TMI Blog2023 (6) TMI 576X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee by the decisions of the coordinate bench of the Tribunal for the preceding assessment years. Decided in favour of assessee. Taxability of reimbursement of expenses - Once the main receipt, i.e. pertaining to chartering of vessel has been held to be not a Royalty, the reimbursement of expenses in relation to the same agreement cannot be held to be taxable as Royalty, in the present case, as the AO is also of the view that the receipts are intricately linked to the chartering income. Accordingly, the addition on account of reimbursement of expenses is deleted. Decided in favour of assessee. - Shri Amarjit Singh, Accountant Member And Shri Sandeep Singh Karhail, Judicial Member For the Assessee : Shri Madhur Agrawal a/w Ms. Miti Shah For the Revenue : Shri Chandip Singh ORDER PER SANDEEP SINGH KARHAIL, J.M. The present appeal has been filed by the assessee challenging the impugned final assessment order dated 18/01/2023, passed under section 143(3) r/w 144C(13) of the Income Tax Act, 1961 ( the Act ), pursuant to the directions dated 27/12/2022, issued by the learned Dispute Resolution Panel-2, Mumbai [ learned DRP ], under section 144C(5) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings under section 270A of the Act 10. erred in initiating penalty proceedings under section 270A of the Act. 3. Ground no.1 is general in nature and therefore needs no separate adjudication. 4. The issue arising in grounds no.2 and 3, raised in assessee s appeal, is pertaining to the taxability of receipts on hire of vessel on a time charter basis. 5. The brief facts of the case, pertaining to this issue, are: The assessee is a company incorporated in Singapore. It is operating in the maritime sector and is primarily engaged in the business of salvage, wreck removal, environment protection, and consultancy services. During the year under consideration, the assessee earned revenues in connection with its contract with Boskalis Offshore Contracting BV ( BOC BV ) in respect of the charter of the vessel, Smit Borneo. The assessee chartered the vessel, Smit Borneo along with the crew to BOC BV, which in turn had entered into a contract with BG Exploration and Production India Ltd for carrying certain activities in connection with the exploration/extraction of mineral oils in the Tapti Gas Field. During the year under consideration, the assessee filed its return of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration since the assessee does not have a Permanent Establishment in India. The AO also held that the vessel, Smit Borneo, is a crane barge which is industrial, scientific, and commercial equipment other than the one falling in Article 8(4)(b) (c) of the India Singapore Double Taxation Avoidance Agreement ( DTAA ). The AO also held that the receipts, in the present case, are in view of the lease of Smit Borneo and are also covered both by clause (iva) of Explanation-2 of section 9(1)(vi) of the Act and Article 12(3)(b) of the India Singapore DTAA. The AO by placing reliance upon the decision of the Hon‟ble Madras High Court in Poompuhar Shipping Corporation Ltd [2013] 30 taxmann.com 150 (Madras) held that the consideration received by the assessee is in the nature of Royalty, since control and use or right to use has been passed on to the charterers, i.e. BOC BV by the assessee. Accordingly, the AO held that receipts are taxable as royalty liable for taxation @10% as per the Act and the India Singapore DTAA. 7. The assessee filed detailed objections against the addition made by the AO. Vide directions dated 27/12/2022, issued under section 144C(5) of the Act, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. As observed by us hereinabove, the assessee had sought our indulgence for adjudication of three issues viz. (1) that, as to whether or not the consideration received by the assessee from time charter of its vessel 'Smit Borneo' had rightly been assessed as 'royalty' by the A.O/DRP under clause (iva) of the 'Explanation 2' to Sec. 9(1)(vi) of the Act, and also Article 12(3)(b) of the India-Singapore tax treaty; (ii) that, as to whether or not the A.O/DRP are right in law and the facts of the case in treating the mobilisation fees received by the assessee as 'royalty', both under the Act, as well as the India-Singapore tax treaty; and (iii) that, as to whether or not the A.O/DRP are justified in treating the consideration received by the assessee towards reimbursement of expenses from Leighton India Contractor Pvt. Ltd., as royalty. 