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2013 (10) TMI 936
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....nd 2006-07 respectively. The assessment years under consideration in T.C.(A)Nos.56 to 64 of 2013 are 2002-03, 2003-04, 2004-05, 2006-07, 2002-03, 2003-04, 2004-05, 2005-06 and 2006-07 respectively. 2. This Court admitted the above Tax Case (Appeals) on the following substantial questions of law: T.C.(A)Nos.2206 to 2208 of 2006: "1. Whether on the facts and circumstances of the case, the Tribunal was right in holding that the payment made for taking ship on time chartered basis would constitute "royalty" as defined under Section 9(1)(vi)(b) of the Income Tax Act and tax has to be deducted at source accordingly? 2. Whether on the facts and circumstances of the case, the Tribunal was right in not holding that as per the terms of "time charter of ships", the charterer merely acquires a right for performance of services by the ship owner for carriage of goods and is not for the use of ships pure and simple? 3. Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee cannot decide whether to deduct tax at source or not on the basis of bonafide belief that the amounts are not chargeable to Indian Income Tax? and 4. Whether t....
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....se, the Income Tax Appellate Tribunal was right in remitting the matter back to the assessing officer for fresh consideration and initiate proceedings either under Section 163 or under Section 201, after disposal of matters in subjudice before the Hon'ble High Court (in TCA Nos.2464 & 2465 of 2006)?" T.C.(A)Nos.598 to 601 of 2013: "1. Whether on the facts and the circumstances of the case and in law the Tribunal was right in holding that assessee is liable to deduct tax u/s.195 in respect of Charter Hire Charges paid to Foreign Shipping Companies after holding that the assessee cannot be treated as a representative assessee u/s.163 of the Act and the payment of Charter Hire charges would not constitute Royalty in terms of Section 9(1)(vi) of the Act ? 2. Whether on the facts and the circumstances of the case and in law the Tribunal was right in directing the assessing officer to initiate proceedings against assessee either u/s.201 or u/s.195 of the Act in the light of Judgment of the Hon'ble Bombay High Court in the case of Premier Tyres Ltd (134 ITR 17) ? 3. Whether on the facts and the circumstances of the case and in law the Tribunal having held that assessee cannot ....
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.... and contended that the charges paid to the foreign companies for hiring the ship would not come within the definition of 'royalty' and the use of the ship would not amount to use of equipment. In any event, the charges paid could only be treated as one for rendering of services, assessable as profits and gains in business, falling under Article 8 of the DTAA. Even herein, the charges though income in the hands of the recipient, is not taxable in India, there being no business connection and permanent establishment of the shipping companies in India. 6. The Assessing Officer rejected this contention in respect of the assessment years under consideration and passed orders under Section 201(1) and 201(1A) of the Income Tax Act. Aggrieved by this, the assessee preferred appeals before the Commissioner of Income Tax (Appeals) in respect of all the above assessment years. 7. The assessee contended that payments made under time charter would not constitute 'royalty' under the Income Tax Act as well as under DTAA, since the payment was for delivery of standard services, which the owner of the ship provided through their Officers, crew and ship. Reiterating their contention that ship....
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....ble to income from operation of ships in international traffic. Even assuming for a moment that the amount paid would not come under royalty and are to be treated as business income, yet, income arising in India could be taxable in India. The Commissioner of Income Tax (Appeals) pointed out that as per the existing agreement between Ennore Port and TNEB, two berths in Ennore Port are under lease to TNEB exclusively for ships chartered by the assessee. The facilities, i.e., place of berth is guaranteed for the foreign ships in coastal waters chartered by the assessee; such facility would tantamount to permanent establishment for the foreign company. The Commissioner of Income Tax (Appeals) also referred to the period of operation available, as furnished by the assessee, that it was evident that some ships had been put to use for more than 180 days and in some cases, more than 90 days continuously in Indian waters. Going by the above facts and referring to the OECD commentary on Article 8 of the DTAA, the Commissioner of Income Tax (Appeals) held that payments made would not come under the purview of Article 8 of the DTAA. Thus, the Commissioner of Income Tax (Appeals) upheld the ord....
