2020 (11) TMI 415 - AT - Income Tax

Tribunal allows appeal on charter receipts treatment, remands expense reimbursement, and directs verification of TDS credit.

Smit Singapore Pte Ltd. SRBC & Associates Versus Deputy Commissioner of Income-tax (I.T.) -4 (2) (1), Mumbai

The Tribunal allowed the appeal, vacating the treatment of time charter receipts and mobilization fees as royalty. The issue of reimbursement of expenses ... Taxability of receipts on hire of vessel on time charter basis - receipts from the time charter of the vessel “Smit Borneo” brought to tax in its hands as ‘royalty’ - charges received on account of time charter services rendered by the Appellant for the vessel 'Smit Borneo' to Leighton India Contractors Private Limited in India were rendered for the 'use' of industrial, commercial or scientific equipment, thereby treating the same as 'Royalty' under section 9(1)(vi) - Whether time charter services shall be covered within the definition of the term 'Royalty' under Article 12(4) of the India - Singapore Double Tax Avoidance Agreement ('DTAA') - HELD THAT:- As can be gathered from a perusal of the relevant extracts of the ‘agreement’ it can safely be concluded that as the assessee had received charges on account of time charter services rendered by its vessel ‘Smit Borneo’ along with the crew to Leighton India Contractor Pvt. Ltd., and not for allowing the latter the ‘use’ or ‘right to use’ of industrial, commercial, or scientific equipment, the same therein cannot be treated as ‘royalty’ within the meaning of Article 12(3)(b) of the India-Singapore tax treaty. We herein not being able to subscribe to the view taken by the lower authorities, to the extent they had concluded that the amounts received by the assessee for time charter of its vessel viz. ‘Smit Borneo’ was to be treated as royalty under Article 12(3)(b) of the India-Singapore tax treaty, therein vacate the same. As we have vacated the view taken by the A.O/DRP that the consideration received by the assessee from time charter of its vessel viz. ‘Smit Borneo’ was to be treated as ‘royalty’ as per Article 12 of the India-Singapore Tax Treaty, therefore, we refrain from adverting to the other contentions advanced by the ld. A.R to support its claim, which thus are left open. Grounds of appeal No. 2 to 4 are allowed in terms of our aforesaid observations. Mobilisation fees received by the assessee from Leighton India Contractor Pvt. Ltd. - Whether wrongly been treated as royalty, both under Sec. 9(1)(iv) of the Act, and Article 12(3)(b) India-Singapore tax treaty? - HELD THAT:- As observed by the A.O/DRP that as the mobilisation of the vessel viz. ‘Smit Borneo’ formed an inextricable part of the time charter services rendered by the assessee, thus the fees therein received were also to be assessed as royalty. As we have concluded that the consideration received by the assessee from time charter of the vessel viz. ‘Smit Borneo’ would not fall within the realm of the definition of the term ‘royalty’ as contemplated in Article 12 of the India-Singapore tax treaty, therefore, the mobilisation fees, which as observed by the A.O/DRP formed an inextricable part of such time charter services has to be similarly construed. As such, we vacate the treatment of the mobilisation fees received by the assessee as royalty by the lower authorities. The Grounds of appeal No. 5-7 are allowed in terms of our aforesaid observations. Amount received by the assessee towards reimbursement of expenses which were incurred by it for and on behalf of Leighton India Contractor Pvt. Ltd. - Whether to be assessed as royalty within the meaning of Sec. 9(1)(vi) of the Act, and Article 12(3)(b) of the India-Singapore tax treaty? - HELD THAT:- As neither the details of the expenses, which as claimed by the assessee were incurred for and on behalf Leighton India Contractor Pvt. Ltd., nor the basis of allocation of the common expenses to the share of the assessee are discernible from the records, therefore, it would be premature to adjudicate the said issue in the absence of the relevant facts. Accordingly, in all fairness we restore the issue to the file of the A.O, who is herein directed to verify the nature of the amounts which as claimed by the assessee were received by way of reimbursements from Leighton India Contractor Pvt. Ltd., and also, the basis of allocation of the common expenses to