TMI Blog2014 (11) TMI 605X X X X Extracts X X X X X X X X Extracts X X X X ..... pletely taken out from clause (1) and (2) of Article 12 - the payment for the use of equipment or any consideration for the use of , for the right to use industrial, commercial or scientific equipment is deleted and it is not taxable in the contracting State in which they arise viz., in the given case India - the appellate authority below has rightly considered Article 12(4) of the DTAA agreement between Netherlands and India and is right in holding that the amount received by the assessee for hiring out Dredgers to an Indian Company of the same name for use in Indian Ports is not taxable in India – Decided against revenue. - T. C. (A). No. 1202 of 2007 - - - Dated:- 14-11-2014 - R. Sudhakar And G. M. Akbar Ali,JJ. For the Appellant : Mr. T. Ravikumar Senior Standing Counsel For the Respondent : Mr. Porus Kaka Senior Counsel for Mr. R. Sivaraman ORDER The appeal has been filed by the Revenue challenging the order of the Income Tax Appellate Tribunal 'A' Bench, Chennai, dated 29.3.2007 made in ITA No.1894/Mds/2005 for the assessment year 2003-2004. 2. The brief facts of the case are as under: The assessee is a company incorporated in Netherlands an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g out dredgers to an Indian Company of the same name for use in Indian ports is not taxable in India in terms of the Double Taxation Avoidance Agreement with the Netherlands? 6. The main contention of the learned Senior Standing Counsel appearing for the Revenue is that as per Clause (iva) to Explanation 2 to Section 9(1) of the Act, the consideration received for the use or right to use, any industrial, commercial or scientific equipment, but not including the amounts referred to in section 44BB, is royalty and since Section 44BB is not applicable to the case on hand, the income is chargeable to tax in India. 7. The next contention of the learned Senior Standing Counsel appearing for the Revenue is that as per Article 12(1) of the Double Taxation Avoidance Agreement, royalty arising in a contracting State may be taxed in the other State and, therefore, there is no restriction on the Revenue to impose tax in India, solely because the assessee has paid tax in the Netherlands. 8. The learned counsel for the revenue would further submit that the payment made towards chartering of the ship should be considered as business income and such business income would attract the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learly held under Article 5 of the DTAA agreement between India and Netherlands, the Netherlands companies are not permanent establishment in India and therefore, there is no tax liability. Reliance was also placed in the case of ABN Amro Bank,N.V vs Commissioner of Income Tax reported in 2012 343 ITR 0081 and also in the case of Commissioner of Income Tax vs BKI/HAM v.o.f reported in 2012 347 ITR 0570. 10. Heard both sides and perused the materials available on record. 11. The following facts are not disputed: The respondent is a Company incorporated in Netherlands and had let out dredging equipments to one of its sister concerns which is a company incorporated in India for the purpose of dredging as per the contract awarded by Gujarat Adhani Port Limited. The respondent company raised invoices for the use of the equipment from 1.7.2001 to 31.3.2003 amounting to ₹ 18,87,40,695/-. The Indian Company deducted TDS of ₹ 5,49,04,367/- under section 195(2) of the Act. The respondent company filed its return claiming the entire TDS amount by way of refund stating that they are not liable for Tax under the provisions of DTAA agreement. However, the assessing officer f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hop; (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 premises used as a sales outlet; (i) an installation or structure used for the exploration of natural resources provided that the activities continue for more than 183 days. 16. Article 7 deals with business profits. Article 12 deals with Royalties, fees for technical service and payments for the use of equipment. Originally, sub clause (1) to (4) of Article 12 stood as follows: 1. Royalties, fees for technical services and payments for the use of equipment arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such royalties, fees and payments may also be taxed in the state in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of these categories of income, the tax so charged shall not exceed 20 per cent of the gross amount of the royalties, of the fees and payments. 3. The competent authorities of the States shall by mutual agreement settle the mode of applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d works or videotape for use in connection with television, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, for the right to use industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Articles 8 and 8A (Shipping and Air Transport) from activities described in paragraph 2(a) of Article 8 or paragraph 4(b) of Article 8A. 18. In a further modification w.e.f.1.4.1997, sub clause 2 was modified as follows: 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 10 percent of the gross amount of the royalties or the fees for technical services. 19. W.e.f.1.4.1998, sub clause 4 of Article 12 was also modified as follows: 4) The term royalties as used in this Article means payment of any kind received as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1998, clause 4 was also restored its original position deleting sub clause (a) and (b). 26. In the modification w.e.f.1.4.1991, clause 6 the definition for payments for the use of equipments did not figure. Clause 5 defines fees for technical services and clause 6 defines the amount which does not include for fees for technical services. The above said clause 6 was further modified w.e.f. 1.4.1995. 27. Sub clause (b) of clause 4 as modified w.e.f.1.4.1991 defined payments of any kind received as consideration for the use of, for the right to use industrial, commercial and scientific equipment, thereby literally including the category payments for the use of equipment into the category of Royalties . However, clause 4 to Article 12 was restored to original position w.ef.1.4.1998. 28. The above would show that for all practical purposes, the 'payments for the use of equipment' originally found in clause (1) of Article 12 as defined in clause (6) was incorporated in the definition of the term Royalties in clause 4 w.e.f.1.4.1991 and subsequently deleted w.e.f.1.4.1998 and thereby completely taken out from clause (1) and (2) of Article 12. This means that the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement is entitled to seek the benefits thereunder, even if the provisions of the Double Taxation Avoidance Agreement are inconsistent with those of the Act. Therefore, a Notification No.S4693(E) dated 30.8.1999 was issued under Sec.90 of the Income Tax Act bringing in the above said modification, as India and Netherlands are members of the Organisation for Economic Co-operation and Development (OECD) to limit the taxation in line with the conventions between India and other countries. Therefore the provisions of the Agreement would prevail over the provisions of the Act. 30. Clause (iva) of Sec.9(1) of Income Tax Act defines Royalties . w.e.f.1.4.2002. But, in our considered view, Clause (iva) of Sec.9(1) is not applicable for the simple reason that the payments for the use of equipment was no longer taxable in the Contracting State viz., India after the modification dated 1.4.1998 in the DTAA. 31. The learned Standing counsel for the department would rely upon the judgment rendered in the case of Poompuhar Shipping corporation Ltd and another vs Income Tax Officer (International Taxation) reported in 2014 360 ITR 257 (Mad) . The main question before the Division Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph (1) of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8 . 90. Thus, while some of the DTAAs include payment for use of or right to use of industrial, commercial and scientific experience as a heading under royalty, invariably, in all the DTAAs payment for use of or right to use of industrial, commercial and scientific equipment, is included in the meaning of royalty . The provision contained in section 9(1)(vi), Explanation 2 (iva) is modelled after U.N. Model and is different from what one has in the OECD model at present. 91. Thus, while the OECD Model got amended to bring payment for use of or right to use of the industrial, commercial scientific experience as royalty , all the DTAA s under consideration contain the clauses on consideration for use of or right to use of industrial, commercial and scientific equipment as well as experience as royalty 92. Thus, when the use or right to use the ship for an economic benefit is given to the assessee, the consideration for the use of the industrial, commercial and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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