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....Aggrieved by this, the assessee has filed the above Tax case (Appeals). Thus, T.C.(A)Nos.2206 to 2208 of 2006 relate to the levy of interest and penalty for non-deduction of tax at source under Section 201 and 201(1A) of the Income Tax Act. 11. In respect of the very same assessee for the very same assessment years, the Assessing Officer proceeded to make assessment, treating the assessee herein as a representative assessee, it being an agent of the foreign shipping companies under Section 163 of the Income Tax Act. These are the subject matters of appeals before this Court in T.C.(A)Nos.56 to 64 of 2013. For the assessment year 2002-03, in the proceedings initiated under Section 147 of the Income Tax Act, the Assessing Officer pointed out that the foreign companies had not filed the return of income and paid tax on the amounts received on hire charges treated as 'royalty'. Thus, treating the assessee as an agent of the foreign shipping company as per Section 163(2) of the Income Tax Act, assessment was made on the income, namely, hire charges, at the hands of the assessee as per Section 160(1)(i) of the Income Tax Act. 12. Referring to the definition of 'business connection'....
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....eals) confirmed the view of the Assessing Officer and thereby dismissed the appeals. The assessee preferred further appeals before the Income Tax Appellate Tribunal. We find from the order of the Tribunal that applying the decision of this Court reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.,), the Tribunal held that the hire charges paid by the assessee to the foreign shipping companies was for providing services for transportation of coal from one Port to another on hire basis; hence payment did not partake the character of royalty. The payment was made for the use of the ship by its owner in rendering services to the assessee. Hence, the payment could not constitute 'royalty' for the use of industrial, commercial, scientific equipment. Thus, Section 9(1)(vi) of the Income Tax Act was not attracted. Although the assessee could not be treated as a representative assessee under Section 160 of the Income Tax Act, it was however liable to deduct tax on the payments made to the shipping companies as per the provisions under Section 195 of the Income Tax Act. Non-compliance of provisions of Section 195 resulted in initiation of proceedings under Section 201 o....
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.... to M/s.Dolphin Maritime Co. Limited, an associate enterprise in Cyprus towards hire charges, payable under bare boat charter-cum-demise for the use of the ship by name, Gem of Paradip. The Assessing Officer held that hire payments by the assessee therein was 'royalty' for the use of equipment, namely, ship, without deducting TDS under Section 195 of the Income Tax Act. The Assessing Officer pointed out that according to the agreement, the assessee could exercise its option to purchase the ship at the end of each year. However, the assessee had not done so. Hence, the payment made for each of the assessment years, namely, 1999-2000 to 2004-2005 was to be taken as for hire, taxable under Article 12 of the DTAA. According to him, as the ship was put to use on the coastal line between Ports in India by the hirer, namely, Poompuhar Shipping Corporation, Article 8 of DTAA would not be of any application. Thus the Assessing Officer rejected the case of the assessee that bare boat charter-cum-demise was a purchase transaction. 18. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) went through the agr....
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....s on the policy of the Government for BBCD method of acquiring ships stated that the payment made towards hire charges should be treated as part of the sale consideration. Considering the above, the payment made was in the nature of hire charges for the use of the ship as long as the option to buy the ship, remained with the charterer. He also referred to UN model convention and commentaries and thus rejected the assessee's arguments. The first Appellate Authority rejected the plea of the assessee based on Article 8 of the DTAA and ultimately held that payments made to the non-resident Indian was for hire charges, which would be covered by Article 12 of the DTAA, it being royalty payment. As to the meaning of the expression 'equipment' appearing in Explanation 2(iva) to Section 9(1)(vi) of the Income Tax Act, he referred to the dictionary meaning as well as to the book by Klaus Vogel on Double Taxation Convention and ultimately rejected the assessee's appeal. On further appeal before the Tribunal, it confirmed the view of the first Appellate Authority, thereby dismissed the appeals. Hence the present appeals by the assessee relating to the assessment years 2002-03 and 2003-04 in T.....
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....v) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. Thus, in a time charter, there being no hiring of the ship in the sense in which the said term 'hire' is understood, Clause (iva) must receive the understanding that similar provision contained in OECD model have received, which was the basis for the amendment to insert Explanation 2(iva). Referring to Explanations 4 and 5, he submitted that going by the scope of the Explanation introduced to clear the doubts, it is clear that what is included by reason of the inclusive definition, must have relevance to those equipment having relevance to Clauses (i), (ii), (iii), (iv) and (v) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. While Explanation 2 includes four types of assets, falling under tangible and intangible assets, Explanation 5 uses three types of assets, viz., right, property or information relating to these alone. With the conscious omission of 'equipment' in Explanation 5 and it having relevance to the aspects of possession, control or place with reference to right, property or information, the same has to be understood to mean that what could not be taxed by reason of presence or absence of possess....
