The view stated in the title of the article (supra) has been expressed by the C- Bench of the C- Bench of the ITAT, Kolkata, in the case of Tarun kumar sarkar v. DY.Director Of Income -3 (1) , Kolkata 2017 Taxpub (DT) 3872 (Kol ‘C’ –Trib): (2017 ) 166 ITD 125 (Kol-Trib).The decision has been picked up for this write –up because the AO’s decision in the case is contry to the CBDT’s Circulars No.13/2017, dt.11-4-2017 and No.17/2017 dt.20-4-2017 issued ofter the assessment.
2.Facts of the case
The assessee,a Marine Engineer by profession , for the AY 2011-12 filed his return of income ,showing an income of Rs.2,09,021 in the status of a ‘non–resident ‘.He was engaged with M/s Mercator Lines Ltd ., Singapore, as a Marine Engineer .During the previous year ,relevant to the AY 2011-12, he was paid a sum of Rs.23,71,727 by the employer company on different dates for his services as a seafarer by credit to his two NRE accounts in india with HSHC Bank. The assessee did not show this amount as income in the return as income in the india filed in the status of a ‘Non-Resident’. The assessee’s case was that this income was received from outside india in foreign currency and,therefore, claimed as exempt.The assessee stated that he used to get his contract to do services with india/foreign shipping company through Indian agent and that contrats were executed in india duly signed by the agent in india and himself before joining the ship. But, he was to float on foreign water to render services during the courses of voyage and accordingly, when he will stay more than 182 days outside india or on foreign water,his residential status will be treated as ‘Non –resident’ as per provision of law and his salary income ,which are received out side india in foreign currency also will not be taxable under section 5 of the Act .The AO accepted the residential status of assessee as non-resident after verification of copy of passport and other details submitted . The assessee claimed that as per provisions of law ,salary income , which is received outside india in foreign issued show cause notice to the assessee as to why the remuneration received in india should not be brought to tax in terms of section 5(2)(a) of the Act. However, before examining the assessee’s defence to the AO’s notice ,it is relevant to examine the provisions of section 5(2)(a) of the Income Tax Act,1961 (Act).
3. Section 5(2)& (b) of the Act
Clauses (a) and (b) of section 5(2) of the Act read as under –
“(2) Subject to the provisions of this Act ,the total income of any previous year of a person , who is a non-resident, includes all income from whatever source derived , which-
(a) is received or is deemed to be received in india in such year by or on behalf of such person ;0
(b) accrues or arises or is deemed to accure or arise to him in india during such year”
Explanation 2 to section 5(2) provides that income,which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in india.
4.Analysis of section 5(2)(a)
From the foregoing extract of section 5(2)(a),it could be seen that section 5 of the Act provides for charge of income tax on accrual or receipt basis . Explanation 2 to section 5(2) provides that if an income has been subject of taxation on accrual basis , it cannot again be taxed on receipt basis. The section ,however , does nit give any indication as to in respect of what income ,the charge shall be on the receipt basis and on what income the charge shall be on accrual basis . Obviously , this would depend on the factual matrix.
5. Appraisal of the Tribunal’s decision
With the above background of legal provisions, the tribunal’s decision can be examined.
According to the AO, the provisions of section 5(2)(a) of the Act state that income from whatever source derived, which is received in india in such year by or on behalf of such person shall be included in the total income of any previous year of such person. He further observed that the said sextion does not mention anything about Indian currency. The section specifically states that any income received or deemed to be received in india taxable in india.He observed that the law states that the income received in india is taxable
In india in all cases (whether accrued in india or elsewhere), irrespective of residential status of the assessee. He also observed that it is significant to know the meaning of income received in india . if the place where the recipient gets the money (on first occasion) under his control ,is in india,it is said be income received in india. In the instant case ,all the income was remitted by the employer to the bank accounts of the assessee maintained in india .therefore, the AO added a sum of Rs .23,71,727 as income chargeable to tax in india. In support of his proposition , he placed of Capt . A.L.Fernandes v. ITO (2002) 81 ITD 203(Mum) (TM) whrerin it was held that teh salary received by the assessee in india was taxable under section 5(2)(a) of teh Act.
