2013 (12) TMI 996 - AT - Income Tax

Foreign Company Wins Tax Appeal in Shipping Business Income Dispute

The Tribunal ruled in favor of the assessee, a foreign company registered in Cyprus, in an appeal against an assessment order under the Income Tax Act. ... Assessment u/s 147 r.w.s. 144C – Held that:- The Article 8 of DTAA deals with shipping and air-transport business – As per Article 8 profits from operation of ships or aircrafts in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated - In view of specific clause in DTAA dealing with shipping business, we are of considered opinion that income of the assessee in the present case is not taxable in India – Following DIT (International Taxation) v. Venkatesh Karrier Ltd [2012 (4) TMI 76 - GUJARAT HIGH COURT] - The agreement between two countries has ousted the jurisdiction of the taxing officer in India to tax the profits derived by the enterprise once it is found that the ship belongs to a resident of the other contracting country - Circular No.333 states that the provisions made in DTAA would prevail over the general provisions of the Act and Circular no.732 clarifies that if ships are owned by an enterprise belonging to a country with which India has entered into an agreement of avoidance of double taxation and the agreement provides for taxation of shipping profits only in the country of which the enterprise is a resident, no tax is payable by such ships at the Indian ports - The income earned by the assessee is not taxable in India – Decided in favour of assessee. Issues:Assessment under section 143(3) read with section 147 r.w.s. 144C(13) of the Income Tax Act, 1961. Interpretation of business connection in India under section 9(1)(i) of the Act. Application of India-Cyprus DTAA for exemption. Permanent establishment in India. Applicability of Article 7 and Article 8 of DTAA. Jurisdiction of the Assessing Officer to levy tax on the foreign company.Analysis:The case involves an appeal against an assessment order under the Income Tax Act, where the foreign company, registered in Cyprus and engaged in shipping business, was assessed for income deemed to accrue in India. The Assessing Officer initiated proceedings under section 147 due to non-filing of returns despite income accrual. The main contention was the taxability of income collected by the Indian subsidiary on behalf of the foreign company. The Assessing Officer held the income taxable in India under various sections of the Act. The Dispute Resolution Panel (DRP) rejected the objections raised by the assessee, leading to the appeal before the Tribunal.The primary arguments put forth by the assessee included the absence of permanent establishment in India, exemption under India-Cyprus DTAA Article 8 for shipping income, and reliance on precedents emphasizing non-taxability of shipping income in India under similar DTAA clauses. The Revenue contended that the DRP's directions were justified, asserting the presence of a permanent establishment in India and invoking DTAA Article 7 for taxation.Upon review, the Tribunal analyzed the DTAA clauses between India and Cyprus, emphasizing Article 8's provision for taxing shipping profits only in the contracting state where the enterprise's effective management is situated. Citing judgments from the Hon'ble Gujarat High Court, the Tribunal concluded that the income from shipping business was not taxable in India based on the specific DTAA provisions. The Court highlighted the precedence of DTAA clauses over general tax provisions and circulars issued by the Board supporting non-taxability of shipping profits in India. Consequently, the Tribunal set aside the assessment order, ruling in favor of the assessee due to the lack of jurisdiction for the Assessing Officer to levy tax on the foreign company.In summary, the judgment revolved around the interpretation of DTAA provisions, specifically Article 8, to determine the taxability of shipping income in India. The Tribunal's decision emphasized the precedence of DTAA clauses in exempting such income from taxation in India, leading to the allowance of the assessee's appeal against the assessment order.