TMI Blog2013 (10) TMI 936X X X X Extracts X X X X X X X X Extracts X X X X ..... Nature of expenditure as Revenue expenditure of Capital expenditure Royalty u/s 9(1)(vi) of Act - Whether payment made to the owner of vessel is in the nature of royalty charges or in the nature of purchase Held that:- Till the last month of the payment or the option exercised, the assessee was not the owner of the vessel. The assessee opted to make the balloon payment of US $2.75 million on 12.1.2005. A sale certificate was issued only on 12.01.2005. The consideration paid periodically was in the nature of hire charges for the use of the Vessel, as described in the agreement and not sale consideration Hire charges to be treated as revenue expenditure - By the exclusion Clause in Clause (iva) referring to cases falling under Sec 44 BB of the Income Tax Act. A payment made for the use or the right to use an equipment thus qualifies as 'royalty' and in this case, considering the nature of time charter agreement and the rights and obligations of the charterer, for the privilege of using the ship, the fee paid is royalty, falling under Clause (iva) of Explanation (2) to Section 9(1)(vi) of the Income Tax Act Meaning of Permanent establishment in india as the place of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the determination of the quantum of income of the non-resident assessee and the tax to be demanded. Reliance has been placed upon the judgment in the case of Transmission Corporation of A.P. Ltd. and another V. CIT reported in [1999 (8) TMI 2 - SUPREME Court] - Proceedings under Section 201 and 201A of the Income Tax act has nothing to do with the status of the assessee as an agent under Section 160 and 163 which would assume significance only for assessment purposes. Thus so long as the Revenue is able to show the receipt as falling under Section 9 of the Income Tax Act, provisions of Section 160 of the Income Tax Act would stand attracted - The contention that Sections 163 and 201 of the Income Tax Act cannot go together is not correct for the reason that they operate on different spheres. Section 195 casts an obligation on TDS on any person responsible for paying, whereas Section 163 is for assessment purposes. - Tax Case (Appeal) Nos.2206 to 2208, 2629 and 2630 of 2006,56 to 64 of 2013, 598 to 601 of 2013& M.P.Nos.1, 2, 2, 1 and 2 of 2006, 1, 1 and 1 of 2008 - - - Dated:- 9-10-2013 - Chitra Venkataraman And T. S. Sivagnanam,JJ. For the Appellant : Mr. Arvind P. Data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the approved means of finance ship acquisition in the 1990s, in accordance with Ministry of Finance letter dated 19.10.92? 3. Whether payments made under the BBCD are exigible to tax in India, when the vessel is flying the cyprus flag, and is deemed to be flying the Indian flag only for the purpose of lifting Government cargo, under the provisions of the Merchant Shipping Act? 4. Whether the Tribunal's interpretation of Articles 7, 8 and 12 of the India-Cyprus Double Taxation Avoidance agreement is correct? 5. Whether the Tribunal's construction of BBCD is correct, especially in the light of position now abundantly clarified by Section 115V of the Act? T.C.(A)Nos.56 to 64 of 2013: "1. Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the assessee is not an agent of the foreign shipping companies to whom it has made payment towards hire charges for the vessels? 2. Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the lease of vessels by the assessee from the Foreign Shipping Companies is only on time charter? 3. Whether under the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of coal, to meet the requirements of the Tamil Nadu Electricity Board, the assessee chartered foreign shipping vessels by entering into agreements in standard time charter form, approved by the New York Produce Exchange. As far as the foreign shipping vessels are concerned, the appellant entered into time charter agreement with the shipping companies having their vessels registered in different countries. The following table gives the name of the shipping company, chartered hire charges and the country of residence. Name of the Shipping Company Charter Hire Charges Country of Residence Setaf Segat 112,352,982 France Star Shipping 123,415,610 Norway Jing Feng Marine Inc 1,537,923 Hong Kong Handy Bulk AG, Germany 78,587,302 Germany Singapore Shipping Int. Pte. Ltd. 698,567 Singapore Western Bulk Carriers 113,723,125 Australia 4. In response to a query from the Assessing Officer on the details of payment made to the foreign shipping companies, under the time charter, the assessee gave the details. On going through the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner of Income Tax (Appeals) held that charges for use of equipment were liable to be treated as 'royalty' and hence ship, being an equipment, the receipts were liable to be treated as 'royalty', within the meaning of Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. Referring to 'international traffic' as defined in DTAA, the Commissioner of Income Tax (Appeals) held that Article 8 of the DTAA would apply in a case where the shipping company itself derived profits from the transportation by sea of passengers etc., carried on by the owner. The profits covered by Article 8 of the DTAA included profits derived by an enterprise from rental of ships incidental to any activity directly connected with such transportation by sea of passengers, mail, livestock or goods carried on by the lessees or charterers of the ship. The first Appellate Authority held that the foreign vessels have been designated as coastal Vessels employed to trade between Ports in India and hence, would not come under international traffic, as defined under DTAA. The definition on 'international traffic' would apply where the journey of a ship or aircraft goes between a place in one Contractin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hire charges partook the character of 'royalty' for the use of the equipment under the provisions of Section 9(1)(vi) of the Income Tax Act. The Tribunal held that the foreign shipping company was in shipping business; as such, in the context of the business, ship could be construed to be an equipment of the business. It further held that the word 'equipment' has got various shades of meaning, one such being, things which are needed for a particular purpose or activity. On the submission of the assessee that the time charter was not for the hire of the ship, but for rendering the services, the Tribunal held that the consideration was paid for the use of the ship; hence, the payments were liable to be held as 'royalty'. The Tribunal further rejected the arguments of the assessee on the aspect of permanent establishment and ultimately referred to Section 195 of the Income Tax Act and pointed out that it was obligatory on the part of the person responsible for making the payment to the non-resident to deduct tax at source in respect of any sum chargeable under the provisions of the Act. If there existed any doubt as regards the taxability of such income, the person responsible for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was no freight element or even if the ship was not plying at all, still the payment would have to be made to the foreign companies for hiring of ships. Thus, on a consideration of the various terms of the agreement, he viewed that it was not one for affreightment. Referring to the decision reported in (1978) 113 ITR 307 (Union of India V. Gosalia Shipping Pvt. Ltd.), the Assessing Officer came to the conclusion that the payments made to the foreign shipping companies, which were put to use between the ports in the Indian coast were assessable as 'royalty' as per the provisions of the Income Tax Act. On the question of ship as equipment, the Assessing Officer also referred to the earlier order of the Tribunal, holding that ship was an equipment. Thus, the Assessing Officer held that hire charges were liable to tax under Section 115A read with Section 44D of the Income Tax Act or at the rates specified by DTAA, whichever is beneficial to the assessee. The assessment order in respect of all the assessment years under consideration are almost similar. