TMI Blog2018 (8) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income Tax Act, 1961 pursuant to the direction of the Dispute Resolution Panel for the concerned assessment years. 2. The common grounds raised in Revenue s appeal read as under: 1. Whether on facts and in circumstances of the case and in law, the phrase other than the profits from the operation of the ships in international traffic occurring in Article-7 tantamount to the 'profit from operations of ships in International traffic' having been dealt within Article -7 so as to exclude treatment of the same under Article-22 of DTAA on account of the phrase not dealt with in the foregoing Articles occurring therein and thereby making profits from operation of ship[s in international traffic duly taxable under the provisions of Indian Income tax Act, 1961. 2. Whether on facts and in circumstances of the case and in law, the introduction of Article -22 in the DTAA changes the undisputed position prevailing up to 2001{prior to introduction of Article-22) that profits of shipping were to be taxed by respective counties according to their Domestic Law by virtue of exclusion of shipping profit from the meaning of business profits occurring in Article-7 of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability of the respondent assessee in India. 4. The grounds raised by the assessee in CO No. 277/Mum/2017 read as under: 1. On the facts and in the circumstances of the case, and without prejudice to the directions of the Hon'ble Dispute Resolution Panel ('DRP') holding that the shipping income of the respondent assessee is not taxable in India under Article 22 of the Double Taxation Avoidance Agreement between India and Switzerland ('Tax Treaty'), the Hon'ble DRP has legally erred in holding that MSC Agency (India) Pvt. Ltd. ('MSC Agency') constitutes a Permanent Establishment ('PE') of the respondent-assessee in India within the meaning of Article 5 of the Tax Treaty. 2. Without prejudice to the above, the Hon'ble DRP has erred in not adjudicating Ground of Objection (No. 5) taken up by the respondent-assessee wherein it was stated that, no income of the respondent assessee could be brought to tax in India as the arm's length commission paid to MSC Agency (which is taxable in India in the hands of MSC Agency), fully extinguishes the tax liability of the respondent assessee in India. 5. At the outset in this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee company from operation of ships in international traffic is governed by Article 22 of Indo-Swiss treaty and although the assessee was having a PE in India, the right or property in respect of which the income was paid i.e. ships not being effectively connected with such PE, profits from operation of ships in international traffic is taxable only in Switzerland as per paragraph 1 of Article 22 of Indo-Swiss treaty. The first and foremost issue that is to be considered and decided thus is whether the taxability of profits from operation of ships in international traffic of the assessee company is governed by Article 22 of the Indo-Swiss treaty or not. 32. The learned Special Counsel for Revenue Shri G.C. Srivastava, has contended that the profits from shipping and air transport are specifically dealt with under Article 8 of OECD model convention according to which profits of an enterprice of a contracting State from the operation of ships or aircraft in international traffic is taxable only in that State. He has contended that India and Switzerland, however, have agreed to modify Article 8 to exclude shipping profit from its scope. He has submitted that the shipping pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent of Switzerland, the income, wherever arising, would fall within the scope of the residuary Article 22 if the same is not dealt with in any other Articles of the treaty. The question, therefore, is whether the shipping profits are dealt with in any other articles of the Indo-Swiss treaty or not. The contention raised by Shri Srivasava on behalf of the Revenue is that by agreeing to exclude the shipping profits from Article 8 as well as Article 7 of the Indo-Swiss treaty, India and Switzerland had agreed to leave the shipping profits to be taxed by each State according to its domestic law and this undisputed position prevailing upto 2001 did not change as a result of introduction of Article 22 of the treaty with effect from 01-04-2001. We are unable to agree with this contention of Shri Srivastava. In our opinion, as a result of introduction of Article 22, the items of income not dealt with in the other articles of the Indo- Swiss treaty are covered in the residuary Article 22 and their taxability is governed by the said Article with effect from 01-04-2001. Articles 7 and 8 of the treaty therefore cannot be relied upon to say that by agreeing to exclude the shipping profits from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealt with by any other article are specifically covered in that article and since the taxability of such other income is now governed by Article 22, the same has to be dealt with reference to the said article. This conclusion gets support from the opinion of Mr. Philip Bekar dated 25th June, 2003 filed by the assessee wherein he has opined that Article 7 cannot be regarded as having dealt with international shipping profit and such profits would be covered within the perview of Article 22 of the Indo-Swiss treaty. 