2017 (2) TMI 1099 - AT - Income Tax

Foreign Shipping Payments Not Royalty; Tax Exemption Under Section 172

The Tribunal allowed the assessee's appeals, determining that payments to Foreign Shipping Companies were not 'royalty' and fell under section 172, ... TDS u/s 195 - Non deduction TDs on remitting charter payments (hire charges) to Foreign Shipping Companies - whether payment made for using ship on time chartered basis to non-resident shipping company amounts to ‘royalty’ since ship is equipment? - question of invoking sec.172 - DTAA - Held that:- In this case, the requisite approvals have to be obtained from Maritime Authorities to hold and operate the vessels. It is not the case that anybody or everybody can operate a vessel. The powers of charterer (in this case this assessee) under the time charter agreement is extremely limited like the charterer cannot dry-dock the vessel and the vessel is operated by its Captain/Master and its crews, who are appointed by the ship owner and not by the charterer (the assessee). There is a distinction between ‘letting the asset’ and ‘use of asset’ by the owner for providing services. The payment made for the use of asset by owner for the purposes cannot be tantamount to a ‘royalty’. In this case, the consideration is not for use of the ship only, but also for the services of moving the goods by a fully manned ship. In the decision of Asia Satellite Telecommunications Co. Ltd. (2011 (1) TMI 47 - DELHI HIGH COURT ) the payment so made by the assessee cannot be treated as royalty for he use of industrial or commercial or scientific use of the equipment. The Id. CIT(A) should have appreciated that the case has only booked the freight space in the ship (time charter) and has not taken the vessel on hire, it is done under what is called “bare boat charter. Therefore, the payment made in this case would not constitute ‘royalty’ paid for the use of industrial, or commercial, or scientific equipments. The essence of the time charter agreement executed between the parties speaks clearly that the asessee can utilize the space in the vessel and not that the assessee is authorized to operate or exercise control over the vessel. In the case of CBDT vs. Chowgule & Co. Ltd. [1991 (6) TMI 53 - KARNATAKA High Court] and in the case of Kar and Lima Lettoa & Co. Ld. Vs. UOI [1967 (11) TMI 27 - GOA High Court] has held that section 172 is a complete code by itself. Thus, the amount paid by the assessee to the FSC on time charter agreement would not amount to ‘royalty’ neither under Explanation 2 or under section 9(1)(b)(ii) or under the DTAA and in this case only section 172 applies. This, no tax is needed to be deducted at source under section 195 as the amount paid does not amount to ‘royalty’. Therefore, the disallowance under section 40(a)(i) for non-deduction at source on the amount paid to FSC for the time charter hire is erroneous. - Decided in favour of assessee. Issues Involved:1. Non-deduction of tax at source on charter payments to Foreign Shipping Companies (FSCs).2. Treatment of the assessee as a representative assessee under section 9(1)(vi) read with sections 160/163 of the Income Tax Act.3. Applicability of section 172 versus section 195 and section 40(a)(i) of the Income Tax Act.Detailed Analysis:1. Non-deduction of Tax at Source on Charter Payments to FSCs:The primary issue in the appeals was whether the payments made by the assessee to FSCs for charter hire charges constituted 'royalty' under section 9(1)(vi) of the Income Tax Act, thereby necessitating tax deduction at source under section 195.The Assessing Officer (AO) treated the payments as royalty, leading to the assessee being deemed 'assessee-in-default' for non-deduction of tax at source. This view was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].The assessee argued that the payments were not for the use of the ship but for the services of moving goods by a fully manned ship, relying on the Madras High Court decision in Poompuhar Shipping Corporation Ltd. and other judicial precedents. The Tribunal agreed with the assessee, stating that the payments did not constitute 'royalty' as the assessee neither had control nor possession over the vessels, and the ship's operations were controlled by the ship owner.2. Treatment of the Assessee as a Representative Assessee:The AO treated the assessee as a representative assessee under section 160/163 for the income of the FSCs. The CIT(A) upheld this view, leading to the re-assessment of the assessee.The Tribunal, however, found that the assessee acted on behalf of the non-resident ship owner and that section 172, which deals with the profits of non-residents from occasional shipping business, applied. The Tribunal noted that once tax is recovered under section 172, there cannot be any further recovery of the same tax from the present assessee, as clarified by CBDT Circular No.723.3. Applicability of Section 172 versus Section 195 and Section 40(a)(i):The Tribunal emphasized that section 172 is a complete code by itself for taxing non-resident shipping companies and that the payments made by the assessee were covered under this section. Consequently, the provisions of section 195 did not apply, and there could be no disallowance under section 40(a)(i) for non-deduction of tax at source.The Tribunal referenced its earlier decisions in the assessee's own case for previous assessment years, where similar issues were decided in favor of the assessee, reinforcing the principle of consistency in judicial proceedings.Conclusion:The Tribunal allowed the appeals of the assessee, holding that the payments made to FSCs did not constitute 'royalty' and were covered under section 172, thereby not requiring tax deduction at source under section 195. Consequently, there could be no disallowance under section 40(a)(i). The Tribunal also ruled that the assessee could not be treated as a representative assessee for the FSCs, as the tax liability had already been discharged under section 172. The appeals of the Revenue were dismissed.