Bareboat charter hire charges treated as taxable royalty-like payments, triggering withholding tax under section 195

Payments under a bareboat charter-cum-demise arrangement to a non-resident ship owner were treated on their substance as hire charges for use of the vessel, not as sale consideration, because ownership passed only on exercise of the purchase option and final payment. A ship was regarded as industrial or commercial equipment for the royalty definition in section 9(1)(vi) and article 12, while article 8 was confined to profits from the operation of ships in international traffic and did not cover these use-based payments. As the sums were chargeable to tax in India, the payer could not disregard section 195 and had to deduct tax at source on the income element.

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Issues: Whether payments made under the bareboat charter-cum-demise arrangement to the non-resident ship owner were chargeable to tax in India so as to attract deduction of tax at source under section 195, and whether such payments were governed by article 8 or constituted royalty under article 12 read with section 9(1)(vi).

Analysis: The arrangement was examined on its substance and not merely by its label. The vessel remained with the foreign owner until the option to purchase was actually exercised and the final balloon payment was made; the periodic remittances were therefore hire charges for use of the ship and not sale consideration. A ship was treated as industrial or commercial equipment for the purposes of the royalty definition in section 9(1)(vi) and article 12 of the treaty. Article 8 applied only to profits from the operation of ships in international traffic, whereas the payments in question were made for the use of the vessel and not from such operation. Since the sums were chargeable to tax in India, the payer could not unilaterally exclude section 195, and tax had to be deducted at source on the income element embedded in the payments.

Conclusion: The payments were royalty-like hire charges chargeable to tax in India, section 195 applied, and the assessee was bound to deduct tax at source.

Final Conclusion: The common legal effect of the decision is that the assessee's challenge failed and the withholding obligation was upheld on the footing that the charter payments were taxable in India.

Ratio Decidendi: Payments under a bareboat charter-cum-demise arrangement, where ownership does not pass until exercise of the purchase option and final payment, are to be treated according to their substance as hire charges for use of equipment and, if chargeable to tax in India, attract deduction of tax at source under section 195.

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