Seafarers are a category of professionals who face a lot of challenges regarding taxability of income, because of the nature of their work that requires them to be in international waters for a significant period of time and as a result, makes them classified as a non-resident as per the Indian tax residency rules (Also read:
How NRI/PIOs can decode the Indian tax residency rules & save tax)
As a result of this, there is a considerable confusion on the taxability of their salary income, whether it will be taxed in India or any other country. In this regard, as part of my study, I came across a recent decision by the Income Tax Appellate Tribunal in the case of Tapas Kr. Bandopadhyay vs. Deputy Director of Income-tax, (IT)-3(1), Kolkata as reported in [2016] 70 taxmann.com 50 (Kolkata – Trib.).
Let us study this case since it has some valuable pointers on taxation of non-resident seafarer’s incomes in India.
Facts of the case
- The assessee was engaged with B Ltd., Singapore in the capacity as a Marine Engineer.
- He worked in international waters during the relevant year and received remuneration from aforesaid concern directly in his NRE bank account in India.
- Assessee qualified as a non resident Indian (NRI) and for the financial year and declared the salary income received from the concern as exempt from tax.
Contentions of revenue:
- Income received in India was taxable in India in all cases (whether accrued in India or elsewhere) irrespective of residential status of the assessee.
- Meaning of “income received in India” is that if the place, where the recipient got the money (on first occasion) under his control, was in India, it was said to be income received in India.
- In the instant case all the income was remitted by the employer to the NRE bank account of the assessee maintained in India & hence, the assessee got the money under its control for the first time in India. Due to this, the case squarely falls within Section 5(2)(a) of the Income Tax Act and should be taxed in India.
Contentions of assessee:
- Due to his work, he was more than 182 days outside India & hence his residential status should be considered as ‘Non-resident’. He submitted passport copy to prove this point.
- Following from the above, as per Section 5 of the Income Tax Act, since his salary was received outside India and that too in foreign currency, it should not be taxable in India.
ITAT decision:
- Scheme of the Act in Section 4 as well as Section 15 is such that charge of tax is made independent of territoriality and residency and currency. The character of receipt of salary does not change by way of fund transfer from foreign company in abroad directly to NRE account of the assessee in India. Hence, income which is actually received in India is taxable in India under section 5(2)(a).
- The assessee was only trying to introduce one more layer to the entire transaction that he got the control over his money in the form of salary income in the international waters and only for the sake of convenience, he instructed the foreign employer to send the monies to his NRE account in India. What was brought into India is not the salary income but only the salary amount. But assessee submitted no evidence on record to prove that the assessee had the control over his salary income in international waters.
- Assessee has not claimed residency of any other country for the stated financial year. The income in the present case did not suffer tax in any other jurisdiction nor was it received in any other tax jurisdiction. If we accept assessee’s argument, then the assessee goes scot free from not paying tax anywhere in the world on this salary income & it would make the provisions of section 5(2)(a) of the Act redundant. A statutory provision needs to be interpreted ut res magis valeat quam pereat, i.e. to make it workable rather than redundant.
- The question that arises for consideration is can a person receive salary on high seas. The only possibility of receiving salary on board of a ship on high seas is to receive in hot currency. It is not the case of the assessee that the hot currency got deposited in the NRE account. On the other hand, the money was transferred from the employer’s account outside India to the assessee’s NRE account in India. In such circumstances, it is difficult to accept the contention of the assessee that salary was not received in India.
- The receipt in the NRE account in India is the first point of receipt by the assessee and prior to that it cannot be said that the assessee had control over the funds that had been deposited in the NRE account from the employer.
- In view of the above points, it is held that salary received in India is taxable in India in terms of section 5(2)(a) of the Income Tax Act.
My learning from this case:
Following are important learning pointers from this case as far as seafarer taxation is concerned:
- If the payment of salary is made to an Indian account & assessee cannot prove that it was received first somewhere outside India, it will be very difficult later on to contend at a litigation stage that income is NOT received but merely remitted to India
- Every year, after filing the return (Also read: Why Returning NRIs should continue filing tax returns even if no taxable income), assessee should also take a print of statement of all the banks to prove later on that income was first received in the overseas bank account & later on remitted to India. Receipt and transfer entries should be evident from the statement.
- As in the above case, the assessee’s income was not being taxed in any other jurisdiction and hence DTAA did not apply (remember, to claim DTAA benefit, you have to qualify as a resident of atleast one of the countries). If the assessee did qualify as a resident of say USA under the DTAA, then he would have had a much stronger case because the DTAA overrides the tax rules of both countries (specifically, Section 5 that has been spoken about in this case) (Also read: Taxability of salary earned in USA under India-USA DTAA)
Hope the post has been helpful to you. For personalised tax advice, reach me on contact@abhinavgulechha.com