TaxTMI 
TaxTMI 
2006 (5) TMI 152
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....ritime Co. Ltd. (hereinafter called 'DMCL')? 3. Shri V. Ramachandran, the learned counsel for the assessee vehemently opposed the impugned order. It was contended that the agreement entered into by the assessee with DMCL, under which the assessee secured a vessel with an option to purchase the same was not a mere Bare Boat Charter and that the payment made under the said agreement cannot be termed as hire charges falling within article 12 of the Double Taxation Avoidance Agreement (hereinafter called 'DTAA') between India and Cyprus. Further it was alleged that ship cannot be construed to be an equipment for the purpose of article 12 of DTAA, as such, the payments made to DMCL cannot be termed as royalty, as the payment was not for the use of the equipment falling within section 9(1)(vi) of the Income-tax Act, 1961 (hereinafter called 'the Act') read with article 12 of the DT AA. The Bare Boat Charter entered into by the assessee with DMCL was an agreement relating to the sale of the ship. The consideration was payable in accordance with the said agreement. The terms of the said agreement have to be looked into along with the surrounding circumstances to ....
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.... Ex consequent; there is no taxable receipt by the non-resident. (iii) If the transaction is treated as payment for operation of ship it is covered by article 8 of DTAA. (iv) Since there is a specific provision to assess the income from shipping under article 8 no other provision under the DTAA would apply to this transaction. (v) Article 12 sought to be applied by the Assessing Officer applies to royalty and does not apply to hiring of ship or payment in respect of such transaction. (vi) Article 12 refers to 'equipment' and ship is not an equipment and BBCD agreement does not relate to the use of ship but relates to acquisition of ship. To buttress the aforesaid points Shri Ramachandran relied on the various precedents and invited our attention on the documents contained in the paper book. 7. The learned departmental representative vehemently opposed the aforesaid arguments. It was submitted that the case of the assessee comes within the ken of section 195, since the payments made by the assessee to the non-resident were exigible to tax in India. What the assessee paid to the owner of the ship was hire charges for the user of the s....
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....e proposed to treat the payments for hiring of ships as royalties under section 9(1)(vi) of the Act. 10. Royalty is defined in Explanation 2 to section 9(1)(vi) of the Act. As per clause 4(a) inserted by the Finance Act, 2001 with effect from 1-4-2002, royalty means consideration for the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred in section 44BB. As per article 12 of the DTAA, royalty means payments or credits made as consideration for the use of or the right to use any industrial, commercial or scientific equipment. 11. The word "equipment" is neither defined under the Act nor under the treaty. As per New Oxford Advanced Learners Dictionary "equipment" means "the things that are needed for a particular purpose or activity". As per Websters Dictionary "equipment" means "all fixed assets other than land and building" used in a business enterprise. A fixed asset is an asset held with an intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. The equipment for the purpose of the Employer's Liability (Defective Equipment) Ac....
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....supplied is also considered as a form of operating ships or aircraft (para 5 MC COMM. Article 8, See m.No. 5). On the other hand leasing a ship on bareboat charter basis is not considered such a form of operation. Income from such a bareboat charter is, as a rule, treated as business income and thus falls under the Article 7 (MC. COMM. Para 5 supra m. No.5); to the extent that DTCs in accordance with the OECD MC valid prior to version 1922 and with the UN MC include 'income from leasing of industrial equipment' in Article 12(2) the earnings from bareboat charters are royalties." 16. In view of the above we hold that article 12 of DTAA with Cyprus relates to equipment and ship is an equipment. The hire charges thus partakes the character of royalty for use of equipment under the provisions of section 9(1)(vi) of the Act/Article 12.3 of the DTAA. 17. It was alleged before us that the transaction in question was for the purchase of the ship on the basis of BBCD and as such the receipt was not exigible to tax. The assessee conceded before the Commissioner (Appeals) that in the statement of facts the payment was wrongly shown to be hire charges. The assessee acquired the s....
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....e Reserve Bank of India directly getting the payment terms of BBCD approved and seek clearance from foreign exchange angle. To this end the shipping companies need not come to Government for further approval. The Ministry of Finance, Department of Economic Affairs issued necessary guidelines for financing of acquisition of ships under BBCD method to the RBI vide their D.O. letter No. 10(14)/92-CCEI, dated 19-10-1992 deciding that: (i) such proposals should have tenure of five years or longer, (ii) the technical condition of the vessel identified and the price reasonableness shall be certified by the Director General (Shipping), (iii) the interest rate margin on the rental payments shall be verified by the Directorate of Shipping and (iv) the rental agreement shall come into force after it is taken on record by the RBI. 20. The Chartering Wing of the Ministry issued orders on 12-8-1992 conveying the decision of the Government that the vessels so acquired under the method of acquisition by the Shipping Companies involving demise clause at the end of the lease/charter period would be treated at par with Indian vessels for the purpose of transportation of Government controlled cargo....