(ii)CIT (A)’s decision
The assessee claimed before the CIT (A) that teh AO’s decision is wrong,interalia, on the ground that he was under employment of a foreign company and serevices were rendered outside India. For The services rendered by the assessee outside India ,the entire payment of salary made by the foreign company in US$ and remittance was made to the NRE account of the assessee in india . The meaning of section 5(2) (a) or the Act. Should be interpreted only in the context of income received in india currency in india.There is a distinction between receiving money and transfer of money . The distinction between receiving money and transfer of money.the distinction is that where a foreign company makes payment to the non-resident for services rendered outside india , the foreign currency to the assessee who is a non- resident and the money in foreign received by the assessee not in india as because the point po payment by the company is in foreign land & the point of receipt by the assessee should be taken from the of payment. Mere remittance or transfer of the payments by the foreign co in the NRE account of the assessee in india that also in foreign exchange shall not be considered as income received in india & larger interpretation to the section would render it otiose.
The CIT (A) did not feel convinced with assessee (appellant before him) and confirmed AO’s order . Hence ,the assessee filed appeal before the income tax Appellate Tribunal (Tribunal ,for short,in later discussion).
(iii) Tribunal’s decision
The Tribunals has decided the appeal in favour of the case of the assessee , inter alia , on the following grounds.
(i) Thuogh the third Member’s decision in the case of capt .A.L.Fernandes v. ITO (2002) 81 (Mum) (TM), could be said to support the AO’s case , but More important are the CBDT’s Circulars (infra), which read as under and are binding on the AO’s:-
“Section 5 of the act –income- Accrual of –Clarification regarding liability to income tax in india for a non-resident seafarer receiving remuneration in NRE (non –resident external) account maintained with an Indian Bank
Circular NO. 13/2017 (F.No500/07/2017- FT & TR –V) dt 11-4-2017 (as corrected by Circular No 17/2017(F.No 500/07/2017-FT& TR- V) dt.26-4-2017)
Represent have been received in the board that income by way of salary received by non- resident seafarers for services rendered outside india on-board foreign ships,are being subjected to tax in india for the reason that the salary has been received by the seafarer.
2. The matter has been examined in the board. section 5(2)(a) of the Act provides that only such income of a non- resident shall be subjected to tax in india that is either received in india. It is hereby clarified that salary accrued to a non-resident seafarer for services rendered out side india on a foreign going ship (with indian flag or foreign flag) shall not be included in the NRE account maintained with an indian bank by the seafarer".
"section 5 of the act - income -accrual of - clarification regarding liability to income - tax in india for a non-resident seafarer receiving remuneraton in NRE (non-resident external) account with an indian bank - Corrigendum to circular NO.13/2017(F.NO.500/07/2017-FT&TR-V) dt.11-4-2017) Circular NO.17/2017(F.NO.500/07/2017-FT&TR-V) dt. 26-4-2017)
In the 4 of the paragraph No. 2 of the captioned circular, the words "Foreign Ship " may be "foreign going ship (with Indian flag or foreign flag)".
(iv) Final summing up by the tribunal
According to the Tribunal, a perusal of the Circulars reffered to above shows that salary accrued to a non-resident seafarer for services rendered outside india on a foreign going ship (withindian flag or foreign flag) shall not be included in the total income merely because the said salary hsa been crtedited in the NRE account maintained with an indian bank by a seafarer.Remittance of salary into NRE account maintained with an indian Bank by a seafarer could bea two types:
(i) employer directly creditng slary to the NRE account maintained with an Indian bank by the seafarer '
(ii) employer directly creding salary to the account maintained outside India by the seafarer transfering such money to NRE account maintained by him in india .the latter remittance would be outside the purview of provisions of section 5(2)(a) of the Act as what is remitted is not 'Salary income' but a mere transfer of assessee's fund from one bank account to another ,which does not give rise to 'income'.It ios not clear as to whether the expression 'merely because ' used in the Circular refers to the former type of remittance or the latter.To this extent, the circular is vague.
However, giving the benefit of doubt to the assessee ,the Tribunal has said that inthe case before it, the employer has directly credited the salary for services rendered outside India into the NRE bank account as it does not specify as to whether the circular covers either of the situations contemplated above. Hence, we deem it fit to give the benifit of doubt to the assessee by holding that the circular covers both teh situations referred to above. The result of such interpretation of teh circular would be that the provisions of section 5(2)(a) of the Act is rendered redundant. Be that as it may,it is well settled that the circulars issued by CBDT are binding on the revenue authorities . This position has been confirmed by the Apex Court in the case of Commissioner of Customs v.Indian Oil Corpn .Ltd .2004 Taxpub (DT) 1391 (SC) : (2004) 267 ITR 272 (SC) wherein their Lordships examined the earlier decisions of the Apex Court with regard to binding nature of the circulars and laid down that when a circular issued by the Bourd remains of the circulars issued by the Board remais in operation then the revenue is bound by it and cannot be allowed to plead that it is contrary to the terms of the statute.Accordingly,the grounds raised by the assessee are allowed.Hence the Tribunal allowed the assessee’s appeal.
