Section 195, read with section 9, of the Income-tax Act

IN THE ITAT CHENNAI BENCH ‘B’ West Asia Maritime Ltd. v. Income-tax Officer International Taxation - II, Chennai M.K.CHATURVEDI, VICE PRESIDENT And K.D.RANJAN, ACCOUNTANT MEMBER IT APPEAL NOS.2376 AND 2377 (MDS.) OF 2005 [ASSESSMENT YEARS 2003-04 AND 2004-05] MAY 19, 2006 Section 195, read with section 9, of the Income-tax Act, 1961 and article 12 of the Double Taxation Avoidance Agreement between India and Cyprus - Deduction of tax at source - Payment to non-resident - Assessment years 2003 -04 and 2004-05 - Whether section 195 takes within its sweep any sum paid to a non-resident which do not wholly represent income or profits chargeable under act but a portion of which only so represents - Held, yes - Under a Bare Boat Charter Cum Demise (BBCD) agreement entered into by assessee with a foreign company, assessee secured a vessel with an option to purchase same - For user of said ship, assessee paid rentals to owner non-resident and did not exercise option to purchase vessel till end of relevant assessment - Assessing Officer treated payment made by assessee as hire charges for user of ship and also treated assessee in default for not deducting any tax at source in respect of said payments - Whether transaction in question could not be construed to be a transaction of purchase of ship on basis of BBCD agreement - Held, yes - Whether, therefore, what assessee paid to owner of ship was hire charges for user of ship and not payment for purchase of ship - Held, yes - Whether ship being an equipment under article 12, hire charges for user of ship partook character of royalty for use of equipment under provisions of section 9(1)(vi) and, hence, exigible to tax in India - Held, yes - Whether, therefore, assessee was under an obligation to deduct tax at source in respect of said payments - Held, yes WORDS AND PHRASES ‘Any other sum’ as occurring in section 195(1) of the Income-tax Act, 1961. FACTS The assessee-company engaged in the business of shipping entered into a Bare Boat Charter-cum-Demise (BBCD) agreement in the year 1998 with a foreign company ‘D’. Under the agreement, the assessee secured a vessel with an option to purchase the same and paid the rentals for the same. The Assessing Officer noticed that the assessee did not purchase the vessel despite having the option to do so under the agreement at the end of each year. Therefore, he treated the payments made by the assessee under the said agreement as hire charges for user of ships falling within article 12 of the DTAA between India and Gyprus. He also treated the assessee in default for not deducting any tax at source in respect of the said payments. On appeal, the Commissioner (Appeals) upheld the impugned order. On second appeal, the assessee, inter alia, contended that the transaction in the instant case was a transaction of purchase of ship on the basis of BBCD; that consequently, the payments made thereunder could not be termed as hire charges falling within article 12 of the DTAA; that a ship cannot be construed as an equipment for the purpose of said article; that there being a specific provision to assess the income from shipping under article 8 no other provision under the DTAA would apply to the transaction in question, as such, the payments made to ‘D’ could not be termed as royalty since the payment was not for the use of the equipment falling within section 9(1)(vi) and that the liability to deduct tax at source under the provisions of section 195 would arise only if the payment could be construed as royalty. HELD Royalty is defined in Explanation 2 to section 9(1)(vi). As per clause 4(a) inserted by the Finance Act, 2001 with effect from 1-4-2002, royalty means consideration for the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred in section 44BB. As per article 12 of the DTAA, royalty means payments or credits made as consideration for the use of or the right to use any industrial, commercial or scientific equipment. (Para 10) The word ‘equipment’ is neither defined under the Act nor under the treaty. As per New Oxford Advanced Learners Dictionary ‘equipment’ means ‘the things that are needed for a particular purpose or activity’. As per Websters Dictionary ‘equipment’ means ‘all fixed assets other than land and building’ used in a business enterprise. A fixed asset is an asset held with an intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. The equipment for the purpose of the Employer’s liability (Defective Equipment) Act, 1969 was held to be (Stroud’s Judicial Dictionary) wide enough to include a ship of whatever size notwithstanding that ships are not specifically mentioned in the definition of the equipment under the Act. (Para 11) The official USA Government Website on the North American Industry Classification system includes shipping under the category of the transportation equipment. In the interpretation of tax treaties, aircrafts and ships have always been considered to fall within the meaning of the term ‘industrial equipment’. (Para 12) The Oxford Concise dictionary defines ‘Equipment’ as - Things needed for a particular purpose’. MacMillan Dictionary defines it as Machines or Tools needed for a job. In the instant case, the ship had been put to use for the purpose of moving from the ports of Haldia, Paradip and Visakhapatnam to the ports of Ennore and Tuticorin. (Para 14) Consequently, it was to be held that article 12 of DTAA with Cyprus relates to equipment and ship is an equipment. The hire charges thus would partake the character of royalty for use of equipment under the provisions of section 9(1)(vi)/article 12.3 of the DTAA. (Para 16) It transpired from the perusal of the BBCD agreement