35. In support of his action in bringing to tax the profits from shipping to tax in India as per domestic law, the AO has relied upon the letter dated 14th February, 2005 issued by the Joint Secretary. However, as rightly contended by the learned counsel for the assessee, the said letter has been impliedly superseded by another letter dated 27th May, 2005 issued subsequently wherein reference was made to two letters written earlier dated 29th October, 2003 and 18th December, 2003 accepting that the taxability of shipping profits was governed by Article 22 of the Indo-Swiss treaty. As a matter of fact, this position was accepted by the AO himself in the assessment compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l services would travel from Article 7 to Article 13. The Special Bench, however, took note of Article 7(9) of the DTAA between India and United Kingdom which provided that where profits include items of income which are dealt with separately in other articles of this convention, then the provisions of those articles shall not be affected by the provisions of this article and held in view of the said article that technical services would have to go back to article 7 for determination of whether India can tax fees from such technical services. The stand of the Revenue that exclusion of an item of income from an article means that such item has been dealt with thus was not accepted by the Special Bench of ITAT by implication in the case of Mahindra Mahindra. 37. As already observed, the expression dealt with used in Article 22 have to be read in the context of purpose of double tax avoidance agreement which is allocation of taxing jurisdiction. From this angle, an item of income can be regarded as dealt with by an article of DTAA only when such article provides for and positively vests the powers to tax such income in one or both States. The mere exclusion of internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t are taxable in Switzerland after the introduction of Article 22 in the Indo-Swiss treaty with effect from 01-04-2001 is to be accepted, the amendment with effect from 1st April, 2012 whereby such income is included in Article 8 thereby giving the State of residence the sole right to tax the same would render a futile exercise, because as a result of the said amendment made in the year 2012, the international shipping profits shall be taxable in the State of residence irrespective of whether the resident has a PE in the other State or not and whether the rights or property are effectively connected with such PE or not which was not the position earlier prior to 2012 even after insertion of Article 22. 40. Shri Srivastava has relied on the commentary of Professor Klaus Vogal wherein while explaining the scope of Article 22, the learned Commentator has stated that the said article does not apply to the items of income classifiable as business profits within the meaning of Article 7. It is, however, to be noted that the international shipping profits have been excluded from business profits within the meaning of Article 7. He has also relied on the comments of Professor Klaus Voga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned by a resident of Libya in India thus is taxable in India if exigible as per the domestic laws in view of the absence of a more beneficial clause in the relevant treaty. This position can be further understood by reference to DTAA between India and Malaysia which has no clause prescribing a tax treatment for capital gains but has a residuary clause i.e. other income clause in Article 22 which prescribes distributive rules with respect to items of income for which no rules have been prescribed in the earlier articles of the agreement. The taxability of capital gains earned by a resident of Malaysia in India thus will be governed by the distributive rules contained in Article 22 if they are more beneficial to the assessee than the relevant provisions contained in the Indian Income-tax Act. These examples will further support and substantiate the view that international shipping profits were being taxed in India under the domestic law upto assessment year 2001-02 not because of the exclusion contained in Article 7 but because of absence of any article prescribing specifically a tax treatment i.e. distributive rules in the Indo-Swiss treaty. This position, however, has changed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22 in the treaty, the income of the assessee from profits from shipping operation in international traffic were taxable only in the State of residence i.e. Switzerland and not in India. 