2025 (9) TMI 1572 - AT - Income Tax

Revisional order under s.263 set aside; coastal shipping income treated under s.44B, outward freight exempt under Article 8 DTAA

ITAT (Del) allowed the appeal, holding the CIT's invocation of revisional jurisdiction under section 263 was mechanical and unsustainable. The Tribunal ... Income from royalty - receipts from costal shipping - India- Singapore DTAA - Taxability in India - Income deemed to accrue or arise in India - HELD THAT:- We find that this is a perennial issue arising since AY 2016-17 in assessee’s case. The CIT(A), International Taxation u/s. 263 of the Act vide had initially raised this issue. The assessee filed appeal before the Tribunal assailing revisional proceedings in [2023 (3) TMI 521 - ITAT DELHI] set aside the revisional order passed u/s. 263 accepting assessee’s claim under section 44B in respect of income from coastal shipping and claim of exemption under Article 8 of the treaty in respect of income from outward freight reveals the mechanical approach of CIT in invoking jurisdiction under section 263. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether receipts from operation of ships for carriage of dry bulk and break bulk cargo, received from India, constitute 'royalty' taxable in India under the India-Singapore DTAA or are exempt as business profits under Article 8 (or taxable under domestic coastal shipping provisions such as section 44B). 2. Whether the Assessing Officer's classification of such receipts as royalty (and imposition of tax at 10% on gross receipts) is sustainable where invoices and contractual documentation show charges for transportation rather than for leasing or transfer of technical/industrial information or rights. 3. Whether the Assessing Officer/Revenue was bound by earlier Tribunal decisions in the assessee's own case for earlier assessment years and by the subsequent dismissal of Revenue's appeals by the High Court (including on departmental concession that treaty-shopping was not an issue). 4. Whether the Assessing Officer and the revisional authority (or DRP) acted mechanically or inconsistently in characterising different streams of shipping receipts (coastal, inward freight, outward freight) and whether such inconsistencies vitiate the impugned assessment. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of shipping receipts as 'royalty' v. business profits / coastal shipping Legal framework: Article 8 of the India-Singapore Double Taxation Avoidance Agreement (DTAA) deals with business profits and the taxation rights of the contracting states; domestic law includes section 44B (special provisions for shipping income/coastal shipping) and general provisions defining income heads in the Income Tax Act. The taxability of payments as 'royalty' requires that the payment be for the use of, or right to use, intellectual property, technical know-how, or transfer of related rights as per treaty/textual meaning. Precedent treatment: Coordinate Bench decisions in the assessee's own appeals for earlier assessment years (AY 2016-17 and AY 2017-18) examined identical facts and held that the receipts were freight for carriage (business receipts) and not royalty; those Tribunal decisions were followed by dismissal of Revenue's appeals before the High Court (where the Revenue conceded no treaty-shopping issue and appeals were dismissed). Interpretation and reasoning: The Tribunal examined invoices and the nature of charges and concluded the assessee charged fees for transportation of goods, not for leasing of vessels or transfer of technical rights. The Tribunal emphasized distinct streams of income-coastal shipping (offered under section 44B), inward freight and outward freight-and found that the documentation and factual matrix support characterization as freight/business receipts. The AO's conclusion treating inward freight as royalty at 10% on a gross basis conflicted with the factual evidence and with the treatment accorded to other receipts (coastal/outward freight), evidencing an incorrect legal characterisation. Ratio vs. Obiter: The finding that receipts evidenced by invoices are remuneration for carriage (freight) and not payments for use of intellectual property/rights is ratio where applied to identical facts; observations about general inconsistencies in the revenue's approach are supporting reasoning but also serve as obiter on the impropriety of mechanical recharacterisation. Conclusions: Receipts arising from operation of ships for carriage of cargo to and from India are business/freight receipts (and to the extent coastal shipping is involved taxable under section 44B) and do not amount to 'royalty' under the DTAA; therefore they are not taxable as royalty in India at 10% on gross receipts. Issue 2 - Reliance on earlier Tribunal and High Court treatment and finality of issue Legal framework: Principles of issue estoppel / precedent in revenue appeals and the binding effect of final decisions in the taxpayer's own case where facts are identical; role of concessions by departmental counsel in disposing of appeals. Precedent treatment: The Tribunal relied on its Coordinate Bench decisions for earlier assessment years which addressed identical factual matrices; the High Court dismissed Departmental appeals after the Department's Senior Standing Counsel conceded that treaty-shopping did not arise, thereby removing grounds for further challenge. Interpretation and reasoning: Where the material facts are the same, and the Tribunal and High Court have adjudicated the identical legal issue in favour of the taxpayer, the assessing authority is obliged to give effect to those decisions. A departmental concession before the High Court that a particular contention does not arise has procedural and practical finality insofar as the appeals were dismissed on that basis. The DRP's direction to examine whether the department was in appeal was unnecessary where the High Court dismissals had occurred on departmental concession; to the extent the AO ignored the Tribunal and High Court findings and continued to classify receipts as royalty, that amounted to non-compliance with binding decisions. Ratio vs. Obiter: The principle that identical issues previously decided in the taxpayer's favour by Tribunal/High Court must be followed by revenue authorities in later years is ratio as applied here; the observation that DRP directions to check departmental appealability were superfluous is ancillary reasoning but highlights procedural impropriety. Conclusions: The issue has attained finality in favour of the taxpayer for identical facts; the AO was bound to follow the Tribunal/High Court decisions and ought not to have re-characterised the receipts as royalty. Issue 3 - Validity of Assessing Officer's approach: mechanical application and inconsistencies Legal framework: Administrative action by tax authorities must be reasoned and consistent with records; invocation of revisional powers (s. 263) and assessment amendments must be founded on correct application of law to facts. Precedent treatment: The Tribunal scrutinised the show-cause and revisional orders and found inconsistencies between allegations (e.g., payments being FTS) and final directions (treating only inward freight as royalty), which undermined the legitimacy of the AO's approach. Interpretation and reasoning: The Tribunal identified that the CIT(A)/revisional authority exhibited a mechanical approach-asserting conflicting rationales in notices and orders and ultimately restricting directions inconsistently. Such inconsistent treatment (accepting section 44B for coastal shipping and treaty exemption for outward freight while treating inward freight as royalty) indicated lack of coherent reasoning and failure to properly apply legal tests distinguishing freight from royalty. Ratio vs. Obiter: The finding that the AO's and revisional authority's approach was mechanical and inconsistent is ratio in invalidating the impugned classification for the facts before the Tribunal; observations on the need for coherent reasoning in other contexts are obiter but instructive. Conclusions: The Assessing Officer's taxation of the receipts as royalty was the product of a mechanically applied, inconsistent approach and therefore unsustainable; proper application of law to facts required treating the receipts as freight/business income (or coastal shipping under s.44B as applicable). Relief and final conclusion The Tribunal set aside the impugned order and allowed the appeal, concluding that the receipts were not in the nature of royalty and that earlier Tribunal and High Court decisions in identical facts bind the revenue authorities; directions by the DRP to check appealability were superfluous where the High Court appeals had been dismissed on departmental concession. The AO's imposition of tax at 10% on gross receipts as 'royalty' is accordingly quashed for the assessment year under consideration.