2001 (12) TMI 873 - AT - Income Tax

Summary

Issues Involved:
1. Whether the salary received by the assessee from Mogul Lines Ltd. for services rendered on a ship outside Indian territorial waters can be considered as salary received for services rendered outside India.
2. How the salary should be treated for tax purposes.

Summary:

Issue 1: Salary Received for Services Rendered Outside India
The assessee, an employee of Mogul Lines Ltd., rendered services on two ships floating outside Indian territorial waters during the relevant period. The assessee initially filed a return as a "Resident" but later revised it to "Non-resident" to exclude the salary earned outside India. The Assessing Officer (AO) held that since the contract of employment was entered in India, the services were rendered per the terms of employment, and the final settlement occurred in India, the salary should be deemed to accrue or arise in India. The CIT(A) upheld this view.

Issue 2: Tax Treatment of Salary
The Tribunal noted that the floating island theory, which treated ships as part of the territory of the state whose flag they fly, had undergone changes in international law. The Central Board of Direct Taxes (CBDT) Circular No. 526 clarified that Indian ships operating beyond Indian territorial waters are not considered part of India for tax purposes. The Tribunal also referred to various decisions and the insertion of an Explanation to Section 9(1)(ii) by the Finance Act, 1983, with retrospective effect from 1st April 1979, which clarified that salary for services rendered in India is considered income earned in India.

The Judicial Member (JM) held that since the services were rendered outside India, the salary should not be considered as income earned in India. However, the Accountant Member (AM) disagreed, stating that the salary received in India should be included in the total income of the assessee, regardless of where the services were rendered. The AM emphasized that the contract of employment was entered in India, making the salary accrued or arisen in India.

Third Member Decision:
The Third Member agreed with the AM, stating that the salary received in India by a non-resident is taxable in India u/s 5(2)(a). The Explanation to Section 9(1)(ii) does not apply to services rendered outside India. The salary accrued or arisen in India due to the contract of employment being entered in India and enforceable in India.

Final Order:
In conformity with the majority opinion, the Tribunal adjudicated the issue in favor of the Revenue and against the assessee. The appeal of the assessee was dismissed.