TMI Blog2009 (9) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... -do- Ms. Akriti Katoch (Kundra Bansal,C.A.) Present for the Department : None RULING [By Hon'ble Chairman] - The applicant - a non-resident shipping Company incorporated under the laws of Switzerland seeks advance ruling from this Authority on the following questions: (1) Whether during the previous years relevant to assessment years 2008-09 and 2009-10, the applicant, in the stated facts and circumstances, had a Permanent Establishment in India under Article 5 of India-Switzerland Double Taxation Avoidance Agreement in relation to activity of charter of vessels for transporting cargoes from Indian ports to outside India ? (2) If the answer to the first question is negative, whether income of the applicant from such charter of vessels is not liable to tax in India under the Treaty? 2. The following facts are stated in the application: 2.1. The applicant enters into medium and long term shipping contracts for the transportation of cargo worldwide. In the course of performance of such contracts, the applicant enters into further contracts with port agents, brokers and stevedores. The applicant only undertakes transportation of cargo. 2.2. During the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its total income be made in accordance with the other provisions of the Act. Accordingly, the applicant 'elected' for assessment of its total income in accordance with the other provisions of the Act. In this context, the applicant relies on S.90 (2) of the Act with Art.7 and Art.22 of the Agreement for avoidance of double taxation between India and Switzerland (hereafter referred to as 'Treaty' or DTAA). As per Section 90(2) of the Act, the income of a non-resident is taxable in India in accordance with the provisions of the Act or the provisions of DTAA, whichever is more beneficial to the non-residents. That is why the applicant seeks to invoke Art.7 and 22 which according to the applicant are more beneficial to it. Broadly, it is the contention of the applicant that if those provisions of the Treaty are applied, the applicant's income derived from the shipping of cargo from the Indian ports cannot be subjected to tax at all having regard to the fact that the applicant has no permanent establishment in India. 3.1. Before proceeding further, we may clarify one factual aspect regarding the option under Section 172(7). Though the applicant stated in the application that it el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer shall assess the income referred to in sub-section (2) and determine the sum payable as tax thereon at the rate or rates in force applicable to the total income of a company which has not made the arrangements referred to in section 194 and such sum shall be payable by the master of the ship. (5) (6) xx xx xx xx xx (7) Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming before the expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian port falls, that an assessment be made of his total income of the previous year and the tax payable on the basis thereof be determined in accordance with the other provisions of this Act, and if he so claims, any payment made under this section in respect of the passengers, livestock, mail or goods shipped at Indian ports during that previous year shall be treated as a payment in advance of the tax leviable for that assessment year, and the difference between the sum so paid and the amount of tax found payable by him on such assessment shall be paid by him or refunded to him, as the case may be. 4.2. In Union of India vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ships in international traffic, shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. [emphasis supplied] (6) Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article." 5.1. The underlined words in Art.7.1 are significant. The profits arising from the operation of ships in international traffic stands excluded from the Article dealing with business profits. The next Article i.e. Article 8 makes a special provision in respect of the profits derived from the operation of aircraft in international traffic. Such profits shall be taxable only in the State to which the enterprise belongs. That means the State of residence can alone tax such profits and the existence or otherwise of a permanent establishment which is an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a i.e. the Income Tax Act, 1961. There are unmistakable indications in the Treaty provisions to show that shipping business income earned by a non-resident is not intended to be covered by the Treaty. The language and scheme of the provisions, the possible incongruities that would otherwise arise and a comparative study of other Treaties would lead us to the inevitable conclusion that shipping income derived from international operations is outside the purview of the Treaty and it is left to be taxed under the domestic law. We shall proceed to spell out the reasons which weighed with us in reaching such conclusion. 8. Art. 22 - a residuary article concerning 'other incomes' was introduced, as noted earlier, in 2001. Till then, there is no dispute and it cannot be disputed that the profits derived from the operation of ships in international traffic are left untouched by the Treaty because of the specific exclusion clause in Art.7. The obvious implication of exclusion is that such income can be subjected to domestic law discipline. Therefore, such income was liable to be taxed in accordance with and in the manner laid down in Section 172 of the IT Act. If this legal position wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk that when the Treaty was revisited in 2001, both the countries apparently desired to continue the status quo as regards the profits derived by non-residents from international shipping operations. At any rate, there would not have been a consensus to alter the existing position. That is why the exclusionary words in Art.7 have been retained. 9. Then, we shall pointedly turn our attention to the language of Art. 22 and test the argument of the applicant. The question is whether the profits from the shipping operations in international traffic can be said to be "an item of income" "not dealt with" in the previous Articles of DTAA? We do not think so. Among the various items of income in the foregoing Articles, business profits into which the shipping income falls has been dealt with under Art. 7. Profits from the international operation of ships are only a species of business profits just as the profits from international air transport. The latter is dealt with separately in Art.8 for the reason that it does not fall in line with the scheme of taxation of business profits under Art.7. Exclusive right is given to the State in which the enterprise resides. Permanent Establishme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aty not to treat the shipping profits at par with the business profits for the purpose of allocating the taxing jurisdiction to the States concerned. In that way, the subject of shipping profits have been dealt with under Article 7. It is not an uncovered or untreated item. We are therefore of the view that for the purposes of Art.22, profits arising from the operation of ships in international traffic cannot be treated as a distinct item of income not dealt with in the preceding Articles of the Treaty. 9.1 The applicant's counsel submitted that an item of income can be said to have been dealt with in an Article of the Treaty only if it defines its scope as well as allocates the right to tax such income between the two contracting States. Mere exclusion of shipping business profits from Article 7 does not amount to dealing with that item of income. We find it difficult to accept this contention. Allocation of taxing right to the source State can well be done by such a process of exclusion. There is no particular manner or methodology of achieving that result. The expression 'dealt with' does not necessarily mean that there should be a detailed or elaborate treatment of the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son for vesting the exclusive power of taxation on the country of residence of the business enterprise concerned in the case of both international shipping and air transport. However, in the absence of clear words in the India-Swiss Treaty, the shipping profits arising from international operations cannot be placed at par with the profits from the business of international air transport. Whether or not to accord the same treatment to the international shipping business is a matter of policy and it is left to the wisdom and volition of the sovereign representatives at the negotiating table. We have interpreted the Treaty as its stands without being unduly carried away by the adoption of a different criterion in the Model Conventions. In fact, even the applicant does not go to the extent of saying that only the Country of residence can tax the shipping profits. The applicant agrees that the shipping profits can be taxed by the State of source if the enterprise concerned has a PE in that state. Thus, the applicant cannot derive much of assistance from the Commentaries referred to above. 10. A comparative study of the Treaties which India has entered into with various countries vi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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