TMI Blog2010 (5) TMI 674X X X X Extracts X X X X X X X X Extracts X X X X ..... n India and Netherlands. The business of the company is to provide dredgers on charter hire to other parties. During the previous year relevant to assessment year 2002-03, the assessee has given a dredger Sagar Manthan on charter hire on bare boat basis to Van Oord Dredging and Marine Contractors BV (formerly known as Ballast Ham Dredging BV). (Van Oord). Van Oord required the said dredger for carrying out the dredging operation in relation to the contract entered by it with the Mumbai Port Trust. Van Oord placed its own crew and employees on the dredger to carry out the dredging operations. The dredger was under the control, management and supervision of the Van Oord at all times. As per the terms of the agreement, the dredger is to be taken by Van Oord from NOB from the port of delivery, i.e., Singapore and returned to the port of re-delivery. Further, the role of NOB ends with the giving of dredger on hire and at agreed location for an agreed duration." 3. The assessee entered into a contract with Hollandsche Anneming Maatschappij by (hereinafter called as HAM ), on 16-8-1997 for lease of dredger. The contract was renewed periodically by entering into separate/fresh a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not been delivered in Penang, Malesia, though claimed to be so, in view of the fact that the agreement dated 1-4-1998 indicate the position of the vessel, to be in Mumbai, India. He also observed that there is substantial difference in the rate quoted between the first agreement and the second agreement and that there is a time gap between the expiry of the first agreement and the commencement of the second agreement, of about less than two months. The Assessing Officer noted that in the previous year relevant to the assessment year 1998-99, the income of the assessee was chargeable to tax at the rate of 10 per cent in terms of DTAA between India and Netherlands. He was of the opinion that in the present assessment year, the rentals have been substantially jacked up. He suspected that this could be a case whether the assessee is a dummy or a front company of HAM or vice versa . No doubt as the Assessing Officer felt that there is no sufficient material available on record, in this regard and, hence, he would not be able to comment conclusively on the same. At page 12 paras 2 and 3 of the assessment order, the Assessing Officer concluded as follows : "As already stated above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer on these documentary evidences. After considering the remand report given by the Assessing Officer as well as the submissions of the assessee, the first appellate authority at para 5.6 held as follows: "I have considered the rival submissions, assessment order and all relevant materials available on record. The main contention of the appellant is that the Assessing Officer without considering the agreement and the relevant clause, which were mutually truck off by both the parties, i.e., HAM and NOB (Tax residents of Netherlands), documentary evidence filed by the appellant held that the lease of the dredger "Sagar Manthan" on hire to HAM was a wet lease and, thus, constituted a PE of the appellant in India. Accordingly, the Assessing Officer has applied rule 10 of the Income-tax Rules and determined total taxable income of the appellant for the year under consideration at Rs. 8,28,14,690. It is also contended that on the same facts and circumstances of the case, in the assessment year 1998-99, the Assessing Officer had acknowledged the appellant s claim that the dredger had been leased on a bareboat basis and, thus, accepted the appellant s claim as returned by it. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant that the provisions of Article 9 of the India-Netherlands treaty are applicable to enterprises in two different Contracting States ( i.e., India and Netherlands). In the instant case, both the entities, i.e., the appellant and HAM are residents of the Netherlands ( i.e., neither of the entities are resident in India). Accordingly, the provisions of Article 9 of the India-Netherlands treaty are outright not applicable to it. Besides this I also agree with the contention of the appellant that since the lease is in the nature of dry lease the period of the lease is not relevant. Further, as regards appellants constituting a PE, based on the documentary evidence, agreement and considering OECD/international Tax Commentary that the appellant did not have a PE in India since it did not have responsibility beyond the provision of the dredger on charter hire, I, hold that since the lease of the dredger was merely a dry lease the appellant does not constitute a PE in India. This ground of appeal is decided in appellant s favour." 7. Aggrieved, the revenue has filed this appeal on the following grounds : 1.On the facts and in the circumstances of the case and in law, the ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o establish the fact that the charter in question was on a bare boat basis. He pointed out that these voluminous details were forwarded by the first appellate authority to the Assessing Officer and a remand report called for. The Assessing Officer in the remand report had not offered any comment on the voluminous documentation furnished by the assessee but on the other hand, tried to raise new issues. He submitted that the Assessing Officer could not substantiate his contention that the lease was wet lease. He pointed out that the assessee submitted evidences to show that the management and control was in the hands of HAM and not the assessee and, hence, the lease was dry lease. He pointed out that for the initial year, i.e., assessment year 1998-99, the Assessing Officer himself, acknowledged the assessee s claim that the dredger has been leased out on a bare boat charter basis and treated the bare boat lease rent as royalty. Thus, he submits that on facts the lease rentals in question are nothing but royalty. 