Note – This post may be dated & tax position may have changed. Please stay tuned for update of this post. In case of personalised tax advice, contact me on contact@abhinavgulechha.com
Some time back, I had written a post on the 2016 ITAT judgement in the case of Tapas Bandopadhyay Link Over the course of a few months, this judgement has had a powerful effect with the Income Tax Department, in a clear overreach, slapping tax notices on seafarers for past years – read this ET news story Link
In the meanwhile, thanks to GoogleJ, my post got some traction among the seafarer community and I received queries from many seafarers enquiring what should be done in these cases.
I also contacted some very senior Chartered Accountants on the sidelines of a NRI taxation seminar to get their views on this judgement and what NRIs can do. I also studied some past judgements on seafarer taxation to get a holistic view of the issue.
Hence, please treat this post as a continuation of my earlier post where I will point out the main conclusions of other judgements as well as a small FAQ on my views on the issue.
Asides: If you are a CA, I sincerely hope that list of judgements presented here will help you to reduce your search time and build a strong case for your client. Also, if I have missed any judgement, I will appreciate if you can point it out in comments section along with citation so that I can analyse & post it here as well.
Analysis of some key judgements on seafarer taxation
Below are some of the judgements I could find, and their main points/outcomes/conclusions (judgements are listed in date wise from oldest to newest)
#1: Commissioner of Income-tax v. Avtar Singh Wadhwan [2001] 115 TAXMAN 536 (HC BOM.)
This is a very important judgement & especially the fact that it has been issued by the High Court which is one level up than ITAT which has issued the Tapas Kr. judgement. It says that even if a seafarer is employed by Indian company (in this case, SCI) & working in international waters, income cannot be said to accrue in India. A combined reading of Section 5,6 and 9(1)(ii) shows that the relevant test to be to be applied is “where the services have been rendered”. Hence, in this case, it was held that the salary received by the assessee from the SCI during the relevant year was not taxable in India.
It may be noted here that the regulatory position on residential status esp. after 2015 Circular by CBDT now is also clear: time spent for services rendered in international waters as evidenced by the continuous discharge certificate will not be counted as the days spent in India.
#2: Capt. A.L. Fernandes v. Income-tax Officer [2002] 81 ITD 203 (ITAT MUM.) (TM)
This is a very detailed and lengthy judgement where the situation was the same – seafarer was employed by Govt. undertaking and he was rendering services in India. His contract of employment, final settlement of accounts etc. was done in India itself. On that logic, the ITD contended that the salary income “accrues” in India hence is taxable in India.
Now, how it happens is that ITAT consists of a judicial member and an accountant member. In this case, the judicial member was of the view that since salary is rendered outside India, it is not taxable in India. However, the accountant member expressed a reverse view: since the salary has been received in India, it should be taxed In India, irrespective of where the services have been rendered.
In such a situation, reference was made to a Third Member who sided with the view of Accountant Member & held that salary received by the assessee in India was taxable.
#3: Income-tax Officer, (International Taxation), Ward-2(1), Bangalore v. Dylan George Smith[2009] 2009 taxmann.com 1017 (Bangalore – Trib.)
In this case, the assessee an NRI, was employed with a foreign company, engaged in management of crew and vessels on a ship which was in international waters. The Assessing Officer noticed that the contract of employment was executed by an Indian agent. The receipt of assessee’s salary was routed through his bank account with the Bank of India.
As the contract of employment determined as to where income would accrue, such income accrued to the assessee in India. The assessee submitted that he was not an employee of Indian agents but of the Foreign Company, and that his income had accrued outside India and was also received outside India on board of the ship.
The Assessing Officer however, rejected the explanation furnished by the assessee and concluded that the said income fell under the purview of section 5(2) and hence taxable.
The Tribunal rejected the contention of ITD and said that assessee was employee of foreign ship & Assessing Officer failed to appreciate the fact that Mumbai was acting as only an recruitment agent of their principal, Foreign Company and not as an employer of the assessee. Thus, the order of CIT(A) was correct and in accordance with law. Payment towards salary was first received by assessee on board of ship and later, as per his instruction, remittance of a portion of salary in form of ‘allocation’ had been made to NRE account of assessee in India and hence cannot be said to be received in India. Hence, the salary was not taxable in India.
