2005 (9) TMI 225 - AT - Income Tax

Foreign oil tanker freight payment not taxable in India under Singapore DTAA. Assessee's appeal successful.

Essar Oil Limited. Versus Deputy Commissioner Of Income-Tax.

The Tribunal held that the freight payment made by the assessee-company to a foreign oil tanker was not taxable in India under the Singapore DTAA, ... Double Taxation Relief Issues Involved:1. Whether the assessee-company was bound to withhold tax on the freight amount paid to a foreign oil tanker under Section 195 of the IT Act, 1961.2. Whether the income from the freight payment is taxable in India under the provisions of the IT Act, 1961 or the Singapore DTAA.Detailed Analysis:Issue 1: Obligation to Withhold Tax under Section 195The primary contention revolves around the applicability of Section 195 of the IT Act, 1961, which mandates withholding tax on payments to non-residents if such payments are chargeable under the Act. The assessee-company chartered a foreign oil tanker from a Singapore-based company (M/s HMPL) to transport petroleum products between two Indian ports and remitted the freight without withholding tax. The Assessing Officer (AO) treated the assessee as an assessee-in-default for non-deduction of tax and demanded tax along with interest under Sections 201(1) and 201(1A) of the IT Act, 1961. The assessee argued that the payment was not taxable in India under the Singapore DTAA, specifically citing Articles 7 and 8, which deal with business profits and shipping income in international traffic, respectively.Issue 2: Taxability of Income under IT Act vs. Singapore DTAAArticle 8 of Singapore DTAA:The assessee-company claimed that the freight payment was not taxable in India under Article 8 of the Singapore DTAA, which states that profits from the operation of ships in international traffic are taxable only in the resident state (Singapore). The definition of 'international traffic' includes any transport by a ship operated by a non-resident enterprise, except when the ship operates solely between places in the other contracting state (India).Article 7 of Singapore DTAA:Alternatively, the assessee argued that if Article 8 did not apply, the income should be considered business profits under Article 7, which are taxable in India only if the non-resident enterprise has a Permanent Establishment (PE) in India. The assessee contended that M/s HMPL did not have a PE in India as the ship was in Indian waters for only 10 days, far less than the 180 days required to establish a PE.Revenue's Argument:The Revenue argued that the freight payment was taxable in India under Section 44B of the IT Act, 1961, which deals with the computation of profits and gains of shipping business for non-residents. They contended that the voyage between two Indian ports did not qualify as 'international traffic' and therefore, Article 8 of the Singapore DTAA did not apply. They further argued that the income should be taxed under the residual Article 23 of the Singapore DTAA, which covers income not expressly mentioned in other articles.Tribunal's Findings:The Tribunal analyzed the definitions and provisions of the Singapore DTAA and the IT Act, 1961. It concluded that the ship was operating in international traffic as it was on a voyage from Singapore to the Arabian Gulf, with a brief deviation to transport goods between Indian ports. The Tribunal emphasized the importance of the term 'solely' in the definition of 'international traffic,' noting that a single voyage between Indian ports does not negate the international nature of the overall voyage.The Tribunal also considered authoritative commentaries on international tax law, which supported the view that occasional voyages between domestic ports do not change the international character of the ship's operations. Therefore, the Tribunal held that the income from the freight payment was covered by Article 8 of the Singapore DTAA and was taxable only in Singapore.Permanent Establishment:The Tribunal further held that even if Article 8 did not apply, the income would still be considered business profits under Article 7 of the Singapore DTAA. Since M/s HMPL did not have a PE in India, the income was not taxable in India. The Tribunal rejected the Revenue's argument that the ship itself could be considered a PE, citing previous judicial decisions that a PE requires a fixed place of business with some degree of permanence.Residual Article 23:The Tribunal disagreed with the Revenue's reliance on Article 23, noting that it is meant for income not expressly mentioned in other articles and typically covers non-business income. Since the income in question was business income from shipping operations, it fell under Article 7 or 8, not Article 23.Conclusion:The Tribunal concluded that the freight payment was not taxable in India under the provisions of the Singapore DTAA, either under Article 8 (shipping income in international traffic) or Article 7 (business profits without a PE in India). Therefore, the assessee-company was not obligated to withhold tax under Section 195 of the IT Act, 1961. The order of the assessing authority under Sections 201(1) and 201(1A) was canceled, and the appeal filed by the assessee was allowed.