1991 (6) TMI 53 - HC - Income Tax

Demurrage for Loading Delays Not Taxable under Income-tax Act, 1961

The court held that demurrage payable to non-resident ship owners or charterers for delays in loading goods is not taxable under sections 5(2) or 172 of ... Demurrage as compensatory payment for detention/delay - demurrage as extended freight - complete code for taxation of profits of non-residents from occasional shipping (section 172) - special provision for computing profits and gains of shipping business in the case of non-residents (section 44B) - taxation of total income of a non-resident (section 5(2))Demurrage as compensatory payment for detention/delay - complete code for taxation of profits of non-residents from occasional shipping (section 172) - Characterisation of demurrage payable by the seller under FOB/time-charter type contracts and its taxability under section 172 - HELD THAT: - The agreements show the sellers were obliged only to load the ore into vessels chartered by the foreign buyers, title passing to the buyers on delivery into the ship; demurrage operates as a payment to the buyer/charterer to compensate for detention caused by delay in loading and to incentivise timely delivery, with despatch money conversely payable to the seller for saving time. Section 172 is a self-contained code governing taxation of profits of non-residents from occasional shipping where amounts are 'on account of' carriage of passengers, goods, etc., shipped at an Indian port and prescribes the mode of computation and recovery. A payment which is essentially for detention or non-carriage (compensatory in nature) is not transformed into a receipt 'on account of' carriage merely because carriage subsequently takes place. Consequently demurrage of the character arising under the contracts before the Court is not taxable under section 172.Demurrage in the facts of these cases is compensatory for delay in delivery/loading and is not taxable under section 172.Special provision for computing profits and gains of shipping business in the case of non-residents (section 44B) - taxation of total income of a non-resident (section 5(2)) - Whether section 44B or section 5(2) can be invoked to tax the demurrage receipts payable to non-residents - HELD THAT: - Section 44B applies only to non-resident assessees engaged in the business of operating ships and supplies a special code for computing shipping profits; it is inapplicable where the non-resident does not carry on a regular shipping business. Section 172, being a complete code for the specified occasional shipping receipts, cannot be supplemented by importing section 5(2) to tax receipts that fall within the subject matter of section 172 or are governed by its exclusive machinery. Where section 172 applies to the subject of levy, residuary charging under section 5(2) cannot be used to impose tax on amounts excluded by section 172. In these cases section 44B does not attract as the foreign buyers were not operating shipping business in India, and section 5(2) cannot be read to tax the demurrage payments characterized as compensatory where section 172 governs the subject-matter; furthermore, section 172 itself is not attracted on the facts.Section 44B is not attracted and section 5(2) cannot be used to tax the demurrage payments in these cases; the receipts are not taxable under the provisions relied upon by the Revenue.Final Conclusion: Writ appeals dismissed; the Reserve Bank circulars directing remittances to be supported by income-tax clearances cannot be applied to the demurrage payments under the contracts before the Court, which are compensatory for delay and not taxable under the provisions relied upon by the Revenue. Issues Involved:1. Taxability of demurrage payable to non-resident ship owners or charterers under the Income-tax Act, 1961.2. Applicability of sections 5(2), 44B, and 172 of the Income-tax Act, 1961.Summary:1. Taxability of Demurrage:The primary issue was whether demurrage payable to non-resident owners or charterers of ships for delays in loading ore sold to foreign buyers is taxable under the Income-tax Act, 1961. The agreements between the petitioners and the foreign buyers indicated that the demurrage was a compensatory payment for the delay in loading the goods, not an extended freight. The Revenue argued that demurrage should be treated as extended freight and taxed similarly. However, the court held that demurrage in this context is not an extended freight but a compensatory payment for detention of the ship.2. Applicability of Sections 5(2), 44B, and 172:The court examined the applicability of sections 5(2), 44B, and 172 of the Income-tax Act. Section 5(2) governs the levy of tax on the total income of a non-resident, while section 44B pertains to the computation of income from shipping business for non-residents. Section 172 is a special provision for taxing non-resident ship owners or charterers for occasional shipping business. The court noted that section 172 is a complete code by itself and overrides other provisions of the Act. It applies to ships carrying goods shipped at an Indian port but not engaged in the regular business of operating ships. The court held that section 172(1) identifies the subject of taxation, and section 172(2) quantifies the income for taxation. Since section 172 is a complete code, the income specified under section 172(2) cannot be taxed under section 5(2).The court referred to the Supreme Court's decision in Union of India v. Gosalia Shipping P. Ltd., which clarified that payments made by a charterer for the hire of a ship are not 'on account of' the carriage of goods and thus not taxable under section 172. Similarly, in the present case, the demurrage payable was for the delay in loading goods, not for the carriage of goods, making section 172(2) inapplicable.Conclusion:The court concurred with the learned single judge's declaration that the demurrage in the instant case is not an extended freight and is not taxable under section 172 or section 5(2) of the Income-tax Act. The impugned circulars issued by the Reserve Bank of India cannot be applied to the facts of these cases. The writ appeals were dismissed without any order as to costs.