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....ed to Article 5 of the OECD model and the meaning of 'permanent establishment' as given in various DTAAs and submitted that the berths in the Port belong to the Chennai Port and this was allotted to TNEB for unloading of coal; thus limited to usage by TNEB, the view of the Authorities as though the berth was the permanent establishment, is totally incorrect and against the definition of 'permanent establishment'. In the absence of any control and exclusive possession and use and as the fixed place as in the case of an owner or a lessee, the non-resident having no such right over the space or the berth, the Revenue cannot treat it as a permanent establishment, even to assess the business income. Thus, even applying the source concept, the income being not assessable as 'income' under the Income Tax Act or 'royalty' under Clause (iva), the Revenue has no jurisdiction to assess this income under the provisions of the Income Tax Act. In any event, except Hong Kong, all other charter agreements are covered by DTAA; hence, the various clauses in the DTAA have relevance in the matter of considering the case of the assessee. 22. Continuing the said arguments further, Mr.P.S.Raman, learn....
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....ship. Thus, whenever Parliament intended that the expression is to cover more than the common parlance meaning, it gave expansive meaning. In the absence of any such definition, the safe guide is to go by a common parlance test alone. 24. Pointing out that there is a clear distinction between plant and machinery and ships, he sought to rely on the depreciation table given in the Rules on depreciation showing separate distinct treatment to plant and machinery and to ships as separate class by themselves. Although, certain provisions like Section 43(3), 44BB as well as Section 32A of the Income Tax Act define 'plant' to include ship, yet, in the absence of any meaning given to the expression 'equipment' or any indication in the Section that the term has to be read in an expansive way, the term 'equipment', as referred to in clause (iva), must be read in the context of the other entries in the Explanation. Thus, for the purpose of royalty, use or right to use of an equipment must be in relation to Clauses (i) to (iv) and (v) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act; hence, only a restricted meaning should be given. Thus, having contended that 'equipment' would not....
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..... Referring to the arguments of the learned senior counsel appearing for the assessee that Section 9(1)(vi) has to be interpreted in terms of OECD model and to the Circular reported in 252 ITR (ST) 65 at 75 and the DTAA, he pointed out that originally, the definition 'royalty' under DTAA under the Act did not cover the case of use or right to use scientific, commercial and industrial equipment. To remove this anomaly alone, amendment was brought in by the insertion of Clause (iva) under Finance Act, 2001 with effect from 01.04.2002. Referring to Section 90(2) of the Income Tax Act, he pointed out that the moment the income sourced to a non-resident is identified, then the assessment of the same has to be seen in the light of the provisions of the Income Tax Act as well as DTAA provisions. In the background of Section 90(2) of the Act, for the purpose of the applicability of the Act and the DTAA, the country of source of income and the residence of the recipient assumes great significance and to the extent beneficial to the assessee, the provisions of the Act would apply. Referring to Article 23A of OECD, he pointed out that when the contingency of taxation of income in two countrie....
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.... the amendment under OECD model and not being a party to OECD, there is no compulsion too to follow suit. Thus the unamended provision alone would be of relevance for the purpose of understanding the issue before the Court. 30. Learned Standing Counsel appearing for the Revenue further drew our attention to the Clause in the Australian DTAA, that in the application of the agreement by the Contracting State, any term not defined in the agreement shall have the meaning which it has under the laws of that State from time to time in force, relating to the taxes to which the agreement applied. Referring to the authoritative text by Klaus Vogel on the right to use of industrial, commercial and scientific equipment, he submitted that wherever the term 'equipment' is used, payment is treated as 'royalty' only. Thus, there is no difference between the treaty treatment on royalty and the Act on royalty. 31. Answering the submissions made by Mr.P.S.Raman, learned senior counsel appearing for the assessee in T.C.(A)Nos.2629 and 2630 of 2006, learned Standing Counsel appearing for the Revenue submitted that Explanation 2(iva) excluded specific cases falling under Section 44BB of the Incom....
