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Section 9 – Royalty - to hold that ‘ship’ is an ‘equipment’ honorable Madras High Court relied on definition of ‘plant’ as per section 43(3) –in view of author, a reconsideration is desirable. |
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Section 9 – Royalty - to hold that ‘ship’ is an ‘equipment’ honorable Madras High Court relied on definition of ‘plant’ as per section 43(3) –in view of author, a reconsideration is desirable. |
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Section 9, 43 (3) of Income Tax Act, 1961. Appendix to Income Tax Rules- Rates for depreciation allowance. M/s. Poompuhar Shipping Corporation Ltd. And Others Versus The Income Tax Officer, International Taxation II And Others 2013 (10) TMI 936 - MADRAS HIGH COURT and various judgments referred to therein. Scope of this article: The scope and extent of this article is restricted on the issue of meaning of ‘equipment’ in the context of payment of royalty. The honorable Madras High Court has held that definition of plant u/s 43(3) includes ‘ship’. Therefore, in context of section 9 word ‘equipment’ is also wider and would include ship. Portions of relevant provisions for the purpose of this study are reproduced below with highlights added for analysis: Chapter II – Basis of Charge: Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India :— (vi) income by way of royalty payable by— xxx Explanation 2.—For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for— (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; 12[(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;] (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and(v). Chapter IV – Computation of total income –d. – profits and gains of business or profession Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires— (3) "plant" includes 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; Preliminary discussion about equipment: Section 9 falls under the chapter II “ Basis of charge”. Whereas S.43 (3) falls under the chapter about computation of income from business or profession. The scope of equipment for the purpose of royalty is as follows: Payment for: the use or right to use of any industrial equipment, any commercial equipment or any scientific equipment but not including the amounts referred to in section 44BB; Therefore, we find that simply the word ‘equipment’ is not used. The equipment must be falling within three categories specified above. The meanings or definitions as provided in section 43(3) are specifically for the purposes of section 28- 41 and therefore, it can be said that the definition of ‘plant’ as inclusive of ship is not relevant for the purpose of S. 9. It can also be said that in section 9 word ‘equipment’ has been used in a restricted sense and not in a wider sense as is case of ‘plant’. In section 43(3) we find that the definition is inclusive. Ships, scientific apparatus and surgical equipment are specifically included. It can be said that had ‘ship’ not been included in definition of ‘plant’ whether it would be treated a plant, is not clear from doubt. On consideration of inclusive definition which specifically includes items like books (very small items) , ships (very large item), small tools like scientific apparatus and surgical equipment, the courts have considered and held that the expression ‘plant’ is very wide and includes any article or thing which is durable and is used as a tool for carrying any business or profession. It includes any such thing whether be alive or dead, fixed or movable. The conditions for testing are that it should have durability and not items which is consumed and should be used as a tool of trade. Readers can refer to various case laws in search of case laws under section 43(3) on the website. Earlier there was no specific exclusion from the meaning of plant. However, two amendments made in the definition has specifically excluded some items which were earlier considered ‘plant’ for the purpose of allowing depreciation and other incentives. Even within the wider definition of ‘plant’ we find that only few items in nature of equipment are included and all such items are not specifically included. Therefore, so far equipments are concerned, it can be said that they have restricted meaning in context of section 9 and 43(3) both. We find that ‘scientific apparatus’ and ‘surgical equipment’ are specifically included. This however cannot be construed to mean that other equipments are not included. Other equipment may be in nature of ‘plant’ or may be included in wider meaning of ‘plant’. When we find that ‘ship’ and ‘vehicles’ are specifically included in definition of plant besides above two categories of ‘apparatus or equipment’. Therefore, it can also be construed that a ship is plant however, it is not equipment. Otherwise, it was not necessary to specifically use words plant or scientific apparatus or surgical equipment. Word equipment is narrow than ‘plant: We find that the word ‘plant’ is wider than the word ‘equipment’. Every equipment can be within fold of plant but it is not necessary that every plant is necessarily equipment. Even in section 43(3) it can be said that word equipment is restricted in its scope and will include only items similar to surgical equipment or scientific apparatus. Such equipments are generally of small size and type and are used as handy tools. Large machinery or large equipments are generally described as plant or machinery or mill etc. and not equipment. For example, in a sugar mill boiler is regarded as a plant and not equipment. Whereas a packing machine for sealing sugar bags is called a machine or equipment. In a work shop a lathe machine is called a machine whereas a small drilling machine is called a hand tool or equipment. Appendix to Income Tax Rules – depreciation rates: Although ‘ship’ is specifically included in definition of plant u/s 43(3) yet we find that the rate of depreciation for ships are not prescribed under head “III Machinery and plant” in the appendix to Rules. We find a separate entry as follows:
