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Dispute over disallowance of salary payment under section 40(a)(iii) for a non-resident company's employees working on a foreign ship for laying pipelines in the Bay of Bengal. Detailed Analysis: 1. The dispute in this case revolves around the disallowance of US $19,61,837 paid by a non-resident company to its employees working on laying pipelines in the Bay of Bengal. The assessing officer disallowed the expenditure under section 40(a)(iii) as tax was not deducted at the source. The company claimed exemption under section 10(6)(viii), stating that the payment was for services on a foreign ship. However, the assessing officer rejected this claim, arguing that the employees were not working on the ship but using it as a platform for their job. 2. The Income-tax Appellate Tribunal (ITAT) considered the provisions of section 40(a)(iii) which disallows any payment under the head 'Salaries' if tax has not been paid or deducted. The company claimed exemption under section 10(6)(viii) for salary payment to non-resident employees working on a foreign ship for a limited period in India. The ITAT analyzed the definition of "in connection with" employment on a foreign ship and concluded that all employees working on and from the ship are entitled to the exemption, regardless of their specific roles. 3. The ITAT found that the employees in question were non-residents, rendering services in connection with their employment on a foreign ship, and their stay in India did not exceed ninety days. The tribunal disagreed with the narrow interpretation of the revenue authorities, emphasizing that the exemption under section 10(6)(viii) aims to encourage workers on high seas. Therefore, it held that the payment made by the company to its employees was exempt under section 10(6)(viii) and not subject to tax or deduction at source. 4. Consequently, the ITAT allowed the appeal, overturning the disallowance of the salary payment under section 40(a)(iii) and directing the assessing officer to accept the company's claim. The tribunal's decision was based on the broader interpretation of "employment on a foreign ship" and the objective of encouraging workers in the maritime industry. 5. In conclusion, the ITAT's judgment clarified the applicability of sections 40(a)(iii) and 10(6)(viii) in the context of salary payments to non-resident employees working on a foreign ship. By interpreting the provisions liberally to promote the maritime industry, the tribunal ruled in favor of the company, highlighting the importance of considering the nature of work and the employees' connection to the ship for determining tax exemptions.
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