TMI Blog2020 (11) TMI 567X X X X Extracts X X X X X X X X Extracts X X X X ..... income to the residence country. By entering in to treaty with Singapore, India has given up its right to tax shipping income of a non-resident in India. Therefore, any income of a non-resident shipping company which is a tax resident of Singapore is liable to tax only in Singapore but not in India. Exclusive right of taxation in one Contracting State is not the same as the specific exemption being available in other Contracting State. Further, shipping income dealt with in Article 8 states that profits derived by an enterprise of a Contracting State by operation of ships in international traffic shall be taxable only in the State of residence. The word only debars the other Contracting State to tax the shipping income; i.e. India is precluded from taxing the shipping income even if it is sourced from India. When India does not have any taxation right on a shipping income of non-resident entity, exemption or reduced rate of taxation in the source state is of no relevance because once the taxing right has been given off, the other conditions like exemption or reduced rate of tax has no bearing on the taxability of particular income in other Contracting State. As we noted ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enied the benefit only on the simple ground that the income of the assessee received in India is exempt by virtue of separate provisions of Singapore Income Tax Act and on the misconception of law to come to the conclusion that once a country of residence has exempts particular income from tax, the other Contracting State (source country) can levy tax on such income without understanding the true meaning of Article 8 of India Singapore DTAA. - AO has also ignored the arguments taken by the assessee in the light of DIT relief certificate issued by the Department for the subject assessment year, where the AO after considering the TRC and supporting documents issued DIT Relief Certificate dated 25.06.2014 and 14.08.2014 by holding that Article 8 of India Singapore DTAA is applicable to the assessee and income from operation in international traffic will not be taxable in India. AO has made an attempt to deny the benefit of exemption claimed by the assessee by invoking Article 24 of India Singapore DTAA, even though, the conditions stipulated under Article 24 are not satisfied. AO as well as the Ld.DRP were erred in coming to the conclusion that income earned by the assessee from sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e), it does not alter the taxing rights of the said income so as to shift the same to the other contracting state (i.e. India). 2.6 The AO / DRP ought to have appreciated that Article 8 of the DTAA is not an exemption provision but only an enabling provision which provides an exclusive right of taxation of income to the residence country and as such the provisions of Article 24 (Limitation of Benefit) will not apply to the income covered under Article 8 of the DTAA. 2.7 The AO / DRP ought to have appreciated that Article 8 of India - Singapore DTAA is unambiguous and clearly states that only the country of residence has the right of taxation of income earned by an Assessee from the operation of ships in international traffic. 2.8 The AO / DRP erred in rejecting the certificate issued by the Singapore Tax Authorities [i.e. Inland Revenue Authority of Singapore (IRAS)] which clearly states that international shipping income is taxable in Singapore only on accrual basis and not on receipt basis and therefore the provisions of Article 24 of the DTAA would not apply. 2.9 The AO / DRP ought to have appreciated that the provisions of Article 24 would apply only to inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from time to time and filed various details as called for. In this case, a draft assessment order was passed u/s.143(3) r.w.s.144C(1) of the Act on 29.12.2018, and in the draft assessment order, the AO has denied the benefit of Article 8 of India Singapore DTAA and further, taxed income received from shipping operations in India u/s.44B of the Act on the ground that Article 24 of India Singapore DTAA limits the benefits of exemption, in case income received outside India is exempt from tax under Singapore Income Tax laws. Since, the income of the assessee from its shipping operations is exempt u/s.13F of the Singapore Income Tax Act, the Assessing Officer was of the opinion that the benefit of Article 8 of India Singapore DTAA is not applicable to the assessee because of specific restriction provided under Article 24 of India Singapore DTAA. 4. Against draft assessment order, the assessee preferred an application before the DRP and filed an intimation of filing the objections to the Assessing Officer. Before the DRP, the assessee has challenged the draft assessment order passed by the AO by raising various grounds and argued that the AO has erred in assessing international sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Singapore, global income from operation of ships is taxable only in Singapore. But, because of specific exemption as per Section 13F of the Singapore Income Tax Act, the assessee lose the benefit of Article 8 of treaty but falls within the purview of Article 24 of India Singapore DTAA, which limit the treaty benefit to the extent of income being exempted in other Contracting State or income which is subject to tax at lower rates and which has been remitted or received in other Contracting State [country of residence]. Therefore, the DRP opined that assessee is not entitled for the benefit of Article 8 but subjected to tax in India as per Article 24 of India Singapore treaty which specifically limits the exemption. The DRP has also discussed the issue in light of various judicial precedents and interpreted India-Singapore treaty in the light of Vienna Convention. The DRP has taken support from the decision of Mumbai ITAT in the case of Hindalco Industries Limited vs. ACT [2005] 2 SOT 528 (Mum) and observed that the purpose of object of DTAA between two sovereign countries is to avoid double taxation of similar income in two countries. If you consider the purpose and object of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of a Treaty. It states that, I. