2024 (11) TMI 953 - AT - Income Tax

Ocean freight charges to Korean logistics company not royalty under section 9(1)(vi) or India-Korea DTAA Article 12.3

Deputy Commissioner of Income Tax, Corporate Circle -1 (1), Chennai. Versus Doosan Power Systems India Private Limited

ITAT Chennai held that ocean freight charges paid to Korean logistics company HSC did not constitute royalty under section 9(1)(vi) or India-Korea DTAA ... TDS u/s 195 - disallowances made u/s. 40(a)(i) - ocean freight charges paid by the assessee company for availing those services falls under the definition of 'Royalty' as per article 12.3 of India-Korea DTAA - income deemed to accrue or arise in India - HELD THAT:- The assessee is a resident Indian Company, is engaged in the business of manufacture / job work of boiler pressure parts, panels, header and coils and designing, building, installation and maintaining engineering plants relating to thermal and coal power plants. During the assessment year the assessee had incurred expenses towards freight charges paid to a non-resident logistic company - Hyupjin Shipping Co. Ltd., Korea (‘HSC’). The Assessee had engaged HSC, a Korean logistics company for availing logistics services along with coordinating with port authorities for vessel berthing, loading, unloading, port clearances, approvals, licenses, permits etc. at various ports outside India.'Firstly, the impugned payment made by the assessee is not in the nature of Royalty under section 9(1)(vi) of the act as the payments were mere simplicitor freight charges. We note that the AO’s conclusion in the Assessment order passed, referring to the explanation 2 of section 9(1)(vi) of the Act for treating the said consideration paid by the Respondent to HSC as ‘Royalty’ towards to right to use of industrial, commercial or scientific equipment i.e., vessel, devoid of merits. As observed from the documents produced by the assessee and as per agreement entered into with HSC, the services does not confer any right to use of the equipment i.e. ship. The services relate only to logistic services, i.e., for movement of goods across various ports outside India and hence the contention of the Ld. FAO factually incorrect and wholly contrary to law. The claim of the assessee that the payment of ocean freight to a non-resident company does not tantamount to royalty. See A.P. Moller Maersk AS [2017 (2) TMI 993 - SUPREME COURT] DTAA between India & Korea existing during the A.Y. 2015-16 - We note that the HSC does not have any place of business/office in India and further no activities are being carried out by HSC in India, there exists no business connection for HSC in India. Therefore, no income arises through business connection in India u/s. 9(1)(i).Further, as per the India-Korea tax-treaty, the business profits of a foreign company would not be taxable in India, if such company does not have a permanent establishment in India through which the business is carried on. HSC (non-resident logistics company) does not have any place of business/office in India through which business activities of the Company are carried on and thereby, the profits arising from logistics services would be taxable only in the resident state i.e., Korea. We note that HSC is a logistics company, the freight income earned by HSC would be governed by Article 7 and not Article 9 of the India-Korea tax-treaty. The Article 9 of the treaty covers only income which are earned from usage of ship / letting out of ships / charter of ships etc and not for providing logistics services in any manner whatsoever. Even on perusal of provisions of Section 195 of the IT Act, itattracts tax only on chargeable income, if any, paid to a non-resident. Where there is no liability, the question of tax deduction does not arise. Where no part of the income is chargeable in India, even clearance under Section 195(2) or 195(3) of the IT Act is not necessary. HSC does not have any place of business/office in India, the profits arising from logistics services would be taxable only in the resident state i.e., Korea, no taxes were required to be withheld by the assessee while making the remittance of freight charges. Hence, the disallowance u/s. 40(a)(i) made by the AO in reassessment is devoid of merits - Decided against revenue. Issues Involved:1. Whether the payment of freight charges to Hyupjin Shipping Co. Ltd., Korea qualifies as 'Royalty' under Section 9(1)(vi) of the Income-tax Act and Article 12 of the India-Korea DTAA.2. Whether the income from logistics services provided by Hyupjin Shipping Co. Ltd. is deemed to accrue or arise in India, necessitating tax withholding under Section 195 of the Income-tax Act.3. Applicability of Article 9 of the India-Korea Tax Treaty on the profits derived from logistics services provided by Hyupjin Shipping Co. Ltd.Detailed Analysis:1. Nature of Payment as 'Royalty':The core issue was whether the freight charges paid to Hyupjin Shipping Co. Ltd. (HSC) constituted 'Royalty' under Section 9(1)(vi) of the Income-tax Act and Article 12 of the India-Korea DTAA. The Assessing Officer (AO) had disallowed the freight charges, treating them as Royalty for the use of equipment (ship). However, the Tribunal found that the payments were mere freight charges for logistics services and did not confer any right to use the vessel. The Tribunal relied on various judicial pronouncements, including the Supreme Court's decision in DIT vs. A.P. Moller Maersk AS, which clarified that ocean freight payments do not amount to royalty. Thus, the Tribunal concluded that the payments were not in the nature of Royalty.2. Income Deemed to Accrue or Arise in India:The Tribunal examined whether the income from logistics services provided by HSC was deemed to accrue or arise in India, requiring tax withholding under Section 195 of the Income-tax Act. It was noted that HSC did not have a business presence or permanent establishment in India. According to Article 7(1) of the India-Korea tax treaty, business profits of a foreign company are taxable only in the resident state unless the company has a permanent establishment in the other state. Since HSC did not have a permanent establishment in India, the Tribunal held that the profits from logistics services were taxable only in Korea, and no tax withholding was required in India.3. Applicability of Article 9 of the India-Korea Tax Treaty:The Tribunal assessed the applicability of Article 9 of the India-Korea tax treaty, which pertains to income from the usage of ships. It was determined that Article 9 did not apply to the logistics services provided by HSC, as these services did not involve the usage or letting out of ships. Instead, the income was governed by Article 7, which deals with business profits. The Tribunal emphasized that the freight income earned by HSC was not chargeable to tax in India, as the operations were conducted entirely outside India, and HSC did not have a permanent establishment in India.Conclusion:The Tribunal dismissed the revenue's appeal, confirming the order of the Commissioner of Income-tax (Appeals) that the payments made to HSC were not Royalty, and no tax withholding was required under Section 195. The Tribunal's decision was based on the interpretation of the India-Korea tax treaty and relevant judicial precedents, affirming that the logistics services income was taxable only in Korea. The appeal filed by the revenue was thus dismissed.