the share of the said charterer. Short credit of the tax deducted at source (TDS) - As against the credit for TDS that was raised in its return of income, the A.O had allowed credit of only ₹ 95,64,832/-, which had thus resulted to a short grant of credit of TDS of ₹ 24,64,351/-(principal amount) - HELD THAT:- As the aforesaid issue would require verification of the facts borne from the records, we therefore restore the same to the file of the A.O who is directed to look into the said grievance of the assessee. In case, the assessee is able to substantiate the fact as regards short allowing of credit of TDS in the course of the ‘set aside’ proceedings, the A.O is directed to issue the balance refund to the assessee, as per law. Ground of appeal No. 11 is allowed for statistical purposes. Issues Involved:1. Assessment of total income.2. Taxability of receipts on hire of vessel on time charter basis.3. Taxability of mobilization fees.4. Taxability of reimbursement of expenses.5. Short granting of credit in respect of tax deducted at source (TDS).6. Levy of interest under section 234A.7. Levy of interest under section 234B.8. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Assessment of Total Income:The assessee, a Singapore-based company, was assessed for the total income of Rs. 31,95,27,485 against a returned income of nil. The assessment was conducted under Sec. 143(3) r.w.s 144C(13) of the Income Tax Act, 1961, for the A.Y. 2014-15.2. Taxability of Receipts on Hire of Vessel on Time Charter Basis:The assessee's vessel 'Smit Borneo' was time chartered to Leighton India Contractors Pvt. Ltd. The AO treated the charges received as 'Royalty' under section 9(1)(vi) of the Act and Article 12(4) of the India-Singapore DTAA. The assessee contended that the receipts should not be classified as royalty since the vessel was provided along with crew and the control remained with the assessee. The Tribunal agreed with the assessee, concluding that the vessel's control remained with the assessee, and the consideration received did not fall within the definition of royalty under Article 12(3)(b) of the India-Singapore tax treaty.3. Taxability of Mobilization Fees:Mobilization fees of Rs. 17,80,500 received by the assessee were linked to the time charter services. The AO and DRP treated these fees as royalty. The Tribunal, however, concluded that since the mobilization fees were part of the time charter services, they should not be treated as royalty under the India-Singapore tax treaty.4. Taxability of Reimbursement of Expenses:The assessee received Rs. 1,31,80,903 as reimbursement of expenses from Leighton India Contractors Pvt. Ltd. The AO characterized these receipts as royalty. The Tribunal noted that the details of the expenses and the basis of allocation were not clear from the records. Therefore, the issue was remanded to the AO for verification of the nature of the amounts and the basis of allocation.5. Short Granting of Credit in Respect of Tax Deducted at Source (TDS):The assessee claimed a TDS credit of Rs. 1,20,29,183 in the return of income, but the AO allowed only Rs. 95,64,832, resulting in a short grant of Rs. 24,64,351. The Tribunal restored the issue to the AO for verification and directed the AO to issue the balance refund if substantiated.6. Levy of Interest Under Section 234A:Interest under section 234A amounting to Rs. 40,29,825 was levied. The Tribunal noted that the charging of interest would be consequential to the final assessment and directed the AO to consider the claim during the set-aside proceedings.7. Levy of Interest Under Section 234B:Interest under section 234B amounting to Rs. 96,26,797 was levied. Similar to section 234A, the Tribunal directed the AO to consider the claim during the set-aside proceedings.8. Initiation of Penalty Proceedings Under Section 271(1)(c):The initiation of penalty proceedings under section 271(1)(c) was challenged. The Tribunal dismissed this ground as premature.Conclusion:The Tribunal allowed the appeal in terms of the observations made, vacated the treatment of time charter receipts and mobilization fees as royalty, remanded the issue of reimbursement of expenses to the AO for verification, and directed the AO to verify the short granting of TDS credit and consider the interest claims during the set-aside proceedings. The initiation of penalty proceedings was dismissed as premature.