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....o include a ship having relevance to Sections 28 to 41 of the Income Tax Act, he submitted that it is totally unsafe to go by the treatment under one Section relating to one purpose to understand the scope of the treatment given in other provisions. His submission, therefore, is, ship is an 'equipment' within the meaning of Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. 34. On the submission of the assessee that 'equipment' in Clause (iva) has relevance to those covered under Clauses (i) to (iv) and (v) and hence, they have relevance only to special equipment, learned standing counsel referred to the decision reported in 320 ITR 290 (Wavefield Inseis Asa, In re) and submitted that it is not necessary that specialised ships in oil exploration alone are covered under Section 44BB of the Income Tax Act and as per this decision, even a chase Vessel relating to seismic survey and data acquisition are inextricably linked to prospecting operations covered under second part of Section 44BB(1) of the Income Tax Act. He submitted that for the purpose of treating receipts for use or right to use an equipment, it is not necessary that it be restricted to specialise....
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.... Nadu V. Essar Shipping Ltd.,) has no relevance to the case on hand. In the circumstances, the Tribunal committed a serious error in following this decision in respect of the appeals filed by the assessee, which has given rise to the Revenue filing T.C.(A) Nos.56 to 64 of 2013. 37. Referring to the decisions reported in (1990) 77 STC 182 (Rashtriya Ispat Nigam Ltd. V. Commercial Tax Officer, Company Circle, Visakhapatnam) affirmed in 126 ITR 114; (1999) 113 ITR 317 (Aggarwal Brothers V. State of Haryana and another) and [2000] 119 STC 182 (20th Century Finance Corporation Ltd. v. State of Maharashtra), he submitted that the distinction between 'transfer of right to use' and 'use' for the purposes of sales tax enactments thus being clearly spelt out in the above decisions, Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act being transfer of use or right to use, where custody is sufficient, one cannot view the provisions in a narrow manner and in any event, going by the terms of agreement, the receipts for the use of the ship are covered by the expression 'royalty'. 38. Referring to the decisions reported in (1978) 113 ITR 307 (Union of India V. Gosalia Shi....
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....any information, irrespective of possession or control, whether or not being with the payer or used directly by the payer or the location in India, are covered under Explanation 5; in other words, what is implicit in Clause (iva) of Explanation 2 is now made explicit through Explanation 5. Thus, payment for providing a facility without a transfer of right to use, would also fall for consideration under 'royalty'. He further pointed out that the Articles on royalty in the DTAAs are no different from what is given under Clause (iva) and the Explanation does not override the DTAA provisions on royalty; consequently, there is no conflict between DTAA and Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. 40. Referring to the decisions reported in (1999) 113 ITR 317 (Aggarwal Brothers V. State of Haryana and another) and (1990) 77 STC 182 (Rashtriya Ispat Nigam Ltd. V. Commercial Tax Officer, Company Circle, Visakhapatnam), he submitted that the right to use of an equipment need not always be followed by a transfer of the equipment and for a transfer of use or right to use; Clause (iva) in Explanation 2 never looked upon on a transfer of possession or control. T....
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....ent under Section 163 of the Income Tax Act in respect of the income of a non-resident specified in sub-section (1) of Section 9. Referring to Section 163(1)(c) on the definition of 'agent' in relation to non-resident as any person in India from or through whom the non-resident is in receipt of any income, whether directly or indirectly, learned standing counsel submitted that if the income does not fit in with Section 9(1)(vi), then the applicability of Section 9(1)(i) becomes relevant. According to the assessee, the receipt is business income and for determining the status of the assessee under Section 163, it is enough to show that the receipts fall under any of the Clauses under Section 9 of the Income Tax Act. 43. As far as the assessee is concerned, business connection exists in India and as per Explanation 2 to sub clause (i), 'business connection' includes any activity carried on through a person acting on behalf of a non-resident. Explanation 2 thus includes certain transactions with effect from 1.4.2004. The expression 'business connection', has been explained in the decision reported in (1965) 56 ITR 20 (Commissioner of Income Tax V. R.D.Aggarwal & Co.) and this decis....
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....t, there need not be a specific geographical location as a fixed place of business. Given the nature of business requiring movement between two points, specific geographical point, as a fixed one, cannot be insisted upon. In any event, Port being a fixed place where the ship is docked, the operation of the ship between two ends is necessitated by the business exigencies and that, by itself, would not negate the concept of permanent establishment as far as the non-resident is concerned. This is so in the context of the nature of business, which requires moving. Thus, if the assessee's contention is to be accepted that the activity is only in the nature of service, hence, would not fall under 'royalty', the receipts being 'business income', with the business connection and place of permanent establishment thus shown to exist, the receipts are assessable in the source territory. Article 5 being common in all the treaties, the data furnished by the assessee in any event negate the claim of the assessee that it had no permanent establishment. Thus the concept of permanent establishment is treaty specific and is common to all the treaties. 45. He further pointed out that Article 12(4)....
