2014 (11) TMI 605 - HC - Income Tax

Foreign company's income from equipment rental not taxable in India under DTAA

The Commissioner of Income Tax Versus Van Oord ACZ Equipment BV C/o. Deshpande & Mahatme Chartered Accountants

The High Court held that the income received by a foreign company for hiring out dredging equipment to an Indian company is not taxable in India under the ... Right to use any industrial, commercial or scientific equipment – Royalty u/s 9 or not – Whether the Tribunal was right in holding that the amount received by the assessee for hiring out dredgers to an Indian Company of the same name for use in Indian ports is not taxable in India in terms of the Double Taxation Avoidance Agreement with the Netherlands - Held that:- Under a Notification No.GSR 382(E) DATED 27.3.1989, the convention, between the Government of Republic of India and the Kingdom of Netherlands for the Avoidance of Double Taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, came into force w.e.f. 21.1.1989 - both Governments have agreed and the DTAA agreement with seven chapters and 30 Articles was signed - the 'payments for the use of equipment' originally found in clause (1) of Article 12 as defined in clause (6) was incorporated in the definition of the term Royalties in clause 4 w.e.f.1.4.1991 and subsequently deleted w.e.f.1.4.1998 and thereby completely taken out from clause (1) and (2) of Article 12 - the payment for the use of equipment or any consideration for the use of , for the right to use industrial, commercial or scientific equipment is deleted and it is not taxable in the contracting State in which they arise viz., in the given case India - the appellate authority below has rightly considered Article 12(4) of the DTAA agreement between Netherlands and India and is right in holding that the amount received by the assessee for hiring out Dredgers to an Indian Company of the same name for use in Indian Ports is not taxable in India – Decided against revenue. Issues Involved:1. Taxability of income received by a foreign company for hiring out dredging equipment to an Indian company.2. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands.3. Definition and applicability of 'royalty' under Section 9 of the Income Tax Act.4. Presence of a permanent establishment in India.Detailed Analysis:1. Taxability of Income Received by a Foreign Company:The core issue revolves around whether the income earned by the foreign company from letting out dredging equipment to its Indian counterpart is taxable in India. The Assessing Officer classified this income as 'royalty' under Section 9 of the Income Tax Act, making it liable to tax. However, the assessee argued that under the DTAA between India and the Netherlands, such income is not taxable in India.2. Applicability of the DTAA:The DTAA between India and the Netherlands plays a crucial role in this case. The Commissioner of Income Tax (Appeals) and the Tribunal both held that the income from hiring out dredging equipment is not taxable in India due to the provisions of the DTAA. Specifically, the amended Article 12 of the DTAA removed 'payments for the use of equipment' from the definition of 'royalties,' thereby exempting such income from Indian taxation. The DTAA provisions prevail over the Income Tax Act as per Section 90 of the Act, as affirmed by the Supreme Court in Union of India vs. Azadi Bachao Andolan.3. Definition and Applicability of 'Royalty':The Revenue contended that the income should be classified as 'royalty' under Section 9(1)(vi) of the Income Tax Act, which includes payments for the use of industrial, commercial, or scientific equipment. However, the Tribunal and the High Court noted that the DTAA's definition of 'royalty' had been amended to exclude such payments. This amendment, effective from 1.4.1998, means that the income in question does not fall under the category of 'royalty' and is not taxable in India.4. Presence of a Permanent Establishment:The Revenue also argued that the foreign company had a permanent establishment in India, which would make the income taxable under Article 7 of the DTAA. However, the Tribunal found that the foreign company did not have a permanent establishment in India, as the dredging equipment was leased on a bareboat basis without Master and Crew. This distinction was crucial in determining that the foreign company did not have the requisite fixed place of business in India to constitute a permanent establishment.Conclusion:The High Court upheld the decisions of the Commissioner of Income Tax (Appeals) and the Tribunal, confirming that the income received by the foreign company for hiring out dredging equipment to its Indian counterpart is not taxable in India under the DTAA. The substantial question of law was answered against the Revenue, and the appeal was dismissed. The High Court emphasized that the DTAA provisions, as amended, take precedence over the Income Tax Act, and the absence of a permanent establishment further supports the non-taxability of the income in India.