Bombay High Court
Oceanic Contractors Inc. vs Income-Tax Officer. on 12 February, 1990
Equivalent citations: (1990)36TTJ(MUMBAI)640
ORDER
Garg, AM - This is an appeal by the assessee against the order of the CIT (A) for the assessment year 1979-80.
2. The only dispute in this appeal is against the disallowance of US $ 19,61,837 being the payment of salary by the assessee to its employees.
3. The assessee is a non-resident company. It entered into a contract with Oil & Natural Gas Commission for executing work at offshore sea beyond the Indian territories. It was to lay pipelines in the Bay of Bengal and for this purpose labour or personnel were in the sea by using the ship or vessel as the platform/standing base. A sum of US $ 19,61,837 was paid the employees which included US $ 17,18,038 debited under the head "Labour - Own employees" and US $ 2,43,799 debited under the head "Marine Equipment". Applying the provisions of section 40(a) (iii), the entire expenditure on salary was disallowed by the assessing officer as the said payment was made without deduction of tax at source. The assessee claimed before the assessing officer that no tax was payable on the payment of the aforesaid amount as the same was exempt under section 10(6) (viii) and, therefore, the provisions of section 40(a) (iii) are not applicable. This connection was rejected by the assessing officer by observing that the exemption under sec. 10(6) (viii) was available only to the employees who had rendered services in connection was rejected by the assessing officer by observing that the exemption under sec. 10(6) (viii) was available only to the employees who had rendered services in connection with their employment on a foreign ship, which services, according to him, must necessarily be on and for the ship. The services rendered by the assessees employees, according to the assessing officer, was to give exemption in respect of the crew and other employees of the ship and, therefore, they must be regular employees duly performing their normal job on the ships and not as stated by the assessee, as only the persons using the ships for performing their duties. From the nature of the work and the qualifications of the personnel, according to him, it could not by any stretch of imagination, be stated that the assessees employees were getting salary on account of rendering services on the ship. He, therefore, rejected the contention of the assessee that the payment of salary was exempt under section 10(6) (viii) of the Act.
4. The IAC in 144B proceedings gave certain directions by observing in paragraph 3 as under :
"As regards claim for salaries it is seen that services are mostly rendered within the territorial waters of India. It cannot be said that all employees are working on the vessel employed by the assessee. It cannot be covered by the term regular employees doing performance of their jobs on the ships. As regards crew members of the ships you may verify the same and allow, if eligible."
The ITO verified the details of the salaries paid by the assessee but reiterating his earlier view, the disallowance proposed in the draft assessment was maintained.
5. The claim of the assessee was also, not accepted by the CIT (A). He observed that the exemption under sec. 10(6) (viii) was meant to cover the cases of the crew members of a foreign ships which might be touching the Indian coast for a short duration in a year. In the present case, he observed, the persons to whom the salary was paid by the assessee were essentially employed for laying the pipeline in Bombay Bayline. He further observed that the fact that the pipeline was laid by them with the help of a ship did not mean that they were employed on the ship and that as the salary income was not received by them for services rendered in connection with their employment on a foreign ship, he held that their salary income was not exempt under section 10(6) (viii). Admittedly, the CIT (A) observed, the assessee did not pay any tax on the salary paid to the employees nor did it deduct tax therefrom. In the circumstances, the CIT (A) held that the disallowance of the salary of US $ 19,61,837 under section 40(a) (iii) of the Act, was justified under the provisions of law.
6. We have heard the parties and considered their rival submissions. Section 40(a) (viii) of the Act reads as under :
"any payment which is chargeable under the head Salaries, if it is payable outside India and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B."