Logically also,the Tribunals decision seems to be correct The salary accrued to the assessee for services rendered outside territorial waters when his status was that of non- resident, about which there is no dispute .The salary having accrued outside territorial waters, whether he rerceives it so on his behalf should make no difference.If at all, it could only be a technical non-compliance, for which the assessee need not be subjected abroad when it is squarely covered by teh CBDT’s circulars. Hence,it is respectfully said that the Tribunal has reached to a correct conclusion though through a circuitous route.
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Recently the Delhi high Court in Bostom Scientific India (p) Ltd.v.Asst.CIT 2017 Tax Pub (DT) 3985 (Del –HC) has give it’s verdict regarding allowability of expenditure incurred by pharma companies on sponsoring medical conference in and outside India. The learned author analyses the impugned issue in the light of this recent verdict.
It is general practice of pharma companies to sponsor and conduct medical conferences in & outside India and for this purpose these companies also make arrangements for travel and accommodation of doctors attending the conferences. In a recent past, a serious controversy arose as regards allowability of expenditure incurred b pharma companies for organising such conferences. These expenditure incurred by pharma companies for organising such conference.these expenditure are claimed to be allowable as business expenditure for being incurred for business purpose, however, the department tends to disallow the same by invoking Explanation 1 to section 37 (1).
The Finance (No. 2) Act, 1998 has inserted an Explanation to section 37(1), with retrospective effect from 1-4-1962, so as to clarify that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.
The pharma companies incr expenditure to sponso and conduct doctors’ conferences , to distribute its product amongst doctors as free samples, to give gift articles to doctors , etc. These expenditure are classified as advertisement and sales promotion expenditure and claimed to be allowable on the ground of being incurred wholly and exclusively for the business purposes.
The Medical council of India in excersise of its statutory powers amended the Indian medical Council (Professional Conduct, Etiquette and Ethics) Reguations, 2002 (the Regulations ) on 10-12-2009 imposing a prohibition on the medical practitioner & their professional associations from taking any gift travel facility , hospitality, cash of monetary grant from the pharmaceutical and allied health sector industries.
Section 37(1) of the Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expenses is laid out/expended wholly or exclusively for the purpose of business income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However,the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law.
Thus the of any expense incurred in providing above mentioned or similar freebies in violation of the provisions of Indian medical Council (Professional Conduct Etiquette and Ethics ) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act beingan expense prohibtited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector industries or other assessee which has provided aforesaid freebies and claimed it as a deductable expense in it’s accounts against income.
It is also clarified that the sum equivalent to value of freebies enjoyed by the aforesaid medical practitioner or professional associatiosns is also taxable as business income or income from the other sources, as teh case may be,depending on the facts of each case.The assessing officers of such medical practitioner or professional associations should examine the same and take an appropriate action.
However,the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations,2002 which has been amended on 10-12-2009 prohibits medical practitioners and their professional associations from taking any gift, travel facility, hospitality, cash or monetary grant from the pharmaceutical and allied health sector industries.
Thus, the expenditure incurred on freebies are disallowed on the ground of being incurred in violation of the provision of Indian medical Council ( Professional Conduct, Etiquette and Ethics) Regulations, 2002.- circular No. 5/2012,dt.1-8-2012.
In live Healthcare Ltd. v. DCIT (2016) 161 ITD 63 (Mum),the Mumbai Bench of the Tribunal held that the expenditure on foreign travel and accomdation of doctors and their spouses was incurred with the intent and the objective of profiteering form the distribution and entertainment that had a direct nexus with promoting the sales and profitability which made such expenditure violative of the provisions of the said regulations of 2002.It held that the expenditure was incurred to seek favours from the doctors by way of recommendation of the company’s product which was an illegal gratification ,was against public policy,was unethical and was prohibited by law. Accordingly,the expenditure in question was liable for disallowance.
