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LR2 Management K/S Versus Income Tax Officer (International Taxation) Rajkot

2015 (11) TMI 274 - ITAT RAJKOT

Assessment under section 172(4) - ‘vessel voyage returns’ filed by the Atlantic Shipping Pvt Ltd, under section 172(3) - validity of orders passed under 172(4) challenged without issuing a draft order as required under section 144C as the assessee is an eligible assessee under section 144(15)(b)(ii) - denial the benefits of India Denmark Double Taxation Avoidance Agreement - Held that:- The point of dispute being whether or not the course of action 144C was permissible, a decision in favour of t .....

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he paperbook, the assessee “has incurred a clearly unsatisfactory loss before tax of USD 579 million in 2012”. This report also states that the assessee incurred an operating loss of USD 253 millions which was stated to be on account of adverse market conditions. When assessee is incurring losses, in respect of its global operations, there cannot be an occasion to pay tax on the income. In these circumstances, if the freight receipts from India are not actually brought to tax in Denmark, it is n .....

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lly subjected to tax in Demark. That condition, in our considered view and for the detailed reasons set out above, is clearly satisfied. As for the place of effective management being in Denmark, as required under Article 9(1), we have already taken note of the evidences in support of the place of effective management being in Denmark.

In view of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that the profits embedded in the freight .....

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Kumar, AM: 1. By way of this appeal, the appellant has challenged correctness of the order dated 9th September 2014, passed by the CIT(A) in the matter of assessment under section 172(4) of the Income Tax Act, 1961, in respect of various vessel voyage returns filed by the Atlantic Shipping Pvt Ltd, under section 172(3), relatable to the assessment year 2009-10. 2. Grievance raised by the appellant is twofold- first, challenging validity of orders passed under 172(4) without first issuing a draf .....

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ment year rather than qua a vessel, as is the scheme of Section 172(4), is de facto an assessment order under section 143(3), and, therefore, the provisions of Section 144C(1) apply for this reason as well. However, for the reasons we will set out in detail, it is not really necessary to deal with this line of reasoning. 3. So far as the first issue is concerned, it lies in a very narrow compass of material facts. There is no dispute that the assessee before us is a foreign company. It is also n .....

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, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee . Yet, no such draft order under section 172(4) was forwarded to the assessee, before the final order under section 172(4) was passed by the Assessing Officer, which is impugned in this appeal, was passed in this case. The case of the assessee is that the impugned order is also an assessment order, and, therefore, the Assessing Officer was required to forward a draft assessment order in thi .....

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as also the applicable legal position. 5. The fundamental question that we have to first consider is whether an order under section 172(4) can be said to be an assessment order because the requirement of serving a draft order on the assessee is only in respect of an assessment order . Section 144C(1) categorically states that the Assessing Officer is required to forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee .....

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passed under section 172(4) can be treated as an assessment order for the purposes of subjecting a completed assessment to reopening under section 147 of the Act. It was in this context that Their Lordships observed held that an order passed under section 172(4) is a summary assessment of income, though the assessee has an option to seek regular assessment of income under section 143(3), and that it is difficult to accept the contention of the petitioner that the provisions of Section 147/148 ca .....

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section 143(3). As the Privy Council pointed out in the case of Seth Badridas Daga Vs. CIT [(1949) 17 ITR 209 (PC)], the word assess and assessment refer primarily to the computation of income. Therefore an order computing the taxable income is essentially an assessment order. Whether it is a regular assessment or an adhoc or summary assessment, it is an assessment nevertheless, and, therefore, any order passed under section 172(4) is also an assessment order. Once we hold so, it is not really .....

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wherein the following observations were made by Their Lordships of Hon ble Supreme Court: 6. The scheme of s. 172 of the Act appears to be this : s. 172(1) of the Act gives a right to the ITO to levy and recover tax in the case of any ship belonging to a non-resident, in a summary manner (ad hoc assessment) notwithstanding anything contained in the other provisions of the Act. It is an absolute right conferred on the assessing authority. The assessee has no right to object to the same. Normally, .....

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e under s. 172(4) of the Act. It is a valuable right. If the assessee exercises the right conferred on him under s. 172(7) of the Act, the ITO is bound to make an assessment of the total income of the previous year of the assessee and the tax payable on the basis thereof should be determined in accordance with the other provisions of the Act and any payment made under the section (earlier) shall be treated as a payment in advance of the tax leviable for that assessment year and the difference be .....

