TMI Blog2006 (5) TMI 152X X X X Extracts X X X X X X X X Extracts X X X X ..... t wholly income or profit. The scheme of tax deduction at source applies not only to the amount paid which wholly bears income character, but also to gross sums, the whole of which may not be income or profits of the recipient, such as payments to contractors and sub-contractors under section 194C and payment of insurance commission under section 194D. Section 195 takes within its sweep any sums paid to a non-resident which do not wholly represent income or profits chargeable under the Act but a portion of which only so represents. The Hon'ble Supreme Court took this view in the case of TRANSMISSION CORPORATION OF AP LTD. AND ANOTHER VERSUS COMMISSIONER OF INCOME-TAX [ 1999 (8) TMI 2 - SUPREME COURT] The Hon'ble Calcutta High Court considered and interpreted a similar provision under section 18(3B) of the Indian Income-tax Act, 1922 in the case of PC. RAY AND CO. (INDIA) PRIVATE LTD. VERSUS AC. MUKHERJEE, INCOME-TAX OFFICER, AND ANOTHER [ 1958 (5) TMI 43 - CALCUTTA HIGH COURT] and held If 'chargeable under the provisions of this Act' means actually liable to be assessed to tax, in other words, if the sum contemplated is taxable income, a difficulty is undoubte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Further it was alleged that ship cannot be construed to be an equipment for the purpose of article 12 of DTAA, as such, the payments made to DMCL cannot be termed as royalty, as the payment was not for the use of the equipment falling within section 9(1)(vi) of the Income-tax Act, 1961 (hereinafter called 'the Act') read with article 12 of the DT AA. The Bare Boat Charter entered into by the assessee with DMCL was an agreement relating to the sale of the ship. The consideration was payable in accordance with the said agreement. The terms of the said agreement have to be looked into along with the surrounding circumstances to decide the nature of the transaction. The revenue failed to do so. The Assessing Officer adumbrated his findings on the misapprehension of the terms of the Bare Boat Charter. The agreement in fact was for the purchase of the ship. The assessee made an application to ICICI Limited for securing the price reasonableness certificate. It obtained the same for the purpose of BBCD acquisition. It is evident from the agreement that the transaction was for an outright purchase. In the case of a mere charter for hire there would be a clause for repossession. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not an equipment and BBCD agreement does not relate to the use of ship but relates to acquisition of ship. To buttress the aforesaid points Shri Ramachandran relied on the various precedents and invited our attention on the documents contained in the paper book. 7. The learned departmental representative vehemently opposed the aforesaid arguments. It was submitted that the case of the assessee comes within the ken of section 195, since the payments made by the assessee to the non-resident were exigible to tax in India. What the assessee paid to the owner of the ship was hire charges for the user of the ship. The assessee did not exercise the option to purchase the vessel at the end of the year. As such it cannot be construed to be a transaction of purchase of ship on the basis of BBCD. Some precedents were also relied upon to buttress the point that even where there exists doubt as to the chargeability of income-tax, there also tax is to be deducted at source ex abundanti cautela. 8. Referring to the provisions of article 8 Shri Srinivasan, the learned departmental representative, submitted that this article can be used only in the context of profits from the operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uipment. 11. The word equipment is neither defined under the Act nor under the treaty. As per New Oxford Advanced Learners Dictionary equipment means the things that are needed for a particular purpose or activity . As per Websters Dictionary equipment means all fixed assets other than land and building used in a business enterprise. A fixed asset is an asset held with an intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. The equipment for the purpose of the Employer's Liability (Defective Equipment) Act, 1969 was held to be (Stroud's Judicial Dictionary) wide enough to include a ship of whatever size notwithstanding that ships are not specifically mentioned in the definition of the equipment under the Act. 12. The official USA Government Website on the North American Industry Classification system includes shipping under the category of the transportation equipment. In the interpretation of tax treaties, aircrafts and ships have always been considered to fall within the meaning of the term 'industrial equipment'. Whenever it was decided to exempt such payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. In view of the above we hold that article 12 of DTAA with Cyprus relates to equipment and ship is an equipment. The hire charges thus partakes the character of royalty for use of equipment under the provisions of section 9(1)(vi) of the Act/Article 12.3 of the DTAA. 17. It was alleged before us that the transaction in question was for the purchase of the ship on the basis of BBCD and as such the receipt was not exigible to tax. The assessee conceded before the Commissioner (Appeals) that in the statement of facts the payment was wrongly shown to be hire charges. The assessee acquired the ship by name 'Yaqul' under the Bare Boat Character (BBC) in the year 1998-99 from DMCL and the ship was christened as 'Gem of Paradip'. Subsequently, by an agreement dated 14-5-1999 with DMCL the original agreement entered into was revised and the ship was acquired under BBCD. Before entering into the agreement with DMCL the assessee had obtained approval of ICICI Ltd., with regard to concomitant funding and financial commitments. It was claimed that the ship so acquired resulted in a sale transaction. It was further stated that there was no clause for repossession of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtified by the Director General (Shipping), (iii) the interest rate margin on the rental payments shall be verified by the Directorate of Shipping and (iv) the rental agreement shall come into force after it is taken on record by the RBI. 20. The Chartering Wing of the Ministry issued orders on 12-8-1992 conveying the decision of the Government that the vessels so acquired under the method of acquisition by the Shipping Companies involving demise clause at the end of the lease/charter period would be treated at par with Indian vessels for the