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TMI Blog2001 (12) TMI 873X X X X Extracts X X X X X X X X Extracts X X X X ..... ship Lok Nayak from 1st May, 1982 to 9th Sept., 1982 and on Lok Vinay from 15th Oct., 1982 to 31st March, 1983. On these dates abovenamed ships were floating outside the territorial water of India. It is mentioned on the certificate dt. 27th July, 1983, issued by the Mogul Lines Ltd. that during this period, the assessee rendered services outside India. On 31st Sept., 1983, the assessee filed its return of income in the status as Resident . Subsequently, the return was revised and the status was taken as non-resident. The amount of salary as reflected in the original return was consequently reduced on the ground that the assessee had rendered services outside India from 1st May, 1982 to 9th Sept., 1982, and from 15th Oct., 1982 to 13th March, 1982. The AO held that the claim of the assessee was not tenable since the employer of the assessee M/s The Mogul Lines Ltd. was a Central Government undertaking. The contract of the employment was entered in India. The services had been rendered by the assessee in accordance with the terms of employment. The final settlement of accounts regarding the payment had also been settled in India. The assessee was on board of an Indian vessel fl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it is virtually a floating island. This theory still holds good in the International law. The learned Departmental Representative further submitted that in the famous Law of the Flag case of National Maritime Union and McCulloch v. Sociedad National de Marineros de Honduras, 372 U.S. 937, 83 Sup. Ct. 877. 9 L.Ed. 2d 767 (1963), the Supreme Court of the United States, upheld the 4000 year old rule of International law that the law of the flag governs in matters relating to seamen on board a ship. In this background, it was argued that the Tribunal took a correct view in the case of Capt. A.L. Kapoor (supra) and the issue in the present case may be decided accordingly. 9. It was further submitted that the words occurring in Section 9(1)(ii), earned in India , ought to be interpreted as arising or accruing in India . So long as the liability to pay the amount under the head Salaries arises in India, Section 9(1)(ii) can be invoked. For this preposition, the learned Departmental Representative relied on the case of CIT v. S.G. Pgnatale (supra). It was stated that in the instant case the contract of employment was in India. The final settlement of account was also made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the aforesaid discussion, it appears that the law has undergone change on this aspect. The floating island theory though remained alive even after the flux of 4000 years, but the undercurrent of the theory passed through many vicissitudes. Correct profile of law emerges only when things are decided in consonance with the principles of justice. Law is not a brooding omnipotence in the sky, but a pragmatic instrument of social order. It is an operational art controlling economic life, and interpretative effort must be imbued with the statutory purpose. The mariners of Indian origin who worked on the foreign ship got favoured tax treatment in view of the floating island theory. Those who worked on the ships belonging to their own country had difficulty in obtaining the tax concessions. Mariners working on foreign ships while in high seas were treated as rendering service in a foreign country, whereas the mariners rendering service on Indian ships while in high sea were treated as rendering service in India. This caused disparity in the tax treatment. 14. The CBDT made a clarification to remove such disparity. We reproduce the relevant CBDT circular: Clarification regarding l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hom salary is paid. Since, as explained above, in the case of members of crew of foreign-going Indian ships, who are not likely to be in India--for a period or periods exceeding 182 days in a year, income which accrues or arises outside India and is also received outside India is not liable to tax in India, the shipping companies and other persons responsible for paying salary to such members of crew may take these factors into account while computing the amount to be deducted as tax and deduct only so much of tax as would be chargeable on the estimated income liable to tax in India. If the shipping company or other person responsible for paying to such members of crew subsequently finds that any person who was earlier considered as not likely to be resident in India and deduction of tax at source was made on that basis is not likely to be resident in India, the shipping company or the other person responsible for making the payment, may increase the deduction so as to adjust any deficiency arising out of an earlier short-deduction or non-deduction during the same financial year. 15. In view of the above, the Indian members of the crew of foreign-going Indian ship would be non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertaking. He was engaged to utilise his services on the ships which were floating in the outside territorial water of India during the relevant previous year. The certificate issued by The Mogul Line Ltd. certifies that the assessee has rendered such services outside India. On that basis, it was claimed that the assessee is a non-resident and, therefore, the income that accrued to the assessee in respect of the services rendered outside India is not includible in his total income. The learned JM has clearly brought out on record the various arguments taken by the parties and accepted the assessee's contention. In taking that view, reference is extensively made to Introduction to International Law by J.G. Starke (Eighth Edition) and also the circular issued by the CBDT bearing No. 526E and the provisions of Section 9(1)(ii) are also discussed. 