TMI Blog2005 (9) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A)-XXXI at Mumbai through his order passed on 3rd April, 2002. The assessee is aggrieved and, therefore, the second appeal before us. 2. The only dispute raised in this appeal is whether the assessee-company was bound to withhold tax on the freight amount paid to foreign oil tanker or not? The question is whether the assessee-company has violated the provisions of s. 195 or not? 3. The question whether the assessee-company has violated the provisions of s. 195 or not, could be decided only on the basis of a finding as to whether the freight amount paid by the assessee-company to the foreign oil tanker was in the nature of "any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries')" as provided in s. 195 of the IT Act, 1961. For that matter, any enquiry as into the application of s. 195 is in fact an enquiry as into whether payment of any interest or any other sum made to a non-resident or to a foreign company is chargeable under the provisions of the IT Act or not. 4. It is necessary, therefore, to briefly state the facts of the present case: (i) The assessee-company had taken a tanker on voyage charter basis from H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing are the relevant articles extracted from Singapore DTAA: "Articles 1 to 2 ......... Article 3 : General definitions-1. In this agreement, unless the context otherwise requires: (a) the term 'India' means the territory of India and includes the territorial sea and airspace above it, as well as any other maritime zone in which India has sovereign rights, other rights and jurisdictions, according to the Indian law and in accordance with international law; (b) to (g) ......... (h) the term 'international traffic' means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State; Article 5 : Permanent establishment-1. For the purposes of this agreement, the term 'permanent establishment' means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... research, or for similar activities which have a preparatory or auxiliary character, for the enterprise. However, the provisions of sub-paras (a) to (e) shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State through which the business of the enterprise is wholly or partly carried on. 8. Notwithstanding the provisions of paras 1 and 2, where a person-other than an agent of an independent status to whom para 9 applies-is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have a PE in the first-mentioned State, if(a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the PE including executive and general administrative expenses so incurred, whether in the State in which the PE is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. 4. Insofar as it has been customary in the Contracting State to determine the profits to be attributed to a PE on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in para 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this article. 5. No profits shall be attributed to a PE by reason of the mere purchase by that PE of goods or merchandise for the enterprise. 6. For the purposes of the preceding paragraphs, the profits to be attributed to the PE shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 7. Where profits include items of income which are dealt with separately in other articles of this agreement, then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. 44B. Special provision for computing profits and gains of shipping business in the case of non-residents.-(1) Notwithstanding anything to the contrary contained in ss. 28 to 43A. in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts specified in sub-s. (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head 'Profits and gains of business or profession'. (2) The amounts referred to in sub-s. (1) shall be the following, namely: (i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and (ii) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of any income in the hands of M/s HMPL not to be ascertained in the light of the Singapore DTAA. (iii) That art. 8 of Singapore DTAA provides that the profits derived by a Singapore enterprise from the operations of ships in 'international traffic' shall be taxable only in Singapore. The tanker ship was chartered for the voyage between Chennai and Hazira in India on its 'international traffic' from Singapore to Arabian Gulf. (iv) That the income attributable in the hands of M/s HMPL is in the nature of business income and, therefore, is to be normally governed by art. 7 of Singapore DTAA. That art. 8 of the Singapore DTAA has specifically provided an independent treatment for shipping business and that is why it is necessary to decide the issue under art. 8, rather than under article. (v) That alternatively, the payment of freight is governed by art. 7 of the Singapore DTAA. As per the said article, the profits shall be taxable in India only if M/s HMPL had a 'permanent establishment' (PE) situate in India. That the tanker ship was in Indian waters for a period of 10 days only and, therefore, no 'permanent establishment' could be inferred, as the period of stay was less tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee-company under s. 201(1) along with interest due thereon under s. 201(1A) of the IT Act, 1961. 10. In first appeal, the CIT(A) also held that the voyage of the ship from the port of Chennai to the port of Hazira was not in 'international traffic' and art. 8 of the Singapore DTAA would not apply in assessee's case. Regarding art. 7, the CIT(A) held that cl. 7 of article provides that the items dealt in by other articles would not be affected by art. 7 and, therefore, when art. 8 was applicable for shipping business, art. 7 would not apply. He held, therefore, that art. 23 applies in assessee's case and that the AO has rightly invoked the provisions of s. 44B in assessee's case. 11. The grounds raised by the assessee-company in the second appeal read as follows: "1. The CIT(A) has erred on facts and in law in holding that the payment made by the company, Essar Oil Ltd. to M/s HMPL, Singapore is liable to be charged to tax in India. 