purpose of transportation of Government controlled cargo for which shipping arrangements are required to be made by the Chartering Wing of the Ministry. The use of foreign flags in the case of India Coastal Operations were reserved for Indian Flag Vessels without any stipulations about the vessels to be built in India. Foreign flag vessels were permitted in coastal trade only after ascertaining that no Indian flag vessels were available. The Ministry issued notification equating vessels acquired under BBCD method which fly foreign flags, equating them with Indian flag vessels for the limited purpose of lifting the Government cargo for which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (including any warranties expressed or implied therein) without first obtaining the consent to such employment of the insurers and complying with such requirements as to extra premium or otherwise as the insurers may prescribe, if required, the charterers shall keep the owners and the mortgagees advised of the intended employment of the vessel. (vi) Inspection: The owners shall have the right at any time to inspect or survey the vessel or instruct a duly authorized surveyor to carry out such survey on their behalf to ascertain the condition of the vessel and satisfy themselves that the vessel is being properly repaired and maintained. The charterers shall also permit the owners to inspect the vessel's log books whenever requested and shall whenever required by the owners furnish them with full information regarding any casualities or other accidents or damage to the vessel. (vii) Inventories and Consumable Oil Stores: (viii) Maintenance and Operation: The vessel shall during the charter period be in the full possession and at the absolute disposal for all purposes of the charterers and under their complete control in every respect. (ix) Hir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear that the purchase option of the vessel would vary depending on the date on which such an option was exercised by the assessee. That is to say that if the assessee decided to opt for purchase in December, 1999, it would be liable to pay the cost of US $ 7.25 million. And likewise if it chose to exercise the option in December, 2004, it would be so liable to US $ 2.75 million. Thus it is clear that the ownership remained with DMCL till the assessee opted to make the balloon payment to DMCL which was only on 12-1-2005 of US $ 2.75 million in the financial year 2004-05. On having made the balloon payment and in terms with the BBCD agreement G.M. Khaleelullah on behalf of DMCL executed a bill of sale dated 12-1-2005 acknowledging the receipt of US $ 2.75 million from the assessee. This bill of sale was also acknowledged transfer of all the shares in the ship as described to the transferee. The bill of sale was executed in Nicosia, Cyprus. The ownership never passed to the assessee until 12-1-2005. DMCL remained the owner till the balloon payment was made and the option to purchase was exercised by the assessee in January, 2005. The consideration paid to DMCL periodically was in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) other activity directly connected with such transportation, and (c) the rental of ships or aircraft incidental to any activity directly connected with such transportation. (3) Profits of an enterprise of a Contracting State described in paragraph 1 from the use, maintenance, or rental of containers (including trailers, barges, and related equipment for the transport of containers) used in connection with the operation of ships or aircraft in international traffic shall be taxable only in that State. (4) The provisions of paragraphs 1 and 3 shall also apply to profits from participation in pool, a joint business, or an international-operating agency. (5) For the purposes of this Article interest of funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 (interest) shall not apply in relation to such interest. (6) Gains derived by an enterprise of a Contracting State described in paragraph 1 from the alienation of ships, aircraft or containers owned and operated by the enterprise, the income from which is taxab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. Keeping an option to buy alone would not be sufficient enough to characterize the hire charges as sale consideration. 31. In the case of Transmission Corporation of A.P. Ltd. v. CIT [1999] 239 ITR 587, the Hon'ble Supreme Court has held that the scheme of sub-sections (1), (2) and (3) of section 195 and section 197 leaves no doubt that the expression 'any other sum chargeable under the provisions of this Act' would mean 'sum' on which income-tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. The consideration would be whether payment of the sum to the non-resident is chargeable to tax under the provisions of the Act or not. That sum may be income or income hidden or otherwise embedded therein. The scheme of tax deduction at source applies not only to the amount paid which wholly bears 'income' character such as salaries, dividends, interest on securities, etc., but also to gross sums, the whole of which may not be income or profits of the recipient. 32. On the basis of the aforesaid decision it can be said that once the amount of tax is deducted at source the person against whose inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court took this view in the case of Transmission Corporation of A.P. Ltd. The Hon'ble Calcutta High Court considered and interpreted a similar provision under section 18(3B) of the Indian Income-tax Act, 1922 in the case of P.C. Roy Co. (India) (P.) Ltd v. A.C Mukherjee, ITO [1959] 36 ITR 365 (Cal.) and held at page 377: If 'chargeable under the provisions of this Act' means actually liable to be assessed to tax, in other words, if the sum contemplated is taxable income, a difficulty is undoubtedly created as to complying with the provisions of the section. 35. It is not open for a person making payment to a non-resident to take a unilateral decision that the payments made by him are not sums chargeable to tax. To take that view the concurrence of the Assessing Officer as provided in sub-section (2) of section 195 is sine qua non. Section 195 is for tentative deduction of income-tax subject to regular assessment. By the deduction of tax the rights of parties are not, in any manner, adversely affected. Where there exists a doubt as to the chargeability of income to tax, there also tax is to be deducted at source ex abundanti cautela. In the present case the atten ..... X X X X Extracts X X X X X X X X Extracts X X X X
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