A foreign salary credited to an NRE account in India does not automatically become taxable in the country. The Income Tax Appellate Tribunal (ITAT), Ahmedabad, reaffirmed this while setting aside revision proceedings initiated against an NRI whose foreign salary had been claimed as exempt.
The Tribunal also made it clear that merely because tax was deducted using an Indian TAN does not by itself decide whether the income is taxable in India. More importantly, it held that the tax department cannot invoke revisionary powers under Section 263 simply because it has a different view if the Assessing Officer (AO) had already carried out detailed enquiries before completing the assessment.
What was the case about?
The case involved Pralay Pradyotkanti Ghosh for the assessment year 2016-17.
In his income tax return, Ghosh declared taxable income of ₹1.16 lakh and claimed exempt income of ₹66.70 lakh. This included foreign salary of ₹45.66 lakh received from Oceaneering International GmbH. He claimed that the salary was exempt because he was a non-resident and had earned it while working in international waters.
The Assessing Officer accepted the claim after scrutiny under Section 143(3).
However, the Principal Commissioner of Income Tax (PCIT) later invoked powers under Section 263, saying the assessment order was erroneous and prejudicial to the interests of the Revenue because the AO had allegedly not carried out adequate enquiries.
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Why did the tax department reopen the issue?
The PCIT raised several objections. It pointed out that tax had been deducted using a Mumbai TAN and questioned whether the salary had actually been paid by an overseas company. It also said the AO had not properly verified the employment agreement, the offshore locations where the taxpayer worked, whether the work was performed in international waters or within Indian territorial waters, and certain passport entries relating to a coastal run.
Had the revision proceedings succeeded, the exemption could have come under fresh scrutiny.
What did the ITAT find?
The Tribunal examined the assessment records and found that this was not a case where the Assessing Officer had failed to make enquiries.
It noted that during the scrutiny proceedings, the AO had issued notices under Section 142(1) and sought detailed information from the taxpayer. These included the employment agreement, Form 26AS, bank statements, passport copies, travel details and documents relating to his residential status. The taxpayer had furnished all these records during the assessment proceedings.
After reviewing these records, the ITAT concluded that the AO had carried out detailed verification before accepting the exemption claim. Therefore, the assessment could not be termed erroneous merely because the Principal Commissioner held a different opinion.
What does the ruling mean?
According to Rajiv Thakkar, Partner, Direct Tax, Bhuta Shah & Co. LLP, the Tribunal has reiterated an important legal principle.
“No. At the outset, it is pertinent to note that the taxability of salary earned by a non-resident for services rendered outside India is governed by provisions of Section 5 of the Income-tax Act,” he said.
Referring to the ruling, Thakkar explained that merely because a foreign employer credits salary into an employee’s NRE account in India, it does not make the income taxable in India. Similarly, deduction of TDS using an Indian TAN is not a deciding factor for determining either residential status or the taxability of foreign income.
The ITAT also relied on earlier judicial precedents involving non-resident seafarers and overseas employees. It observed that courts have consistently held that salary earned for services rendered outside India does not become taxable simply because it is remitted to an NRE account in India. Likewise, TDS deducted through an Indian project office is not, by itself, sufficient to tax such income.
Section 263 cannot be invoked just because another view is possible
The Tribunal emphasised that the Assessing Officer had made detailed enquiries and had taken a legally sustainable view based on the documents placed on record. Since the conditions required under Section 263 were not satisfied, the revision order could not stand.
Explaining the significance of the ruling, Thakkar said Section 263 allows the Principal Commissioner to revise an assessment only if it is both erroneous and prejudicial to the interests of the Revenue.
He added that revision for “lack of enquiry” is justified only where the assessment has been completed without making necessary enquiries or verification. “Where a plausible view was taken after due verification and that view is duly supported by judicial precedent, the order cannot be termed erroneous simply because the Principal Commissioner disagrees with the conclusion reached by the Assessing Officer,” he said.
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What documents should NRIs keep?
The ruling also highlights the importance of maintaining proper records, especially for NRIs, seafarers and employees working overseas.
According to Thakkar, taxpayers should preserve documents such as their foreign employment agreement, passport with entry and exit stamps, Form 26AS, TDS certificates, bank statements showing salary credits and records supporting their residential status.
For seafarers, vessel movement records or documents showing whether duties were performed in international waters can also be important during scrutiny.
In this case, the Tribunal noted that the taxpayer had produced the employment agreement, passport, travel details, bank statements and other supporting documents before the Assessing Officer, which helped establish that proper verification had been carried out.
Final verdict
The ITAT ultimately set aside the Principal Commissioner’s order passed under Section 263 and allowed the taxpayer’s appeal, holding that the Assessing Officer had already conducted detailed enquiries and adopted a legally sustainable view while completing the assessment.
Disclaimer: This article is for informational purposes only and should not be construed as legal or tax advice. Taxability of foreign income depends on an individual’s residential status, source of income, applicable provisions of the Income-tax Act and the facts of each case. Taxpayers should consult a qualified tax professional before taking any decision based on this ruling.
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