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose 6. Therefore the international standards of treaty interpretation treat the object and purpose of the treaty as the prism through which all treaties should be interpreted. The India- Singapore DTAA begins by enunciating the purpose of the treaty with the following lines: The Government of the Republic of India and the Government of the Republic of Singapore, desiring to conclude an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, Have agreed as follows: From the above mentioned introductory sentence of the India-Singapore DTAA it is clear that the purpose of entering into this agreement is the avoidance of double taxation and prevention of fiscal evasion . 7. In simple terms, the meaning of double taxation is the taxation of the same income twice. In the parlance of International Taxation, this usually implies taxation of the same income by two different cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... waters. This however, is a skewed interpretation. The DTAA seeks to prevent a situation where both the signatory countries lay claim to taxation rights on the same income. In such a scenario, the DTAA comes into picture only to clarify as to which country will have the first right of taxation. In other words, in a situation where both India and Singapore are laying claim to taxation rights on the shipping income of the assessee company, then in that case the country of residence, will have the exclusive right of taxation. However, in a situation where the country of residence itself is not taxing the income in question, then the question of double taxation does not arise in the first place and the other country i.e the source country (India) very much gets the right of taxation. All DTAAs have been entered into for the purpose of avoiding double taxation. The intention has never been to allow or enable Double Non-Taxation . What can be gauged from the above discussion is that there are certain pre-requisites that need to be satisfied to invoke the provisions of the DTAA: Existence of an income that has accrued in a foreign country. The country of source and country o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pore in respect of profits from any trade or business is chargeable to Tax. Since the assessee claimed exemption 13F of Singapore Income Tax Act, the income earned from Indian operations neither taxed at Singapore nor taxed at India. The unambiguous thrust of treaty on income being subject to tax in one contracting state to be able to claim treaty protection in other contracting state, and avoidance of Double non-taxation being a clear objective of the Indo-Singapore tax treaty, such exempt income will not be eligible to get treaty protection in Source state. For reference, the Article 24 of the India-Singapore DTAA is reproduced hereunder. Where this Agreement provides (with or without other conditions) that income from sources in a contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by a non- resident, which carries goods shipped at a port in India seven and a half per cent of the amount paid or payable on account of such carriage to the owner or the charterer or to any person on his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be income accruing in India to the owner or charterer on account of such carriage. The relevant section is reproduced hereunder; Section 172 in Income- Tax Act, 1995 172 Shipping business of non- residents (1) The provisions of this section shall, notwithstanding anything contained in the other provisions of this Act, apply for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non- resident, which carries passengers, livestock, mail or goods shipped at a port in India.. (2) Where such a ship carries passengers, livestock, mail or goods shipped at a port in India, 2 seven and a half] per cent of the amount paid or payable on account of such carriage to the owner or the charterer or to any person on his behalf whether that amount is paid or payable in or out of India, shall be deemed to be income accruing in India to the ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national traffic shall be taxable only in that state i.e resident state. The word only debars the other contracting state to tax the shipping income, that is India is precluded from taxing the shipping income even if it is sourced from India An enterprise which is a tax resident of Singapore is liable for taxation oil its shipping income only in Singapore and not in India. When India does not have any taxation right on a shipping income of non-resident entity, exemption or reduced rate of taxation in the source state. It only envisages territorial and jurisdictional rights for taxing the income and India has no jurisdiction for any taxing right which are governed by Article 8. There is no stipulation about exemption under Article 8 of the shipping income which has been specifically provided in some of the Articles like Article 20,21 22. Hence, it cannot be reckoned that shipping income earned from India is to be treated as exempt from tax or taxed at reduced rate, which is a condition precedent for applicability of Article 24, albeit India at the threshold does not have jurisdiction to tax the shipping income of the non-resident entity. Thus, the condition of Article 24 is not sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 24 of DTAA is not satisfied and in order to invoke the provisions of Article 24, the first condition is that income sourced in