TMI Blog2015 (3) TMI 148X X X X Extracts X X X X X X X X Extracts X X X X ..... India through the said dependant agent, it constituted the permanent establishment of the assessee company in India in terms of the Indo-Swiss treaty. Keeping in view the relevant portion of the OECD commentary on Model Tax Convention on Income and on Capital (condensed version) published in July, 2010 we are of the view that the right or property in respect of which the shipping income is earned by the assessee i.e. ships cannot be said to be effectively connected with the permanent establishment in India. Such income, therefore, will not fall under Article 22(2) but will fall under Article 22(1) and accordingly shall be taxable only in the State of residence of the assessee company i.e. Switzerland and not in India. In that view of the matter, we uphold the impugned order of the learned CIT(Appeals) holding that the international shipping profits of the assessee company are covered by Article 22 of the Indo-Swiss treaty and although the assessee company had a PE in India in the year under consideration, the ships i.e. the property in respect of which shipping income was paid to the assessee company being not effectively connected with that PE, the case of the assessee will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting with the Assessing Officer's action that MSC Agency (India) Pvt. Ltd. Constitutes Permanent Establishment of the assessee company under Article 5(1) 5(2)(c) of the DTAA without appreciating the fact that, from clauses of the agreement, it is very clear that MSC Agency (India) Pvt. Ltd. Is carrying out the activities wholly and exclusively for Mediterranean Shipping Co. S.A. Only . On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in holding that none of the assessee's income is taxable in India under article 22(2) of the Tax Treaty without appreciating the fact that MSC Agency (India) Pvt. Ltd. Constitutes Permanent Establishment of the assessee company in India and the freight income earned by the assessee company in India is effectively connected to the Permanent Establishment. On the facts and in the circumstances of the case and in law, the Id CIT(A) erred in directing to tax the interest income received from the income-tax Department on refund as per the Article 11 of the Indo-Switzerland Treaty @ 10% whereas, Assessing Officer has taxed @40% as per I. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operation of ships in international traffic. Article 22 of the Tax treaty dealing with other income, subject to tax shipping profits only in the state of residence viz, Swiss Confederation in the case of the assessee company. In view of the above,. the assessee treated the profits on shipping operations in India as not taxable in India and thereby claimed refund of entire tax paid amounting to ₹ 11,07,71,150/-. 6. The Assessing Officer was of the view that the Treaty is silent on the taxation of shipping profits and hence shipping profits should be assessed as per the provisions of the Indian Income Tax Act, 1961. The Assessing Officer was of the view that the assessee is taxable in accordance with the provisions of section 44B of the I.T.Act, 1961. In this regard, the assessee submitted before the Assessing Officer that the assessee relies on the CBDT's letter dated 18-12-2003 written to Swiss Federal Tax Administration (SFTA) and the reply of SFTA vide letter dated 30-1-2004 in respect of the profits from the operation of ships in international traffic is governed by the provisions of the Article 22 of the Double Taxation Avoidance Agreement. The assessee further re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Integrated Containers Feeder Service Vs. Jt. CIT 96 ITD 371. In this regard, the appellant has filed a written submission and it is reproduced below :- 1. In the impugned order, the learned Asst. Director of Income tax (Int'l Tax), Range 3(2) (AD IT) has relied on the decision of the Mumbai Tribunal in the case of Integrated Container Feeder Service (ICFS) Vs. JCIT 96 ITD 371 (copy enclosed at pages 216 to 237) to deny the appellant the benefits of the India Swiss Double Taxation Avoidance Agreement (DTM). 2. It is respectfully submitted that the facts in that case are different from the facts in the appellant's case before your honour. This would be clear from the discussions below: (a) ICFS,. a company incorporated in Mauritius, was engaged in the business of operation of ships in international traffic. In its return of income, ICFS claimed that its profits from operation of ships were taxable only in Mauritius and not in India under Article 8 of the India Mauritius DTAA. (b) As per Article 8 of the India Mauritius DTAA, profits from the operation of ships in international traffic are taxable only in the contracting state in which the place of effectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty involved is India Mauritius tax treaty. In that case, there was a specific article i.e. article 8 which deals with shipping business. Since article 8 covers shipping business, article 22 has no role to play. Whereas in the case of the appellant the treaty involved is India - Switzerland tax treaty. In that treaty there is no specific article which deals with shipping business. In view of this, article 22 is applicable. Any income which accrues in India is taxable in India. It will not be taxed in India if the DTAA provides so. In the case of Integrated Container Feeder Service, the DTAA does not exclude the shipping business from taxation in India whereas in the appellant's case in view of the fact that the treaty has no specific provision with regard to shipping, Article 22 comes into play and according to it the shipping income is taxable only in Switzerland. In view of this fact, I hold that the decision of the Hon'ble ITAT in the case of Integrated Container Feeder Service is distinguishable and cannot be applied in the appellant's case. In view of all the above, the appeal is allowed on this issue. 10. Against the order of CIT(A), the Revenue is in appeal be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 6-11-2012, passed in ITA No.2311/Mum/2007. 