15. In our considered view, the genesis of the controversy involved in the present appeal primarily hinges around the aspect that as to whether or not the lower authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sub-clauses (1) to (iv), (iva) and (v) Further, the term 'royalty' has been defined as per Article 12 of the India- Singapore tax treaty, as under: 3. The term royalties as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: (a) any copyright of a literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information; (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraphs 4(b) or 4(c) of Article 8. As observed by us hereinabove, the assessee in order to impress upon us that its case does not fall within the meaning of the term 'royalty' as defined in 'Explanation 2' to Sec.9(1)(vi) of the Act, had came forth with two fold contentions viz. (i) that, as the assessee had time chartered its v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;right to use' of the said vessel to the charterer, viz. Leighton India Contractor Pvt. Ltd., the same thus could not be treated as royalty in the hands of the assessee. On a perusal of the records, we find substantial force in the claim of the assessee that the nature of 'agreement' entered into by it with Leighton India Contractor Pvt. Ltd., was for providing of time charter services, and not for hiring of any equipment. As such, there is substance in the claim of the Id. A.R that the assessee had only time chartered its vessel viz. 'Smit Borneo' along with the crew to Leighton India Contractor Pvt. Ltd., and had at no stage passed over the 'use' or right to use' of the said vessel to the charterer. But then, we cannot remain oblivious of the fact that the Id. A.R could not dislodge the claim of the revenue that as per 'Explanation 5' to Sec. 9(1)(vi) of the Act, the fact as to whether the possession or control of the right or property was with the payer or the right or property was used directly by the payer, would have any bearing on the characterising of the amounts received for 'use', or the 'right to use' of any indu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Subject to STCW code, The Master shall carry out his duties promptly and the Vessel shall render all reasonable services within her capabilities by day and by night and at such times and on such schedules as the Charterers may reasonably require without any obligations of the Charterers to pay to the Owners or the Master, Offices or the Crew of the Vessel any excess or overtime payment. Clause 7 (b) The Vessel's crew if required by charterers will connect and disconnect electric cables, fuel, water and pneumatic hoses when placed on board the Vessel for loading and unloading cargoes, and will hook and unhook cargo on board the Vessel when loading or discharging alongside offshore units. Clause 7(d) The entire operation, navigation, and management of the vessel shall be in the exclusive control and command of the Owners, their Masters, Officers and Crew. The Vessel will be operated and the services hereunder will be rendered as requested by the Charterers, subject always to the exclusive Right of the Owners or the Master of the Vessel to determine whether operation of the Vessel may be safely undertaken. In the performance of the Charter Party, the Owne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. DIT (2011) 332 ITR 340 (Del), had observed as under: 34. As far as DTAA in the present case is concerned, the income earned by the Assessee would be treated as royalty only where it is received as consideration for the use of the equipment, i.e., industrial, commercial or scientific. It can also be for use of or the right to use any copyright or for information concerning industrial, commercial or scientific experience. It is clear from the contract itself that the control of the equipment throughout remained with the Petitioner and did not get transferred to IOCL. 35.1 In this context, it is necessary to refer to the decision of this Court in Asia Satellite Telecommunications Co. Ltd (supra). The facts were that the Assessee in that case, Asia Satellite Telecommunications Co. Ltd. (ASTC), a company incorporated in Hong Kong, was carrying on the business of private satellite communications and broadcasting facilities and was the lessee of a satellite called AsiaSat 1 which was launched in April 1990 and was the owner of a satellite called AsiaSat 2 which was launched in November 1995. ASTC entered into agreements with television channels, communication companies or ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provision of the DTAA which is more beneficial to the Assessee. This aspect too has been clarified by the Court in Asia Satellite Telecommunications (supra). It was observed: The effect of an agreement made pursuant to Section 90 is that if no tax liability is imposed under this Act, the question of resorting to agreement would not arise. No provision of the agreement can fasten a tax liability when the liability is not imposed by this Act. If a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it. In case of difference between the provisions of the Act and of an agreement under section 90, the provisions of the agreement shall prevail over the provisions of the Act and can be enforced by an appellate authority or the court. However, as provided by sub-section (2), the provisions of this Act will apply to the assessee in the event they are more beneficial to him. Where there is no specific provision in the agreement, it is the basic law, i.e., the Income-tax Act which will govern the taxation of income. 