#4: Director of Income-tax (International Taxation) v. Prahlad Vijendra Rao [2011] 198 TAXMAN 551 (HC Kar.)
In this case, the assessee had earned salary during his stay outside India for a period of 225 days for working on board of a ship which was outside shores of India. The Assessing Officer held that the amount received by way of salary by the assessee was income deemed to have been received in India as per section 5(2)(b) and, as such, same was brought within the taxable income. The High Court held that the assessee was working outside India for a period of 225 days and the income in question earned by the assessee had not accrued in India and would not be deemed to have accrued in India. As such, the contention of the revenue could not be accepted and salary cannot be held to be taxable in India.
#5: Arvind Singh Chauhan v. Income-tax Officer, Ward 1(2), Gwalior [2014] 42 taxmann.com 285 (Agra – ITAT)
In this case, assessee employed in a Singapore based company and worked on merchant vessels and tankers plying on international routes. In addition to this salary income, the assessee also derived income from bank interest and received pension from Indian Army, his former employer.
The assessee’s stay in India in the relevant previous year, was less than 182 days, and that the residential status of the assessee is ‘non-resident’. In the income tax return filed by the assessee, the salary received by the assessee from employer was not offered to tax on the ground that the salary income in respect of ship crew was accruing and arising outside India.
The Assessing Officer was of the view that the assessee’s explanation could not be accepted because section 6(5) provides that where a person’s status is resident for one of the sources of his income, his status for all the sources of income is to be taken as resident, and because assessee’s status for pension and interest, by his own admission, was that of ‘resident’, an inference based on assessee having shown pension and interest income as his taxable income in the return of income, the status of the assessee for all his sources of income is required to be taken as ‘resident’.
The Assessing Officer further observed that the assessee was a resident in India for one of the sources of income i.e. pension, because he was a Government employee and is getting pension. The Assessing Officer was also of the view that since appointment letter was issued by foreign employer’s agent in India, it is to be deemed that the salary income accrued in India.
The Assessing Officer further took note of the fact that the salary cheques were credited to assessee’s account with HSBC Bank. It was in this backdrop that the salary received from foreign employer was brought to tax in the hands of the assessee
The Tribunal in its order, stated that the salary received in India was NOT taxable to the assessee for below mentioned reasons:
- It is wrong to say that where a person’s status is resident for one of the sources of his income, his status for all the sources of income is to be taken as resident. This wording was there in the Act, when there were separate financial years for different sources of Income. This provision in the Act now stands redundant.
- The ITAT relied on the earlier judgement in case of Avtar Wadhwan and held that the test of accrual of salary income is where the services are rendered
- As regards receipt of salary income in an Indian bank account, Tribunal held that ‘receipt’ of income refers to the first occasion when assessee gets the money in his own control – real or constructive. What is material is the receipt of income in its character as income, and not what happens subsequently once the income, in its character as such is received by the assessee or his agent. The assessee was in lawful right to receive these monies, as an employee, at the place of employment, i.e. at the location of its foreign employer, and it is a matter of convenience that the monies were thereafter transferred to India. 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
My view on these above judgements
I admit that the conclusions I have picked up from these judgements cannot be considered sacrosanct. One needs to read the judgement in full, understand the context and see if the judgement applies to one’s own case. However, the utility of above listing is that we can draw some inference and one such inference can be clearly drawn: there are judgements that go both ways: for example, while Capt. AL Fernandes is clearly siding towards ITD, judgements like Arvind Chauhan and Dylan George Smith side towards the assessee. So, there is NO one clear view that emerges.
My personal view is completely in line the thought that a mere receipt of salary in Indian NRE account does not make it taxable in India. Assessee received it out of India and transfer to Indian account is a mere allocation basis an implicit direction by assessee.
However, what good is this view if the ITAT holds otherwise, as it did in Tapas Kr. case? Still, there is a lot of merit to pursue each such case in litigation because taxing such incomes in India is unjustified and at the same time, the legal position is also divided in this matter, as we can see from contradicting orders as listed above.
Way forward on Seafarer taxation:
I have listed down my thoughts on what could be a way forward approach for the seafarer community on taxation aspects post Tapas Kr. judgement & in the backdrop of overreach by IT department in terms of issue of notices:
- Tapas Kr. judgement CANNOT become a binding precedent for other courts deciding on such cases because there are clear cut judgements (e.g. Arvind Chauhan, Dylan George Smith, etc.) where a 180 degree opposite view has been taken and salary received in India has been held as not taxable.