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....nd were not towards deferred consideration. 48. As to the objection of the assessee that when the assessee had time charter with several foreign non-resident ship owners, one assessment order passed covering all the recipients in a representative capacity, is illegal, learned standing counsel submitted that this, at best, could only be viewed as a technical violation and this cannot, however, introduce any illegality in the assessment. Thus, learned standing counsel submitted that the case of the assessee would fall for consideration under Explanation 2(iva) of Section 9(1)(vi), as 'royalty' and 'equipment' would include ship. The time charter agreement being one for the use of the ship, the payments made thus would come under 'royalty' and the obligation being there on the assessee to deduct tax, failure to do so would attract penal action. This would be so even in the case of BBCD. In the alternative, if the assessee's contention that it is not royalty but it is a business income is to be accepted, he fairly submitted that the question as regards permanent establishment not being considered by any of the Authorities, which, it is argued, that the matter may be remanded for con....
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....shment in India, learned standing counsel submitted that if this Court is to accept the plea of the assessee that the income is not taxable as 'royalty' but income in the 'nature of service', even then a question arises as to whether the income arises out of the business connection through the permanent establishment. Therefore, the assessee is bound to deduct tax. 51. Mr.T.Ravi Kumar, learned standing counsel appearing for the Revenue in T.C.(A)Nos.2629 and 2630 of 2006, took us through the order of the Income Tax Officer as well as the Commissioner of Income Tax (Appeals) and pointed out that as far as the bare boat charter is concerned, initially, the assessee had gone for a bare boat charter agreement alone. He further pointed out that the assessee had subsequently addressed a letter in October, 1999, seeking permission to purchase a Vessel in terms of the agreement entered into between the assessee herein and M/s.Dolphin Maritime Co. Ltd., Cyprus. In terms of the agreement, there was an addendum entered into on 14th May, 1999, giving the hire charges payable quarterly for 69 months for the purchase option at the end of each period at a price to be paid by the assessee. The ....
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....elow committed serious error in thinking that the assessee did not exercise its option for purchase. Going by the terms of the agreement dated 14.5.1999, it was clear that the payment structure as is given in the addendum itself would show that what was agreed to between the parties was deferred payment on the consideration. Referring from the text by Klaus Vogel, particularly Pages 788 and 789, he submitted that ship not being an equipment to fall for consideration under Article 12 and there being no permanent establishment, BBCD would clearly show that it is concerned more about the sale of the Vessel; consequently, Article 8(6) would be of relevance. Touching on the terms of the said agreement that no right is reserved on the Cyprus company to retrieve the Vessel except in stated circumstances, BBCD has to be seen as one for sale of the Vessel. In the hire purchase agreement the option to purchase being predominant, the question of treating the deferred consideration as 'royalty' did not arise. He pointed out that for Article 8(6), the test of international traffic has no relevance. In any event, even taking the view that till the exercise of option to purchase the use or right ....
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....ther Article relevant would be Article 7. 55. Touching on Article 7 of the DTAA, Mr.Arvind P.Datar submitted that the profits on the operation of Ship under time charter under Article 7 would arise only if and when there existed a permanent establishment. Countering the claim of the Revenue that a Port could be a permanent establishment, he submitted that before the Commissioner of Income Tax (Appeals) and the Tribunal, the Revenue took a plea that berth was permanent establishment. The arguments now taken by the Revenue before this Court were never raised before the Authorities below. 56. Leaving aside this technicality, he referred to the definition of 'permanent establishment' under Article 5, to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. Referring to sub-Article (2) which is an inclusive definition, he submitted that barring clause (j) therein, all other enumerated places relate to immovable property. Referring to Sub-Article (3), which deems a permanent establishment, he pointed out that under sub-clause (c), where a permanent establishment provides services including managerial services and those mentioned ....
