2013 (10) TMI 936 - HC - Income Tax

Ship treated as plant; charter hire royalty under s.9(1)(vi), triggering TDS duties and valid proceedings under ss.195,201,201A

HC held that a ship qualifies as 'plant', as the term includes all tools, apparatus and equipment used for business, movable or fixed. Under the time ... Royalty (consideration for the use of or right to use industrial, commercial or scientific equipment) - use or right to use - equipment (ship as equipment) - time charter - characterisation as hire/use versus contract for services - bare boat charter-cum-demise (BBCD) - possession, control and purchase option - permanent establishment and business connection - tax deduction at source obligation under Section 195 and default under Section 201 - representative assessee / agent under Sections 160 and 163 - clarificatory effect of Explanation 5 to Explanation 2(iva) - no new charge but clarificationRoyalty (consideration for the use of or right to use industrial, commercial or scientific equipment) - use or right to use - time charter - characterisation as hire/use versus contract for services - Payments made under time charter fall within 'royalty' as consideration for the use or right to use equipment - HELD THAT: - The Court examined the character of time charter agreements and the meaning of the phrase 'use or right to use' in Explanation 2(iva) to Section 9(1)(vi). It held that the presence or absence of transfer of physical possession or effective control is not decisive for income-tax characterisation; where the charterer obtains the right to use the vessel (including economic exploitation, right to select employment and route, sub letting rights etc.) the payment is consideration for the use or right to use the ship. The Court rejected reliance on sales tax jurisprudence and the Essar (VST) decision as inapposite because those decisions turn on the specific charging provisions and the requirement of transfer of effective control for sales tax. The OECD post 1992 developments do not narrow the statutory phrase in the Indian Act; India retained the clause covering use/right to use equipment. Applying these principles to the facts, the Court concluded that amounts paid under time charters constitute 'royalty' under Explanation 2(iva). [Paras 78, 83, 85, 92]Payments under the time charters are 'royalty' within Explanation 2(iva) to Section 9(1)(vi) and taxable as such; assessee had obligation to consider TDS consequences.Equipment (ship as equipment) - bare boat charter-cum-demise (BBCD) - possession, control and purchase option - clarificatory effect of Explanation 5 to Explanation 2(iva) - no new charge but clarification - A ship qualifies as 'equipment' for the purposes of Explanation 2(iva); BBCD payments constitute consideration for use/right to use and hence fall within 'royalty' - HELD THAT: - The Court considered the statutory context, inclusive definitions (notably Section 43(3) where 'plant' includes ships), the purposive reading of Explanation 2(iva) and the specific exclusion of Section 44BB. It rejected arguments that 'equipment' must be narrowly read or limited to specialised ICS apparatus and held that, in the Act's context, 'equipment' embraces ships used by a shipowner in its business. Explanation 5 was held to be clarificatory, making explicit that royalty includes consideration irrespective of possession, control or the location of the right/property. On BBCD facts the Tribunal and lower authorities' findings that the periodic payments were hire (with ownership passing only later) led to the conclusion that such payments were exigible as 'royalty'. [Paras 98, 101, 117, 119, 122]Ship is an 'equipment' and payments under BBCD/time charter (so long as they represent use/right to use) qualify as 'royalty' under Explanation 2(iva); Explanation 5 only clarifies this position.Permanent establishment and business connection - business profits (Article 7) versus royalties (Article 12) - Even if characterised as business income, the foreign owners had or could be treated as having a permanent establishment/business connection in India; however the payments in issue were not attributable to a permanent establishment and thus remain in the ambit of Article 12 - HELD THAT: - The Court analysed the DTAA provisions and OECD commentary on 'international traffic' and 'permanent establishment'. It accepted that the ships operated solely on Indian coastal routes and that regular berthing facilities and continuous operations pointed to business connection and the presence of a permanent establishment (fixed place/commercial coherence). Nevertheless, Article 12(4) permits Article 7 to apply only where the royalties are effectively connected with a permanent establishment. The Court found the receipts were not to be attributed as profits of a permanent establishment and therefore concluded that Article 12 (royalty) governed the taxability of the payments rather than Article 7. [Paras 131, 136, 138, 141, 142]Although facts show business connection/permanent establishment indicia, the payments were not attributable to any permanent establishment and accordingly fall under Article 12 as royalties.Tax deduction at source obligation under Section 195 and default under Section 201 - representative assessee / agent under Sections 160 and 163 - The assessee had an obligation to deduct tax under Section 195; failure attracted treatment as assessee in default under Section 201; assessment of the assessee as representative assessee/agent under Sections 160/163 is permissible and not vitiated by parallel TDS proceedings - HELD THAT: - The Court reiterated that Section 195 imposes an independent statutory obligation on any person responsible for making payments to a non resident to deduct tax when the sum is chargeable under the Act, subject to procedure under Section 195(2)/(3) for obtaining certificates. It rejected the contention that Sections 163/160 cannot operate alongside Sections 195/201, explaining they operate in different fields (deduction at source versus representative assessment). The authorities were justified in treating the assessee as in default where tax was not deducted. Technical irregularity of grouping multiple non residents in a single representative assessment did not invalidate the exercise if each non resident's liability was quantified. [Paras 143, 146, 147, 148, 149]Assessee's obligation to deduct TDS under Section 195 existed; non deduction justified default proceedings under Section 201; assessment in representative capacity under Sections 160/163 is legally sustainable.Final Conclusion: The High Court held that payments for time charters and bare boat charter cum demise to foreign ship owners constitute 'royalty' as consideration for the use or right to use ships (ships being 'equipment' within Explanation 2(iva)), Explanation 5 is clarificatory, the assessee had an obligation to deduct tax under Section 195 and was rightly treated in default under Section 201, and representative assessee assessments under Sections 160/163 are permissible; accordingly the assessees' appeals were dismissed and the Revenue's appeals allowed. 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.