43. There is no dispute that the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to assessment year 2002- 03 wherein the claim of the assessee was accepted by the AO. In the year under consideration, he, however, has taken a different view relying on the letter dated 14th February, 2005 issued by the Joint Secretary. As pointed out by the learned counsel for the assessee, the said letter has been superseded by another letter issued on 27th May, 2005 wherein the Joint Secretary has made a reference to the letters exchanged between the competent authority of India and that of Switzerland dated 29th October, 2003 and 18th December, 2003. Copies of the said letters are placed on record. The first letter dated 29th October, 2003 was sent by Professor Dr. R. Waldburger, Vice Director, Division for International Fiscal Law and Double Taxation Matters, Swiss Federation Tax Administration to the Joint Secretary (FT TR), Ministry of Finance, G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. Accordingly, any income derived by a resident of one of the Contracting States not specifically dealt with in any of the other Articles of our agreement falls under Article 22. According to paragraph 1 of Article 22 such income is taxable only in the country of residence, unless the beneficial owner carries on business in the other Contracting State through a permanent establishment and the right or property in respect of such income is effectively connected with such permanent establishment (paragraph 2 of Article 22). Considering these provisions, we are of the opinion, that income derived by a resident of Switzerland from India out of operation of ships in international traffic, shall fall under Article 22. Further, it is our understanding that such income would be liable to tax only in Switzerland unless the beneficial owner carries on business in India through a permanent establishment situated therein and the right or property in respect of such income is effectively connected wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian Competent Authority that profit from operation of ships in International traffic is not governed specifically by any of the articles of the treaty and that Article 22 of the DTAA dealing with other income would fall to be applicable in respect of such income. The AO, however, relied on the letter dated 14th February, 2005 written by Joint Secretary (FT TR) to DGIT, International Taxation clarifying that India has not accepted that income from operations of ships in international traffic accruing to a resident of Switzerland will not be taxable in India in view of applicability of Article 22 of Indo-Swiss treaty and such income will be taxable only in accordance with the domestic law of the State. As pointed out by the learned counsel for the assessee, another letter dated 27th May, 2005 thereafter was written by Joint Secretary (FT TR) to the DGIT, International Taxation enclosing the letters dated 10th December, 2003 and 18th December, 2003 issued in the matter for necessary action. As already noted by us, letter dated 18th December, 2003 was written by the Joint Secretary (FT TR) after 10th December, 2003 clarifying the matter further to the Competent Authority of Swit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utta High Court at page 496 of the report that if an agreement between two parties has been understood in a certain way and has been acted upon by them, it would not be open to the Tax Officer to give another interpretation to the agreement. In the present context, the Indo-Swiss treaty especially the scope of Article 22thereof was understood in a certain way as expressed and clarified in the letter dated 29th October, 2003 issued by the Competent Authority of Switzerland and reply thereto given by the Indian Competent Authority by letter dated 18th December, 2003 agreeing that there being no other article of the treaty dealing with profits derived from shipping operations in international traffic, the taxability thereof was governed by Article 22. We are of the view that the revenue authorities in India therefore are not justified to take a different view by assigning different interpretation to the relevant clauses of the treaty than the one understood by both the parties to the said agreement. 47. In support of the Revenue's case on the issue under consideration, Shri Srivastava has heavily relied on the decision of Authority for Advance Ruling in the case of Gearbulk AG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of ADIT (International Taxation) vs. Green Emirate Shipping Travels 100 ITD 203 (Mum.), reliance was placed on behalf of the Revenue on the ruling given by the Authority for Advance Ruling in the case of Abdul Razak A. Meman 276 ITR 306 which was directly applicable to the issue under consideration. The Tribunal, however, declined to treat it as a covered matter relying on the decision of Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) wherein it was held that the ruling given by the Authority for Advance Ruling is not even binding on the Commissioner of Income Tax and authorities sub-ordinate thereto in any case except in the case of the very assessee in which such a ruling was given and that too in respect of transaction in respect of which such ruling was given. It was held by the Tribunal that whatever be the respect and deference judicial authorities