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....Charterers' shall mean the Bareboat charterers and shall not be construed to mean a time charterer or a voyage charterer. 2. Delivery- (iii) Time for delivery (not applicable to new building vessels) (iv) Cancelling (not applicable to new building vessels) (v) Trading Limits. The vessel shall be employed in lawful trades for the carriage of suitable lawful merchandise within the trading limits indicated in Box 19. The charterers undertake not to employ the vessel or suffer the vessel to be employed otherwise than in conformity with the terms of the instruments of insurance (including any warranties expressed or implied therein) without first obtaining the consent to such employment of the insurers and complying with such requirements as to extra premium or otherwise as the insurers may prescribe, if required, the charterers shall keep the owners and the mortgagees advised of the intended employment of the vessel. (vi) Inspection: The owners shall have the right at any time to inspect or survey the vessel or instruct a duly authorized surveyor to carry out such survey on their behalf to ascertain the conditi....
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....ted and legalized, together with a certificate setting out the registered encumbrances. 4.8 This contract was entered into by the appellant on 14-5-1999 with DMCL. In the addendum 1 to the BBCD agreement in 'Barecon 89' dated 14-5-1999 the hire charges payable quarterly for 69 months was specified as below: The purchase option (cost) of the said vessel at the end of each period was also specified as follows: 24. It transpires from the perusal of the aforesaid agreement that the assessee was not the owner of the vessel until the last month's hire instalment was paid to DMCL in exchange of which it would execute a bill of sale in favour of the assessee. It was also clear that the purchase option of the vessel would vary depending on the date on which such an option was exercised by the assessee. That is to say that if the assessee decided to opt for purchase in December, 1999, it would be liable to pay the cost of US $ 7.25 million. And likewise if it chose to exercise the option in December, 2004, it would be so liable to US $ 2.75 million. Thus it is clear that the ownership remained with DMCL till the assessee opted to make the bal....
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....e 8. Shipping and air transport.- (1) Profits derived by an enterprise registered and having the headquarters (i.e., effective management) in a Contracting State from the operation by that enterprise of ships or aircraft in international traffic should be taxable only in that State. (2) For the purposes of this Article profits from the operation of ships or aircraft in international traffic shall mean profits derived by an enterprise described in paragraph 1 from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft including:- (a) the sale of tickets for such transportation on behalf of other enterprises. (b) other activity directly connected with such transportation, and (c) the rental of ships or aircraft incidental to any activity directly connected with such transportation. (3) Profits of an enterprise of a Contracting State described in paragraph 1 from the use, maintenance, or rental of containers (including trailers, barges, and related equipment for the transport of containers) used in connection with the operation of ships or ....
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....venue authorities noted that the assessee regularly maintained books of account for all the relevant years treating it as revenue expenditure. Subsequently, after the commencement of proceedings under section 201 claiming hire charges as capital expenditure does appear as an afterthought on the part of the assessee. It was obligatory on the part of the assessee to purchase the vessel at the end of charter period only. Hence the hire charges paid till the date of exercise of option or at the end of the period would not be capitalized. Since there was an option on the part of the assessee to buy the vessel, the option was not exercised, and in that eventuality the payments to be treated as hire charges. These payments were treated as revenue expenditure. Keeping an option to buy alone would not be sufficient enough to characterize the hire charges as sale consideration. 31. In the case of Transmission Corporation of A.P. Ltd. v. CIT [1999] 239 ITR 587, the Hon'ble Supreme Court has held that the scheme of sub-sections (1), (2) and (3) of section 195 and section 197 leaves no doubt that the expression 'any other sum chargeable under the provisions of this Act' would mea....
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....ecipient, such as payments to contractors and sub-contractors under section 194C and payment of insurance commission under section 194D. The provisions of section 195(2) make the intention of the Legislature very clear that what is required to be considered for the purpose of tax deduction at source under section 195(1) is not the wholly income or profit. In that view of the matter it cannot be contended that where the sum paid to any person is not wholly chargeable under the provisions of the Act, then the application of section 195 is ousted. Section 195 takes within its sweep any sums paid to a non-resident which do not wholly represent income or profits chargeable under the Act but a portion of which only so represents. The Hon'ble Supreme Court took this view in the case of Transmission Corporation of A.P. Ltd. The Hon'ble Calcutta High Court considered and interpreted a similar provision under section 18(3B) of the Indian Income-tax Act, 1922 in the case of P.C. Roy & Co. (India) (P.) Ltd v. A.C Mukherjee, ITO [1959] 36 ITR 365 (Cal.) and held at page 377: "If 'chargeable under the provisions of this Act' means actually liable to be assessed to tax, in other w....