- The case in point of Tapas Kr. & any other such case should be challenged till the highest level – it is better that SC clears the air around the issue (this way or that way) AND THAT WILL BECOME THE PRECEDENT for all lower courts, be it HC or ITAT.
- Despite clear verdicts, it is very natural for the ITD (and this is what you expect from them) to go after seafarers on the back of this judgement. Understand that ITD also has targets to fulfil.
- I can understand and empathise with the seafarer community on this issue. But I feel only once you ACCEPT it with a calm mind and don’t tense yourself with the right and wrong of this overreach of the ITD, only then you can evaluate all your options and take a clear decision.
- There is nothing to be frightened if you get a tax notice. Most of the times, it is standard language. Know that like you, many others would have received it. What is important is your RESPONSE to the notice. Read this helpful post in Livemint Link
- Watch out for tax notice. If you miss the e-mail/snail mail communication from IT department and fail to respond within stipulated time, there is a penalty of Rs. 10,000 & the risk that AO can proceed to do a best judgement assessment u/s 144 of the Income Tax Act.
- As regards imposition of penalty, there is no need to fear. Even in the worse case, the AO will not be able to succeed in imposing penalty for “concealment of income” if you have disclosed this income in exempt income in your tax return.
- The worst that can happen is that the IT authorities can raise a notice for last 6 years however note that government has by a recent amendment in Finance Act, 2016 has virtually extended it to your date of birth in a very discreet way: this is a very controversial development and remains to be tested in courts so very early to say anything!
- Seafarers should not take knee jerk reaction of moving their money/investments in India to tax havens/foreign locations or disturb their saving and investment plans for long term financial goals – first let the air settle on the case. One thing that can be done is to open an overseas bank account and ask for salary to be remitted to that account & then transfer amount from that account to India. I have discussed that option in this post.
Some suggestions for Seafarer Unions
The seafarer unions may consider below 3 actions to protect the financial interests of the seafarer community:
- Make a formal representation to the Finance Ministry and ask it to issue a clear cut instruction to CBDT, which in turn should issue a clear circular to field officers from blindly sending notices.
- Help Mr. Tapas Kr. & others also to fight the case to the highest level.
- Frame a panel of credible CAs across cities who practise tax litigation and put it on the website so that it is easy for the seafarer to find and approach the CA for liasioning with ITD in case he gets a notice. Union can also negotiate and standardise the fee that CA will charge in such cases.
- Put out on the website clear cut directions on what should a seafarer do in such cases – how to respond to the notice, what actions to take etc. (this can be prepared in consultation with CA)
Open overseas bank account – Some thoughts
- At the time of opening the account, you need to be aware of non-resident taxation in that country – if it is the same as in India which taxes income “received in India”, it’ll be the same case & hence not of much use.
- Also check the succession laws of the country – for e.g. in UAE, the bank accounts are frozen within hours after death and in case there is no registered will, the UAE courts rely on Sharia law for division and the whole process can be very complex
- As far as Indian FEMA regulations are concerned, they allow a non-resident to open bank accounts outside India and he can even retain those bank accounts after becoming a resident, so no issues on that front.
- If you credit salary outside India & then remit to an Indian account, income tax authorities cannot tax it as the settled principle of law is that receipt is taxable, not remittance. So, you can legally escape the receipt based taxation in India by doing this way. And from the NRE account, you can make the investments in India as per your choice. However, note that “income” from those investments will be taxable to you in India.
- As long as you are a resident as per FEMA, you can hold the money in overseas account & there is no compulsion to bring it to India. You can even buy assets like real estate, shares etc. overseas from that money and it will not be questioned in India as long as you hold NRI status. You can also use this money to fund your financial goals in foreign currency e.g. your child
- Make it a point to transfer max. permissible amount (after keeping mandated min. balance) at the earliest from overseas account to Indian NRE account.
- Maintain salary slips & bank statements of overseas & Indian bank accounts to show clear trail of funds.
- Last but not the least; let your wife know of the overseas bank account. Don’t forget to nominate her in that account.