36. For the payment to be characterised as one for the use of the equipment, factually, the equipment must be used by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts therein involved are distinguishable as in comparison to those in the case before us, which can be briefly culled out as under: Sr. no. In case of Madras HC Ruling In case of assessee 1. Assessee was engaged in the business of moving coal from various ports in India to a particular location in India Assessee was in the business of providing time charter services in connection with prospecting, extraction or production of mineral oil in India. 2. The place of re-delivery of ships was at the option of the assessee (i.e charterer or the lessee). The place of delivery and redelivery of the vessel was at the location of the assessee (i.e the owner or the lessor) in Singapore (refer Box No. 7 8 of the agreement). 3. The masters/captains and others working in the ships are at the disposal of the assessee (i.e charterer or lessee. The entire operation, navigation and management of the vessel was in the exclusive control and command of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time charter of vessels in this case constitutes royalty . This perception seems to be misconceived. The Hon'ble Delhi High Court in the case of Asia Satellite Telecommunication Co. Ltd. vs. DCIT (supra) has held that two things are necessary to christen a payment as a royalty under Explanation 2 appended to clause (vi), which speaks about possession and control of the vessel in the given case, the assessee neither has control nor possession. over the vessels. The Captain/Master and the crew is instructed, directed and controlled by the ship owner only and not by the assessee. The assessee simply informs the description of the cargo to be carried on and from which port to which port the cargo has to be transported. Thus, it becomes clear that the assessee neither has control/nor the possession over the vessel in question. Apart from that, we find that a similar view had also been arrived at by the ITAT Ahmedabad bench 'I' in the case of DCIT, International Taxation, Baroda Vs. Bombardier Transportation India Pvt. Itd. (2017) 162 ITD 586 (Ahd). In the said case, it was observed by the Tribunal that the rendition of I.T support services to the assessee by a Canadian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, was given on a time charter basis to Leighton India Contractors Private Limited, for providing services for exploration/extraction of mineral oil to ONGC. Thus, we find no merits in the submissions of the learned DR that the nature of the contract is different in the present case. During the hearing, the learned DR placed reliance on clause 4 of the agreement between the assessee and BOC BV, as quoted on page no.2 of the draft assessment order, to support the submission that the charterer has the option of making structural alterations to the vessel and therefore, the charterer has specific control upon the vessel for its business activities. However, we find that the said clause of the agreement also states that the vessel is to be re-delivered and reinstated at the charterer s expense to the original condition and the vessel is to remain on hire during any period of these alterations or reinstatement. In the said clause, it is also stated that such repairs and maintenance may also be undertaken by the assessee at the charterer s expense when the same is necessary for the safe and efficient performance of the vessel. Therefore, in view of the above, we are of the considered opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these receipts are intricately linked to the chartering income and the reimbursement would not have a reason, but for the charter agreement with BOC BV. Accordingly, the AO taxed these receipts as Royalty income of the assessee. The learned DRP, vide its directions, rejected the objections filed by the assessee on this issue by following its directions rendered in assessee s own case for the assessment year 2014-15. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order. Being aggrieved, the assessee is in appeal before us. 17. Having considered the submissions of both sides and perused the material available on record, we are of the considered view that once the main receipt, i.e. pertaining to chartering of vessel has been held to be not a Royalty, the reimbursement of expenses in relation to the same agreement cannot be held to be taxable as Royalty, in the present case, as the AO is also of the view that the receipts are intricately linked to the chartering income. Accordingly, the addition on account of reimbursement of expenses is deleted. As a result, grounds no.5 and 6 raised in assessee s appeal are allowed. 18 ..... 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