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who considered the contentions unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee under one of the provisions of the Act for the purpose of assessing the income. The assessee submits that considering the view that the Tribunal has taken on the representative capacity of the assessee, the further direction given to initiate proceedings, either under Section 201 or under Section 195, applying the decision reported in (1982) 134 ITR 17 (Commissioner of Income-tax v. Premier Tyres Ltd.), is erroneous in law. The Tribunal rejected the contention of the assessee that the reopening of assessment under Section 148 of the Income Tax Act was barred by limitation and that the reopening was only a change of opinion. The Tribunal dismissed the assessee's claim on both counts holding that the Officer had valid reasons for reopening of the assessement and that there was no change of opinion in the reopening of the assessment. The Tribunal further held that once a notice was issued within the time limit, but served after the expiry of the time limit, the assessment could not be set aside as time barred. Aggrieved by the direction of the Tribunal, the present appeals are filed before this Court by the assessee. 16. We have already pointed out in the preceding paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on BBCD basis in respect of the vessel from the owners DMCL, Cyprus. The assessee entered into an agreement with DMCL on 14th May, 1999 on various aspects relating to the vessel and the modalities including delivery, inspection, maintenance and operation, insurance and repairs, bank guarantee etc. The first Appellate Authority pointed out that a reading of the agreement showed that the assessee was not the owner of the vessel until the last month's hire instalment was paid to DMCL, in exchange of which, the owner would execute a bill of sale in favour of the assessee. The cost of the Vessel would vary depending on the date on which such option was to be exercised by the assessee. Thus, till the option to purchase and to make the balloon payment to the owner was exercised, ownership remained with DMCL. It was noted that the owner executed a bill of sale on 12.1.2005, acknowledging the receipt to 2.75 million US Dollars from the assessee. This bill of sale was executed in Nicosia, Cyprus. Thus, till 12.1.2005, ownership remained with DMCL; thus the consideration paid periodically was in the nature of hire charges for the use of the ship and was not the deferred payment of the consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and OECD model, he submitted that payment under time charter party or voyage charter party or for liner services is more in the nature of a payment for services and hence, cannot be construed as royalties. The expression 'use of or right to use of' is not defined in the Act or in the DTAA. So too the OECD Model. Yet, the commentaries make a clear distinction between the amount paid for the use of equipment called royalty and the payment constituting consideration for sale of equipment and for availing of the services. Time charter is not a contract for hire of the ship, but for provision of standard services which the owner of the ship provides through the ship, crew and the master. Time charter party merely gives the right to use the carrying capacity of a ship; hence, under a time charter, there is only a contract for services. Thus, referring to the meaning of the expression 'use or right to use' in the context of the time charter party internationally accepted, learned Senior Counsel submitted that neither Clause (iva) of Explanation 2 to Section 9(1)(vi) nor Section 9(1)(vi) of the Income Tax Act could cover a payment under time charter to hold the payment as 'royalty'. Referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use or right to use of an equipment. 21. He further referred to the definition given under Section 44BB of the Income Tax Act on the expression 'plant'. In the absence of any definition on 'equipment', the said term has to be understood in the manner in which it is commercially used and understood. In other words, ship cannot be called as 'equipment' in an ordinary commercial parlance and with the exclusion of the income falling under Section 44BB of the Income Tax Act, it is clear that the intention is not to treat ship an equipment. Placing reliance on the decision reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.,), particularly at page 226, he submitted that going by the said decision, which primarily dealt with the hiring of a ship under a time charter in the context of the liability on the transfer of right to use under Section 3-A of the Tamil Nadu General Sales Tax Act, there being no possession transferred to the hirer for use or right to use, the payments under the time charter cannot be treated as one for the use or right to use the ship as an equipment. Thus, apart from the fact that ship is not an equipment, Clause (iva) of Explanation 2 to S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the end of each year. He further pointed out that the vessel - Gem of Paradip was given on hire to M/s.Poompuhar Shipping Corporation, which was used for movement of coal to TNEB from Haldia/Paradip/Vizag to Chennai/Tuticorin. The agreement between the assessee and the Cyprus company is one covered by DTAA dated 26th November, 1995. According to learned senior counsel, the case of the assessee squarely falls under Article 8 of the DTAA and not under Article 12 of the DTAA relating to royalty, since 'royalty', even as per Clause (iva) of Explanation 2, applies to use or right to use of scientific, commercial or industrial equipment. 23. Taking us through Explanation 2 of Section 9(1)(vi) of the Income Tax Act, he submitted that read in the context of other Clauses in the said Explanation, 'equipment' referred to in Clause (iva) to Explanation 2 must be read as having relevance to those special equipment relating to intellectual property rights, which are of industrial, commercial and scientific nature; hence, not every kind of transaction, 'equipment', for use or right to use, is covered by Clause (iva) of Explanation 2. The attempt of the Revenue to include a Vessel given on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by a ship is operated by an enterprise registered, having headquarters in the contracting State, the income can only be taxed in the contracting State and not in India. 25. Taking us through Section 115 of Chapter XII G of the Income Tax Act, he submitted that with the definition given on bare boat charter-cum-demise, with the option given to the assessee to purchase the Vessel, the payment made has to be considered as deferred payment on the option for purchase of the vessel Thus Clause (iva) will not be of relevance to the case on hand. 26. In sum and substance, the contention of the learned senior counsel is that the policies of Ministry of Finance and Ministry of Surface Transport govern the purchase of a ship under BBCD. Thus the agreement was a means for acquiring the ship and not for hiring the ship simpliciter. In any event, ship not being an equipment, the payment cannot be brought under clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. Referring to the decision reported in (2000) 245 ITR 538 (Indian Hotels Co. Ltd. V. Income-tax Officer), he submitted that the Authorities should have given a meaningful reading to the expression 'equipment'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ships chartered sail only on the Eastern Coasts. Under the Act, what is taxable is the traffic within India and even though the effective management may be outside, nevertheless, when the ships are operated between the places in the other contracting State, namely, India, income arising from the transaction on the coast is taxable in India; hence, the transaction does not fall within the meaning of 'international traffic' to be covered under Article 8 of the DTAA. Referring to the examples given under the Model Code, he thus pointed out that what is taxable is the traffic within India; hence, the assessee's case in West Asia Maritime Co. Limited would not fall for consideration under Article 8 of the DTAA. Thus, reading the Clauses in Article 8, on facts, he submitted that international traffic being absent, the receipts would not fall for consideration under Article 8 of the DTAA. 29. On the treatment of the receipts as royalty falling under Clause (iva)/Article 12, he referred to Article 12 of the OECD model (prior to amendment of the Article in the year 1992) as well as to the DTAAs that the definition of 'royalty' included receipts arising from use or right to use of ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded within the meaning of 'equipment'. Thus, given the wider interpretation to the word 'equipment', he submitted that the first part of the Explanation must be understood to include all other ships and but for the exclusion of Section 44BB, even those ships would get covered under the definition of 'equipment'. 