1990 (7) TMI 73 - HC - Income Tax

Demurrage payments not taxable under Income-tax Act. Circular by RBI found without legal authority.

The court ruled that demurrage paid to non-resident shipowners or charterers is not taxable under sections 44B and 172 of the Income-tax Act, 1961. It ... Demurrage as income - scope of section 172 - levy and recovery for ships touching Indian ports - section 44B - profits of non-residents from shipping business - non-obstante clause and exclusion of other provisions - income deemed to accrue or arise in India - representative assessee - requirement of tax deduction on payments to non-residentsDemurrage as income - scope of section 172 - levy and recovery for ships touching Indian ports - Whether demurrage payments made to foreign shipowners or charterers fall within the income chargeable under section 172 or otherwise constitute income exigible to tax under the Income-tax Act, 1961. - HELD THAT: - The court analysed the statutory scheme and the ordinary and judicial meaning of 'demurrage' and held that demurrage is compensation for detention of the vessel and, on the facts and contracts considered, does not fall within the amounts payable 'on account of' carriage of passengers, goods, livestock or mail from an Indian port as contemplated by section 172(2). Section 172 is directed to levy and recovery in respect of ships belonging to or chartered by non-residents where carriage from Indian ports is the relevant income-producing activity; the heading and text indicate it is aimed at occasional shipping business calling at Indian ports and prescribes its own procedure. Applying Union of India v. Gosalia Shipping (P.) Ltd. and other authorities, the court concluded that where the substance of the transaction shows demurrage is not payment for carriage from an Indian port, section 172 is not attracted and demurrage is not exigible to tax under that provision.Demurrage paid under the facts of these cases does not fall within section 172 and is not exigible to tax thereunder.Section 44B - profits of non-residents from shipping business - non-obstante clause and exclusion of other provisions - Whether section 44B excludes other assessment and collection provisions of the Act and/or renders demurrage exigible to tax under its self-contained scheme. - HELD THAT: - The court distinguished section 44B from section 172: section 44B applies to non-residents engaged in the business of operation of ships and contains a deemed profit provision but contains no parallel procedural levy and collection machinery as in section 172. The non-obstante clause in section 44B relates to specified sections (28-43A) and does not operate to exclude other provisions of the Act beyond that scope. Consequently, demurrage, as characterised on the facts, does not fall within the 44B description so as to attract its deemed-profit mechanism.Section 44B does not bring the demurrage receipts in these cases within its self-contained levy; demurrage is not exigible to tax under section 44B on the facts of these petitions.Requirement of tax deduction on payments to non-residents - representative assessee - Validity of the Reserve Bank/CBDT circulars directing exporters to obtain income-tax clearance for remittance of demurrage payments (annexures B and C) and prematurity of the petitions. - HELD THAT: - The court rejected the Revenue's submission that the petitions were premature, observing that a legal determination as to whether demurrage is income under the Act must be made before directing tax collection procedure. The court held that annexure-C, which advises that demurrage payable in respect of foreign vessels chartered for carriage of goods exported from India attract Indian income-tax and requires tax-clearance certificates, prescribes a mode of recovery and payment in respect of demurrage that is without authority of law where section 172 is not attracted. Annexure-B dealt with Indian (resident) charterers and did not affect the petitioners who are exporters and not charterers. The court also noted that it could not prevent the Board from forming and issuing an opinion, but that the procedural prescription in annexure-C lacked legal foundation as applied to the petitioners' circumstances.The circular at annexure-C is without authority so far as it prescribes a mode of recovery/payment of demurrage in respect of foreign vessels in circumstances where section 172 does not apply; annexure-B does not affect these petitioners.Final Conclusion: The writ petitions were disposed of by holding that, on the facts before the court, demurrage paid to foreign shipowners/charterers does not attract tax under section 172 or section 44B of the Income-tax Act, 1961; the directive in annexure-C prescribing tax-clearance procedure for such demurrage payments is without authority insofar as it seeks to impose recovery/payment procedure where section 172 is not attracted, and annexure-B does not apply to the petitioners. The petitions were disposed of subject to the observations recorded; parties to bear their own costs. Issues Involved:1. Whether demurrage paid to non-resident shipowners or charterers is exigible to income-tax under sections 44B and 172 of the Income-tax Act, 1961.2. Whether the petitions are premature and should be dismissed in limine.3. Validity of the circular instructions issued by the Reserve Bank of India requiring income-tax clearance for remittances of demurrage payments.Summary:Issue 1: Taxability of Demurrage under Sections 44B and 172 of the Income-tax Act, 1961The petitioners argued that income from shipping of non-resident shipowners or charterers is exclusively covered by sections 44B and 172 of the Income-tax Act, 1961, and that demurrage paid to foreign shipowners or charterers is not exigible to tax under these sections. Section 44B deals with non-resident assessees engaged in the business of operation of ships and section 172 pertains to the levy and recovery of tax from ships belonging to or chartered by non-residents carrying goods from Indian ports. The court noted that demurrage, defined as compensation for the detention of a vessel, does not constitute income from the carriage of goods, passengers, livestock, or mail from Indian ports under sections 44B and 172. The court referred to the Supreme Court's decision in Union of India v. Gosalia Shipping (P.) Ltd. [1978] 113 ITR 307, which held that demurrage does not fall within the ambit of income 'on account of' carriage of goods under section 172(2). Therefore, demurrage paid to non-resident shipowners or charterers is not taxable under sections 44B and 172.Issue 2: Prematurity of the PetitionsThe court rejected the contention that the petitions were premature. It held that the petitions could not be dismissed in limine without deciding whether demurrage is income falling under sections 4, 5, or 9 of the Income-tax Act. The court emphasized the need to determine the initial jurisdiction and the applicability of the relevant sections before dismissing the petitions.Issue 3: Validity of Circular Instructions Requiring Income-Tax ClearanceThe court examined the circular instructions issued by the Reserve Bank of India, which required exporters to obtain income-tax clearance for remittances of demurrage payments. The court found that the circulars, annexures B and C, were based on the opinion formed by the Chairman, Central Board of Direct Taxes. Annexure B referred to Indian charterers, which did not affect the petitioners as they were not charterers. Annexure C dealt with foreign vessels chartered for the carriage of goods exported from India. The court held that the procedure required by the circulars was without the authority of law, as demurrage paid is not income exigible to tax under sections 44B or 172. The court declared that the circulars could not prescribe a mode of recovery and payment for demurrage paid by exporters when the ship falls within the ambit of section 172.Conclusion:The court upheld the contention that demurrage is not taxable under sections 44B or 172 of the Income-tax Act. The circulars issued by the Reserve Bank of India requiring income-tax clearance for demurrage payments were declared without authority of law. The petitions were disposed of with the hope that the respondents would not cause undue hardship to exporters. Parties were directed to bear their own costs.