indeed have for the rulings given by the authority, the Authority for Advance Ruling not being a part of judicial hierarchy cannot lay down a binding precedence. It was held that the ruling given by the Hon'ble Authority for Advance Ruling, therefore, has no precedence value in general. We are, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement covers all ports in the Region and /or inland agency work within the Region nominated in clause 11 and covers the following duties:- * Sales and Marketing * Bookings * Documentation * Equipment Control * Equipment Control * Inland Transportation * Operations cost control * Vessel Operations / Husbandry * Disbursements * Systems/IT 2.02 The Agents undertake not to accept the representation in the Region of any other Principals for the service in direct competition or with direct conflict of interest with the Principal's activities in section, without written consent, which shall not be unreasonably withheld by the Principals. 3.10 Marketing Sales and Documentation:- 3.11 To provide marketing and sales activities for the services of the Principals in the Region, to canvass for and book cargo, to publicise the services and to maintain contact with Shippers, Consignees, Forwarding Agents, Port and other Authorities and trade organizations. 3.12 To provide statistics and information, and to report on cargo bookings and use of space allocations. To announce sailing and / or arrivals and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into contracts for and on behalf of the assessee company which, in our opinion, is contrary to the relevant clauses of the agreement between the assessee company and M/s MSC Agency India Pvt. Ltd. defining the scope and authority of M/s MSC Agency India Pvt. Ltd. and its commitment to work exclusively for the assessee company and not to accept the representation of any other principle for the same services in the same region without the written consent of the assessee company. 52. The next issue that arises for our consideration in this context is whether the property in respect of which international shipping income was received by the assessee company through shipping business carried on in India through the P.E. situated therein i.e. ships was effectively connected with such permanent establishment. The expression effectively connected used in this context in the Article 22(2) of the Indo-Swiss treaty is not defined either in the said treaty or even in the domestic law i.e. Income-tax Act. The said term, therefore, has to be understood using the general principles of common law keeping in mind the common uses associated with the phrase. The assessee has filed opinion of Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be otherwise effectively connected with the permanent establishment in India. They are the assets of the shipping company and have no connection with any agency PE in India save that the PE may clear inbound cargo and book outbound cargo which is carried on those ships. Where the ships are owned or chartered by a non-resident shipping company and the agency PE merely clears inbound cargo and books outbound cargo and carries out similar ancillary functions, the ships are clearly not the assets of the PE nor are they in some other way effectively connected with a permanent establishment. According to him, the concept of effectively connected can be applied in practical terms where branch accounts are drawn up for the PE based upon the correct accounting principles where the ships are shown as assets of the branch. 54. In the case of Sumitomo Mitsui Banking Corporation (supra), the Special Bench of this Tribunal had an occasion to consider and interpret the meaning of the term effectively connected used in paragraph No. 6 of Article 11 of the Indo- Japanese treaty which reads as under : The provisions of para 1, 2 and 3 shall not apply if the beneficial owner of the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odel Tax Convention on Income and on Capital (condensed version) published in July, 2010, the term used in paragraph 21(1) of the Model Convention, (similar to Article 22(1) of the Indo-Swiss Treaty) viz. a right or property in respect of which income paid will be effectively connected with a permanent establishment has been explained. It is stated that for the purposes of paragraph 21(1), a right or property in respect of which income paid will be effectively connected with a PE if the economic ownership of that right or property is allocated to that PE. It is stated that the economic ownership of a right or property in this context means the equivalent of ownership for incometax purposes by a separate enterprise with the attended benefits and burdens (e.g. the right to the income attributable to the ownership of the right or property, the right to any available depreciation and judicial exposer to gains or losses from the appreciation or depreciation of that right or property). 57. 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 and the ratio of the decision of Special Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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