32. Referring to Law Lexicon 3rd Edition giving the meaning of the definition 'equipment', he submitted that vehicles, ships, or aircraft are treated as 'equipment' only. Referring to the contention based on the different depreciation rate in the schedule on which heavy reliance is placed by the assessee, thus drawing the inference that plant and ships are two distinct categories, learned standing counsel pointed out that the depreciation table is for the specific purpose of granting a deduction and the various entries in the schedules cannot be the basis for understanding the meaning of 'equipment'. Thus, wherever the statute thought of special treatment to a specific business or article, the Act contains special provisions either in the main Act or in the delegated Legislation; hence, depreciation schedule, which is a matter of administrative convenience, cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mills Others V. Gosalia Shipping Pvt. Ltd.), he submitted that de hors Explanation 5, time charter being one for usage of ship and the consideration is for the right to use the ship, the transaction would fall clearly within the ambit of 'use' under Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act, which language is also found in Article XII of the DTAA. 35. Referring to the reliance placed on the decision reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.,), he submitted that the said decision has no relevance to the provisions of the Income Tax Act. The expression 'use' under Section 3-A of the Tamil Nadu General Sales Tax Act is on transfer of right to use. Going by the chargeable event therein, where possession and control are sine qua non to attract chargeability and that the use under time charter being in the nature of the contracting party not having possession and control thereon and which attracted service tax liability, following the decisions of the Apex Court on similarly worded provision in other States' General Sales tax Acts, this Court held that the transaction did not attract the charge under Section 3-A of the Tam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alian decision by Mr.Arvind P.Datar, learned senior counsel appearing for the assessee, he submitted that those decisions relate to e-commerce issues and have no relevance to the time charter as well as bare boat charter. The control of the ship and the usage right being with the charterers, the consideration could only be seen as one for use or right to use. Thus, even prior to the amendment, the case would directly be covered by the expression 'use' in Clause (iva) of Explanation 2 and even without the aid of Explanation 5 to Section 9(1)(vi) of the Income Tax Act, the receipts could be properly brought under the above said Clause in Explanation 2. 39. Referring to the position post amendment, wherein Explanation 5 is introduced retrospectively, learned Standing counsel submitted that the insertion of Explanation 5 was introduced as a clarificatory amendment for the purpose of removing the doubts raised on certain aspects of the payment treated as 'royalty'. Couched in a language to give exhaustive meaning to the term 'royalty' in respect of any right, property or information, he submitted that the amendment made it clear that irrespective of the possession, control, direct use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otally uncalled for. Thus, going by Section 192 of the Income Tax Act, the assessee has an obligation to deduct tax on the royalty paid and failure to deduct tax attracts Section 201 and 201(1A) of the Income Tax Act, relevant to T.C.(A) Nos.2206 to 2208 of 2006. 41. On the question as to whether the assessee Poompuhar Shipping Corporation could be treated as an agent of the non-resident under Section 160 read with Section 163(1)(c) and that there could not be a parallel proceedings with one under Sections 195, 201, 201(1A) and 160, he pointed out that Sections 195 and 195(2) are on TDS on non-resident and certificate of non-deduction to be obtained, that the income is not chargeable. The obligation to deduct tax at source is on any person liable to make payment. When a person contends or the recipient contends that receipts are not liable to be charged under the provisions of the Income Tax Act, necessary safeguard is provided for in the form of certificate to be obtained from the Assessing Authority under Section 195(2) of the Income Tax Act. Admittedly, neither the assessee nor the non-resident invoked Section 195(2) of the Income Tax Act. The mechanism on TDS is more a facili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as Article 5 in DTAA for Australia, that a place of business, as given under a permanent establishment, includes facilities; thus, a Port used by every person is also a place of business and there need not be any exclusive usage of the space by the foreign enterprise, as has been contended by the assessee. Hence, it is immaterial whether the non-resident is the owner or the place is a rental one or otherwise, at the exclusive disposal of the enterprise, there need not be a formal legal right to use that place, for, even under Article 5, for a permanent establishment, what is contemplated is (a) business, (b) a fixed place of business and (c) the business to be carried on partly or fully therein. Referring to the OECD commentary, he submitted that the place of business need not be a fixed place fixed to geographical location and depending on the nature of business, it may vary, the only requirement being that there must be a close connection between the business needs and the geographical points. Thus, the ship docks used by several persons is also a place of permanent establishment; thus the ship dock, the berthing facility available for regular use, to wait and move on instru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be shall apply; thus Article 7 will be applicable to 'business profits' which do not belong to categories of income not covered by the other Articles. 46. In this connection, he drew our attention to the commentary on model convention, particularly to the 1977 model, which included payments "for the use or the right to use of industrial, commercial or scientific equipment" as falling under 'royalty' and subsequently deleted. To bring this apart from the income from container leasing under Article 7 or 8, as the case may be, rather than under Article 12, in other words, if the economic ownership of the property is permanently allocated to the permanent establishment, then, the property would form part of the 'business property' of the permanent establishment and the income would be taxable as 'business profits' under Article 7. 47. As to the contention of the assessee, particularly with reference to West Asia Maritime Co. Limited, as to whether income should fall under Article 7 or 8 or not, learned standing counsel replied that rental income as profits from the operation of the ship are clearly spelt out in the DTAAs, which are the results of the negotiation between the two C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is on the same lines as in Clause (iva) and since the Explanation is a clarificatory one and when no new charge is created, the Explanation cannot be read as though it had enhanced the scope of the definition of 'royalty' in Explanation 2 for the first time. In fact, the UN model and the Income Tax Act are on the same lines and only post 1992 amendment, OECD model omitted "use or right to use industrial, commercial and scientific equipment" to substitute the same as "use or right to use industrial, commercial and scientific experience." Thus, practically, there is no conflict between DTAA and the Income Tax Act. Thus, wherever there is a DTAA and the receipt being 'royalty', there could be no dispute in applying DTAA to the assessee's case and going by the decision reported in (2003) 263 ITR 706 (Union of India and another V. Azadi Bachao Andolan another), the effect of DTAA has to be given its full thrust. 