2020 (11) TMI 567 - AT - Income Tax

Taxpayer wins: Article 8 grants residence exclusive taxation of ship operation profits, Article 24 wrongly invoked; Section 13F inapplicable

ITAT held for the taxpayer, directing deletion of additions of shipping income earned in India. The tribunal found the AO erred in invoking Article 24 of ... Taxation of international shipping income - Article 8 of India-Singapore DTAA - Article 24 (Limitation of Benefits) of India-Singapore DTAA - accrual versus remittance basis of taxation - Doctrine of treaty interpretation (Vienna Convention Article 31) - chargeability under Section 172/44B of the Income tax Act, 1961 - principle of consistency / promissory estoppel in tax proceedingsTaxation of international shipping income - Article 8 of India-Singapore DTAA - accrual versus remittance basis of taxation - Whether the assessee's international shipping income is taxable only in Singapore under Article 8 of the India-Singapore DTAA - HELD THAT: - The Tribunal held that Article 8 confers an exclusive right of taxation on the country of residence for profits from operation of ships in international traffic and is an enabling provision rather than an exemption clause. The assessee, a tax resident of Singapore, therefore enjoys taxation of its global shipping income only in Singapore on an accrual basis. The Tribunal applied the ordinary meaning/contextual interpretation of the treaty (per Article 31 of the Vienna Convention) and observed that by entering into the DTAA India has ceded its right to tax such shipping income. On these findings the Tribunal concluded that shipping income earned from Indian operations by the Singapore resident is taxable only in Singapore and not in India, and directed deletion of the additions made by the AO under domestic provisions. [Paras 13, 14, 20, 21]Article 8 applies: the shipping income of the Singapore resident is taxable only in Singapore (on accrual basis) and not taxable in India; additions to tax are to be deleted.Article 24 (Limitation of Benefits) of India-Singapore DTAA - accrual versus remittance basis of taxation - chargeability under Section 172/44B of the Income tax Act, 1961 - Whether Article 24 of the India-Singapore DTAA can be invoked to deny treaty benefit and permit taxation in India of the shipping income - HELD THAT: - The Tribunal found that Article 24 operates only where the income is exempt or taxed at a reduced rate in one Contracting State and, under the laws of the other Contracting State, is taxable only by reference to amounts remitted or received there. Two cumulative conditions must be satisfied: (i) the income must be exempt or taxed at reduced rate under the DTAA in the source State and (ii) the resident state's law must tax that income on a remittance/receipt basis. On the facts, Article 8 does not constitute an exemption in India but an exclusive allocation of taxing rights to Singapore; moreover Singapore taxes the shipping income on an accrual basis (as confirmed by IRAS). Therefore both conditions for Article 24 are not satisfied and Article 24 cannot be invoked to deny Article 8 benefits or to justify taxation in India under domestic law (Section 172/44B). The AO's reliance on Singapore's Section 13F to invoke Article 24 was rejected. [Paras 15, 16, 17]Article 24 is not applicable on the facts; it cannot be invoked to deny the Article 8 benefit or to tax the shipping income in India.Principle of consistency / promissory estoppel in tax proceedings - Doctrine of treaty interpretation (Vienna Convention Article 31) - Whether the Tribunal may entertain the Revenue's preliminary objection on its jurisdiction (raised before the Bench but not pleaded by the Revenue in the assessee's appeal) and whether the Assessing Officer could depart from the earlier DIT relief certificate without change of fact or law - HELD THAT: - The Tribunal declined to entertain the Revenue's preliminary contention on the Bench's jurisdiction because the objection was not raised in the grounds filed by the assessee and the Revenue had not filed a separate appeal or cross objection on that point; accordingly the Tribunal refused to decide an issue not before it. Separately, the Tribunal noted that the AO had issued DIT relief certificates earlier and, absent any change in fact or law, consistency (and promissory estoppel principles) militated against taking a contrary position in the assessment; the AO's later contrary approach was criticised. [Paras 12, 18]Revenue's