a Contracting State and such income should be exempt or taxed at a reduced rate by virtue of any article under the India Singapore DTAA. He, further submitted that Article 8 of the India Singapore DTAA does not provide for exemption or reduced rate of taxation of such income and hence the conditions prescribed for applicability of Article 24 is not satisfied. This fact is strengthened by the letter issued by the Inland Revenue Authority of Singapore (IRAS) dated 17.09.2018 where the authority has clarified that the provisions of Article 24 of the India Singapore DTAA would not be applicable to the shipping income. The AR further submitted that second condition that required to be looked in to before applying Article 24 of India Singapore DTAA is that the income of the non-resident should be taxable on receipt basis in Singapore. Inland Revenue Authority of Singapore has clarified that the income by a Singaporean company from operation of ships in international traffic is taxable in Singapore on accrual basis. Thus, both the conditions of Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the issue of provisions of Section 13F and Section 10(1) of Singapore Income Tax Act and with the help of certain judicial precedent including the decision of Hon ble Supreme Court in the case of UOI vs. Azadi Bachao Andolan, 132 Taxman 373 submitted that although profits derived by an international shipping enterprises is exempted from taxation u/s.13F of Singapore Income Tax Act, but such income is always liable to tax in Singapore and exemption provided u/s.13F is only on case to case basis for a limited period of time and it is subject to certain conditions. Therefore, merely for the reason that shipping income is exempt u/s 13F of Singapore income tax, the DTAA benefit cannot be denied to the assessee. In this regard, he relied upon the following judicial precedents:- Sl.No. Case Law Citation Reference 1 Union of India vs. Azadi Bachao Andolan (2003) 132 Taxman 373 (Supreme Court) 2 CIT vs. P.V.A.L.Kulandagan Chettiar (2004) 137 Taxman 460 (Supreme Court) 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the Tribunal over such orders by the Special Bench which is yet to be constituted by the Tribunal. This is in consequent to the order of the Hon ble Jurisdictional High Court in the case of M/s. India Trimmings Pvt. Ltd. vs. DCIT (Tax case No.118 of 2018). Therefore, before going to the merits of the case, the primary issue raised by the Revenue needs to be addressed by the Bench. 10. As regards, merits of the issue involved in present appeal, the DRP as well as the AO has brought out clear facts that the entire income earned by the assessee in India is taxable in India as the said income has been sourced in India and hence accrued in India for income tax purpose. The LD.DR further submitted that the purpose of DTAA between two sovereign states is only to avoid double taxation of the same income and not facilitating the purpose of double non-taxation. Moreover, since the shipping income of the assessee is not subject to tax in Singapore, which is the source state, Article 8 read with Article 24 of the India Singapore DTAA, clearly mandates, that the assessee should not be allowed treaty benefits and granted exemption from tax in the Contracting State i.e. India. The DR f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -taxation, the court has declined to comment as the said issue was raised for the first time before the Hon ble court. Therefore, the case laws relied upon by the assessee has no benefit to the assessee. The Ld.DR further referring to the arguments advanced by the Ld.AR in the light of DIT Relief Certificate submitted that the same was issued for the purpose of tax deduction at source and it is only that once the certificate is issued, the Revenue cannot hold the deductor to be in default for whatsoever reason, but that does not serve as a bar on the income of the assessee being assessed in its hands. Therefore, we submit that there is no error in the findings recorded by the authorities below including DRP to come to the conclusion that shipping income of the assessee earned in India is liable to tax in India by virtue of Article 24 of India Singapore DTAA. 12. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below along with various case laws cited by both the sides. As regards preliminary issue raised by the revenue regarding jurisdiction of the bench to decide this appeal, on the issue of whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State. From the combined reading of Articles 8 and 24 of India Singapore DTAA, it is very clear that article 8 provides exclusive right of taxation to country of residence, i.e. Singapore on accrual basis. Similarly, article 24 limits the exemption, in case income is exempt or taxed at reduced rate in source country, i.e. in India and further such income is taxable in country of residence on receipt basis. The AO, referring to Article 24 of the tax treaty, was of the opinion that although global shipping income of a Singapore tax resident is taxable only at resident State, but by virtue of Article 24 exemption would apply only to the extent of the amount repatriated / remitted to Singapore. In our view, the above conclusion of the AO is under the misconception of the provisions of India Singapore tax treaty, because as per Article 8 of India Singapore tax treaty, it was clearly specified that only the resident country has the right of taxation of freight income earned from operation of ships in international traffic. As may be see ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n accrual basis. 