50. On the assessee's argument that 'receipts' would fall under Article 8 and not as 'royalty' as argued by Mr.P.S.Raman, learned Senior Counsel appearing for West Asia Maritime Co. Limited, that income from shipping income could not be charged in the country of source, lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of facts what the foreign company earned was hire charges for the use of bare boat from 15.4.1999 to 25.10.2002. Referring to Article 8, the Commissioner of Income Tax (Appeals) held that the assessee did not fulfil the requirement of Article 8, since profits derived from the operation of ships in the coastal traffic is distinguished from the international traffic. As regards the relevance of Article 12 relating to royalties, the Commissioner further pointed out that the provisions of Article 7 would be applicable only in case where the foreign company itself was in operation of ships for transportation of passengers/goods in the international traffic. Since the payments made were with reference to the hire charges for operating the ships on the Indian Coast, the same would be covered by Article 12 of the DTAA. The Commissioner of Income Tax (Appeals) also upheld the contention of the Revenue that ship was an equipment. Thus, on the facts found, learned standing counsel submitted that the contention of the assessee claiming hire charges as capital expenditure was clearly an after thought, the accounting treatment given clearly showed the assessee treating it as revenue expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion anywhere in the Income Tax Act treating plant and machinery to include 'ship'. Therefore, when there is enough material in the Act itself to show that ship is treated differently from general plant and machinery, then ship cannot be treated as something similar to plant and machinery to become an 'equipment'. Since Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act is similar to OECD model and internationally, ship is not treated as an 'equipment', the attempt on the part of the Revenue to treat ship as an equipment for the purpose of attracting Clause (iva) is totally against the provisions of the Act. Further referring to Clause (iva) of Explanation 2, he pointed out that 'use or right to use' is with reference to industrial, commercial and scientific equipment. While industrial equipment relates to manufacturing and production aspect; commercial equipment relates to trade and commerce and scientific equipment relates to research equipment. Read in the context of the preceding Clauses, when Ship is not an equipment, the logical syllogism would be that the payment not being towards equipment, it could not be royalty. On the meaning of 'equipment', he refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Even to deem a place as a permanent establishment, it must be in the nature of what is enumerated under sub-clause (3) of Article 5. Thus, even if a time charter is treated as one of service and admitting that berth is a fixed place for business, still when there is no dominion over this place at the hands of the foreign enterprise, berth cannot be treated as a permanent establishment for the foreign enterprise. The berth reserved for TNEB was at the disposal of M/s.Poompuhar Shipping Corporation for operating its domestic as well as foreign ships. Thus, the same place cannot be a subject of relatable dominion and disposal. Referring to the time charter agreement, he submitted that in the absence of any certainty as to the permanency in carrying its operations or to the certainty of berthing in different places, there is no permanent establishment; consequently, Article 7 also fails in this case. 57. Touching on the submission of the Revenue that the decision of this Court reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.,) would have no relevance, he submitted that the consideration paid if at all to come under royalty, it must be for 'use or right to us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. ........ Explanation 2. For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident, (a)has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b); or (c)...... (vi)income by way of royalty payable by (a)the Government ; or (b)a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c)...... ........ Explanation 2. For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es or livestock or buildings or furniture and fittings" SECTION 44BB: "44 BB.(1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" : Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 44DA or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections. ......... Explanation. For the purposes of this section, (i) "plant" includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business; (ii) "mineral oil" includes petroleum and natural gas." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Explanation 2. For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (3) Subject to rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in. Hence, Articles dealing with the definition on international traffic, permanent establishment, tax on profits and gains, payment of royalty, as given under the DTAA with Australia are given here under: ARTICLE V- Permanent establishment - 1.For the purposes of this Agreement, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2.The term permanent establishment shall include especially : (a)a place of management; (b)a branch; (c)an office; (d)a factory; (e)a workshop; (f)a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g)a warehouse in relation to a person providing storage facilities for others; (h)a farm, plantation or other place where agricultural, pastoral, forestry or plantation activities are carried on; (i)premises used as a sales outlet or for receiving or soliciting orders; (j)an installation or structure, or plant or equipment, used for the exploration for or exploitation of natural resources; (k)a building site or construction, installation or assembly project, or supervisory activities in connection with such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection with radio broadcasting; (f)total or partial forbearance in respect of the use or supply of any property or right referred to in sub-paragraphs (a) to (e); (g)the rendering of any services (including those of technical or other personnel), which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design; but that term does not include payments or credits relating to services mentioned in sub-paragraphs (d) and (g) that are made; (h)for services that are ancillary and subsidiary, and inextricably and essentially linked, to a sale of property; (i)for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (j)for teaching in or by an educational institution; (k)for services for the personal use of the individual or individuals making the payments or credits; or (l)to an employee of the person making the payments or credits or to any individual or firm of individuals (other than a company) for professional services as defined in Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed, port charges, pilotages, agencies, commissions, consular charges etc. 64. In the decision reported in (1978) 113 ITR 307 (Union of India V. Gosalia Shipping P. Ltd.), the Supreme Court considered the similar clauses in a time charter agreement and pointed out that the conclusion that one would draw from the terms is that the payment by time charterers to the owners of the ship was not one payable on account of the carriage of goods, but was payable on account of the use and hire of the ship. Pointing out that the charter party was approved by the New York Produce Exchange and that there is no warrant for supposing that though the payment which the charterers bound themselves to make to the owners of the ship is on account of the carriage of goods, the parties described it as payable for the use and hire of the Vessel, in order to avoid the payment of Indian Income Tax. Referring to the clause on the liberty reserved to the charterers to sub-let, and the captain of the ship should be under the orders and directions of the charterers as regards employment and agency, the Supreme Court pointed out "the character of the payment cannot change according to the use to which the cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Court also referred to the decision reported in (2000) 119 STC 182 (SC) (20th Century Finance Corpn. Ltd. V. State of Maharashtra) and the decision of the Apex Court reported in (1999) 113 STC 317 (Aggarwal Brothers V. State of Haryana), for the understanding of the expression 'use or right to use'. This Court also referred to the decision reported in (2005) 145 STC 91 (SC) (Bharat Sanchar Nigam Ltd. V. Union of India) and pointed out to the attributes in right to use goods for the purposes of attracting the charge to hold that a transfer of right to use goods implied transfer of effective control for use. In that context, going by the charging provisions under Section 3A of the Tamil Nadu General Sales Tax Act, this Court held that in a time charter party, there being no transfer of effective control for use, the transactions would not attract Section 3A of the Tamil Nadu General Sales Tax Act. 66. Learned senior counsel appearing for the assessee submitted that the view of this Court in the decision reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.,) squarely