2017 (10) TMI 1253 - AT - Income Tax

Tribunal confirms Permanent Establishment in India, denies benefits under DTAA for shipping operations

APL Director Co. Pte. Ltd. Versus Asstt. Director of Income-tax (Int. Taxation)

The tribunal upheld the existence of a Permanent Establishment (PE) in India for the assessee due to insufficient proof of international shipping ... P.E. in India - whether the income earned by the assessee from operation of 15 ships was taxable or not in India in light of the above-mentioned provisions of the DTAA or not? - Held that:- Pre-condition, for claiming exemption from Indian tax law is to establish the fact that the income earned/accrued to an assessee had arisen from operation of ships in international traffic. The onus was on the assessee to prove the fact. Under Section 106 of the Evidence Act when any fact is especially within the knowledge of any person, the burden of proving the fact is upon him. In the case under consideration, fact of operation of ships in international traffic was specially within the knowledge of the assessee and it was not possible for the AG to have any knowledge about it. So, it was duty of the assessee to prove the factum of operation of ship for deduction. We have taken note of the fact that it had not produced any of the documents before the AO required by him. Even before the DRP it filed bills of lading for five ships. In case of one ship only copy of delivery note was submitted. Without commenting upon the evidentiary value of the documents produced by it, for claiming exemption from tax provisions of the Act, we would like to mention that it had not produced not even a single paper for nine ships that could prove that same were operating in international traffic. Before us also, the assessee had not produced any document to substantiate its claim. So as far as income from nine ships are concerned, we arc of the opinion that same should be taxed as per the provisions of Act. - Decided against assessee. Charging of interest u/s.234B - Held that:- DRP should have decided the issue raised by the assessee by a speaking order. But, that does not mean that we cannot decide it. It is a legal issue and has remained unadjudicated. It was brought to our notice that the Department had issued Double income Tax Relief Certificate to the assessee. Clearly the assessee was not liable to pay advance tax. Besides for freight income earned by it was liable for deduction of tax at source as per the provisions of section 209(1)(d) of the Act. Issues Involved:1. Permanent Establishment (PE) in India.2. Denial of benefits under Article 8 of the DTAA.3. Charging of interest under Section 234B of the Income Tax Act.4. Taxation of Inland Haulage Charges (IHC).Issue-wise Detailed Analysis:1. Permanent Establishment (PE) in India:The primary issue raised by the assessee was the direction of the Dispute Resolution Panel (DRP) in holding that the assessee had a Permanent Establishment (PE) in India under Article 5(1) and Article 5(8) of the Tax Treaty. The Assessing Officer (AO) concluded that the assessee had an exclusive agent and front office in India, thus constituting a PE. The DRP upheld this view, noting that the assessee had not provided sufficient documentation to substantiate that the income from 15 ships was from international shipping operations. The tribunal agreed with the lower authorities, emphasizing that the onus was on the assessee to prove the international nature of its shipping operations, which it failed to do for 15 ships.2. Denial of benefits under Article 8 of the DTAA:The assessee, a tax resident of Singapore, claimed that its income from shipping operations was exempt from Indian tax under Article 8 of the DTAA. However, the AO and DRP denied this benefit for 15 ships due to insufficient documentation. The tribunal upheld this decision, noting that the assessee failed to provide necessary documents for these ships. The tribunal referenced Article 8, which states that profits from international shipping operations should be taxed in the state of residence, but emphasized that the assessee must prove the international nature of its operations. The tribunal cited previous cases, including Balaji Shipping UK Ltd., to support its decision.3. Charging of interest under Section 234B of the Income Tax Act:The AO proposed to levy interest under Section 234B, which the assessee contested. The DRP did not adjudicate on this issue, leaving it to the tribunal. The tribunal decided in favor of the assessee, noting that the Department had issued a Double Income Tax Relief Certificate, indicating that the assessee was not liable to pay advance tax. The tribunal also noted that the freight income was subject to tax deduction at source under Section 209(1)(d) of the Act.4. Taxation of Inland Haulage Charges (IHC):The AO found that Inland Haulage Charges (IHC) amounting to Rs. 20 lakhs were taxable. The tribunal referenced previous decisions, including Sufamarine Container Line NV and Freight Systems (India) (P) Ltd., which held that IHC are not covered under Section 44B of the Act. The tribunal concluded that IHC should be considered part of the income from the operation of ships in international traffic under Article 8 of the DTAA, and thus not taxable in India. This decision was based on the principle that inland transportation connected with international shipping operations is covered under Article 8.Conclusion:The appeal filed by the AO was dismissed, the assessee's appeal was partly allowed, and the cross-objection (CO) was allowed for statistical purposes. The tribunal's decisions were based on the interpretation of the DTAA, the onus of proof on the assessee, and previous judicial precedents. The order was pronounced in the open court on 11th October 2017.