TMI Blog2020 (11) TMI 415X X X X Extracts X X X X X X X X Extracts X X X X ..... mercial, or scientific equipment, the same therein cannot be treated as royalty within the meaning of Article 12(3)(b) of the India-Singapore tax treaty. We herein not being able to subscribe to the view taken by the lower authorities, to the extent they had concluded that the amounts received by the assessee for time charter of its vessel viz. Smit Borneo was to be treated as royalty under Article 12(3)(b) of the India-Singapore tax treaty, therein vacate the same. As we have vacated the view taken by the A.O/DRP that the consideration received by the assessee from time charter of its vessel viz. Smit Borneo was to be treated as royalty as per Article 12 of the India-Singapore Tax Treaty, therefore, we refrain from adverting to the other contentions advanced by the ld. A.R to support its claim, which thus are left open. Grounds of appeal No. 2 to 4 are allowed in terms of our aforesaid observations. Mobilisation fees received by the assessee from Leighton India Contractor Pvt. Ltd. - Whether wrongly been treated as royalty, both under Sec. 9(1)(iv) of the Act, and Article 12(3)(b) India-Singapore tax treaty? - HELD THAT:- As observed by the A.O/DRP that as the mobi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit of TDS in the course of the set aside proceedings, the A.O is directed to issue the balance refund to the assessee, as per law. Ground of appeal No. 11 is allowed for statistical purposes. - ITA No.7055/Mum/2017 - - - Dated:- 9-11-2020 - Shri Pramod Kumar, Vice President And Shri Ravish Sood, Judicial Member For the Appellant : Shri Madhur Agarwal, A.R For the Respondent : Shri Sanjay Singh And Shri T.S. Khaisa, CIT, D.Rs ORDER PER RAVISH SOOD, JM The present appeal filed by the assessee is directed against the order passed by the A.O under Sec. 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (for short Act ), dated nil for A.Y. 2014-15. The assessee has assailed the impugned order on the following grounds of appeal before us: Based on the facts and circumstances of the case, Smit Singapore Pte Ltd. (hereinafter referred to as the Appellant) respectfully craves leave to prefer an appeal against the order dated 10 October 2017 passed by Deputy Commissioner of Income-tax (International Taxation) - 4(2)(1) ('AO') in pursuance of the directions issued by Dispute Resolution Panel - 2 ('DRP'), Mumbai on the following grounds: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act, 1961 ('the Act'): 9. erred in holding that the impugned reimbursement of expenses shall be covered within the definition of the term Royalty under Article 12(4) of the India - Singapore DTAA: 10. Without prejudice to the above, erred in not applying the special deeming provisions of Section 44BB of the Act, wherein 10% of the gross receipts shall be deemed to be income of the Appellant; Short granting of credit in respect of tax deducted at source ('TDS') 11. erred in granting TDS credit of ₹ 95,64,832 as against a credit of ₹ 1,20,29,183 claimed by the Appellant in the return of income, thereby short granting TDS credit by ₹ 24,64,351/- Levy of interest under section 234A of ₹ 40,29,825 12. erred in levying interest under section 234A of the Act amounting to ₹ 40,29,825 Levy of interest under section 234B of the Act of ₹ 96,26,797 13. erred in levying interest under section 234B of the Act amounting to ₹ 96,26,797 Initiation of penalty proceedings under section 271(1)(c) of the Act erred in initiating penalty proceedings under section 271(1)(c) of the Act. The above grounds o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia. 4. After deliberating on the reply filed by the assessee, the A.O called upon it to explain as to whether the receipts from time charter of the vessel Smit Borneo to Leighton India Contractor Pvt. Ltd. was claimed as exempt under Article 8 of India-Singapore tax treaty. In reply, it was submitted by the assessee that for the purpose of applicability of Article 8 of the India-Singapore Tax Treaty two conditions were required to be satisfied viz. (i) the nature of activity should be transportation by sea or air of passengers, mail, livestock or goods; and (ii) the activity of transportation is carried on by the owner or lessee or the charterer of the ship or aircraft. It was submitted by the assessee that given the nature of its activities and the further use of the vessel, the said primary condition for applicability of Article 8 of the India-Singapore tax treaty was not satisfied. Accordingly, it was submitted by the assessee that Article 8 was not applicable in its case for the year under consideration i.e A.Y. 2014- 15. As regards the query raised by the A.O as to whether its receipts were covered under Section 44B of the Act, the assessee answered in the negative. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eo may not be brought to tax in its hands as royalty . Rebutting the aforesaid claim of the A.O, it was submitted by the assessee that providing of vessel on time charter basis along with crew was neither in the nature of any patent or a license nor as that of imparting of any information of any technical, industrial, commercial or scientific knowledge. Also, as stated by the assessee the time charter of the vessel did not involve transfer of any rights/licenses in respect of any copyright, literary, artistic or scientific work. Alternatively, it was the claim of the assessee, that even if the time charter of the vessel along with the crew was considered as use or right to use of any industrial, commercial or scientific equipment, the revenue earned therefrom by the assessee being covered under Sec. 44BB of the Act would fall within the realm of the exclusion carved out in clause (iva) of the Explanation 2 to Sec. 9(1)(vi) of the Act, and thus fall beyond the purview of the definition of royalty therein contemplated. Adverting to the India-Singapore tax treaty, it was submitted by the assessee that Article 12 of the tax treaty provided that the consideration for the use, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as to why the said amount may not be treated as royalty, the assessee came forth with a two fold submission ,viz. (i) that as the mobilisation fees was received in connection with the delivery of the vessel at the location in Singapore, and thus the services were neither rendered or utilized in India, the same not having accrued or arisen in India could thus not be brought to tax in India.; and (ii) that, as the vessel was used by the assessee for rendering services to Leighton India Contractor Pvt. Ltd., and not used by the latter on an independent basis, the same thus could not be assessed as royalty. Alternatively, it was submitted by the assessee that if the mobilisation fees was to be considered as chargeable to tax, the same may be taxed as per the provisions of Sec. 44BB of the Act. However, the A.O was not persuaded to subscribe to the aforesaid contentions of the assessee. Observing, that the mobilisation fees was a part of the receipt for use of the vessel, the A.O assessed it as royalty in the hands of the assessee. Further, it was observed by the A.O that the assessee had claimed to have received an amount of ₹ 1,31,80,903/- towards reimbursement of exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spite the fact that the assessee did not have a PE in India during the year under consideration, the same was liable to tax as per the rate prescribed in the India-Singapore tax treaty. It was observed by the DRP that the assessee had claimed to have provided on a time charter basis its vessel viz. Smith Borneo along with crew to Leighton India Contractor Pvt. Ltd., for providing services for exploration or extraction of mineral oil to ONGC, in connection with the latters I-tube and Flexible pipe installations for ONGC Pipeline Replacement Project-3 and Heera RD Phrase-II Pipeline Project. It was observed by the DRP that Leighton India Contractor Pvt. Ltd. had obtained the aforesaid vessel viz. Smith Borneo alongwith crew on time charter basis from the assessee for providing services to ONGC in its exploration of mineral oils work. Observing, that the vessel Smith Borneo was a Crane barge, a specialised vessel used for a range of services, that included marine salvage work, lifting and transporting oil field equipment, deployment of mooring and riser systems, offshore installations services etc., the DRP concurred with the A.O that the same would fall within the definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arterer in the course of its services rendered to ONGC. As such, observing that the mobilisation fees received by the assessee was for the services which formed an integral part of the receipts for providing the vessel on time charter basis to Leighton India Contractor Pvt. Ltd., the DRP upheld the view taken by the A.O that the mobilisation receipts were liable to be assessed as royalty in the hands of the assessee. Also, the alternate claim of the assessee that the said receipts be assessed as per the provision of Sec.44BB of the Act, was also rejected by the DRP, for the reason, that the provisions of Sec. 44BB were not applicable in the case of the assessee. As regards the amount of ₹ 1,31,80,903/- which was claimed by the assessee to have been received towards reimbursement of expenses from Leighton India Contractor Pvt. Ltd., the DRP observed, that the said receipts were intrinsically linked with the chartering receipts. Apart from that, it was observed by the DRP