2013 (10) TMI 936 - HC - Income Tax

Time-chartered ship payments deemed 'royalty' under tax law, TDS required

M/s. Poompuhar Shipping Corporation Ltd. And Others Versus The Income Tax Officer, International Taxation II And Others

The court held that the payment made for taking a ship on a time chartered basis constitutes 'royalty' under the Income Tax Act and the India-Cyprus ... Whether ship comes under the fold of word ‘Plant’ – Held that:- Plant would include any article or object fixed or movable, live or dead, used by a business man for carrying on his business and it is not necessarily confined to an apparatus which is used for mechanical or industrial business. Thus, plant includes every tool, apparatus, equipment or machinery, not limited to machinery used in tool. In fact, even in Section 43(3) of the Income Tax Act, the expression used is 'unless the context otherwise requires'. Thus, when the context does not require 'otherwise', the meaning of the word 'plant' as defined under Section 43(3) would be relevant to understand what 'equipment' would mean. Thus, with the inclusive definition on plant embracing within its fold so diverse a matter from a ship to a book, or medical equipment, every tool, apparatus, 'plant' includes 'all equipment' used by a business man for carrying on his business – Therefore, ship comes under the fold of plant. Nature of expenditure as Revenue expenditure of Capital expenditure – Royalty u/s 9(1)(vi) of Act - Whether payment made to the owner of vessel is in the nature of royalty charges or in the nature of purchase – Held that:- Till the last month of the payment or the option exercised, the assessee was not the owner of the vessel. The assessee opted to make the balloon payment of US $2.75 million on 12.1.2005. A sale certificate was issued only on 12.01.2005. The consideration paid periodically was in the nature of hire charges for the use of the Vessel, as described in the agreement and not sale consideration – Hire charges to be treated as revenue expenditure - By the exclusion Clause in Clause (iva) referring to cases falling under Sec 44 BB of the Income Tax Act. A payment made for the use or the right to use an equipment thus qualifies as 'royalty' and in this case, considering the nature of time charter agreement and the rights and obligations of the charterer, for the privilege of using the ship, the fee paid is royalty, falling under Clause (iva) of Explanation (2) to Section 9(1)(vi) of the Income Tax Act Meaning of Permanent establishment in india as the place of business – Held that:- For permanent establishment, there must be a place for the business to be carried on through that fixed place. The concept of permanent establishment assumes significance in the context of the determination of the rights of the Contracting State to tax the profits of an undertaking of the other Contracting state. In the context of the various business activities, in the case of equipment, a fixed place can be found to exist even though the equipment by the nature of business may be relocated from one site to another for a single customer under one integrated contract. A movable place of business is thus treated as fixed place of business and most of the equipment is used at fixed points within a proximate area on a repetitive continuous basis for sufficient period of time as required by the business. Thus, when the business activities are peripatetic and the equipment is moved between neighbouring location, a single place of business could be considered to exist where the location to which the equipment is moved. Thus the submission of the Revenue that the moving ship has a place of business in the place where the ship is docked and the fact that the ship moved from one point to another is the result of the nature of business contract and the movement is an integrated one having business and geographical coherence leads to the inference that the foreign enterprise has the place of permanent establishment in this Country. The foreign enterprise thus satisfying the presence a permanent establishment. Whether the penal provisions u/s 201 and 201A of the Income Tax act apply on the agents of Non-residents u/s 160 & 163 of the Income Tax Act :- Held that:- Section 195 relates to TDS on payment to a non-resident. The Section states 'any person' responsible for paying to a non-resident would has to deduct tax at source. Section 195(2) states that the person responsible for deduction of tax at source can apply to the Assessing Officer for general or special order for determination of appropriate proportion of tax deductible, where the amount paid could not be fully taxable, the assessee responsible for TDS can ask for nil certificate. The non-resident or the agent could make an application for a certificate of 'nil' deduction at a lesser rate. Thus, as far as Section 160 is concerned, this is a procedural and