that the assessee was not the owner of the vessel until the last month’s hire instalment was paid to ‘D’ in exchange of which it would execute a bill of sale in favour of the assessee. It was also clear that the purchase option of the vessel would vary depending on the date on which such an option was exercised by the assessee. Thus, it was clear that the ownership remained with ‘D’ till the assessee opted to make the balloon payment to ‘D’ which was only on 12-1-2005 in the financial year 2004-05. On having made the balloon payment and in terms with the BBCD agreement, ‘D’ executed a bill of sale dated 12-1-2005 acknowledging the receipt of US$ 2.75 million from the assessee. That bill of sale was also acknowledged transfer of all the shares in the ship as described to the transferee. The bill of sale was executed in Nicosia, Cyprus. The ownership never passed to the assessee until 12-1-2005. ‘D’ remained the owner till the balloon payment was made and the option to purchase was exercised by the assessee in January, 2005.The consideration paid to ‘D’ periodically was in the nature of hire charges for the use of the ship as described in the agreement and not sale consideration. The title in the goods remained with ‘D’ all through the period of agreement and only passed to the assessee on 12-1-2005. (Para 24) It was nowhere stated that the payment made towards hire charges should be treated as part of sale consideration. The acquisition of a ship by BBCD method is only a policy decision of the Government, which cannot override or preclude the application of the provisions of the Act or of the relevant DTAA. (Para 25) On the basis of said facts it could be concluded that the assessee did make payment of hire charges for the user of the ship. Those hire charges were exigible to tax in India. (Para 26) As per the language of article 8, it would apply in a case when the contracting enterprise ‘D’ itself derived profits from the transportation by sea of passengers, etc. carried on by the owner. The assessee was in the operation of ships in the international traffic between 15-4-1999 to 25-10-2002. But the profits derived by ‘D’ were not from transportation of passenger, etc. Lease rentals/hire charges received from the assessee could not be said to be incidental to any activity directly connected with such transportation by ‘D’. They were pure hire charges for the use of bareboat or the ship. Admittedly, during the year under consideration, the ship was plying in the coastal traffic and not in the international traffic. As such the requirement of Article 8 was not fulfilled. (Para 28) Similarly, hire charges paid to a non resident enterprise could not be treated as business income in view of article 7.7 which states that where profits include items of income which are dealt with separately in other articles of the agreement then the provisions of those articles shall not be affected by the provisions of this article. In the instant case, the payments made to the non-resident enterprise were found to be hire charges which were covered by article 12 as being royalty payment. (Para 29) Under section 195 any person responsible for paying to a non-resident, including a foreign company, any income by way of interest or any other sum which is chargeable to tax in India, is required to deduct tax at source on such income at the time of payment. As per the mandate of the section tax is to be deducted at source with reference to the income element embedded in the payments. However, a non-resident including a foreign company may obtain from the Assessing Officer a certificate authorizing him to receive payment without deduction of tax at source. The expression ‘any other sum’ occurring in section 195(1) does not necessarily refer to sums which represent wholly income or profit. The scheme of tax deduction at source applies not only to the amount paid which wholly bears income character, but also to gross sums, the whole of which may not be income or profits of the recipient, such as payments to contractors and sub-contractors under section 194C and payment of insurance commission under section 194D. The provisions of section 195(2) make the intention of the Legislature very clear that what is required to be considered for the purpose of tax deduction at source under section 195(1) is not the wholly income or profit. In that view of the matter it could not be contended that where the sum paid to any person is not wholly chargeable under the provisions of the Act, then the application of section 195 is ousted. Section 195 takes within its sweep any sums paid to a non resident which do not wholly represent income or profits chargeable under the Act but a portion of which only so represents. (Para 34) It is not open for a person making payment to a non-resident to take a unilateral decision that the payments made by him are not sums chargeable to tax. To take that view the concurrence of the Assessing Officer as provided in section 195(2) is sine qua non. Section 195 is for tentative deduction of income tax subject to regular assessment. By the deduction of tax the rights of parties are not, in any manner, adversely affected. Where there exists a doubt as to the chargeability of income to tax, there also tax is to be deducted at source ex abundanti cautela. In the instant case, the attendant circumstances suggested that ex facie the amount paid was not for the acquisition of the ship, but for the user of the ship, as such, taxable. Therefore, the assessee could not be exonerated from the obligation of deduction of tax at source. The order of the Commissioner (Appeals) was to be upheld. (Para 35) In the result, the appeals of the assessee stood dismissed. (Para 36)