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....e or exchange of the property'. Consequently, this Court held that capital gains was income arising from the use of the assets attracting Article 6. Extending the reasoning, learned senior counsel appearing for the assessee submitted that the decisions of this Court reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.,) that a time charter does not amount to right to use a ship or use of ship and it is contract for services, would squarely govern the case on hand. Learned Senior Counsel, however, pointed out that even though the Revenue had not argued their case on permanent establishment before the Tribunal in the manner in which it is now done before this court and raised an issue thereon, this Court itself may consider the question, it being a question of law on the facts narrated. 58. Heard Mr. Arvind P.Datar, learned senior counsel appearing for the assessee in T.C.(A)Nos.2206 to 2208 of 2006 and 598 to 601 of 2013; Mr.P.S.Raman, learned senior counsel appearing for the assessee in T.C.(A)No.2629 and 2630 of 2006; Mr. T. Ravikumar, learned standing counsel appearing for the Revenue in T.C.(A)Nos.2629 and 2630 of 2006 and Mr.N.V.Balaji, learned standing ....
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....ommercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v)the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or (vi)the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). ........ Explanation 4. For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5. For the removal of doubts, it is hereby clarified that the royalty includes and has always included conside....
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.... through whom the non-resident is in receipt of any income, whether directly or indirectly; or (d) who is the trustee of the non-resident; ......... Explanation. For the purposes of this sub-section, the expression "business connection" shall have the meaning assigned to it in Explanation 2 to clause (i) of sub-section (1) of section 9 of this Act. (2) No person shall be treated as the agent of a non-resident unless he has had an opportunity of being heard by the Assessing Officer as to his liability to be treated as such. SECTION 195: 195.(1)Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that in the case of interest payable by the Government or a pub....
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.... or other sum without deducting tax thereon under sub-section (1). (4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation. (5) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith. (6) The person referred to in sub-section (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board. (7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable u....
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....y so much of them as is attributable to : (a)that permanent establishment; or (b)sales within that other Contracting State of goods or merchandise of the same or a similar kind as those sold, or other business activities of the same or a similar kind as those carried on, through that permanent establishment. ARTICLE VIII- Ships and aircraft - 1.Profits from the operation of ships or aircraft, including interest on funds connected with that operation, derived by a resident of one of the Contracting States shall be taxable only in that State." ARTICLE XII- Royalties - 1.Royalties arising in one of the Contracting States, being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. .... 3.The term royalties in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for : (a)the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right; (b)the use of, or the right to use, any industrial, commercial or scientific e....
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.... place and the capacity of the ship. The charter agreement further shows that the charterers have the liberty to sub-let the vessel for all or any part of the time covered by the charter, but the charterers remained responsible for the fulfilment of the charter party. Clause 4 further states that the charterers shall pay for the use and hire of the vessel at the rate of US Dollars per day commencing from the day of delivery and dropping lust outward sea, pilot station at safe port etc. The agreement further shows that the whole reach of the Vessel's hold, docks and usual places of loading shall be at the charterer's disposal and the Vessels are to work day and night. The Captain shall be under the direction of the charterer as regards the employment and agency. In some of the agreements, there is also a reference to the agents of the owners, as for instance, in the charter agreement, with SETAFSAGET EXPLOITATION, Clause 53 gives the name and address of the Owners' agents, which reads as follows: "Clause 53 Agents Name and address of Owners' agents at Charterer's ports of call: Haldia South India Corporation Agencies LTD. Paradip J.M.Baxi + Co. Vizag J.M.Baxi + Co. ....
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.... goods, they received nothing on account of the carriage of goods. Referring to the various authors' view on time charter party, the Apex Court pointed out that it being distinguishable from charter by demise and voyage charter, time charter is essentially the one for the use and hire of the ship. The amount payable is irrespective of what use the ship is to be put to by the time charterers. Thus, no part of the amount could be said as one paid on account of the carriage of goods. 65. In fact, in the decision reported in (2012) 47 VST 209 (Mad) (State of Tamil Nadu V. Essar Shipping Limited), to which one of us was a party (Chitra Venkataraman,J), this Court had an occasion to consider the taxability on the consideration paid under the time charter agreement in the context of Section 3A of the Tamil Nadu General Sales Tax Act. This Court pointed out that in a time charter, there is no transfer of effective control of the Vessel. This Court also referred to the Statements by Scrutton on "Charter-Parties" that in a time charter, the charterer has no interest in the ship and the ship owner has to do the agreed work with the use of his Vessel. Not being demise of the ship, but a con....