enabling Section for the determination of the quantum of income of the non-resident assessee and the tax to be demanded. Reliance has been placed upon the judgment in the case of Transmission Corporation of A.P. Ltd. and another V. CIT reported in [1999 (8) TMI 2 - SUPREME Court] - Proceedings under Section 201 and 201A of the Income Tax act has nothing to do with the status of the assessee as an agent under Section 160 and 163 which would assume significance only for assessment purposes. Thus so long as the Revenue is able to show the receipt as falling under Section 9 of the Income Tax Act, provisions of Section 160 of the Income Tax Act would stand attracted - The contention that Sections 163 and 201 of the Income Tax Act cannot go together is not correct for the reason that they operate on different spheres. Section 195 casts an obligation on TDS on any person responsible for paying, whereas Section 163 is for assessment purposes. Issues Involved:1. Whether the payment made for taking a ship on a time chartered basis constitutes 'royalty' under Section 9(1)(vi)(b) of the Income Tax Act.2. Whether the ship is considered 'equipment' within the meaning of Article XII of the India-Cyprus Double Taxation Avoidance Agreement (DTAA).3. Whether the lease of vessels by the assessee from Foreign Shipping Companies is only on time charter.4. Whether the payment made by the assessee to the foreign shipping companies towards hire charges is 'royalty.'5. Whether the Tribunal was correct in remitting the matter back to the assessing officer for fresh consideration under Section 201 or Section 195 of the Income Tax Act.6. Whether the assessee is liable to deduct tax under Section 195 in respect of Charter Hire Charges paid to Foreign Shipping Companies.7. Whether the assessee can be treated as a representative assessee under Section 163 of the Income Tax Act.8. Whether the reopening of assessment under Section 148 of the Income Tax Act was barred by limitation and constituted a change of opinion.Detailed Analysis:1. Payment for Time Charter as 'Royalty':The court held that the payment made for taking a ship on a time chartered basis constitutes 'royalty' under Section 9(1)(vi)(b) of the Income Tax Act. The Tribunal followed the decision in West Asia Maritime Ltd., where it was held that a ship is an equipment and hire charges for its use are considered 'royalty' under the Income Tax Act.2. Ship as 'Equipment' under DTAA:The court held that a ship is considered 'equipment' within the meaning of Article XII of the India-Cyprus DTAA. The definition of 'plant' under Section 43(3) of the Income Tax Act includes ships, and thus, the payment for the use of the ship is considered 'royalty.'3. Lease of Vessels as Time Charter:The Tribunal held that the lease of vessels by the assessee from Foreign Shipping Companies is only on time charter. The court agreed with this interpretation, emphasizing that the payment was for the use of the ship, not for affreightment.4. Payment Made to Foreign Shipping Companies as 'Royalty':The court confirmed that the payment made by the assessee to the foreign shipping companies towards hire charges is 'royalty.' The Tribunal's interpretation that the payment for the use of the ship falls under the definition of 'royalty' was upheld.5. Tribunal's Remand to Assessing Officer:The Tribunal remitted the matter back to the assessing officer for fresh consideration under Section 201 or Section 195 of the Income Tax Act. The court found this direction appropriate, given the complexity of the issues involved.6. Liability to Deduct Tax under Section 195:The court held that the assessee is liable to deduct tax under Section 195 in respect of Charter Hire Charges paid to Foreign Shipping Companies. The Tribunal's decision that the assessee cannot be treated as a representative assessee under Section 163, but is still liable to deduct tax under Section 195, was upheld.7. Assessee as Representative Assessee under Section 163:The court held that the assessee cannot be treated as a representative assessee under Section 163 of the Income Tax Act. However, the assessee is still liable to deduct tax at source under Section 195.8. Reopening of Assessment under Section 148:The court rejected the assessee's contention that the reopening of assessment under Section 148 was barred by limitation and constituted a change of opinion. The Tribunal found that the officer had valid reasons for reopening the assessment.Conclusion:The court dismissed the appeals filed by the assessees and allowed the appeals filed by the Revenue. The court held that the payment made for taking a ship on a time chartered basis constitutes 'royalty' under the Income Tax Act and the DTAA, and the assessee is liable to deduct tax at source under Section 195. The court also upheld the Tribunal's decision to remit the matter back to the assessing officer for fresh consideration.