As per this provisions, any payment which is chargeable under the head Salaries and payable outside India shall not be allowed as deduction in computing the total income of an assessee if the tax has not been paid thereon or deducted therefrom under Chapter XVII-B covering sections 192 to 206B. These sections obviously come into play when the payment made has the character of salary chargeable under the Income-tax Act. If the payment made has the character of salary chargeable as salary in the hands of the recipient, the payment of tax thereon or deduction of tax therefrom would not arise. By virtue of section 10(6) (viii), the assessee claimed that the payment was not includible in the total income of the recipient and it was, therefore, not chargeable to tax under the head salaries.
7. Section 10(6) (viii) reads as under :
"10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included -
(6) in the case of an individual who is not citizen of India.
(viii) any income chargeable under the head Salaries received by or due to any such individual being a non-resident as remuneration for services rendered in connection with his employment on a foreign ship where his total stay in India does not exceed in the aggregate a period of ninety days in the previous year."
Here also, we find that the words are "any income chargeable under the head salaries". Therefore, technically speaking, to such payment of salary, the provisions of section 40(a) (iii) might be applicable as the payment was chargeable under the head salaries in the hands of the recipient. Section 10, however, being an overriding section, any income excluded for being its inclusion in the total income of the recipient, no tax would be payable thereon and consequently no tax would be deductible therefrom as well. The question, therefore, is whether it was prohibited to be included in the total income of the assessee.
8. The facts that (i) the payment was made to the individuals who were non-residents, (ii) that it was for the services rendered in connection with the employment with the assessee, and (iii) that their stay in India did not exceed in aggregate a period of ninety days in the previous year are not in dispute. Similarly, the fact that the vessel used by the assessee was a foreign ship is also not in dispute. The only dispute is that the employment of the persons working on the said vessel/ship were not on a foreign ship. The claim of the revenue is that to get exemption under s. 10(6) (a), the employment must be as a crew man who runs the ship and not in any other way even though the persons were working on a foreign ship while laying the pipeline for Oil & Natural Gas Commission in pursuance of the agreement. The contention of the assessee, on the other hand, is that everybody who was working on the ship, in whatever capacity, would be entitled to exemption. In any case, it was submitted that in the peculiar nature of the job done which was laying sub-marine pipelines 4 metre under the sea bed, it was absolutely necessary that the same was done from the special type of ships manufactured and fitted with special equipment for this purpose. The crews working operate from the ship and almost all the work is performed only from the ship, therefore, it was further submitted that the departmental authorities have erroneously rejected the claim of the assessee. The words used in section 10(6) (viii) are "in connection with" which have been defined in the Income-tax Act. "In connection with", as defined in the Law of Lexicon, Vol. 1, 1975 Edition, page 248-II, must be considered to imply a substantial or direct connection. The word "connected" is defined in Chambers Dictionary to mean "to tie or fasten together, to establish a relation between; to associate". The meaning given by the ITO to these words is as being physically on the ship is very narrow interpretation. The object behind granting the exemption is not only to encourage the ship industry but also to encourage the workers working on high seas on a ship. In our view, therefore, the interpretation given by the departmental authorities is too narrow to be accepted. A person who is working on a ship in whatever capacity, would be entitled to the exemption so long as his operations are confined on the ship. The fact that the ship is used as a platform or a base for laying the pipeline would not make any difference. All the persons who are working on and from the ship would be having an employment receiving their remuneration for services rendered in connection with their employment on a foreign ship. We do not find anything in the language of the provisions of section 10(6) (viii) which could possible restrict the meaning of the words "employment on a ship" only to the crews who run the ship excluding the other employees on such a ship.
9. In view of the aforesaid, we are of the opinion that the payment made by the assessee to the employees, though would be income chargeable under the head salary, would be exempt under section 10(6) (viii) of the Act and, therefore, would not be assessable to tax nor the same would be subjected to any deduction at source. In such circumstances, the provisions of section 40(a) (iii) of the Act would not be applicable as the payments received by them would neither be subjected to payment of tax nor any deduction of tax therefrom. We, therefore, delete the disallowance and direct the assessing officer to allow the claim of the assessee.
10. In the result, the appeal is allowed.