2. The CIT(A) has erred on facts and in law in holding that the amount paid to M/s HMPL, Singapore by Essar Oil Ltd. was assessable to tax in terms of art. 23, being the income not expressly mentioned in earlier article. 3. The CIT(A) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts from Chennai to Hazira was nothing but business profits out of shipping operations. The tax treatment of business profits is governed by art. 7 of Singapore DTAA. (v) Therefore, the shipping profit earned out of coastal traffic could be taxable or would be taxable only if M/s HMPL had a PE in India. Article 5 of DTAA covers concerns with PE. It means fixed place of business which it did not have in India. M/s HMPL did not have any PE in India either in the specific manner illustrated in cl. 2 or in the manners illustrated in cls. 3 to 10 of art. 5. (vi) The Tribunal, Mumbai Bench 'E' in the case of Dy. CIT vs. Subsea Offshore Ltd. (1998) 61 TTJ (Mumbai) 339 : (1998) 66 ITD 296 (Mumbai) has held that a foreign vessel which was in Indian waters only for 2-1/2 months could not be said to be a PE. The facts considered by the Tribunal in the above case are similar to the facts of the present case. Therefore, in the light of the abovementioned Tribunal decision, the assessing authority is not justified in passing an observation that the ship itself was a PE. (vii) The finding of the assessing authority that cl. 7 of art. 7 precludes the case of the assessee from the scope of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State. 'Solely' implies that the entire voyage must begin, end and take place within the State before that State may impose any tax. 15. The learned chartered accountant further stated that where the operations of the ship are confined to voyages within the State, the ship cannot be one in 'international traffic'. He relied on similar understanding found in the work of Klaus Voguel on 'Double Taxation Conventions' at para 34 which is as under: "The term 'international traffic' is defined in art. 3(1)(d) of the MCs as follows: 'Unless the context otherwise requires, the term 'international traffic' means any transport by a ship or aircraft operated by an enterprise which has its place of effective management in a Contracting State, except when the ship or aircraft is operated 'solely' between places in the other Contracting State. It is sufficient for the operation of ships or aircrafts to be of a cross-border nature while transportation as such may even be restricted to the movement of goods or passengers between points within the State of the place of management or within a third State. If, for instance, auxilliary activities such as the sale of passage tickets, are perform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted at p. 1072 of the Commentary of Klaus Voguel, the residuary provision remains very narrow and applies the following topics of income: (i) Social insurance; (ii) Annuity arising out of previous contributions; (iii) Maintenance payment to relatives; (iv) Accident benefit payments; (v) Income from so-called derivatives; (vi) Lottery winnings; and (vii) Income from gambling. Klaus Voguel has specifically stated on p. 1073 that art. 23 does not apply to income from business. 19. The learned chartered accountant, therefore, submitted that the profit attributable to the transportation carried out by M/s HMPL is not chargeable to tax in India as the same is governed by art. 8 of Singapore DTAA and at the same time also enjoys the benefit of the provisions of art. 7 in the nature of business profit for the reason that it had no PE in India. Therefore, the lower authorities have grossly erred in relying on art. 23 which is totally irrelevant to the assessee's case and in roping the assessee by the provisions of s. 44B of the IT Act, 1961. 20. Without prejudice to the above arguments, the learned chartered accountant further argued on the quantum of liabilities determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me has to be held as taxable in India. Therefore, the assessee-company was bound to deduct tax before remitting the amount. 24. Shri Manoj Kumar further contended that the articles relied on by the assessee-company in the Singapore DTAA are not applicable to the present case. As the transportation of goods was undertaken between two Indian ports, the case does not fall under art. 8. Once the assessee's case is out of art. 8, the assessee is straight away covered by the specific provision provided in s. 44B of the IT Act. Where s. 44B is specifically available to a non-resident shipping business, there is no justification in relying on a general cl. 7 in Singapore DTAA. He, therefore, submitted that the AO as well as the CIT(A) have rightly held that the income earned by M/s HMPL was assessable in India and, therefore, the assessee-company was liable to deduct the tax at the time of remittance of the freight amount. 25. We heard both sides in detail and considered the matter involved in this appeal. It is to be stated that there are no disputes regarding the facts of the case relating to the issue involved herein. The foreign ship was on its way from Singapore to Arabian Gulf. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income is covered by the Singapore DTAA and, therefore, obviously the Singapore DTAA will be governing the issue of taxability in the hands of HMPL, a non-resident shipping company, who received the freight amount of USD 280,000 from the assessee-company. 