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Maersk Line U.K. Ltd. & Another Versus The Deputy Director of Income Tax, International Taxation-2 (1) , Kolkata & Another

2016 (4) TMI 526 - CALCUTTA HIGH COURT

Reopening of assessment against the partnership firm based in the UK - Indo-UK treaty - whether partners of the firm had fiscal domicile offshore - noticee to be a person covered by the treaty - Held that:- Similar situation was dealt with in P & O Nedlloyd Ltd. & Ors. (2014 (11) TMI 564 - CALCUTTA HIGH COURT ) where this Court held the noticee to be a person covered by the treaty. Applying that decision to the facts of this case the noticee stands covered by the treaty as a person thereunder an .....

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n the UK is treated as a person under domestic law as its income exigible to tax thereunder, it follows that paragraph 2 of Article 3 of the convention is to be given an interpretation so as to benefit such a partnership based in the UK which since not taxed under the laws there might be treated as liable to tax in India. Mr. Chakraborty had fairly submitted that there was a subsequent amendment made to the treaty and duly notified whereby similar issue would not arise in future against the noti .....

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s Kaka, Sr. Adv. Mr. Vipul Kundalia, Adv. ,Mr. Manish Kanth, Adv. Ms. Sonal Saha, Adv For the Respondents : Mr. U. Chakraborty, Adv. Ms. Mamta Bhargava, Adv JUDGMENT The Court: These two writ petitions are at the instance of two partners of a partnership firm. The petitioner no.1 is the UK based partner while the petitioner no.2 is the partner based in the Netherlands. The partnership is the assessee known as P & O Nedlloyd which suffered issuance of notices under Section 148 of the Income T .....

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e Taxation Avoidance Agreement (DTAA), income from operation of ships in international traffic is not liable to tax in India in the hands of either of the two corporate partners. However the department went on to say further that which the petitioners contend, cannot be sustained. …PONP being a partnership firm based in U.K., it is fiscally transparent entity in U.K. and hence outside the ambit of the treaty between India and U.K. Its income is therefore, exigible to tax as per the provis .....

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as nil in the hands of the partners. That same income could not thereafter be taken to be income exigible to tax in India in the hands of the partnership. He referred to Articles 9(5) and 8A (4) of the respective treaties that India has with the UK and Netherlands. He then submitted the position had been made clear by the Supreme Court in the case of Union of India vs. Azadi Bachao Andolan reported in (2003) 263 ITR 706. He submitted the Supreme Court had interpreted the law on this aspect to be .....

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4 of the DTAC, what is relevant is the legal situation, namely, liability to taxation, and not the fiscal fact of actual payment of tax. If this were not so, the DTAC would not have used the words, liable to taxation , but would have used some appropriate words like Pays tax . On the language of the DTAC, it is not possible to accept the contention of the respondents that offshore companies incorporated and registered under the MOBA are not liable to taxation under the Mauritius Income-tax Act; .....

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h observed: Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated in so far as the particular item under consideration is concerned. Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx .....

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Vogel, only in exceptional cases, and only when expressly agreed to by the parties, is exemption in one Contracting State dependent upon whether the income or capital is taxable in the other Contracting State, or upon whether it is actually taxed there. (see in this connection Klaus Vogel, Double Taxation Convention, pages 26-29, third edition). It is, therefore, not possible for us to accept the contentions so strenuously urged on behalf of the respondents that avoidance of double taxation can .....

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n the impugned notices against the firm. In any event, according to him, the reasons to believe also included the contention of the Revenue alleged to have been established in the case of the assessee firm for the assessment year 2002-03 which was negated by this Court in the case of P & O Nedlloyd Ltd. & Ors. vs. Assistant Director of Income-tax reported in (2014) 269 ITR 282 (Cal). Mr. Kaka submitted still further, fiscal domicile of the partnership based in the UK and constituted by t .....

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and (5) to submit that the partnership being an enterprise of the UK was only taxable in that State. Mr. Chakraborty assisted by Ms. Mamta Bhargav, learned Advocates appeared on behalf of the Revenue and had initially submitted the matter should be adjourned pending decision of the Supreme Court in the Appeal by Special Leave preferred against P & O Nedlloyd Ltd. & Ors. (supra) which submission was vehemently opposed and thereafter the matter heard. He then had submitted on instructions .....

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aid that the noticee had fiscal domicile there. The partners having fiscal domicile elsewhere could not be taken to mean that the partnership though based in the UK also had fiscal domicile there. He submitted, furthermore the noticee was not a person under the convention to be able to resist the issuance of the impugned notices to it. Mr. Kaka, in reply reiterated that the argument of the Revenue stood negated by the decision in P & O Nedlloyd Ltd. & Ors. (supra). He submitted, another .....

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ia. He added, the interpretation of Article 3, paragraph 1(f), according to him, was that partnerships per se were not persons thereunder and, therefore the said partnership not being an Indian partnership could not have had the impugned notices issued to it by the Revenue. Two contentions were raised by the Revenue in seeking to resist the challenge made in the writ petitions. The first was that the writ petitions should be adjourned pending decision of the Supreme Court in the appeal by Specia .....

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ly challenged by the petitioners therein who are the petitioners herein also. In these two writ petitions the petitioners have challenged the said notices relating to assessment years 2005-06 and 2006-07. The respective assessment orders dated 31st October, 2007 and 10th November, 2008 relating to those assessment years are annexures P-8 and P-10 to the writ petitions. Assessments made by both the orders were that income tax payable on income from the operation of ships by the partnership for th .....

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The department has treated the noticee as being a partnership firm based in the UK and transparent to the tax laws of that country. The noticee is not a person under the treaty was also the submission made on behalf of both the parties. Its income is, therefore, exigible to tax as per the provisions of domestic law according to the Revenue. The petitioners have annexed to their writ petitions a note on partnership provisions in the 1993 UK-India DTAA written by the Head of Tax Treaty Negotiatio .....

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g to their agreed shares and the partners are then subject to corporation tax on their share as if it derived from a trade carried on alone by that partner. It is the partners that are subject to UK tax on the partnership profits. Common contentions of the parties appear to be that:- i) the noticee is a partnership firm based in the UK; and ii) the noticee is not a person under the treaty. The relevant clauses of the treaty in this regard are reproduced below: ARTICLE 3-General Definitions 1&hel .....

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enterprise of a Contracting State and enterprise of the other Contracting State mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State: (i)……. (j)…… (k)…… 2. A partnership which is treated as a taxable unit under the Income tax Act, 1961 (43 of 1961) of India shall be treated as a person for the purposes of this Convention. ARTICLE 9- Shipping 1. Income of .....

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y as not being a person thereunder. Its income is exigible to tax in India under the Income-tax Act, 1961 while the partners thereof exempt under Section 10(2A) of the said Act. It follows that the Revenue has treated the noticee as a person within the meaning of Section 2(31) of the said Act to apply the charging Section 4 thereof which is reproduced below: 4.(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate o .....

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he noticee stands covered by the treaty as a person thereunder and being an enterprise of a Contracting State, taxable only in that State. Nevertheless, since on behalf of the petitioner it was also submitted in the alternative that the noticee is not a person covered by the treaty though such submission not made in agreement with the submission to the same effect made by the Revenue, the purportedly similar submissions must be considered. At the first instance, if the noticee is not covered by .....

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