covers the case on hand, particularly as regards the phrase 'use or right to use' and hence, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... triya Ispat Nigam Ltd., who owned the Visakapatnam Steel Project, had the effective control of the machinery belonging to it . Even while the machinery was in the use of the contractor, the contractor had no more freedom to make use of the same for other works or move it out during the period when the machinery was in his use than to make use of it for the project for which it was given. To facilitate the execution of work by the contractors with the use of sophisticated machinery, the owner, namely, Rashtriya Ispat Nigam Ltd. had undertaken to supply the machinery to the contractors for the purpose of it being used in the execution of the contracted work. Thus the contractor was entitled to make use of the machinery for the purpose of execution of the work of the owner, namely, Rashtriya Ispat Nigam Ltd. and there was no transfer of right to use as such, in favour of the contractor. The High Court pointed out as follows: "An owner of property has a bundle of rights in it, namely, right to possess, right to use and enjoy, right to usufruct, right to consume, to destroy, to alienate or transfer, etc. In law it is not only possible but also permissible that the various rights and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is hired under "rent-a-car" scheme, and a cab is provided, usually driver accompanies the cab; there the driver will have the custody of the car though the hirer will have the possession and effective control of the cab. This may be contrasted with the case when a taxi car is hired for going from one place to another. There the driver will have both the custody as well as possession; what is provided is service on hire." 72. The above-said decision was appealed against by the State and in the decision reported in 126 STC 114 (Rashtirya Ispat Nigam Ltd. Vs. Commercial Tax Officer, Company Circle, Visakhapatnam), affirming the decision of the High Court, the Apex Court held that the transaction did not involve transfer of right to use the machinery in favour of the contractors and in the absence of satisfying that essential requirement of Section 5-E, the hire charges collected by the assessee from the contractors were not exigible to sales tax. 73. In the decision reported in (1999) 113 ITR 317 (Aggarwal Brothers V. State of Haryana and another), the question of hiring as amounting to transfer of right to use goods again surfaced with reference to Haryana General Sales Tax Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main of the goods in which right to use is transferred. 67. It is a common ground that the transaction mentioned in Sub-clause (d) which is treated as a 'deemed sale', is in effect leasing hiring of the goods, which implies use of the goods by the hirer. 68. It will be useful to note the following passage in 'Introduction to the Law of property' by Mr. F.H. Lawson 1958 Edition, Page 117. "In Roman law hire was nothing more than contract. In English law, however, it is much more. Here again we must distinguish between chattels and land. When a chattel is handed over by way of hire a bailment takes place, and thereby the hirer is put in possession of the thing. For land the corresponding transaction is a lease, and here too there is a transfer of possession. So far the two are very similar, though whereas the lessor always retains what is misleadingly called 'possession', a bailor who bails goods for a fixed term loses possession... 69. The Halsbury's Laws of England describes 'Hire of chattels' Fourth Edition, Volume 2, Para 1551 thus : "Hire is a class of bailment. It is a contract by which the hirer obtains a right to use the chattel hired in return for the payment to the ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 72. Reverting to Sub-clause (d) of Clause (29A), a perusal of the Statement of Objects and Reasons appended to The Constitution (Forty-Sixth Amendment) Act, 1982, shows that the Parliament has taken note of the fact that the main right in regard to films relates to its exploitation and after exploitation for a certain period of time, in most cases, the film ceases to have any value, so instead of resorting to the outright sale of a film, only a lease or transfer of the right to exploit the film is made. The device by way of lease of films has been resulting in avoidance of sales tax so to curb that device, Sub-clause (d) is inserted in Clause (29A). Even so, Sub-clause (d) is wider import than a mere leasing of films. It applies to all kinds of leasing/hiring of goods, for example, leases of plants, machinery, computers, cars, planes, furniture etc, 73. A sale of any goods is complete when the property in the goods passes to the purchaser pursuant to a contract of sale of those goods. So also, a deemed sale of goods under Sub-clause (d), as has been pointed out above, will be complete when the control of the goods in which the right to use is transferred, passes to the transfere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09 (State of Tamil Nadu V. Essar Shipping Ltd.) pointed out that without the transfer of right to use, the transaction in question cannot fall under the charging position. This Court further referred to the decision reported in (2005) 145 STC 91 (SC) (Bharat Sanchar Nigam Ltd. V. Union of India) and held what is contemplated as held in the Apex Court decision to attract the charge under the Sales Tax Act on the transfer of right to use goods was that the possession given unaccompanied by transfer of right to use, in the sense of there being no effective control, would not bring the transaction within the four corners of the charging provision. Thus the decision reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.) rested on the scheme, the charging Section and the decisions of the Apex Court on the similarly worded charging position. 78. As far as the present case is concerned, 'royalty' means the consideration paid for "the use or right to use". Irrespective of whether there is any transfer or not, the consideration paid for use or right to use simpliciter is sufficient for the consideration being called as 'royalty'. The presence or absence of possession ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which they had agreed to render, the charterers would be entitled for damages for that breach. The Court further pointed out that when the Vessel was waiting with the cargo, the ship owners turned the crew on to chipping rusty plates or to painting the vessel, the charterers could not object that if the ship were loaded or to be sailing the seas instead of being chipped, or painted, in dock. The ship was in enforced idleness, which was solely on account of the charterers and it was clear during that time that the ship owners were only doing that, which the charterers had themselves suggested that they should do and the charterers approved of what the ship owners did, in fitting the degaussing apparatus. Thus, the Court held that the claim of the charterers could be saved of paying the hire during this period, was rejected. The Court pointed out that when the ship arrived at the Blyth, the ship could not be loaded immediately and the ship owner suggested fitting of degaussing apparatus. In the circumstances, the Court held that there was no breach of contract by the ship owners. The reference to the observation therein, hence, has to be understood in the context of the facts there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cates that the meaning of the word "Use" must take its colour from the context in which it is used read in the background of the explanation and on its own the expression deserves to receive a wider meaning given to it. It may be noted that in the decision reported in (1994) 208 ITR 400 CIT v. Vr.S.R.M.Firm) affirmed by the Supreme Court in the decision reported in (2004) 267 ITR 654 (Commissioner of Income Tax V. P.V.A.L., Kulandagan Chettiar) in the context of the term "direct use or use in any other form" viewed that the disposal of the property or the capital asset itself is as much a form or method of use of the immovable property and that the expression 'direct use or use in any form' are sufficiently wide enough to include within its scope the transfer, sale or exchange of the property. Even though the said decision is in the context of the DTAA with Malayasia, the judgment gives a guidance as to how the phrases used in the DTAA should be understood in the absence of words of limitation. Thus the scope of the expression cannot be curtailed by the decisions under the provisions of the General Sales Tax Act. 85. As pointed out in the decision reported in (1990) 77 STC 182 (R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty; c) the provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient 87. The term 'use or right to use' in the Act, is thus intended to take its ordinary meaning and applied in the broader sense, meaning, employing for any purpose. It is truism that the word 'use' is not having a single precise meaning. It is a word of wide import and its meaning in any particular case depends on the context in which it is employed (Refer Taylor J in City of Newcastle v. Royal Newcastle Hospital (1957) 96 CLR 493 at 515 as referred to by Stephen J in Ryde Municipal Council vs Macquire University reported in (1978) 139 CLR 633). 