30. The first question to be considered is whether art. 8 of the Singapore DTAA would apply in this case or not. Article 8 provides that profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State. In the present case, the Contracting State is Singapore and, therefore, if the ship in the present case is to be treated as sailed through international traffic, the income arising therefrom shall be taxable only in Singapore. The term 'international traffic' means any transport by a ship or aircraft operated by an enterprise of Contracting State except when the ship or aircraft is operated solely between places in the other Contracting State. It means any transport by a ship which is operated by a non-resident ship is to be treated as any international traffic except in one situation. The exceptional situation is that the status of 'inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uel, an authority on the subject has explained in 'Double Taxation Conventions' in the following manner: "Unless the context otherwise requires, the term 'international traffic' means any transport by a ship or aircraft operated by an enterprise which has its place of effective management in a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State. Auxiliary services such as the sale of passenger tickets are performed by an agency within the other Contracting State and if such tickets are valid only for travelling between points within the State of effective management or within a third State, this would nevertheless involve international traffic and taxation of the profits made on the sale of tickets would be governed by art. 8." Klaus Voguel has further held that "in particular, it is unnecessary for a border to be crossed after every take off or sailing. Even if placed within one stoppage of point one after the other, such transportation continues to fall within the scope of operating ships or aircraft in international traffic unless the ship or aircraft had to remain in that State for good." 33. Therefore, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any purpose. Every clause, every expression and everything therein are relevant and operative. Therefore, art. 8 of Singapore DTAA becomes operative only when there are circumstances where ship sailing through international waters may occasionally crossover to Indian waters for carrying out random business operations. Such crossover to Indian waters does not change the character of international voyage of the ship only for the reason that the ship has operated in random business for an Indian client. 35. The clauses in DTAAs are drafted on the basis of real time business experienced and close study of the attended circumstances and not on the basis of any academic propositions and logical presumptions. In the area of international maritime business, it is necessary for ocean going ships to crossover to the domestic waters of other countries even in the course of their international traffic. It has to provide for such practical necessities that practical articles like 7 and 8 are provided in such DTAAs. 36. Therefore, in the facts and circumstances for the detailed discussions, we had in the above paragraphs, we hold that the case in appeal is covered by art. 8 of Singapore DTA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness by a non-resident is to be considered as profits and gains and it is for that reason the taxability of such profit has been brought under s. 44B which is brought under Part D of Chapter IV of the IT Act, 1961. Part D deals with computation of income under the head 'Profits and gains of business or profession' in ss. 28 to 44DA. The income attributable to operations carried out by M/s HMPL is nothing but germane to the regular business of shipping carried on by it. Therefore, by the basic concept of Indian income taxation itself is that such income is 'income from business'. 40. Article 7 of Singapore DTAA deals with business profits. It reads that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a PE situated therein. If we again rely on the authorities on the subject, Klaus Voguel has explained that income derived from the operation of ships or aircraft other than in international traffic applies the case under art. 7 if it constitutes business profit. Profits obtained by leasing a ship or aircraft on charter fully equipped, manned and supplied is a busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. This is straight away ruled out. M/s HMPL had no fixed place of business in India. Clause 2 of art. 5 illustrates certain items as in the nature of PE. The first among them is place of management and that is not applicable to M/s HMPL; the place of management is in Singapore. The second item is a 'branch'; it had no branch in India. The third is 'an office; the assessee did not have that also. The fourth one is 'a factory'; that too was not there. The next one is 'a workshop'; no doubt it was not there. The next item is 'a mine, an oil or gas well, etc.'; Revenue has no such case. M/s HMPL had no warehouse or farm or premises used as sales outlet or for soliciting and receiving orders or an installation or structure used for the exploration or exploitation of natural resources. None of the items specified in art. 5 is applicable to the assessee. It was a sailing ship, just crossed over to Indian waters for a period of 10 days. Therefore, according to the stipulations provided in Singapore DTAA, M/s HMPL had no PE in India during the relevant previous year. 44. A similar issue was considered by Tribunal, Mumbai Bench 'E' in the case of Dy. CIT vs. Subsea Offshore Ltd., In that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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