13. We have considered rival contentions, carefully gone through the orders of the authorities below as well as order of the Tribunal in assessee s own case on the very same issue. The issue with regard to applicability of Article 22 of DTAA between India and Switzerland was decided in favour of the assessee after having following observations :- 31. We have considered the rival submissions and also perused the relevant material on record. It is observed that the profits from operation of ships in international traffic were claimed to be taxable only in Switzerland by the assessee i.e. in the State of its residence and not in India and accordingly Nil income was declared by it in the return of income filed for the year under consideration. This claim of the assessee was based on Article 22 of the DTAA between India and Switzerland (Indo-Swiss treaty) especially paragraph 1 of that article. According to the AO, the said Article 22 dealing with other income not specifically dealt with by any article of the treaty, however, was not applicable in respect of profits from operation of ships in international traffic as the same was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to its domestic law. He has contended that this was an undisputed position and understanding of the true import of the Indo-Swiss treaty till the year 2001 and the introduction of Article 22 in the treaty in 2001 did not alter this position. 33. The provisions of Article 22 introduced in the Indo-Swiss treaty in 2001 being relevant in the present context are reproduced hereunder: I. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such the provisions of Article 7 or Article 14, as the case may be, shall ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of treaty could have resulted in leaving the same to be taxed by the concerned contracting State according to its domestic law prior to introduction of Article 22. However, such exclusion alone will not take it out of the scope of Article 22 unless it is established that the shipping profits have been dealt with in any other article of the treaty. The language of Article 22(1) in this regard is plain and simple and the requirement for application of the said Article is explicitly clear. 34. It is pertinent to note here that the purpose of tax treaties is to allocate taxing jurisdiction as held, inter alia, by the Hon'ble Supreme Court in the case of Union of India vs. Azadi Bachao Aandolan 263 ITR 706 and only when an Article provides for tax treatment i.e. to distribute taxing right of a particular type of income, then it can be said that it deals with such item of income. If there is no article providing for such tax treatment to distribute jurisdiction to tax a particular income like the shipping profits the present case, then it cannot be said that such income is dealt with by the articles of the treaty. When Article 7 provides for taxability of business profits other th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a particular item of income has been dealt with, it is necessary that the relevant article must state whether Switzerland or India or both have a right to tax such item of income. Vesting of such jurisdiction must positively and explicitly stated and it cannot be inferred by implication as sought to be contended by Shri. Srivastava relying on Articles 7 and 8 of the treaty. As rightly contended by the learned counsel for the assessee, the mere exclusion of international shipping profit from Article 7 cannot be regarded as an item of income dealt with by the said article as envisaged in Article 22(1). The expression dealt with contemplates a positive action and such positive action in the present context would be when there is an article categorically stating the source of country or the country of residence or both have a right to tax that item of income. The fact that the expression used in Article 22(1) of the Indo-Swiss treaty is dealt with viza-viz the expression mentioned used in some other treaties clearly demonstrates that the expression dealt with is some thing more than a mere mention of such income in the article and as rightly contended by the learned counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is contended that such profit, therefore, will be taxable in India as per the domestic law by applying the provisions of section 44B of the Income-tax Act, 1961. If this contention of the Revenue is accepted, the same, in our opinion, will lead to absurdity as rightly contended by the learned counsel for the assessee inasmuch as the profits from the operation of ships in domestic traffic, for example, freight earned for carriage from Goa to Mumbai will be eligible for treaty benefit and will not be taxable in India whereas profits from the operation of ships in international traffic will be taxable in India u/s 44B of the Act. In our opinion, this cannot be the intention of the legislature or even of the parties to the Indo-Swiss treaty i.e. India and Switzerland and the contention of the Revenue resulting in such absurdity cannot be accepted. One of the contentions raised by Shri Srivastava is that the reason for exclusion of international shipping profits from the Indo-Swiss treaty is that the Switzerland is a Land locked country and if the Indo-Swiss treaty were to provide taxability of such profit, it would result into treaty shopping. However, as pointed out by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f international shipping profits and keeping in view this agreement arrived at between the two competent authorities, we are of the view that the Revenue authorities are not free to take any contrary view relying on the commentary of Professor Klaus Vogal. As regards the contention of Shri Srivastava that there is nothing in Article 22 to suggest that the position that existed till assessment year 2001-02 got altered or modified by the introduction of Article 22 in the Indo-Swiss treaty, we are of the view that the mutual agreement arrived at by the competent authorities of two countries, is good enough to suggest that the position as regards the taxability of international shipping profits got changed by the introduction of Article 22. 