. For the services rendered in the international waters outside the country he was paid salary. He received the salary on board the ships. A particular amount was allocated to be transferred to his NRE account in India. Merely because a portion of his salary was credited to his account in India, that would not render him liable to tax in India when the service was rendered outside India, salary was paid outside India and his employer was a foreign employer.

(ii) The provisions of the Act were not attracted to the salary of the assessee. Therefore, the Tribunal was justified in upholding the order passed by the CIT(A) and in setting aside the order passed by the Assessing Officer.

(iii) Hence, there was not any merit in the instant appeal. Accordingly, the appeal was to be dismissed.”