88. This takes us to the consideration on Article 12 under DTAA. Article 12 of the Australian DTAA deals with the jurisdiction of the State on the taxability of royalty. It states that ARTICLE VIII - Ships and aircraft - 1.Profits from the operation of ships or aircraft, including interest on funds connected with that operation, derived by a resident of one of the Contracting States shall be taxable only in that State. The definition of 'royalty' as given under Article 12(3) of the DTAA with Austra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit is given to the assessee, the consideration for the use of the industrial, commercial and scientific equipment is 'royalty', assessable under Explanation 2(iva) to Section 9(1)(vi) of the Income Tax Act. Thus, for the purposes of Income Tax Act, under the time charter, the payment made being for the use of the ship, the same comes within the meaning of the word "royalty". 93. This takes us to the second question as to whether 'Ship' could be considered as an equipment at all. Mr.P.S.Raman, learned senior counsel appearing for the assessee placed reliance on the meaning of the word "equipment" under the Merchant Shipping Act as well as tried to draw inspiration from the Schedule of rates for depreciation under Rule 5 and the schedule read with Section 32, only to emphasize the difference maintained between plant and machinery on the one hand and ship on the other hand under the said table and submitted that read in the context of the other sub-clauses, the expression "industrial, commercial and scientific equipment", must be in relation to what is enunciated under Clauses (i) to (iv) and (v) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. Thus, according to him, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC) (CIT V. Venkateswara Hatcheries (P) Ltd.), the Apex Court pointed out "When the word is not so defined in the Act it may be permissible to refer to the dictionary to find out the meaning of that word as it is understood in the common parlance. But where the dictionary gives divergent or more than one meaning of a word, in that case it is not safe to construe the said word according to the suggested dictionary meaning of that word. In such a situation, the word has to be construed in the context of the provisions of the Act and regard must also be had to the legislative history of the provisions of the Act and the scheme of the Act. It is a settled principle of interpretation that the meaning of the words, occurring in the provisions of the Act must take their colour from the context in which they are so used. In other words, for arriving at the true meaning of a word, the said word should not be detached from the context. Thus, when the word read in the context conveys a meaning, that meaning would be the appropriate meaning of that word and in that case we need not rely upon the dictionary meaning of that word." 97. Keeping this in the background, we find that under Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of certain terms relevant to income from profits and gains of business with reference to Sections 28 to 41 of the Income Tax Act. Section 43(3) of the Income Tax Act defines "plant" to include ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession, but does not include tea bushes or livestock or buildings or furniture and fittings. We have a separate provision relating to income of shipping companies under Chapter XIIG of the Income Tax Act . Section 115V of the Income Tax Act defines various terms like bare boat charter, bare boat charter -cum- demise, Director-General of Shipping, factory ship, fishing Vessel, etc. Thus, with reference to Sections 28 to 41 of the Income Tax Act as is evident from the inclusive definition in Section 43(3), the word 'plant' is widely defined to include a ship. The relevant test that is to be applied in finding out as to whether a particular thing is a plant or not, would be, to find out the operation that a particular thing performs in the business, as to whether it is a tool of the tax payer's trade and fulfils the function of the plant in the trading activity in the earning of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the definition of the terms thus has relevance to the computation of income under the head 'profits and gains of business or profession'. Thus, in the absence of any definition of equipment under the DTA and considering the business of the foreign enterprise, the definition of "plant", as including 'ship' will be the appropriate definition for the understanding on the scope of the expression "equipment". 101. There is no definition of what "plant" is. The term 'plant' is judicially understood as meaning and referring to whatever apparatus is used by a business man for carrying on his business, including all goods and chattels, fixed or movable, which he keeps for permanent employment in his business but not including his stock-in-trade which he buys or makes for sale. In the decision reported in (1971) 82 ITR 44 (CIT V. Taj Mahal Hotel), the Supreme Court pointed out that "the word plant must be given a wide meaning having regard to the fact that articles like books and surgical instruments are expressly included in the definition of plant". 102. After tracing the Indian and English law, in the decisions reported in (1989) 175 ITR 154 (Commissioner Of Income-Tax vs Sri Kr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to an apparatus which is used for mechanical or industrial business. Thus, plant includes every tool, apparatus, equipment or machinery, not limited to machinery used in tool. In fact, even in Section 43(3) of the Income Tax Act, the expression used is "unless the context otherwise requires". Thus, when the context does not require "otherwise", the meaning of the word "plant" as defined under Section 43(3) would be relevant to understand what 'equipment' would mean. Thus, with the inclusive definition on plant embracing within its fold so diverse a matter from a ship to a book, or medical equipment, every tool, apparatus, 'plant' includes 'all equipment' used by a business man for carrying on his business. Thus, we have no hesitation in accepting the plea of the Revenue that ship is an equipment, with which the assessees carried on their business, which they keeps for employment in their business. 104. The word "equipment" construed in the light of Section 9(1)(vi)(c) thus extends the normal meaning of the word, to cover even those specified categories of machinery or plant that would themselves not construed within its plain and ordinary meaning. As rightly pointed out by the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Court held that answer must surely include his ships. The Court pointed out that word 'equipment' is certainly capable of including ships as a matter of language. It was further pointed out "that equipment in section 1(1) includes all chattels provided for the purpose of the employer's business other than materials and work in progress." On appeal by the ship owner, Lord Oliver of Aylmerton with whom other Judges agreed, pointed out that no doubt equipment frequently used may describe the appurtenances of some larger entity, yet, he felt in the background of the object of the legislation and the definition of the word on 'equipment', "he saw no reason either in logic or as a matter of language why its use should be so confined". The Judgment of the House of Lords appears to be the one and only judgment on the aspect as to whether ship is an equipment at all and in the context of the provisions of the Act, as well as going by the object of the legislation, the House of Lords held that ship is included in the definition of 'equipment'. 