3. In my opinion, there is no dispute between us as regards the residential status of the assessee. The assessee, in our view, is non-resident as his stay in India does not satisfy the test laid down for determining the residential status under Section 6 of the IT Act, 1961. In my opinion, the reference to the International law an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficance, however, only in relation to non-resident for, if a non-resident were to be charged on accrual or arisal basis, such portion of his income as accrues or arises abroad will be exempted from charge. If the income is received in India, it should be included in the total income irrespective of where the income accrues or arises. The expression received in India does not find elaboration in the IT Act except as the extension or inclusion of the income deemed to be received , which is dealt by Section 7 of the IT Act, 1961. In the case before us, the assessee has received the salary in India and, therefore, it should have been included in the total income of the assessee. I think, from the discussions made by the two Revenue authorities in their orders and from the facts of the case, there is no dispute on this aspect of the matter that the income is received in India. The receipt of salary is in India by or on behalf of the assessee. Now I come to the aspect of accrual or arisal of income. 'Accrue' means arise or spring as a natural growth or result, to come by way of increase (Webster's Dictionary). 'Arisen' means coming into existence or notice or prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration, which is a payment for services rendered, arises from the contract of employment and the place where the contract is made determines the locality of the source. In CIT v. S.G. Pgnatele (1980) 124 ITR 391 (Guj), the Gujarat High Court was concerned with an assessee who was an employee of a French company and whose services were rendered in India, The salary was paid outside India by the French company. Although the services were rendered in India, the Gujarat High Court took a view that the salary was not earned in India. In other words, a very strict interpretation was given to the words earned in India . The amendments were made by the Finance Act, 1983, w.e.f. 1st April, 1979, by inserting an Explanation to declare that the salary payable for services rendered in India shall always be regarded as income earned in India. The Explanation concerns with the services rendered in India and does not concern itself with the services rendered outside India. In other words, the Explanation does not deal with the payment of 'salaries' in India for the services rendered outside India. Therefore, in my view, the Explanation to Section 9(1)(ii) does not bring about any change ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ship Lok Nayak from 1st May, 1982 to 19th Sept., 1982, and on board, Lok Vinay from 15th Oct. 1982 to 31st March, 1983. During this period, the ships were floating outside the territorial waters of India. As per the certificate issued by Mogal Lines on 27th July, 1983, during the aforesaid period, the assessee had rendered services outside India. 3. In the return filed by the assessee, the status was claimed as that of resident but subsequently, a revised return was filed showing the status as non-resident. Consequently, the salary income received from Mogal Lines was reduced to exclude the salary. The AO, however, took the view that the assessee's employer was a Central Government undertaking that the contract of employment was entered into in India, that the services were rendered by the assessee in accordance with the terms of employment, that the final settlement of accounts regarding the payment had also taken place in India, that the assessee had rendered services on Board an Indian vessel carrying the flag of India and, therefore, the payment of salary has to be deemed to have accrued or arisen in India. The entire salary income was, therefore, brought to tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation was inserted by the Finance Act, 1983, w.e.f. 1st April, 1979, to nullify the effect of the judgment of the Gujarat High Court in the case of CUT v. S.G. Pgnatale (1980) 124 ITR 391 (Guj), wherein it was held that an employee of a French company, who rendered services in India, was not taxable in respect of the salary which was paid outside India, because the salary was not earned in India. According to the learned AM, the Explanation is concerned with the services rendered in India and does not concern itself with services rendered outside India. In other words, the Explanation does not deal with the payment of salaries in India, for the services rendered outside India. In this view of the matter, the learned AM held that Section 9(1)(ii) read with the Explanation did not apply to the present case. In his view, as already noted, the income accrued or arose in India and that position is not affected by the fact that the services were rendered outside India. He, therefore, held that the salary was includible in the assessment and accordingly dismissed the assessee's appeal. 7. The appeal was posted before me from time to time. If was adjourned at the request of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rue or arise in India. The Explanation does not concern itself with a case where the assessee renders services outside India, as in the present case, where the assessee has rendered services aboard the Indian ships while they were outside the territorial waters of India. The services were thus rendered by the assessee outside India, since the ships can no longer be considered as floating island. There is, therefore, no question of deeming the salary received by the assessee as having accrued or arisen in India. The effect of the Explanation is that it is no longer open to an assessee to say that though he rendered services in India, since the contract of employment was entered into outside India, the salary cannot be said to have accrued or arisen in India. In such a case, the Explanation deems the salary as having accrued or arisen in India, notwithstanding that the contract of employment was entered into outside India. In the case of Pgnatale (supra), the Gujarat High Court was concerned with an assessee who was an employee of a French company and whose services were rendered in India. The salary was paid outside India. The High Court took the view that the salary was not earned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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