However in PHL Parma (p) Ltd. v. ACIT (2017) 163 ITD 10(Mum),the decision was given in favour of the assessee by observing that the code of conduct has meant to be followed and adhered to by the medical practironers and doctors alone and did not apply in any manner to pharmaceutical companies. The Indian Medical Council did not have any jurisdiction nor had any authority upon the pharmaceutical companies and could not have prohibited such companies in conduct of their business. The CBDT in issuing Circular No. 5, dt. 1-8-2012 had enlarged the scope of the said Regulations by applying it to the pharmaceutical companies without any enabling provisions to do so. Further the circular in any case could not be reckoned retrospectively i.e., it could not be applied before the date of its issue, i.e., on 1-8-2012.
Thus the expenditure incurred by the assessee company was in the nature of sales and business promotion and was to be allowed; the gift articles bore the logo of the assessee and could not be held to the freebies,the free samples proved the efficacy of the products of the products of the company and again were not in violation of the said Regulations framed by the Medical Council of India.
In Syncom Foundations (I) Ltd. ( IT PPEAL Nos. 6429 & 6428 (Mum) of 2012, it was observed that CBDT circular would not be applicable in the assessment years 2010-11 and 2011-12 as it was introduced w.e.f. 1-8-2012. Similarly it was held in UCB India (P) Ltd.v. ITO (IT Appeal No. 6681 (Mum) of 2013, dt 13-5-2016), that the CBDT circular colud not have a retrospective effect.
In Boston Scientific India (P) Ltd v. Asstt. CIT 2017 Tax Pub (DT) 3985 (Del-HC), the assessing officer on the specific heads of ‘advertisement and business promotion’ and travel related expenses ‘ made the following disallowances :
(i) Expenditure of Rs. 13,14,548 was stated to be constituting freebies provided to medical consultants and other doctors, disallowable in view of Explanation 1 to section 37(1) of the Act , read with CBDT Circular No. 5/2012, dt.1-8-2012.
(ii) Expenditure of Rs 19,06,000 incurred on conducting seminars conventions, meetings, etc., for the purpose of Appellant’s business.
This was disallowed on the ground that details were scanty, despite ample opportunity being given to the assessee .
(iii) Expenditure of Rs 8,00,000 incurred on sponsorship for organizing conference/seminor. This was disallowed on the ground that the payment was made after the event had place.
On appeal before ITAT , it was held that as the assessee had incurred expenses in the garb of marketing the cardiac machine, onus was upon the assessee to prove that the expenses incurred did not violate any law that may be applicable. The burden lies uopon the assessee which has not been discharged by evidences/materials. Merely by placing the bills of payments, the travel details, the hotel details , where the doctors were stationed , and the seminars / conferences that were actually attended by such doctors. Assessee had also not demonstrated that the doctors by participating in such conferences and accepting the hospitality extendedby it (the assessee ) have not contravened any MCI Regulations.
The High Court ,however, said that the ITAT placed an unfair burden on the assessee to prove that the above expenses was incurred bona fide for the business purpose of the assessee. The assessee had placed before the ITAT all the relevant details thereby discharging the initial onus. Thereafter,it was open to the Revenue to prove to the contrary . It was not possible for the assesee to show that doctors “actually delivered any lectures, attented any meetings for, providing training courses and seminars for assessee, etc.
As regards other disallowances, it was held that since the ITAT proceeded on and conjectures and failed to deal with the contentions of the assessee in that regard , it is only fair that the ITAT considers the entire appeal of the assessee on merits afresh.
Thus, the High Court rendered decision in favour of assessee and against the revenue and all the contentions of the assessee raised in the appeal before the ITAT would be considered afresh.
The decision of the Delhi High Court has provided some rays of hope in favour of Pharmaceutical Companies for doctors. If relief is provided, it wil be of great help in sharing and upgrading knowledge in the field of medical science and ultimately whole mankind would get benefitted therefrom.
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Accommodation services are under the purview of tax net since a long time It was a handsome source of revenue under service tax law and the legacy is continuing in refined manner,even under GST law.
Accommadation service is the service to provide a place to live or stay, it has been introduced in the service tax net since positive list regime.The same is carried forward in the GST law also.Under GST law there is classification of services and accordingly accomdation services have been classified into the various categories according to the practice prevailing in the industry.
Accommodation services have been classified under HSN/SAC 9963 wherein the further classification ia as under.