preliminary jurisdictional objection not entertained; the AO could not take a contrary view to an earlier DIT relief certificate without change in fact or law.Final Conclusion: The assessee's appeal is allowed. The Tribunal held that Article 8 of the India-Singapore DTAA applies so that the international shipping income of the Singapore resident is taxable only in Singapore (on accrual basis); Article 24 cannot be invoked on the facts to deny treaty benefit or justify taxation in India, and the additions made under domestic law are to be deleted. The Revenue's preliminary jurisdictional objection was not entertained. Issues Involved:1. Taxability of international shipping income from freight operations in India.2. Applicability of Article 8 and Article 24 of the India-Singapore DTAA.3. Interpretation of the provisions of the India-Singapore DTAA in light of the Vienna Convention.4. Validity of the Dispute Resolution Panel's (DRP) directions and the Assessing Officer's (AO) final assessment order.5. Jurisdiction of the Tribunal to adjudicate the appeal.Issue-wise Detailed Analysis:1. Taxability of International Shipping Income from Freight Operations in India:The core issue is whether the international shipping income earned by the assessee, a Singapore resident, from freight operations in India is taxable in India. The assessee claimed that such income is exempt under Article 8 of the India-Singapore DTAA, which provides that shipping income of a non-resident is taxable only in the country of residence (Singapore). The AO and DRP contended that since the income is exempt in Singapore under Section 13F of the Singapore Income Tax Act, it should be taxed in India under Article 24 of the DTAA.2. Applicability of Article 8 and Article 24 of the India-Singapore DTAA:Article 8 of the DTAA states that profits from the operation of ships in international traffic are taxable only in the country of residence. The AO and DRP argued that Article 24, which limits benefits if the income is exempt or taxed at a reduced rate in the source country, applies here because the income is exempt in Singapore. However, the Tribunal found that Article 8 is an enabling provision granting exclusive taxation rights to the residence country, and not an exemption provision. Therefore, Article 24 does not apply as the income is not exempt under the DTAA but is taxable in Singapore on an accrual basis.3. Interpretation of the Provisions of the India-Singapore DTAA in Light of the Vienna Convention:The Tribunal referred to the Vienna Convention on the Law of Treaties, emphasizing that treaties should be interpreted in good faith according to the ordinary meaning of their terms in context and in light of their object and purpose. The Tribunal concluded that the object of the DTAA is to avoid double taxation, not to facilitate double non-taxation. The Tribunal held that the AO's interpretation was flawed, as it did not consider the context and purpose of Article 8, which provides exclusive taxation rights to the residence country.4. Validity of the DRP's Directions and the AO's Final Assessment Order:The Tribunal found that the DRP and AO erred in their interpretation of the DTAA provisions. The DRP's reliance on Article 24 was misplaced as the conditions for its applicability were not satisfied. The Tribunal noted that Article 8 grants exclusive taxation rights to Singapore, and the AO's attempt to tax the income in India was contrary to the DTAA's provisions. The Tribunal also criticized the AO for ignoring the DIT relief certificate issued to the assessee, which confirmed the applicability of Article 8.5. Jurisdiction of the Tribunal to Adjudicate the Appeal:The Tribunal dismissed the Revenue's argument challenging its jurisdiction. The Tribunal stated that the Revenue did not file a separate appeal or cross-objection on this issue, and therefore, the Tribunal would not entertain the jurisdictional challenge. The Tribunal confirmed its authority to adjudicate the appeal based on the grounds raised by the assessee.Conclusion:The Tribunal concluded that the international shipping income earned by the assessee from operations in India is taxable only in Singapore under Article 8 of the India-Singapore DTAA. The AO and DRP's reliance on Article 24 was incorrect as the conditions for its applicability were not met. The Tribunal directed the AO to delete the additions made towards the shipping income earned by the assessee in India. The appeal was allowed in favor of the assessee.