106. Section 9(1)(vi)(b) states that income by way of royalty payable by a person who is a resident arising or accruing whether directly or indir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for the Revenue pointed out that considering the specific exclusion of the cases referred to in Section 44BB (relating to income earned by a non-resident engaged in the business of providing services or facilities in connection with or supplying plant and machinery or hire used, or to be used in the perspective for or extraction or production of mineral oil) in Clause (iva) and 'plant' defined to include ships, aircraft, vehicle drilling works, scientific apparatus and equipment used for the purposes of the sand business, the construction that one has to give Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act is that other than what is excluded by specific reference namely, to cases falling under Section 44BB, all other ships used in the business would be considered as included within the scope of Clause (iva) of the Act. 108. In this connection, he placed reliance on the decision reported in (1985) 2 SCC 670 = AIR 1985 SC 973 (Daman Singh and others V. State of Punjab and others). The said decision related to the challenge as to the provision of Section 13(8) of the Punjab Co-operative Societies Act which provided for the compulsory amalgamation of Co-op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amely, as income falling under Section 44BB. Read in the context of the decision of the Supreme Court reported in (1985) 2 SCC 670 = AIR 1985 SC 973 (Daman Singh and others V. State of Punjab and others), ships, other than those referred to under Section 44BB are included for the purposes of Clause (iva) . Thus, as a matter of language, ship, as an apparatus, with which the business is carried on, is an equipment and as held in the decision of the House of Lords, apparatus includes all chattels provided for the purposes of the business of a person other than the stock-in-trade. It is no doubt true that a plain ordinary meaning of the word may be elusive. But when the word has a potentially wider meaning in the context of the provisions, as pointed out in the decisions in the interpretation of the words, to quote, the House of Lords, there is a danger of mistaking the plain and ordinary meaning from the one most frequently used in practice. The question we have to hence ask oneself is what the word means in the context of the provisions therein. Thus, in the context in which the word 'equipment' appears and the exclusion of those referable to the income under Section 44BB, it is evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... films. 112. We had already seen that while the OECD model deleted the use or right to use of industrial, commercial and scientific equipment from the definition 'royalty', the Indian Income tax retained this. The Clauses in Explanation 2 speak on transfer, imparting and use of these intellectual property rights and apart from these, it also includes payment for use of and right to use of any industrial, commercial and scientific equipment and in the DTAAs as well, the use or right to use of any equipment is used. The use of the term ' any equipment' thus not being specifically restricted in its application to those having relevance to other Clauses. The only inference that one may draw out from this is that quite apart from what is enunciated in other Clauses as having relevance to what is stated as use or right to use of an equipment, there could be yet other categories on the use or right to use of any equipment and the payment for the use or right to use may rightly fall under the category of 'royalty'. This is thus made further clear by the exclusion Clause in Clause (iva) referring to cases falling under Sec 44 BB of the Income Tax Act. A payment made for the use or the rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax at source . Mr.Arvind P.Datar, learned senior counsel appearing for the assessee, however, replied that reading Section 194C, 194I and 194J of the Income Tax Act, one would note that the payments on hire are not treated as 'royalty', ship is not treated as an equipment and domestic hire is not treated as 'royalty' under Section 194 C of the Income Tax Act. He pointed out that the use of the expression "includes" in Explanation 5 is a word of limitation and it really means as "means and includes". 116. Explanation 5, inserted by Finance Act, 2012, with effect from 01.06.1976, begins with the phrase "for removal of doubts, it is hereby clarified that the royalty includes and has always included." Leaving aside this argument as to whether this is an expression of limitation or not, the Explanation is clear in its intent and clarifies that irrespective of whether the possession and control of right, property or information are with the payer or not, such right, property and information is used directly by the payer or not, whether the location on such rights, property or information is in India or not, 'royalty' includes and always included consideration in respect of any proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hooses to use it for carrying cargo or lays it up out of use. The ownership and possession of the vessel which remain with the owner are separated from the use of the ship, which is granted to the charterer. The agreement states that the charterer may send the vessel to safe berths, safe ports and safe anchorages, the owners are responsible for the navigation of the vessel and the Master has the obligation to prosecute the voyage with utmost care. The payment is calculated according to the time stated in the agreement rather than the same is performed. The right to remuneration is unaffected by the lay off by the charterer. Thus with the possibility in law and permissible too under law that various rights and interest in a property may be vested in various persons, the Explanation merely recognises what is evident in law and thus clears whatever doubt one may have on the aspect of use or right to use, be it with regard to tangible or intangible property, rights and information. Consequently, we do not find any need for giving Explanation 5 a restrictive application to Clauses (i) to (iv) and (v) alone. In the circumstances, apart from the fact that the case of the Revenue could sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as 'royalty'. 122. We do not agree with this, for, the facts found by the Authorities clearly show that on 14th May, 1999, the assessee entered into a BBCD contract with DMCL fixing the hire charges for 69 months starting from April, 1999 to December, 2004 and the purchase option at the end of each period was also specified. Thus, till the last month of the payment or the option exercised, the assessee was not the owner of the vessel. The assessee opted to make the balloon payment of US $2.75 million on 12.1.2005. A sale certificate was issued only on 12.01.2005. The consideration paid periodically was in the nature of hire charges for the use of the Vessel, as described in the agreement and not sale consideration as was contended by the asessee. The Commissioner of Income Tax (Appeals) referred to the correspondence dated 31.03.1999 addressed to Marine Group of ICICI Limited, the financier, evidencing the intention of the assessee to acquire the vessel on BBCD basis. It stated that in addition to the BBCD hire, it had to pay balloon payment of US $ 2.75 million at the end of the charter period, so that, the owner could transfer the Vessel to the assessee. On the ICICI Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f taxing the income treating it as 'royalty' under Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act did not arise. 124. We do not agree with the above submission. As rightly pointed out by the Revenue, as far as the exercise of the option to purchase and deferred payment of the consideration is concerned, we have already considered this in the preceding paragraphs, and hence, we reject the reliance on Article 8(6). As for the submission based on Article 8(1), that the profits could be taxed only by the Contracting State where the enterprise is registered, even here, we do not agree with the assessee, given the definition on international traffic and that the vessel was not in international traffic at all as has been understood in the commentary on OECD model . 125. The commentary on OECD model definition on "international traffic" points out that the definition of the term "international traffic" is broader than is normally understood, so as to preserve for the State of the place of effective management the right to tax purely domestic traffic as well as international traffic between third States, and to allow the other Contracting State to tax traffic so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. Berthing is guaranteed for the foreign ships in coastal waters chartered by the assessee. The Tribunal held that it amounted to permanent establishment of the foreign shipping companies and nothing was placed by the assessee before the Tribunal to refute this contention. Thus, the Tribunal rejected the appeal of the assessee on this aspect too. Although Mr.Arvind P.Datar, learned senior counsel appearing for the assessee pointed out that the questions raised by the Revenue in the T.C.