Employment outside India and travel expense exclusions turn on actual place of work and duration of overseas posting.

Travel expenditure connected with employee travel, including hotel expenses and related allowances, is treated as falling within rule 6D for disallowance purposes, consistent with the court's earlier view on the same point. Section 40A(5)(b)(i) excludes salary and allowances only where employment is genuinely outside India for a substantial and continuous period; short foreign visits by employees who remain employed in India do not qualify. Crew working on a ship outside India's territorial waters are treated as employed outside India for that period because the ship is the place of work, while shore staff are not covered merely because they spend brief periods abroad.

---

---

Issues: (i) Whether expenditure on travelling by employees, including hotel expenses and allowances, falls to be excluded under rule 6D for the purpose of disallowance; (ii) Whether salary and allowances paid to employees, including crew on a ship outside the territorial waters of India, are excluded from the ceiling under section 40A(5)(b)(i) as expenditure incurred in respect of employment outside India.

Issue (i): Whether expenditure on travelling by employees, including hotel expenses and allowances, falls to be excluded under rule 6D for the purpose of disallowance.

Analysis: The exclusion under rule 6D covers expenditure incurred in connection with an employee's travel, including incidental hotel expenses and allowances paid in connection with such travel. The question was treated as concluded by the earlier decision of the court on the same legal point.

Conclusion: The issue was answered in favour of the Revenue and against the assessee.

Issue (ii): Whether salary and allowances paid to employees, including crew on a ship outside the territorial waters of India, are excluded from the ceiling under section 40A(5)(b)(i) as expenditure incurred in respect of employment outside India.

Analysis: Section 40A(5) forms part of a composite scheme with the ceiling provisions, and the exclusion for employment outside India applies only where the employment is in substance outside India for a reasonable and continuous period. Employees who merely make short visits abroad while remaining employed in India do not come within the exclusion. By contrast, crew employed on a ship are treated as employed outside India for the period during which the ship remains outside the territorial waters of India, because the place of work is the ship itself. The exclusion does not extend to shore staff merely because they spend short periods outside India.

Conclusion: The issue was answered in favour of the assessee only in relation to floating staff and against the assessee in relation to shore staff.

Final Conclusion: The reference was disposed of by answering the first question in favour of the Revenue and the second question partly in favour of the assessee, confined to the floating staff employed on the ship outside the territorial waters of India.

Ratio Decidendi: Expenditure is excluded from the ceiling under section 40A(5)(b)(i) only when the employment is genuinely outside India for a substantial period, and crew on a ship outside Indian territorial waters are treated as so employed, whereas employees who only make short foreign visits remain employed in India.

---