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TMI Blog2017 (5) TMI 1219X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. constitutes a permanent establishment of assessee in India within the meaning of Article 5 of the Tax Treaty. 4. At the outset learned AR placed on record the order of the Tribunal in assessee's own case for the A.Y. 2004-05 wherein the Tribunal have decided the above issue as under:- 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 artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stituted therein. He has contended that the combined effect of these modifications in Articles 7 and 8 makes it clear that the profits from the operation of ships in international traffic were left to be taxed by each contracting State according 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as altered as a result of introduction of the said article inasmuch as it became necessary to find out as to whether shipping profits have been dealt with in any other article of the treaty. Mere exclusion of shipping profits from the scope 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 distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment order passed on 10thi June, 2005 u/s 172(4), the AO accepted that the international shipping profits of the assessee company for assessment year 2005-06 were governed by Article 22(1) of the Indo-Swiss treaty. In order to say that 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he stand of the Revenue is that by excluding the profits from the operation of ships in international traffic from Article 7(1), the same has to be regarded as dealt with by Article 7(1)and it, therefore, cannot fall under Article 22. It 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 ship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard, we have already referred to the correspondence exchanged with the competent authorities of India and Switzerland whereby it was mutually agreed to assign a certain specific interpretation to Article 22 in the context of 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 not hing 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 Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue came up for consideration for the first time in assessment year 2002-03 when Article 22 introduced in the Indo-Swiss treaty from 0104-2001 became operative and applicable. For that year, the return was filed by the assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion agreement. During our negotiation both contracting States decided to tax enterprises that operate in the shipping business according to the internal law of each Contracting State. The term "international traffic" in paragraph 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 busi ne ss pr of it at t r ibut ion bet w een t he com pany and it s per m anent 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 para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n bold letters) We thank you for your cooperation in this matter and look forward to receiving your soon answer." 44. The immediate reply to the above letter was sent by Joint Secretary (FT & TR) by a letter dated l0 December, 2003 communicating 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 18 t " 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 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of such income. The letter dated 14th February, 2005 of Joint Secretary (FT & TR) relied upon by the AO to deny the treaty benefit to the assessee company thus was superseded by the letter dated 27'' May, 2005 and the reliance of the AO on the 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 authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee that Article 22 of the Indo-Swiss treaty applies to such income and allocates taxing rights to the country of residence i.e. Switzerland. He has contended that although the said decision of Authority for Advance Ruling is not strictly binding on 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 & CO No.259/07 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion, the item of income in question i.e. international shipping profit cannot be said to be dealt with in any other articles of the Indo-Swiss treaty and the taxability of the said income thus is governed by residuary Article 22 introduced in the treaty with effect from 01-04-2002. 49. Having held that the taxability of internat ional 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 Samasar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a d v e r t i s i n g, press................agreed by the principles. 3.14 To issue, sign a n d s t a m p o n b e h a l f o f t h e P r i n c i p a l s.......to perform these duties. 5.00 Principals' Duties: 5.02 The Principals will provide the Agents with any necessary funds 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 Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to mean that there is a powerful, complete or thorough control of the ship by the agency. In his view, the shipping company, however, has no such control whatsoever over the ship and since it is only working as an agent who makes bookings and perform other ancillary 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 & CONo.259/07 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein and the debt claimed in respect of which the interest is paid is effectively connected with such PE or fixed base. In such a case, the provision of Article 7 or Article 4 as the case may be shall apply." 55. The Special Bench in this context noted that the provisions of Article 11(6) of the Indo-Japanese 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 commi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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