A brief critique of the judgement of Kolkata bench of the Income Tax Appellate Tribunal in the case of Tapas Kumar Bandopadhay vs DDIT [2016]70 taxmann.com50(Kolkat-Trib)
The new era of the global citizen or the peripatetic Indian brings with it its unique problems at the level of taxation. The Income Tax Act, 1961, (Act) has introduced its own dose of confusion and the judicial interpretations thereunder have only served to confound the common man further.
In the case on hand the assessee, a marine engineer was employed by two overseas enterprises [Singapore entities] on board a ship for a major part of the previous year. He was thus statutorily accepted to be a non-resident for the year. This non-resident in good faith had opened an NRE account with two banks in India.
To digress, an ‘NRE account’ is simply an account which can be opened and operated only by ‘non- residents’. Its chief feature being that money from this account is freely repatriable unlike other accounts, the account can be operated from anywhere in the world (even high seas) and further as per RBI regulations interest earned on such accounts is not taxable in India.
Section 5(2) of the Income Tax Act (Act) brings to tax all income received or deemed to be received or accrued or deemed to have accrued in India.
While Section 9(1)(ii) creates a deeming fiction on what could be an accrual or deemed accrual in respect of salary received/receivable by a non- resident, there is no clear explanation in the Act with respect to amounts/income which has been received or deemed to have been received.
In the case on hand the Hon’ble Income Tax appellate Tribunal was most probably of the view that the assessee clearly did not fall within the four corners of Section 9(1)(ii) as the conditions mentioned in that subsection with regard to rendering of services in India is clearly not fulfilled. It has however refrained from commenting on the applicability or otherwise of this section. The short grounds on which the appeal was decided was;
- Income was received in India because the Singapore entity remitted the salary into the NRE account maintained by the assessee in two banks in India.
- The assessee having rendered services on the high seas was not a resident of any state and therefore he was pre-empted from seeking shelter under any Double taxation avoidance agreement.
This decision leaves many questions unanswered….
It is established law that in case of moneys paid to the banker or other agent of the assessee the time and place of payment to the banker, broker or other agent are the time and place of receipt by the assessee for the purpose of this act.
In Ogale Glass Works Ltd vs CIT 25 ITR 529(SC) it was held that if a cheque is sent by post, the receipt would be at the place where the cheque is posted if such mode of payment was at the express request of the recipient. There the assessee was a company which was carrying on business in an Indian State (outside British India) and its liability to Indian Income-Tax depended upon its receipt of money within British India. The assessee had to be paid for goods supplied to the Government of India and at his request the Government of India agreed to make payments by cheques which were drawn in Delhi on a Bombay bank and were posted in Delhi and received by the assessee in the Indian State. It was held that the post office was the agent of the assessee and that the payments were received in Delhi. The principle of that case applies equally to the facts of this case the remittances were made from a foreign bank which transferred such sums to the assessee’s NRE account. By applying the principle in Ogale’s case if we presume the Indian bank to be an agent of the assessee/marine engineer then the transfer took place in Singapore as the employer gave instructions based on its agreement with the marine engineer to its bank in Singapore /foreign territory only. If the transaction took place in Singapore ,the transmission of money in US dollars could only have taken place thereafter. In the1950s when the transactions referred to Ogale’s case took place there was no electronic transfer available. The courts therefore still held that the time and place of handing over the cheque to the post office constituted the time and place of receipt. In the present case also, applying the same principle, the time and place of clocking in the transaction at Singapore is the time and place of receipt by the assessee.
The payment was therefore received in foreign territory [place where the employer’s bank was situated] when the funds were transferred to the assessee’s name.
Further, the Hon’ble Tribunal declined relief under the Double Taxation Avoidance Agreements on the ground that the assessee was not a resident ‘of any other state’. It is not clear as to which state the ship on which the assessee was employed belonged to. As that would be the determining factor for residential status, the Hon’ble Tribunal has while ignoring a number of high court decisions applied the ratio in the case of Capt. A.L. Fernandez vs ITO [81ITD203 (Mum)(TM)] where it was established that assessee was on board an Indian vessel. It was employed by the Indian Government and as the salary was purportedly received in India the same was held to be taxable in India. The major difference being that AL Fernandez was employed by an Indian company unlike the marine engineer in question.
Assuming that the assessee was on board an Indian vessel, the assessee was admittedly a non-resident, his employers were undoubtedly non-residents; as such since the source of income and the place of service is outside India, how justified was the Tribunal in ignoring the principles of international taxation?
Further, the employers were foreign entities with no permanent establishment in India. Article 15.3 of the OECD commentary on the Model Tax Convention on Income and Capital states that remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the contracting state in which the place of effective management of the enterprise is situated. If that be so, then even if the assessee was mistaken about its state of residence why did not the Tribunal examine this aspect before applying the maxim ut res magis valeat quam pereat i.e., a statutory provision is to be interpreted so as to make it workable rather than redundant?
[The author is a Principal Associate, Direct Tax Practice, Lakshmikumaran & Sridharan, Bangalore]