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attracted. 7. In view of the above discussions, while it would indeed seem that an order passed under section 172(4) is required to be treated as an assessment order, there are issues with regard to the implementation of the corollaries to this conclusion. To appreciate these difficulties, we will have to take a look at the scheme of reference to Dispute Resolution Panel (DRP, in short) as set out in Section 144(1). For ready reference, this section is reproduced below: Reference to dispute reso .....

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hall, within thirty days of the receipt by him of the draft order,- (a) file his acceptance of the variations to the Assessing Officer; or (b) file his objections, if any, to such variation with,- (i) the Dispute Resolution Panel; and (ii) the Assessing Officer. (3) The Assessing Officer shall complete the assessment on the basis of the draft order, if- (a) the assessee intimates to the Assessing Officer the acceptance of the variation; or (b) no objections are received within the period specifi .....

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Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in subsection (5), after considering the following, namely:- (a) draft order; (b) objections filed by the assessee; (c) evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by .....

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riation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. Explanation.-For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. (9) If the member .....

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, respectively. (12) No direction under sub-section (5) shall be issued after nine months from the end of the month in which the draft order is forwarded to the eligible assessee. (13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within o .....

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e assessee means,- (i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and (ii) any foreign company. 8. If the above provisions of reference to the DRP are to be applied in the context of orders passed under section 172(4), in terms of the provisions of Section 144(1), it is incumbent upon the Assessing Officer to first forward a draft assessment order under se .....

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etc are concerned, there is no such enabling provision for extension of limitation period. This aspect of the matter becomes even more significant in case the assessee indeed opts for making a reference to the DRP because in such a case, in order to make the provisions workable, the limitation period for passing the assessment order has to suitably get extended for taking care of the period of time taken by the DRP in adjudicating upon the objections of the assessee and for the period of time t .....

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the return under sub-section (3) is furnished . While under section 144C(15), notwithstanding time limit set out in section 153 and 153B, the order giving effect to the directions of the DRP can be passed within one month from the end of the month in which such directions are received, there is no statutory provision under which such time limit under section 172 (4A) can be relaxed. When the DRP itself is allowed a period of nine months from the date on which the draft assessment order is serve .....

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on 30th March of an year, the Assessing Officer will have just one day to furnish the draft assessment order under section 172(4) to the assessee, and not even a day to implement the directions of the DRP as issued under section 144C(8). The reason is this. In respect of voyage vessel returns received in the month of March of an year, under section 172(4A), the Assessing Officer has to necessarily pass the order within December of that year and unless he forwards the draft assessment order to th .....

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ith such a situation. We find guidance from Hon ble Supreme Court s judgment in the case of CIT Vs Hindustan Bulk Carriers [(2003) 259 ITR 449 (SC)], wherein it is observed that, a construction which reduces the statute to a futility has to be avoided and that a statute or any enacting provision therein must be so construed as to make it effective and operative on the principle expressed in maxim ut res magis valeat quam pereat i.e., a liberal construction should be put upon written instruments, .....

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ns of Section 144C cannot be treated as including all the cases of assessment orders, and not merely for assessment orders under section 143(3) and 153A. The interpretation that relaxation in time limit for passing the assessment orders is only under section 143(3) and 153A as the intention of Section 144C was only to cover the assessments under section 143 and 153A will also be contrary to the scheme of the Act as evident from the Notes on Clauses to the Finance Bill 2009 which clearly indicate .....

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e Resolution Panel. The subjects of transfer pricing audit and the taxation of foreign company are at nascent stage in India. Often the Assessing Officers and Transfer Pricing Officers tend to take a conservative view. The correction of such views takes very long time with the existing appellate structure. With a view to provide speedy disposal, it is proposed to amend the Income-tax Act so as to create an alternative dispute resolution mechanism within the income-tax department and accordingly, .....

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ice that we now have is between interpreting the connotations of an assessment order as per the law laid down by Hon ble Courts above, in furthering the scheme of the legislative amendment, in introducing section 144C, and thus reading the references to Section 153 and 153B, as appearing in Section 144C(4) and 144C(15), as illustrative rather than exhaustive, and between interpreting the connotations of an assessment order contrary to the law laid down by Hon ble Courts above, in construing the .....

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fore passing the impugned final assessment order under section 172(4), we also hold that the references to Section 153 and 153B, appearing in Section 144C(4) and 144 C(15), as illustrative rather than exhaustive and in effect, thus, a reference to section 172(4A) is to be read into these provisions as well. We do feel that this kind of a litigation before judicial bodies, i.e. whether or not an assessee is eligible for approaching the DRP in respect of order under section 172(4), could be easily .....