15. Having said so, let us examine the applicability of Article 24 of India Singapore DTAA. Article 24 of India Singapore DTAA contemplates twin conditions for its applicability. The first condition is that income sourced in a Contracting State and such income should be exempt or taxed at a reduced rate by virtue of any article under the India Singapore DTAA. As we noted earlier Article 8 of India Singapore DTAA does not provide for exemption or reduced rate of taxation of such income. It is crucial to note that Article 8 of India Singapore DTAA contemplates the taxation rights of a particular income in particular State. As per said article, the country of residence is having exclusive right over taxation of shipping income and that being the case, the assessee being resident of Singapore vest with right to tax such income under the Singapore Income Tax laws. Accordingly, the shipping income earned in India is neither exempt nor taxed at reduced rate as per Article 8 of DTAA which is a condition precedent for applicability of Article 24. This fact has been clarified by the IRAS vide its letter dated 17.09.2018, where it was specifically sated that provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this clause does not provide that in every case of non-remittance of income to the Contracting State, Article 8 would not apply irrespective of tax treatment such income is given. The Hon ble court while arriving at the above conclusion has taken support from the letter issued by Singapore Revenue Authority clarifying the taxation position of global shipping income of tax resident of Singapore and held that when shipping income of a tax resident of Singapore was taxable at Singapore on the basis of accrual, the very basis of applying Article 24 would not survive. This issue was further considered by the Mumbai Bench of ITAT in the case of APL Co. Pte Ltd vs. ADIT, 78 taxmann.com 240, where it was held that in order to invoke provisions of Article 24, two conditions need to be fulfilled. Firstly, income earned from source State (India) is exempt from tax or is taxed at a reduced rate in source State (India) as per DTAA; and secondly as per the laws in force of resident state (Singapore), such income is subject to tax by reference to amount thereof which is remitted to or received in resident State and not by reference to full amount thereof. The Tribunal further noted that the key p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement and specifically agreed on the taxing rights of particular streams of income, the provisions of such agreement should be merely given effect to and as such the action of the AO to claim taxing right over the said income which is not provided in the treaty is ultravires the power of the AO and will amount to dishonoring the bilateral agreement between two sovereign nations. We further noted that the AO has taken support from 10(1) of Singapore Income Tax Act to argue that any income of a Singaporean resident that is accrued or received in Singapore is chargeable to tax in Singapore at the specified income tax rates. But, fact remains is that although profits derived by an international shipping enterprise is exempted from taxation as per Section 13F of Singapore Income Tax Act, but such income is always liable to tax in Singapore. The exemption provided u/s.13F of the Singapore Income Tax Act is only on a case to case basis for a limited period of time and it is subject to certain conditions. Therefore, we are of the considered view that the liability to taxation is not dependent on whether taxes are actually paid in the said jurisdiction. This fact is strengthened by the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the countries tax the same income and the second way is providing exclusive right of taxation to one country and thereby double taxation can be avoided. In the present case, Article 8 provides exclusive right of taxation of shipping income to Singapore in order to avoid double taxation method where India has given up its right of taxation of international shipping income of a Singaporean resident and as such Singapore has reserved its exclusive right to tax the same. Once the country of resident is having exclusive rights to tax a particular income by way of separate Article, then limiting or denying such benefit by interpreting the other Articles which are provided for limiting the benefit in case such income is exempt or taxed at reduced rate of tax in other Contracting State is contrary to the purpose and object of DTAA. 18. In this case, the Assessing Officer has denied the benefit only on the simple ground that the income of the assessee received in India is exempt by virtue of separate provisions of Singapore Income Tax Act and on the misconception of law to come to the conclusion that once a country of residence has exempts particular income from tax, the other Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by both the parties. We have perused the order of the Assessing Officer and the directions of the DRP and also the judgements relied on by the AR. In the present case it is not in dispute that the assessee/appellant is a foreign company and has its effective management in Cyprus. The AR has placed on record a copy of DTAA between India and Cyprus. A perusal of Article 7 of the DTAA shows that Article 7 relates to business profits of an enterprise having permanent establishment in India. Article 7 specifically states that such profits shall be taxable only in that State unless the enterprise carries on business in other contracting State through a permanent establishment situated therein. The Article 8 of DTAA deals with shipping and air-transport business. Article 8 provides that profits derived by enterprise registered and having headquarters (i.e. effective management) in a Contracting State from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in that State i.e. profits from operation of ships or aircrafts in international traffic shall be taxable only in the Contracting State in which the place of effective management of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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