2021 (8) TMI 1355 - AT - Income Tax

Tribunal extends tax treaty benefit to freight receipts, rules in favor of assessee.

Avana Global FZCO   Versus Deputy Commissioner of Income Tax, (International Taxation) Circle 1 (1) (2) Mumbai

Avana Global FZCO   Versus Deputy Commissioner of Income Tax, (International Taxation) Circle 1 (1) (2) Mumbai - TMI Issues Involved:1. Denial of benefit under Article 8 of the India-UAE Double Taxation Avoidance Agreement (DTAA) for shipping income.2. Tax liability on shipping income under Article 8(4) of the Tax Treaty.3. Taxability of income in the absence of business connection or Permanent Establishment (PE) in India under Article 7 of the Tax Treaty.4. Existence of a fixed place PE in India under Article 5(1) of the Tax Treaty.5. Classification of Albatross Shipping Ltd. and BSL Freight Solutions Pvt. Ltd. as dependent agency PE under Article 5(4) of the Tax Treaty.6. Levy of interest under section 234B of the Income Tax Act.7. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.Detailed Analysis:1. Denial of Benefit under Article 8 of the India-UAE DTAA:The assessee challenged the denial of the benefit of Article 8 of the DTAA, which pertains to the taxation of profits from the operation of ships in international traffic. The Assessing Officer (AO) denied this benefit for freight receipts amounting to Rs. 216,00,95,105, citing that the income was taxable in India under Rule 10 of the Income-tax Rules, 1962. The Dispute Resolution Panel (DRP) acknowledged that the claim under Article 8 was supported by the jurisdictional High Court's judgment in DIT vs. Balaji Shipping (UK) Ltd. However, the DRP rejected the claim due to a pending Special Leave Petition (SLP) before the Supreme Court.2. Tax Liability on Shipping Income under Article 8(4) of the Tax Treaty:The DRP noted that Article 8(4) of the India-UAE DTAA covers profits from participation in a pool, joint business, or international operating agency. The DRP concluded that income from Freight, THC, and Detention charges earned from pooling arrangements with OEL FZCO did not qualify as income from the operation of ships in international traffic and thus was not covered by Article 8. This income was deemed taxable under section 44B of the Income Tax Act.3. Taxability of Income in the Absence of Business Connection or PE in India:The assessee contended that in the absence of any business connection or PE in India, its income should not be taxable under Article 7 (Business Profits) of the Tax Treaty. However, this argument became academic as the primary issue was resolved in favor of the assessee.4. Existence of a Fixed Place PE in India:The AO held that the assessee had a fixed place PE in India under Article 5(1) of the Tax Treaty. This was based on the presence of an exclusive agent and front office in India. However, this issue became irrelevant following the resolution of the primary issue.5. Classification of Albatross Shipping Ltd. and BSL Freight Solutions Pvt. Ltd. as Dependent Agency PE:The AO classified Albatross Shipping Ltd. and BSL Freight Solutions Pvt. Ltd. as dependent agency PE under Article 5(4) of the Tax Treaty. The assessee argued that these entities were agents of independent status within the meaning of Article 5(5). This issue also became irrelevant following the resolution of the primary issue.6. Levy of Interest under Section 234B:The assessee disputed the levy of interest under section 234B, arguing that it was not liable to pay advance tax based on a 100% Double Income-tax Relief Certificate issued by the DCIT. This issue became moot following the resolution of the primary issue.7. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee challenged the initiation of penalty proceedings under section 271(1)(c), asserting that it had not concealed any particulars of income or furnished inaccurate particulars. This issue also became moot following the resolution of the primary issue.Judgment:The Tribunal upheld the assessee's plea, directing that the benefit of Article 8 must be extended to the entire freight receipts, regardless of whether the earnings were related to feeder vessels or ships in international traffic. Consequently, grounds 1 and 2 were allowed, and grounds 3 to 7 were dismissed as infructuous. The appeal was allowed in favor of the assessee.