that the A.O had categorically noted that the assessee had not provided any details as to what actual expenditure was incurred by it towards providing of common services, and as to how the reimbursement amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as Article 12(3)(b) of the India-Singapore tax treaty. Elaborating on his said contention, it was submitted by the ld. A.R that for bringing a sum received by the assessee within the realm of the definition of the term royalty as contemplated in the clause (iva) of Explanation 2 to Sec. 9(1)(vi) of the Act, it has to be shown that it was received for the use or right to use any industrial, commercial or scientific equipment. Apart from that, it was the claim of the ld. A.R that clause (iva) of Explanation 2 to Sec. 9(1)(vi) carved out an exclusion in respect of the amounts referred to in Sec. 44BB of the Act. In the backdrop of the aforesaid facts, it was submitted by the ld. A.R that as the assessee had time chartered its vessel viz. Smit Borneo along with crew to Leighton India Contractor Pvt. Ltd., and had not passed over or parted with the use or right to use of the said vessel to the said charterer, therefore, the consideration therein received could not be brought within the realm of the definition of the term royalty as contemplated in clause (iva) of the Explanation 2 to Sec. 9(1)(v) of the Act. Apart from that, it was submitted by the ld. A.R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same thus not having accrued or arisen in India could not have been brought to tax in India. It was further submitted by the ld. A.R that as the assessee had not passed over the use or right to use of vessel viz. Smit Borneo , to Leighton India Contractor Pvt. Ltd., therefore, the mobilisation fees could not be treated as royalty . Assailing the re-characterisation of the amounts received by the assessee towards reimbursement of expenses by Leighton India Contractor Pvt. Ltd., as royalty by the lower authorities, it was submitted by the ld. A.R that as the said amounts were simpliciter in the nature of reimbursement of certain expenses which were incurred by the assessee for and on behalf of Leighton India Contractor Pvt. Ltd, therefore, the same could not have been included and therein treated as royalty in the hands of the assessee. It was averred by the ld. A.R, that it was not the case of the revenue that the assessee had not incurred any expenses for and on behalf of Leighton India Contractor Pvt. Ltd. As such, it was the claim of the ld. A.R, that the consideration received by the assessee towards reimbursement of the expenses which were incurred by it on behalf of L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehalf of Leighton India Contractor Pvt. Ltd. was wrongly assessed as royalty in its hands, the ld. D.R relied on the orders of the lower authorities. It was submitted by the ld. D.R that the assessee had failed to demonstrate as to what all expenses were incurred by it on behalf of Leighton India Contractor Pvt. Ltd., for which it was thereafter reimbursed, and had also failed to furnish details as regards the allocation basis that was adopted for allocating the common expenses to the share of the charterer. Apart from that, it was submitted by the ld. D.R that there was also no evidence on record that the market value of the services received by Leighton India Contractor Pvt. Ltd. from the assessee were equivalent to the payments received by the assessee from any other entity. 13. Rebutting the aforesaid contention of the counsel for the revenue, it was submitted by the ld. A.R that the assessee had at no stage passed over either the use or the right to use of the vessel viz. Smit Borneo to the charterer. In order to drive home his said contention the ld. A.R took us through the relevant clauses of its agreement with Leighton India Contractor Pvt. Ltd. Further, it was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. 9(1)(vi) of the Act, AND Article 12(3)(b) of the India-Singapore tax treaty. The term royalty as defined in the Explanation 2 of Sec. 9(1)(vi) of the Act, reads as under: Explanation 2.