11. On law, the learned counsel submitted that royalty is covered under section 9(1)( vi ), read with Article 12 of the DTAA. He pointed out that up to the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see does not have a fixed place in India through which it is carrying on business. It had merely leased a dredger to HAM on bare boat charter basis and that the dredger was under the control and management of the HAM and not the assessee. He submitted that the assessee has no employees in India nor did the assessee render any dredger services in India and that mere leased of a dredger does not amount to establishing a PE. He took this Bench through the order of the CIT (Appeals) as well as the written submissions made by the assessee before the CIT (Appeals) in support of his claim that the assessee does not have a PE in India. He also relied on the decision of the Mumbai Bench of the Tribunal in the case of Dy. CIT v. Reliance Industries Ltd. [2003] 81 TTJ (Mum.) 787. He prayed that the order of the first appellate authority be upheld. 13. On the second ground, i.e., deletion of interest under section 234B, he submitted that the assessee would not be liable to pay interest under the said section for the reason that no tax is payable by the assessee on the amounts received by it. 14. Rival contentions heard. On a careful consideration of the facts and circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant has stated that the contracts were entered into with Ham Dredging and Marine Contractors and not with HAM bv. In this regard, it is found that that the certificate of incorporation of HAM clearly indicates its legal name along with its trade name HAM Dredging Marine Contractors . Accordingly, I agree with the contention of the appellant that the name HAM Dredging Marine Contractors is merely a trade name and that HAM and HAM Dredging Marine Contractors are not two separate entities. I find merits in the appellant s contention that merely because the appellant is a wholly-owned subsidiary of HAM, it cannot be concluded that it has retained operation, management and control of the dredger with itself thereby constituting a wet lease. All the documentary evidence like invoices raised by the third party in the name of HAM clearly shows that the management and control of the dredger were with HAM and not the appellant. On the contrary, the Assessing Officer to support its contention that it was a wet lease has brought no material on record. In his report, the Assessing Officer stated that "the contracts/arrangements were not with HAM bv, the Netherlands but with HAM, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was included in the definition of royalty in clause 4 indirectly rendering the said payments taxable. Para VI - w.e.f. 1-4-1998. The above clause 4 was again amended to exclude "payments of any kind received as consideration far the use of, or the right to use industrial, commercial or scientific equipment" by deleting sub-clause ( b ) in the definition of Royalty . However, no amendment was made to clause 1 and thereby "payments for use of equipment" remained excluded from scope of royalty. Then, the position after 1-4-1998 is that "payments for use of equipment" stood excluded from the scope of Royalty under clause 1 with effect from 1-4-1947 and the same also stood excluded from the definition of Royalty under clause 4. All the above amendments render the said "payment for use of equipment" excluded from scope of Article 12 and thereby excluded from purview of taxability under the DTAA." From the above it is clear that under the DTAA agreement, the receipt of bare boat rentals, i.e., rent for use of or payment for use of equipment is not brought to tax as royalty consequent to the amendment. Thus, though under domestic law, the charging section treats the recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . ( supra ) wherein it is held as follows: ". . . . Clause ( vi ) of section 9(1) deals with a specific type of income, namely, income by way of royalty, whereas clause ( i ) of section 9(1) is a more general provision, which deals with all incomes accruing or arising, whether directly or indirectly, through or from, any business connection in India. Income by way of royalty is a species or one of the categories of a larger class mentioned in clause ( i ) of section 9(1) and, hence, the specific instance having been provided by clause ( vi ), once we come across the question of royalty, we have only to look at that clause ( vi ) and not to the more general provision of clause ( i ) of section 9(1). Similarly, income by way of fees for technical assistance, which is covered by clause ( vii ) of section 9(1), is a more general category as compared to the royalty which is referred to in clause ( vi ), particularly in the light of the definition of "royalty" in Explanation 2 to clause ( vi ) of section 9(1). Again, the same principle of particular excluding the general has to be applied in this case and if the case falls under clause ( vi ) and is exempted from the operation of cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the said Act for the purpose of chargeability. The ld. Departmental Representative could not controvert these finding of the facts on this point. We have, therefore, no hesitation to uphold the finding of the ld. CIT(A) on this issue." This decision squarely covers the issue on hand. Respectfully following the same, we uphold the order of the first appellate authority. 22. The next issue is whether the assessee has a PE in India or not. As per Article 5 of the India-Netherlands Tax Treaty, a PE means a fixed place of business through which business of an enterprise is wholly or partly carrying out. Mere provision of a dredger on dry lease for carrying out dredging activity in India does not result the assessee having a PE. OECD commentary on the subject states as follows : "The paragraph defines the term "permanent establishment" as a fixed place of business through which the business of an enterprise is wholly or partly carried on. This definition, therefore, contains the following conditions : the existence of a "place of business", i.e., a facility such as premises or in certain instance, machinery or equipment. this place of business must be "fixed", i.e., ..... X X X X Extracts X X X X X X X X Extracts X X X X
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