Service Tariff Code (HSN/SAC)
Description of Service
Room or unit accomdation services provided by Hotels, INN,Guest House , club, etc
Camp Site Services
Recreational an vocational camp services
Room or unit accomdation services for students in student residences
Room or unit accomdation services provided by Hotels, Capms, Paying Guests, etc.
Other room or unit accomdation services not specified else where
3.Nature of supply
Accommodation services are generally provided at the premises used for providing accomdation services. Since the GST is destination based consumption tax, therefore, the place of supply of accomdation services is the place where the property used forproviding such services is situated and the nature of supply is intra – State supply. However, before reaching at the conlusion we need to understand the relevantprovisions of the GST law.
The relevant provisions of law determaining the nature of services are coverd under the provisions of section 8 and setion 12 of the IGST Act,2017 read together.
According to setion 8(2) of the IGST Act,2017 supply of services where the location of the supplier and the place of supply of services are in the same State or the same Union territory shall be treated as intra-state supply.
According to setion 12(3)(b) of the IGST Act,2017, the place of supply of service by way of lodging accomdation by a hotel, inn, guest house ,home stay , club or campsite, by whatever name called and including a house boat or any other vessel shall be the location at which the immovable property or boat or vessel, as the case may be, is located or intended to be located.
Thus, on a combined reading of the above two provision,one can easily figure out the nature of supply of accomdation services is intra-State supply.
4.Whether accomdation services can be an inter-State supply
Although by referring to the provisions cited above, it can be inferred that the basic philosophy of implematon of destination based consumption tax goes in line of taxing accommodation services as intra-State supply. Howeve, the following provisions of IGST Act,2017 are worth noting-
(a)Provisio to section 8(2) : The said provision reads as –“the intra-State supply of services shall not include supply of services shall not include supply of services to or by a Special Economic Zone developer or a Special Economic Zone unit”.
(b) Section 7(5) (b) : Supply of goods or services or both to or by a Special Economic Zone developer or a Special Economic Zone unit shall be treated to be a supply of goods or services or both in the course of inter –State trade or commerce.
The direct implication of the above provisions on accomdation services is that the said services if provided to any unit in SEZ shall not be considered as intra-State supply. In other words, it shall be considered as inter –State supply.
Hence, it can be fairly concluded that the accommodation services when provided to any unit in SEZ or by unit in SEZ evolves a concept divergent to the basic intent of the GST law of taxing the services on consumption basis.Now the question that flashes in the minds is the need of such a provision. The purpose of introduction of such provison can be understood with the provisions of section 16 of the IGST Act, 2017
Implication of sections 7(5), 8(2) and 16 of the IGST Act, 2017
The implication of sections 16 and 8(2) can be understood i two parts. In one part the supplier of services is outside the SEZ and in other part the supplier of services is in the SEZ. The impact on both the transaction shall be different.
(i) Supply to SEZ – Zero- rated supply
Accordingly to section 16 of the IGST Act, 2017, “zero-rated supply “ means any of the following supplies of goods or services or both namely :- (a) export of goods or services or both; or (b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
The provision stated in section 16 clearly mandates that the accommodation services provided to SEZ developer or to a unit in SEZ shall be treated as zero-rated supply. To put it differently, the same shall be considered at par with export of services. Thus, such services shall fall under zero –rated supply under GST law and shall be eligible for benefits attributed to zero rated supplies including refund of taxes paid on the relevant , services,subject to the other provisionsof GST law.
(ii) Supply by SEZ-Inter-State-supply
On a close reading of section 8(2) and section 16 as mentioned above, it can be inferred that accomdation services provided by the unit in SEZ to any person outside SEZ shall be treated as inter-State supply. Meaning thereby that the said services provided by SEZ shall be considered as inter-State supply and IGST shall be considered as inter –State supply and IGST shall be chargeable on the same.
(iii) Supply within SEZ–Zero–rated supply
Since in case of supply within SEZ the recipient shall always be in SEZ, therefore, such supply shall always fall within the meaning of zero-rated supply.Hence,supplies within SEZ shall be eligible for benefits at par with the benefits available to zero –rated supply.
Accomdation services are generally taxed as intra-state supply, however the law contains the relevant provisions for treating the same as inter-state supply also. Thus, before reaching at any conclusion about the place of supply, it is essential to refer the lwa as a whole and relevancy of sections 7(5) and 8(2) cannot be undermined.
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