-For the purposes of this clause, royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'Capital gains ) for- (i) the transfer of all or any rights (including the granting of a l icense) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (v) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (vi) the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We shall first deal with the second limb of the aforesaid contention advanced by the ld. A.R before us. As observed by us hereinabove, it is the claim of the assessee that as the time charter receipts were covered by Sec. 44BB of the Act, the same would thus fall within the exclusion carved out in the definition of the term royalty as contemplated in clause (iva) of the Explanation 2 to Sec. 9(1)(vi) of the Act. We are unable to persuade ourselves to accept the aforesaid claim of the assessee. As had been observed by us hereinabove, in the absence of the assessee s PE in India, the aforesaid time charter receipts could not have been brought to tax under Sec.44BB of the Act. In fact, the assessee had itself not offered the aforesaid amount for tax under Sec.44BB of the Act. Accordingly, in the backdrop of the aforesaid facts, now when the time charter receipts during the year under consideration had not been brought to tax, or in fact, could not have been subjected to tax under Sec. 44BB of the Act, therefore, the claim of the assessee that the same would fall within the scope and gamut of the exclusion carved out in the definition of term royalty as contemplated in clause (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posed by the Act. But then, if a tax liability is imposed by the Act, the agreement may be resorted to for negativing or reducing it. Further, as observed by the Hon ble High Court, in case of difference between the provisions of the Act and of a tax treaty under Sec. 90, the provisions of the tax treaty shall prevail over the provisions of the Act and can be enforced by an appellate authority or the Court. However, as provided by sub-sec (2) of Sec. 90, the provisions of the Act will apply to an assessee in the event they are more beneficial to him. A similar view has been arrived at by the Hon ble High Court of Bombay in the case of CIT Vs. Siemens Aktionlesellschaft (2009) 310 ITR 320 (Bom) . In the said case, it was inter alia observed by the Hon ble High Court that though provisions of Sec. 9 of the Act would be applicable, however, considering the provisions of the DTAA if beneficial than the provisions of the IT Act, the provisions of DTAA would prevail. 17. In the backdrop of our aforesaid observations, we shall test the claim of the ld. A.R that the time charter receipts would not fall with the realm of the definition of royalty , as provided in Article 12 of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee for rendering services to Leighton India Contractor Pvt. Ltd., but the same, as per the terms of the agreement was not used by Leighton India Contractor Pvt. Ltd. on an independent basis. In our considered view there is a subtle distinction between the use of an equipment by the assessee for the charterer, and the use of the equipment by the charterer. In our considered view, on the basis of the facts discernible from the records, as the vessel viz. Smit Borneo along with crew was used by the assessee for rendering of services to Leighton India Contractor Pvt. Ltd., it could thus by no means be held as being in the nature of a contract of hiring of equipment by Leighton India Contractor Pvt. Ltd. from the assessee. Our aforesaid view that in a case where the control of the equipment throughout had remained with the assessee and did not get transferred to the charterer, the consideration therein received cannot be brought within the realm of the definition of the term royalty is fortified by the judgment of the Hon ble High Court of Delhi in the case of Technip Singapore Pte. Ltd. Vs. DIT, 70 taxman.com 233 (Del) . In the said case, the Hon ble High Court relying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equipment to the customers. ASTC had merely given access to a broadband width available in a transponder which could be utilized for the purpose of transmitting signals of the customer. It was held that the terms lease of transponder capacity , lessor , lessee and rental used in the agreement would not be the determinative factors. There was no use of process by the television channels. Moreover, no such purported use had taken place in India. It was held that the services provided were an integral part of the satellite and remained under the control of the satellite/transponder owner (like the appellant in this case) and it does not vest with the telecast operator/ television channels. The Court rejected the plea that the payment made to ASTC could be 'royalty' within the meaning of Section 9 (1) (vi) of the Act. The Court reiterated that the fact remains that there is no use of 'process' by the television channels. Moreover, no such purported use has taken place in India. 