Treaty relief for ship charter hire: offshore vessel earnings were not royalty, so no withholding tax applied.

Charter hire paid for a fully operational vessel under a time charter was examined for Indian tax withholding under section 195. Although domestic law in section 9(1)(vi) read with Explanation 2(iva) could widen royalty to cover use of equipment, Article 8 of the India-UAE DTAA specifically treated profits from operation of ships in international traffic, including incidental charter or rental of ships, as taxable only in the State of residence. Because the vessel operated between India and Maldives in international traffic, the treaty provision prevailed under section 90, so the payment was not royalty taxable in India and no tax deduction at source was required.

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Issues: Whether charter hire charges paid for use of a vessel hired from a UAE resident were chargeable to tax in India as royalty, so as to require deduction of tax at source under section 195 of the Income-tax Act, 1961, or were covered by the India-UAE DTAA as profits from operation of ships in international traffic.

Analysis: The payment was made under a time charter for a fully operational vessel used for transport of goods between India and Maldives. Though the domestic law definition of royalty in section 9(1)(vi), read with Explanation 2(iva), is wide enough to include consideration for use or right to use industrial, commercial or scientific equipment, the treaty contained a specific provision for shipping. Article 8 of the DTAA provided that profits derived from the operation of ships in international traffic are taxable only in the State of residence, and expressly included charter or rental of ships incidental to such transportation. Since the vessel operated between Tuticorin and Maldives in international traffic, the more beneficial treaty provision prevailed over the domestic charging fiction by virtue of section 90. The charter hire therefore could not be treated as royalty taxable in India, and no obligation to deduct tax at source arose on that payment.

Conclusion: The charter hire payment was not taxable in India as royalty and the assessee was not liable to deduct tax at source on that amount.

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