(A)Nos.56 to 64 of 2013 are different from what had been argued before the Tribunal on the aspect of permanent establishment, when specifically asked by the court as to whether this demanded a remand, learned senior counsel quickly answered in the negative and requested this Court to consider the questions in all perspective - the issue being legal in character and Section 260A of the Income Tax Act permitted such additional questions to be raised at the direction of the Court for a proper consideration of the issues involved on the admitted facts. Mr.P.S.Raman, learned Senior Counsel appearing for the assessee too expressed that he has no objection to this. 131. The Department's contention h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red services from within India with its men and there is intimate connection between global business and business in Indian soil. Thus the business activity in India resulted in profit in India. Learned standing counsel appearing for the Revenue, however, contended that allocable profits may be a matter of consideration by the Assessing Officer, yet, the larger question on business profits and business connection linked to the permanent establishment; being a question of law, the same can be considered by this Court, since facts necessary for considering this is before this Court also and no fresh facts need to be considered. 133. According to the Revenue, the non-resident Indian Company also has permanent establishment to carry on the business which one finds through the berth where the ship docks, waits and on instruction it moves. The ship has the licence to move along the coast granted by the Indian Authority. To have a permanent establishment, it is not necessary it should be a fixed place of business, so long as there is a link between specific geographical point with which it moved. Thus the Port where the ship is docked is also a Permanent Establishment. For the moving sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee for the delivery and re-delivery on the Vessels taken on hire shows that those vessels were put to use for more than 90 days continuously between the named Ports in India. Thus the hiring was not an occasional feature and the hiring was for a continuous period solely at the disposal of the assessee for the entire period of hire. Thus, it is evident that the Vessels sailed along the Indian Coast on the Eastern side on a regular exclusive basis and the Ports are used for berthing of the ships. The agreement between French Company and the assessee and the assessee and the German Company shows that they had local agents employed in India. As per the definition under Article 5, 'permanent establishment' means a fixed place of business through which the business of the enterprise is wholly or partly carried on. Article 5(2) contains an inclusive definition to include a place of management, a branch, an office, a factory, a workshop and a mine an oil or gas well, a quarry or any other place of extract of natural resources. Sub-clause (3) deems certain places as permanent establishment. As per this Sub-Clause, a building site or construction or installation project constitutes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it satisfies the expression permanent establishment. In contra distinction to a mere fleeting presence, the intention to use it for its business and in the course of its business is required and the space is available at the disposal of the enterprise for regularly carrying on business The commentary further pointed out that what is meant by a fixed place in the context of permanent establishment. It further clarifies that to call a place a fixed place, there has to be a link or coherence between the place of business and a specific geographical point. This, however, ultimately depended on the nature of the business too. It observed as follows: "single place of business will generally be considered to exist where, in light of the nature of the business, a particular location within which the activities are moved may be identified as constituting a coherent whole commercially and geographically with respect to that business...... By contrast, where there is no commercial coherence, the fact that activities may be carried on within a limited geographic area should not result in that area being considered as a single place of business..... Conversely an area where activities are car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. 140. Thus the submission of the Revenue that the moving ship has a place of business in the place where the ship is docked and the fact that the ship moved from one point to another is the result of the nature of business contract and the movement is an integrated one having business and geographical coherence leads to the inference that the foreign enterprise has the place of permanent establishment in this Country. The foreign enterprise thus satisfying the presence a permanent establishment, but for the character of the receipt not being attributed as the income earned from the permanent establishment for it, to be assessable as business profits earned by its participation in the economic benefit of this Country, we do not find the case of the assessee could be brought under Article 7 to assess the income as business income. 141. It may be of relevance to note that under Article 12(4), it is specifically pointed out that provisions of paragraph 1 and 2 on Article 12 shall not apply to treat the receipts as royalty, if the person beneficially entitled to royalties carries on business in the other Contracting state, in which the royalties arise through a permanent establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efines who is an agent. As an inclusive definition, the Section treats any person in India having business connection with a non-resident as an agent in relation to the non-resident and an agent from whom or through whom the non-resident is in receipt of any income whether directly or indirectly. Section 160 defines who are representative assessees. Sub-section (i) of Section 160(1) states that in respect of the income of a non-resident specified in sub-section (1) of Section 9, the agent of the non-resident including a person treated as an agent under Section 163 would be a representative assessee. 145. Section 195 relates to TDS on payment to a non-resident. The Section states "any person" responsible for paying to a non-resident would has to deduct tax at source. Section 195(2) states that the person responsible for deduction of tax at source can apply to the Assessing Officer for general or special order for determination of appropriate proportion of tax deductible, where the amount paid could not be fully taxable, the assessee responsible for TDS can ask for nil certificate. The non-resident or the agent could make an application for a certificate of 'nil' deduction at a les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 of the Income Tax Act, provisions of Section 160 of the Income Tax Act would stand attracted . 148. One of the objections taken by the assessee to this is that in respect of several of the non-residents, single assessment has been done at the hands of the assessee. As rightly pointed out by the Revenue, this technicality, however, does not cut at the legality of the assessment. It is no doubt true that under Section 160(1) of the Income Tax Act, representative assessee means an agent of the non resident, including a person who is treated as an agent under Section 163 in respect of the income of a non-resident specified in sub-Section (1) of Section 9. The fact herein is that the assessment in respect of each of the non-resident from whom the assessee is to be assessed in a representative capacity has been specifically quantified and that in each of the case of the non-resident, the assessee had been treated as a representative assessee. In the circumstances, we do not find any merit in the contention of the assessee that the order fails on this technical ground. 149. The contention that Sections 163 and 201 of the Income Tax Act cannot go together is not correct for the reas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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