Therefore, we find that ‘ship’ has been treated differently in comparison to other machinery and plant .The difference become more prominent if we consider various type of plant and machinery specifically included in the heading III Machinery and plant. Under that heading we find various type of independent plant and machinery as well as some complex plant and machinery. In some of sub-headings word equipment has been used e.g. Air / water pollution control equipment, life saving medical equipment, waste heat recovery equipment, electrical equipment etc. We also find expressions like devices, systems, concerns. On consideration of all these entries it is apparent that ‘ship’ has not been regarded as an equipment. Ship has been regarded a special class of ‘plant’. Ship: A ship is a very large establishment in itself. A ship provide setting and housing for many other plant and machinery, equipments, water supply system and fittings, electrical fittings, power generation units, and even buildings constructed to provide accommodation for living of crew members, passengers / voyagers , godowns or storage space for storing material required during voyage as well as goods loaded for transportation by the ship to various destinations from time to time. Therefore, ship is in fact a place or setting to carry various activities. Though ship provide space like in a building, and is in nature of a floating and moving building. Activity of construction of ship is called ship building. However, a ship cannot be called a building as per normal understanding about buildings. A ship consists of many machines, equipments and furniture , fittings etc. Therefore, a ship provide housing for many plant, machinery, equipment, furniture, furnishings, and spaces just like rooms , godowns, store rooms, kitchen etc. in a building. Therefore a ship cannot be called ‘any industrial equipment’ , ‘any commercial equipment ‘ or ‘any scientific equipment’. Some definitions of equipment relevant to the context: http://www.thefreedictionary.com/equipment 1. Something with which a person, an organization, or a thing is equipped. 2. The rolling stock especially of a transportation system. Synonyms: equipment, apparatus, gear, materiel, outfit, paraphernalia http://www.businessdictionary.com/definition/equipment.html Tangible property (other than land or buildings) that is used in the operations of a business. Examples of equipment include devices, machines, tools, and vehicles. http://en.wikipedia.org/wiki/Equipment
From the above definitions we find large number of items which are considered ‘equipment’ or similar to equipment like devices, instrument, apparatus, system etc. A ship cannot even be called a simple vehicle. In any definition of similar words ship is not regarded an ‘equipment’. A reconsideration is required: In view of above discussion author feels that calling or regarding a ship an equipment, is not as per normal general understanding and terminology used in the trade and industry and also not within wisdom of enlarged scope of word equipment and its synonyms. Even in context of section 9 read with section 43(3) and appendix to IT Rules, as discussed and illustrated above, ship cannot be regarded an equipment. A ship cannot properly be regarded an equipment of any of three categories as provided in section 9. It seems that many of contentions as discussed above were not raised before the Court. Therefore, emphasis was laid on wider meaning of ‘plant’ as defined in section 43(3) to include ship. However, distinction between plant and an equipment could not be pressed with emphasis. Applying definition in section 43(3) in context of S. 9 also appears to be out of context. Therefore, with due regard to the views expressed by their lordships, author feels that the judgment in case of Poompuhar Shipping deserves a reconsideration. IT/ILT : 'Equipment' includes ship, fee paid for use of ship to be considered as royalty under section 9(1)(vi). Meaning of the word 'plant' as defined under section 43(3) would be relevant to determine meaning of the word 'equipment'. Facts: The aggrieved assessee appealed against order of Tribunal holding that the payment made for taking ship on time charter basis would constitute 'royalty' as defined under section 9(1)(vi)(b) of the Income Tax Act ('the I-T Act'). Assessee contended that the ship was not equipment and, consequently, there was no question of use or right to use of any equipment which could be construed as 'royalty'. The High Court held in favour of revenue as under: (1) The consideration paid for use of the industrial, commercial and scientific equipment is 'royalty' in view of clause (iva) of Explanation 2 to section 9(1)(vi) of the I-T Act. (2) The word 'equipment' is not defined under section 9, however, the word 'plant' has been defined under section 43(3). As per the definition provided in section 43(3), 'plant' includes ships, vehicles, books, scientific apparatus and surgical equipments used for the purposes of the business or profssion, but does not include tea bushes or livestock or buildings or furniture and fittings. Thus, in view of section 43(3), the word 'plant' is widely defined to include a ship; (3) In absence of any definition of 'equipment' under the I-T Act and considering the business of the foreign enterprise, the definition of 'plant', as including 'ship' would be appropriate for understanding the scope of the expression 'equipment'; (4) Thus, plant would include any article or object fixed or movable, live or dead, used by a business man for carrying on his business. It is not necessarily confined to an apparatus which is used for mechanical or industrial business; (5) 'Plant' includes every tool, apparatus, equipment or machinery, not limited to machinery used in tool. In fact, section 43 starts with an expression that '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' means; (6) Thus, with the inclusive definition of plant embracing within its fold so diverse a matter from a ship to a book, or medical equipment, every tool, apparatus, 'plant' includes all equipments used by an assessee for carrying on his business; (7) The word 'equipment' construed in the light of section 9(1)(vi) extends the normal meaning of the word to cover even those specified categories of machinery or plant that would themselves not be construed within its plain and ordinary meaning. As rightly pointed out by the Revenue, the only limitation that one may read into the word 'equipment' would be that which is specifically excluded; (8) Royalty payable by a resident in India to a non-resident in respect of any right, property or information used or services utilized for the purposes of business or profession carried on by him in India would satisfy the definition of 'royalty'. Clause (iva) of Explanation 2 states that consideration paid for use or right to use any industrial, commercial, scientific equipment but not include the amounts as referred to in section 44BB would be royalty; (9) In context of section 9(1)(vi)(b), the presence of the word 'any' preceding the word 'equipment', clearly points out the need for construing 'equipment' widely, so as to embrace every article employed by the employer for the purposes of his business. 'Equipment', by whatever name called either as an apparatus or as plant or machinery, so long as they are employed for the purposes of one's income, the same shall stand covered by clause (iva) of Explanation 2; (10) Therefore, the Tribunal held that in absence of any word of limitation other than what was explicitly provided for, we do not find any legal necessity of reading a limitation on the word equipment. Consequently, we reject the arguments of the assessee. Thus, ship being a plant, an equipment with which the ship owner operates the business and commercially exploits it for earning the income from chartering of ship, the payment thereof would be clearly in nature of 'royalty'
By: CA DEV KUMAR KOTHARI - January 23, 2014
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