Bareboat charter payments to Singapore company without permanent establishment not taxable under India-Singapore DTAA Article 7

ITAT Chennai held that bareboat charter payments made by the assessee to a Singapore company were not taxable in India under Article 7 read with Article 5 of the India-Singapore DTAA. The Singapore company had no permanent establishment in India, making the income non-chargeable to Indian tax. Consequently, no withholding tax deduction under section 195 was required, and no disallowance under section 40(a)(i) was warranted. The assessee had properly exercised the option under section 44BB by maintaining audited books of accounts. The appeal was allowed, and additions made by the Assessing Officer were deleted.

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Issues Involved:
1. Validity of the final assessment order.
2. Disallowance u/s 40(a)(i) for non-deduction of tax.
3. Tax liability of a non-resident company incorporated in Singapore.
4. Applicability of DTAA or ITA as per section 90.
5. Payments made to Singapore-based companies DD4PL and DD8PL.
6. Application of section 44BB of the Income Tax Act, 1961.
7. Requirement for TDS deduction on payments made outside India.

Summary:

1. Validity of the Final Assessment Order:
The assessee challenged the final assessment order passed by the Dy. Commissioner of Income Tax, contending it was erroneous both legally and factually. The Tribunal found that the assessment was conducted following the due procedures, including the draft assessment order, objections, and directions from the Dispute Resolution Panel (DRP).

2. Disallowance u/s 40(a)(i) for Non-Deduction of Tax:
The Assessing Officer (AO) disallowed Rs. 40,81,64,000 u/s 40(a)(i) for non-deduction of TDS on bareboat charter hire expenses. The Tribunal noted that the assessee had opted for the presumptive taxation scheme u/s 44BB, which excludes the application of sections 28 to 41 and sections 43 and 43A. Therefore, section 40(a)(i) was not applicable.

3. Tax Liability of a Non-Resident Company Incorporated in Singapore:
The assessee, a non-resident company incorporated in Singapore, argued it was not liable to tax on its global income in India. The Tribunal upheld this, noting that the payments made to DD4PL and DD8PL, both Singapore-based companies, were for services rendered outside India and thus not taxable in India.

4. Applicability of DTAA or ITA as per Section 90:
The Tribunal agreed with the assessee that the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore, which are more beneficial to the assessee, should be considered. As per the DTAA, the income of DD4PL and DD8PL was not taxable in India.

5. Payments Made to Singapore-Based Companies DD4PL and DD8PL:
The Tribunal found that the payments made to DD4PL and DD8PL were for hiring rigs on a bareboat charter basis, and these payments were made outside India. Therefore, these payments were not subject to Indian tax laws, and no TDS was required.

6. Application of Section 44BB of the Income Tax Act, 1961:
The Tribunal noted that the assessee had filed its return u/s 44BB, which deals with income from the exploration and extraction of mineral oils. The section is a non-obstante clause that excludes other provisions of the Act, including section 40(a)(i). The Tribunal cited judicial precedents supporting the non-applicability of section 40(a)(i) when section 44BB is invoked.

7. Requirement for TDS Deduction on Payments Made Outside India:
The Tribunal held that the provisions of section 195, which mandate TDS on payments to non-residents, were not applicable as the payments were made outside India and were not chargeable to tax in India. The Tribunal cited Supreme Court decisions affirming that TDS is required only on sums chargeable under the Act.

Conclusion:
The Tribunal concluded that the payments made by the assessee to DD4PL and DD8PL were not liable to tax in India and, therefore, no TDS was required. The disallowance u/s 40(a)(i) was deleted, and the appeal filed by the assessee was allowed.

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