35.4 The Court has held that the concept of dominion or control is sine qua non use. Further Explanation 5 below Section 9 (vi), to the extent it is not beneficial to the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vantage, the requirement for use or right to use is met. We have perused the aforesaid judgment of the Hon ble High Court, and are of the considered view, that the observations of the High Court have to be read in context of the facts as were involved in the case before the court. On a perusal of the facts involved in the case before the Hon ble High Court, we find, that the assessee had entered into charter agreements with various non-resident companies for chartering of their ships in the course of its business of moving of coal from various ports in India to a particular location in India. As per the agreements entered into between the assessee with the various non-resident companies, we find, that there were certain peculiar clauses viz. (i) the place of redelivery of ships was at the option of the charterer; (ii) the masters/captain and others working on the ships were at the disposal of the charterer; and (iii) the charterer had the right to use the ship, select the time and decide the route as per its requirement. We have given a thoughtful consideration to the facts involved in the aforesaid case before the Hon ble High Court, and are in agreement with the claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of a coordinate bench of the Tribunal i.e ITAT, Chennai in the case of Sical Logistics Ltd. Vs. ADIT (I.T) Chennai [ITA No. 1074- 1079/Mad/2015, dated 14.12.2016] . In the said case, the tribunal had distinguished the facts involved in the case before its jurisdictional High Court in the case of Poompuhar Shipping Corporation (supra). It was observed by the tribunal that in case of time charter of vessel the control of the vessel remains with the foreign shipping companies. In the backdrop of the aforesaid factual matrix the Tribunal relying on the judgment of the Hon ble High Court of Delhi in the case of Asia Satellite Telecommunication company ltd. Vs. DIT (2011) 332 ITR 340 (Del), had observed, that there is a distinction between letting the asset and use of the asset by the owner for providing services. By drawing support from the aforesaid judgment of the High Court, it was observed by the Tribunal that the payment made for use of the asset by owner cannot tantamount to royalty. The Tribunal while concluding as hereinabove had observed as under: We are also not in agreement in Department s contention that the payment made in time charter of vessels in this case con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the latter the use or right to use of industrial, commercial, or scientific equipment, the same therein cannot be treated as royalty within the meaning of Article 12(3)(b) of the India-Singapore tax treaty. As such, we herein not being able to subscribe to the view taken by the lower authorities, to the extent they had concluded that the amounts received by the assessee for time charter of its vessel viz. Smit Borneo was to be treated as royalty under Article 12(3)(b) of the India-Singapore tax treaty, therein vacate the same. As we have vacated the view taken by the A.O/DRP that the consideration received by the assessee from time charter of its vessel viz. Smit Borneo was to be treated as royalty as per Article 12 of the India-Singapore Tax Treaty, therefore, we refrain from adverting to the other contentions advanced by the ld. A.R to support its claim, which thus are left open. The Grounds of appeal No. 2 to 4 are allowed in terms of our aforesaid observations. 19. We shall now advert to the claim of the ld. A.R that the mobilisation fees of ₹ 17,80,500/- received by the assessee from Leighton India Contractor Pvt. Ltd. had wrongly been treated as royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the said charterer. Needless to say, the A.O in the course of the set aside proceedings shall afford a reasonable opportunity of being heard to the assessee who shall remain at a liberty to place on record the requisite documents in support of its claim that the aforesaid amounts received from Leighton India Contractor Pvt. Ltd. were purely towards reimbursement of expenses which were incurred by the assessee for and on the latter s behalf. 21. The assessee has further claimed that the A.O while framing the assessment had allowed a short credit of the tax deducted at source (TDS). It is the claim of the assessee, that as against the credit for TDS of ₹ 1,20,29,183/- that was raised in its return of income, the A.O had allowed credit of only ₹ 95,64,832/-, which had thus resulted to a short grant of credit of TDS of ₹ 24,64,351/-(principal amount). As the aforesaid issue would require verification of the facts borne from the records, we therefore restore the same to the file of the A.O who is directed to look into the said grievance of the assessee. In case, the assessee is able to substantiate the fact as regards short allowing of credit of TDS in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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