Whether Charter hire payment is assessable as royalty, and obligation to deduct TDS arises and whether disallowance u/s 40(a)(i) can be made?

IN THE INCOME TAX APPELLATE TRIBUNAL

COCHIN BENCH, COCHIN

Before Shri N.R.S. Ganesan (JM) and Shri Chandra Poojari (AM)

I.T.A No. 39/Coch/2014

(Assessment year 2006-07)

M/s Mathewsons Exports & ImportsPvt Ltd,

MathewsonsBldgsErnakulam

Kaloor, Kochi 682 017

PAN : AACCM1889Q

(Appellant)

Versus

 ACIT, Cir.1(3)

(Respondent)

Appellant by: Shri K.P. Paulson

Respondent by: Shri M Anil Kumar, CIT

Date of hearing: 06-08-2014

Date of pronouncement: 21-10s-2014

O R D E R

Per N.R.S. Ganesan (JM)

This appeal of the assessee is directed against the order of the CIT(A)-II, Kochi dated 22-10-2013 and pertains to assessment year 2006-07.

2. The only issue arises for consideration is non-deduction of tax for payment of ship charter hire charges.

3. Shri K.P. Paulson, the ld. representative for the assessee submitted that the assessee is engaged in the business of import and export of merchandise goods. According to the ld. representative, the assesse exports goods mainly to Maldives. The ld. representative further submitted that for the purpose of export of goods the assessee hired a vessel named “M.V. Thekkady’ from Lots International Ltd, Dubai on the basis of a time charter agreement dated 07-05-2005 for a period of three months. According to the ld. representative, the assessee has to pay hire charges ofUSD 725 per day. The charter agreement was also renewed for a further period of three months by another agreement dated 03-08-2005.According to the ld. representative, the owner of the vessel, viz. Lots International Ltd is a company incorporated in Dubai. According to the ld. representative, what was paid by the assesee is hire charges for hiring the vessel to run the same in the international waters. However, the assessing officer found that what was paid by the assessee is royalty. Therefore, the assessee had to deduct tax u/s 195 of the Act. According to the ld. representative, what was paid by the assessee is not royalty. A fully operational vessel with necessary permits and trained crew was hired by the assessee for use of the same for transportation of goods in the international waters. The owner of the vessel / recipient of the payment is a non resident Indian (NRI) based in Dubai, UAE. Therefore, according to the ld. representative, the Double Taxation Avoidance Agreement (DTAA)between the two sovereign countries, viz. Government of India and Government of UAE would come into operation. According to the ld. representative, the royalty arising in a contracting state and paid to the recipients of the other contracting state shall be taxed in the other contracting state. Referring to Article 12(4) of DTAA, the copy of which is available at page 9 to 23 of the paper book, the ld. representative submitted that the payment received by the NRI has to be treated as business income, therefore, it cannot be treated as royalty. According to the ld. representative, the NRI had no permanent establishment in India, therefore, no income accrued to the NRI in India on the payment of hire charges for the charter of vessel for operating the same in international water. According to the ld. representative, the provisions of section 195would apply only in case the payment was received or deemed to be received in India. In this case, the payment was not received in India and not deemed to be received in India. Therefore, according to the ld.representative, the assessing officer is not justified in disallowing the claim of the assessee.

4. The ld. representative further submitted that DTAA between the two sovereign countries would override the provisions of Indian Income-tax Act insofar as it is more beneficial to the assessee. According to the ld.representative, Article 8 of the DTAA clearly says that the profit derived by an enterprise of a contracting state from the operation of ships in international water shall be taxable only in that state. Therefore, in view of the specific clause in the DTAA, more particularly, Article 8, the income received by the NRI has to be taxed only in the other contracting state, viz.UAE. On a query from the bench only if the ship was operated in the international traffic / waters then only the profit was taxable in the other contracting state, then how can the assessee substantiate claim that thevessel was operated in the international waters, the ld. representative by placing several documents issued by Tuticorin Port Trust and Customs (CCargo) submitted that the vessel ‘M.V. Thekkadi’ arrived to Tuticorin Portfrom foreign country without any load / material / goods. Therefore, it isobvious that empty vessel sailed all the way from Maldives to Tuticorin. After loading goods at Tuticorin Port, the vessel M.V. Thekkadi sailed to Maldives which is obvious from the documents issued by the customs’authorities (C-Cargo) at Tuticorin Port. No domestic sailing of the ship was undertaken at any point of time. The vessel, M.V. Thekkadi sailed between Tuticorin Port to Maldives Port. Therefore, the operation of vessel M.V. Thekkadi is only in the international waters / traffic, therefore, according to the ld. representative, Article 8 of the DTAA would come into operation. Article 8 of the DTAA would override the provisions of section 9of the I.T. Act since admittedly, Article 8 is more beneficial to the assessee.

5. Referring to Article 2 of the DTAA between India and UAE, the ld.representative for the assessee submitted that specific provision would override the general provisions in the DTAA. Charter and rental charges of the shipping business are specifically referred to in Article 8 of the DTAA. According to the ld. representative, the taxation of the rental / hire charges of the vessel M.V. Thekkadi has to be considered on the basis of the DTAA between Government of India and Government of UAE. Since, admittedly, the hire charges was paid for operating the vessel in the international waters from Tuticorin to Maldives more particularly at Mali Port, according to the ld. representative, the hire charges is not taxable in India.

6. Referring to the circular issued by the CBDT in circular No.333 dated02-04-1982, the ld. representative submitted that CBDT clarified that whenever there is a specific provision made in the DTAA that provision hasto prevail over the general provisions in the Income-tax Act. Section 90 of the Income-tax Act also provides for giving preferential treatment to the DTAA. Since the payment received by NRI is not taxable in India in viewof the DTAA, according to the ld. representative, the assessee is not liable to deduct tax, therefore, the provisions of section 195 / 194J is not applicable in the present case. The ld. representative placed his reliance on the decision of the Mumbai Bench of this Tribunal in Essar Oil Ltd vs DCIT (2006) 102 TTJ (Mum) 61.

7. The other part of the issue pertains to non deduction of tax from audit fee to the extent of Rs.50,508. The ld. representative submitted that he is not pressing this issue. The ld. representative has made an endorsement to that effect on the file.

To read the full judgment, please find the attached file :

Attached file:

http://www.itatonline.in:8080/itat/upload/-710220204754457122113$5%5E1REFNOITA_39-Coch-2014.pdf