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et out in Section 153 itself could also achieve that objective. It can never be too late for the tax administration to take a call in this respect and take a clear cut stand on the matter. Be that as it may, once we hold that an order under section 172(4) is also covered by the scheme of Section 144C, the next question which needs to be adjudicated by us is whether in a situation in which an eligible assessee has not been forwarded a draft assessment order, the assessment order will stand quashe .....

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mp; Ors [(2014) 369 ITR 113 (Mad)] has held that such an order will be null and void . It is also pointed out that a Delhi bench of this Tribunal, in the case of Capsugel Healthcare Limited Vs ACIT and vice versa (unreported judgment dated 30th September 2014 in ITA Nos. 1356 and 1371/Del/2012) also holds so. Learned Departmental Representative, on the other hand, submits that if, in the wisdom of the Tribunal, this matter is to be held to be covered by the scheme of Section 144C, the matter can .....

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licable to the facts of the case, was not adhered to. The case before us, however, is qualitatively different inasmuch the very application of the scheme of Section 144C has been disputed on the facts of the case. Learned Departmental Representative s contention is that the provisions of Section 144C does not apply because an order under section 172(4) is not an assessment order at all. While we have not approved this line of reasoning, we cannot be oblivious to the fact that the Assessing Offic .....

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which is in sharp contrast with the fact situation being dealt with in the judicial precedents cited before us. The subject matter of dispute before us is not as to what is the consequence of not issuing a draft assessment order, when it was admittedly required to be issued on the facts of a case, but whether such a draft order was required to be issued in the first place. In such a situation and the relevant material facts being qualitatively different, in our considered view, it would meet the .....

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n the eyes of law. As we hold so, we may add that, as a lower judicial forum, expressing a view contrary to the views of Hon ble Courts above, is simply unthinkable in judicial conduct for us, and, going a step further, we are extremely reluctant even in taking any view which may can even remotely be perceived to be at variance with the esteemed views of Hon ble Courts above. However, in our limited but sincere understanding, the variations in material facts is on such fundamental aspects that a .....

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of action 144C was permissible, a decision in favour of the assessee is to be essentially followed with an opportunity being given to the assessee to be allowed to traverse that path. However, having held so in principle, on the peculiar facts of this case and for the reasons we will now set out, this conclusion is somewhat academic as we see no need to remit the matter back to the Assessing Officer for the reason that the assessee deserves to succeed on merits. 12. Coming to the merits of the .....

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fficer, he called upon the assessee to file various details in order to verify the effective control and management of the freight beneficiary . In the course of these proceedings before the Assessing Officer, it was submitted by the assessee that LR2 was foreign commercial agent for the principal freight beneficiary Torm A/s. It was also pointed out that the above mentioned vessels are owned/chartered by Torm A/s , that the operator and freight beneficiary of the above vessels is Torm A/s , and .....

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listed in Copenhagen Stock Exchange, engaged in the business of shipping, chartering and other transportation services, which is incorporated in, and tax resident of, Denmark and it is effectively managed from Denmark. Accordingly, under Article 9 of Indo Danish tax treaty, the income from operations of ships in international traffic was taxable only in Denmark. As to the question of remittance of freight in the account of LR2 Management K/s, the assessee submitted as follows: It may be noted th .....

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s to the principal shipping company who is ultimate freight beneficiary. In accordance with the above, LR2, on behalf of Torm A/s, collects gross revenue, being hire, freight, demurrage etc due from Torm A/s, as vessel operation and freight beneficiary. All such money collection is received vy LR2 is deposited in a bank account centrally managed by LR2. After meeting the required expenses, the surplus freight is remitted by LR2 to Torm A/s. Even in Indian context, please note that when collectio .....

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rd to show that effective management and control of LR 2 was in Denmark. It was also noted that the freight amounts billed in India were received in LR2 s bank account no. DK2330003100104539 with Danska Bank A/s, Denmark. There was nothing to show that this amount was received by Torm A/s. In any event, there was nothing to show that the effective place of management of Torm A/s was in Denmark and that tax residency certificate cannot be treated as an evidence of the effective place of managemen .....

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the ruling given, with reference to the provisions of the Indo UAE treaty in this regard, in the cases of M A Rafik In Re [(1995) 213 ITR 317 (AAR)]. The Assessing thus declined the treaty protection to the freight income, and proceeded to bring to tax, in India, the entire freight receipts by the assessee. 14. Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) was of the view that the vessel .....