41. Upto assessment year 2001-02, international shipping profits no doubt were being taxed under the domestic laws as per the provisions of section 44B. However, it was not because of the exclusion contained in Article 7 that India was vested with the authority to tax such international shipping profit but it was because there was no other article in the Indo-Swiss treaty dealing with international shipping profits which could override the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declaring Nil income making a similar claim that under the beneficial provisions of Article 22 of Indo-Swiss treaty, it was not liable to tax in India on its international shipping profits. The stand of the assessee was that in the absence of any specific article in the DTAA dealing with taxability of profits derived from the operation of ships in international traffic, paragraph I of Article 22 of the DTAA was applicable and its shipping profits were taxable only in Switzerland. It was submitted that even Article 7 of the treaty which excluded international shipping profits from its ambit did not deal with such profit up to 31/03/2001 and in the absence of any other article in the treaty dealing with such profit, the same was chargeable to tax as income under the Indian Income-tax Act. It was submitted that this position, however, got changed as a result of introduction of Article 22 in the treaty with effect from 01-04-2001 which governs the taxability of all other income which have not been dealt with in other articles of the treaty and since as per the said Article 22, all other income not specifically dealt with in the other articles of the treaty is taxable only in the State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ragraph 1 subparagraph i) of Article 3 therefore was limited to transport by an aircraft operated by an enterprises of a Contracting State. Consequently we have excluded shipping profits in Article 8 DTA-IND (which normally deals withprofits arising from shipping and operation of aircrafts). According to paragraph 1 of Article 7 DTA-IND profits from the operation of ships in international traffic are not treated under the general concept of business profit attribution between the company and its permanent establishment. As the double taxation agreement concluded in 1994 did not contain a general provision attributing the taxing right for other income to the states of residence, shipping profits could be taxed by each Contracting State according to its internal law. During the renegotiation we inserted Article 22 into our agreement that deals with all items of income not dealt with specifically under the other Articles of our agreement. As paragraph 1 subparagraph i) of Article 3, Article 7 and Article 8 DTA-IND did not undergo any changes, business profit arising from shipping activities consequently falls under Article 22. Paragraph I and 2 of Article 22 DTA-IND, which is re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icating that India was not in agreement that income from shipping business in international traffic would be covered under Article 22 and reasons for the same were also given. However, immediately thereafter, a letter dated 18t December, 2003 was sent by the Joint Secretary (FT TR) to Shri Wardbarger clarifying the matter as under: As regards the query raised in your letter dated 29.10.2003, I have already handed over a written reply to Ms. Silvia Frohofer. However, to clarify the matter further, I may submit that profit from operation of ships in international traffic is not covered specifically by any of the Articles of the amended DTAA (Article 8 only refers to air transport). Accordingly, Article 22 of the DTAA dealing with other income would fall to be applicable in respect of income from operation of ships in international traffic. As per paragraph 1 of the said Article, such income is taxable only in the state of residence of the taxpayer. However, paragraph 2 of the Article provides that if the enterprise engaged in operation of ships in international traffic has a Permanent Establishment in another country, then the provisions of Article 7 of the DTAA would apply and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he letter dated 14th February, 2005 to deny the treaty benefit to the assessee company was clearly misplaced. 45. In Article 3 of Indo-Swiss treaty giving general definitions, the term competent authority is defined to mean in the case of India, the Central Government in the Department of Revenue or their authorized representative and in the case of Switzerland, Director of Federal Tax Administration or his authorized representative. Article 25 of the said treaty prescribes the mutual agreement procedure whereby if a resident of a contracting State considers that the action of one or both of the contracting States result or will result for him in taxation not in accordance with this agreement, he may notwithstanding the remedies provided by the national laws of those States, present his case to the competent authority of the contracting States of which he is a resident. As per paragraph 2 of Article 25, the competent authority then shall endeavor, if the objection appears to it to be justified and if it is not itself able to arrive at an appropriate solution, to resolve the case by mutual agreement with the competent authority of the other contracting State, with a view to avo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Tribunal, it has a grate persuasive value and their being no decision of the Tribunal, High Court or the Supreme Court directly on the issue, the decision of Authority for Advance Ruling deserves to be followed by the Tribunal. We are unable to accept this contention of Shri Srivastava. A perusal of the judgment of the Authority for Advance Ruling passed in the case of Gearbulk AG (supra) shows that the letters exchanged between the Competent Authority of India and Switzerland explaining their understanding as regards the applicability of Article 22 to the international shipping profits were not brought to the notice of the Authority. Moreover, having held at one place that prior to 01-04-2001, such profits were untouched under the Indo-Swiss treaty, the Authority still proceeded to arrive at a conclusion that Article 22 did not apply to such profits which, in our opinion, with due respect, is self contradictory. It is also observed that the Authority while holding that there was no point in excluding shipping profits from Article 7 and including it in Article 22 when both Articles 7 and 22 prescribed PE based taxation, has overlooked the fact that the scope of Article 22 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from 01-04-2002. 