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....e charging provision under Section 3A of the Tamil Nadu General Sales Tax Act. Section 3A, introduced consequent on the 46th amendment, seeks to levy tax on the transfer of right to use in goods. The Section reads as follows: "Section 3-A. Levy of tax on right to use any goods (1) Notwithstanding anything contained in sub-sections (2-A), (2-B), (3), (4), (7) and (8) of Section 3, of section 7-A but subject to the other provisions of this Act including the provisions of sub-section (1) of section 3, every dealer referred to in item (viii) of clause (g) of section 2 shall pay, for each year, a tax on his taxable turnover relating to the business of transfer of the right to use any goods for any purpose at the rates mentioned in sub-section (20 of section 3 or as the case may be, in section 4." 68. The phrase "use or right to use goods" came up for consideration before the Supreme Court in the decisions reported in (1990) 77 STC 182 (AP) (Rashtirya Ispat Nigam Ltd. V. Commercial Tax Officer, Company Circle, Visakhapatnam) (affirmed in the decision reported in (2002) 126 STC 114); (1999) 113 ITR 317 (Aggarwal Brothers V. State of Haryana and another) and [2000] 119 STC 182 (20th ....
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....welfth Edition at page 424) Section 148 of the Contract Act defines "bailment" in the following terms : "148. 'Bailment', 'bailor' and 'bailee' defined. - A 'bailment' is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the 'bailor'. The person to whom they are delivered is called the 'bailee'." 6. Thus in bailment there is transfer of goods for a particular period and thereafter the goods have to be returned to the person delivering them. One of the categories of bailment is hire of chattel. In Halsbury's Laws of England (Fourth Edition) at paragraph 1551 it is defined as follows : "It is a contract by which the hirer obtains to use the chattel hired in return for the payment to the owner of the price of the hiring." 70. Thus, the High Court Pointed out "it is this category of bailment of goods that is the tax base under section 5-E of the Act. The taxable event under section 5-E is the transfer of the right to use any goods. What does this phrase conn....
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....ed to be sale. Where the transfer of a right to use is for consideration, the requirement of law is satisfied and is deemed to be a sale. The Supreme Court rejected the contention of the assessee and held that, to come under the expression of right to use goods to be a deemed sale, the transaction need not be like a lease. When the assessee transferred the shuttering for consideration to builders for use in the construction of buildings, there can be no doubt that the requirement of a deemed sale was satisfied. 74. In the decision reported in (2000) 119 STC 182 (SC) (20th Century Finance Corporation Ltd. V. State of Maharashtra), the Apex Court pointed out that the definition given under Article 366(29A) in the second limb provided that transfer, delivery or supply of any goods referred to in first limb in Clauses (a) to (f) shall be deemed to be a sale of those goods by the person making the transfer, delivery, or supply and the purchase of those goods by the person to whom such transfer, delivery or supply is made. It further observed with reference to Clause (d), namely, the tax on the transfer of the right to use any goods for any purpose (whether or not for a specified peri....
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....ation of bailment made by Holt C.J. in Coggs v. Bernard 1703 (92) ER 107 into six categories of which the third is relevant on the facts in the case of the appellant. Here the equipment, on being received from the manufacturer/supplier, is left with the hirer for being used for hire. The material extract of that book reads thus: And there are six sorts of bailments.... The third sort is, when goods are left with the bailee to be used by him for hire; this is called location et conduction, and the lender is called locator and the borrower conductor. 71. Be that as it may, what is the contractual nature of the transaction specified in Sub-clause (d) of Clause (29A)? Whether it is a specie of bailment or not? These questions should not detain us because we are concerned here not with the contractual nature of the transaction but with the substance and content of Sub-clause (d). Suffice it to mention that the Parliament itself has not named the transaction and for purposes of the present discussion relating to tax on the transaction of the nature in Sub- clause (d) of Clause (29A), brought into the fold of deemed sale, it is not necessary to give a nomen juris to it. It may, howe....
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....s the custody and has the right for economic exploitation of the ship on payment of charges, we do not find the decision under the Sales Tax Act having relevance to the case on hand. As pointed out in the Supreme Court decision reported in (1978) 113 ITR 307 (Union of India V. Gosalia Shipping Pvt. Ltd.), the charter, though does not have the possession, yet, has the right to give direction to the course that the ship will take, to determine the voyage. Thus even though the ship never leaves the owner, the amount paid by the charterer for the use of the ship by its custody has to be seen in the context of the expression 'use or right to use' as appearing under Clause (iva). In the decision reported in (2005) 145 STC 91 (SC) (Bharat Sanchar Nigam Ltd. V. Union of India), the Supreme Court pointed out to the decision reported in [2000] 119 STC 182 (20th Century Finance Corporation Ltd. v. State of Maharashtra) and observed as follows: "77. But in the case of Aggarwal Brothers v. State of Haryana (1999) 9 SCC 182 when the assessee had hired shuttering to favour of contractors to use it in the course of construction of buildings it was found that possession of the shuttering materia....