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ant to prove that remittances of freight charges have been offered to tax in Denmark , and, for this reason also, treaty protection could not be extended to the income embedded in the freight receipts. The assessee is not satisfied by the stand so taken by the CIT(A) and is in further appeal before us. 15. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 16. We find that there is no dispute th .....

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ner of the freight remitted from India and it is for this reason LR2 cannot avail the treaty benefits. In the case of Torm A/s, however, the treaty benefit is declined, inter alia, for the reason that there is nothing to show that the freight amounts were received by Torm A/s. There is an inherent contradiction in this approach. Be that as it may, the core issue for deciding as to in whose hands an income is to be taxed depends on who is beneficial owner of that income in the sense who bears ent .....

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acting for Torm. It is also an uncontroverted position on the facts of this case that the freight receipts in the hands of the LR2 are not in its own right but in a representative capacity for Torm; all the business risks continue to be borne by Torm. The taxability is of profits, and not of receipts, and profits are the rewards of risks. When all the risks continue to be borne by Torm, the profits are to be taxed in the hands of Torm and the treaty entitlement is to be seen for Torm. 17. As fo .....

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e in respect only of income from sources in that State or capital situated therein . The true test for residence status thus is that the person should be a taxable unit, in principle on global income basis, rather than limited source basis, and this tax liability should be by the virtue of domicile, residence, place of management or any other criterion of similar nature . In essence, these tests refer to being liable to tax on the basis of a locality related attachment which leads to residence t .....

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4(1), is governed solely by being liable to tax , in that tax jurisdiction- i.e. contracting state, by the reason of a locality related attachment which leads to residence type taxation. Of course, article 9(1) does require a person claiming treaty protection to have place of management in Denmark as this article provides that, profits derived from the operation of ships in international traffic shall be taxable only in the Contracting State in which the place of effective management of the ente .....

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, are Danish nationals. As regards reliance of the Assessing Officer in the case of SMR Investments Ltd Vs DDIT [(2010) TII 66 ITAT DEL], that was a case in which one Suresh Rajpal, director and 99% shareholder of the Mauritian company, was found to be, on the basis of statements of the persons he was doing business with, doing business on behalf of the company over telephone and this person was resident in India. There was no evidence that this person was in Mauritius on the points of time when .....

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essee was in Denmark. If in every case, without there being any specific material to indicate that business is being carried on from outside the jurisdiction in which the company is ordinarily situated, the assessee is asked to prove that he is not conducting the business from outside that jurisdiction, this will be asking the assessee to prove a negative. As is the settled legal position, nobody can be expected to prove a negative. The assessee has given reasonable evidence in support of the co .....

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matter. A lot of emphasis has been placed by the authorities below on the proposition that since there is no specific provision for revision of a return filed under section 172(3), no amendments in the facts stated in such a return, howsoever justified, can be entertained. We are unable to see any merits in this hyper technical approach adopted by the authorities below. All the inputs, including the inputs set out in the return filed under section 172(3), are to be examined on merits for arrivin .....

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anuary 2013 whereby The Danish Business Authority certifies and attests Torm A/s , Tuborg Havnevej 18, DK 2900 Hellerup, under CVR number 22460218 (former registration no. A/S 2206) in the municipality of Gentofte has processed a legal registration as a public company in the records of the Danish Business Authority in accordance with the Danish Companies Act . We also find that the assessee has filed certificates dated 12th June 2014 and 13th June 2014, issued by the Danish Customs & Tax Adm .....

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ate proceedings, no evidences whatsoever have been produced by the appellant to prove that remittances of freight charges have been offered to tax in Denmark . This approach is clearly fallacious inasmuch as the treaty entitlements are not triggered by actual taxation of an income in the other contracting state but the assessee becomes eligible to treaty protection by being liable to tax on global income basis, rather than limited source basis, in the residence jurisdiction as long as such a lia .....

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avels [(2006) 100 ITD 203 (Mum)]. The AAR rulings, with greatest respect, donot constitute binding precedents. In any event, even these rulings were in the context of the situations in which the residence jurisdictions have not exercised the right to tax by not introducing the related tax legislation. That s not the case before us. 19. We have noted that, as evident from the Directors report of Torm A/swhich is filed before us in the paperbook, the assessee has incurred a clearly unsatisfactory .....

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