49. Having held that the taxability of international shipping profits is covered by Article 22, it is necessary to ascertain whether the assessee company which received such income being a resident of Switzerland carried on the shipping business in India through a permanent establishment situated therein and whether the property in respect of which such income was paid i.e. ships is effectively connected with such permanent establishment. If both these conditions are satisfied, the international shipping profits will be taken out of Article 22 and will fall in Article 7 as per paragraph 2 of Article 22. As regards the issue as to whether M/s MSC Agency India Pvt. Ltd. constituted permanent establishment of the assessee company in India, it is observed that certain specific information was received by the AO from ACIT, Central Circle-40, Mumbai vide letter dated 31-03-2005 showing that M/s Samasara Shipping P. Ltd. was working as dependant agent of the assessee company in India upto assessment year 2002-03 and the business of the said concern was taken over and continued by M/s MSC Agency India Pvt. Ltd. from assessment year 2003-04. The said information, gist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds to cover creditors and any advance disbursements in respect of the Principal's business within the region, which may be specifically agreed as items not subtracted from the freight account. 5.03 To pay all statutory charges and taxes (as required by Law) levied by countries in the Region, payable by ship owners I operators /charterers whose ships call at ports in the Region. 6.00 Remuneration: 6.01 The Principals agree to pay the Agents, for the above services rendered by them, the commission set forth in Schedule A to this agreement. 7. Duration: The Agent confirms that if their current Agency name includes any of the names listed below, or any variation of these names, then, on termination of this agreement, the existing name of their agency shall also cease, and they will no longer have any entitlement to use the following names, or variations thereof:- MSC M.S.C. Mediterranean Shipping Company (or Mediterranean Shipping Co.) Medite Medship 51. After having perused the relevant clauses of the agreement between assessee company and M/s MSC Agency India Pvt. Ltd. as given above, we find ourselves in agreement with the view of the AO and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry services, it cannot be said that the ship has any effective connection with the agency. He has stated that to say that the ships are effectively connected with the agency would lead to absurd results inasmuch as the agency will be liable to pay tax whenever the ships are plied on international waters even if they do not come to or depart from Indian shores which would result in extending the territorial jurisdiction of Indian Tax Laws. According to him, Article 22(2) brings profits of the PE within the scope of Article 7 only if the relevant income of the PE arises from a right or property effectively connected with such PE which necessarily refers to the ship itself as the property which generates the income is the ship. In the circumstances, when the ships clearly do not form part the assets of the PE in India but are the assets of the non-resident shipping company abroad, the same cannot be said to be effectively connected to such PE. Where the ships are owned or chartered by the non-resident shipping company abroad and the agency PE merely clears inbound cargo and books outbound cargo and carries out similar functions, the ships are clearly not the assets of the PE nor ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... convention were pari-materia to that of Article 11(4) of the OECD Model Convention and after taking into consideration the purpose and scope of Article 11(4) of the OECD Model Convention as explained in paragraph No. 24 and 25.1 of the OECD commentary on Model Tax Convention on Income Tax and on Capital (condensed version) issue in July, 2010, the Special Bench held that the economic ownership of the debt claim not being allocated to the PE, it cannot be said that such debt claim is effectively connected with that PE. The Special Bench thus has taken the economic ownership as the basis or criteria to apply the concept of effectively connected with . Since the economic ownership of the ships in the present case cannot be said to be allocated to the PE but the same has always remained with the assessee company, we are of the view that it cannot be said that the property in the said ships is effectively connected with the PE in India on the basis of criteria adopted by the Special Bench of this Tribunal in the case of Sumitomo Mitsui Banking Corporation (supra). Shri Srivastava has contended that the expression effectively connected is much wider than the expression owned . He ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rland and not in India. In that view of the matter, we uphold the impugned order of the learned CIT(Appeals) holding that the international shipping profits of the assessee company are covered by Article 22 of the Indo-Swiss treaty and although the assessee company had a PE in India in the year under consideration, the ships i.e. the property in respect of which shipping income was paid to the assessee company being not effectively connected with that PE, the case of the assessee will be out of paragraph No. 2 of Article 22 and will fall in paragraph I of the said article. Consequently, the same will be taxable in the country of residence of the assessee company i.e. Switzerland and not in India. 58. As regards the alternative contention of Shri Dastur that no portion of the international shipping profits earned by the assessee in any case can be taxed in India as the commission paid to M/s MSC Agency India Pvt. Ltd. which constituted its PE is admittedly at an arm's length, it is observed that this alternative claim of the assessee has now become academic in view of our decision accepting the main contention of the assessee that the international shipping profits are charge ..... X X X X Extracts X X X X X X X X Extracts X X X X
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