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....the assessee, submitted that world over, payment for time charter is never recognised as 'royalty', for, use or right to use must necessarily take within its fold, possession and control. Going by the well understood meaning given to a time charter, particularly to the terms used therein on hire, delivery and re-delivery, the consideration paid could only be taken as one for taking the services of the Vessel for transport of coal. Thus, he supports by further contending that ship is not an equipment; consequently, there is no question of use or right to use. 80. Placing reliance on the decision reported in (1978) 113 ITR 307 (Union of India V. Gosalia Shipping Pvt. Ltd.) as well as (1942) 2KB 65 : (1942) 1 All ER 503 (Sea and Land Securities, Limited V. William Dickinson and Company, Limited), he submitted that the decision as to the employment rested only with the Master, although the decision as to the navigation rested with the charterer. 81. Dealing with the time charter in the decision reported in (1978) 113 ITR 307 (Union of India V. Gosalia Shipping Pvt. Ltd.), the Supreme Court pointed out that it is a case of use of the ship for consideration and it is not one of aff....
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.... the payment is not in consideration 'for the use of, or the right to use' that property and cannot, therefore, represent a royalty. It further pointed out to the changes brought to the model convention that the expression 'for the use of, or right to use' industrial, commercial or scientific equipment was subsequently deleted by using the expression 'for the use of, or right to use' industrial, commercial and scientific experience. It was observed that given the nature of income from leasing of industrial, commercial, scientific equipment including the leasing of containers, the Committee on Fiscal Affairs decided to exclude the income from such leasing from the definition of 'royalty' and to consequently remove it from the application of Article 12, in order to make sure that it would fall under the Rules for the taxation of business profits, as defined in Articles 5 and 7. The decision and the background of the decision leading to the removal of the equipment to be replaced by experience in OECD model, cannot be pressed into service, to contend that the payment under time charter cannot come under the definition of 'royalty'. As already pointed out, the payment herein is for 'us....
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....long as the assessee is given the right to its usage (with a right to put it into beneficial use for itself or to keep it idle, the right to sublet) and the lessee has access to the use of the Vessel to its advantage economically, we have no hesitation in holding that the expression 'use or right to use' cannot be read in a narrow campus, to hold that the consideration paid for would not be 'royalty'. 86. On the expression 'use or right to use' industrial, commercial and scientific equipment, the Australian Ruling in TR92/197/1, TR2003/2 dated 14.05.2003 pointed out that the term 'industrial, commercial and scientific equipment' is not defined in the DTAAs or in the OECD model. In paragraph Nos.85 and 86, it observed "the term 'ICS equipment' is also not defined in Austrialia's DTAs or in the OECD Model. However, there are sufficient indications in the text and context of Australia's DTAs as well as the OECD Model and Commentary to suggest that 'ICS equipment' has a broad meaning and includes ships, aircraft, drilling rigs, apparatus, machinery, containers, motor cars, wax figures and so on. The Report on the leasing of ICS equipment, at paragraph 5, states that 'in the field of....
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....ontracting State may be taxed in that other State. ....... 3.The term royalties as used in this Article means : (a)payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and (b)payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. 90. Thus, while some of the DTAAs include payment for use of or right to use of industrial, commercial and scientific experience as a heading under royalty, invari....
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.... do not find any good reason to read the expression in a narrow manner . 94. Mr.Arvind P.Datar, learned senior counsel appearing for the assessee submitted that there is no provision in the Act wherein plant and machinery is defined to include ship. He relied on the decision reported in 237 ITR 174 (SC) (CIT V. Venkateswara Hatcheries (P) Ltd.) that one cannot understand the expression "equipment" with the help of a dictionary meaning. In common parlance, "equipment" is not understood to include a ship; hence, even assuming that the payment is for use of or right to use, yet, ship not being an equipment, the consideration could not be treated so. He pointed out to the specific exclusion of the amounts referred to in Section 44BB from Explanation 2 to Section 9(1)(vi) of the Income Tax Act. 95. As far as the resort to dictionary meaning of a term, in the absence of definition thereof is concerned, in the decision reported in 1985 TLR 2948 (SC) = AIR 1985 SC 1293, 1985 SCR (3) 26 (State Of Orissa & Other vs The Tltaghur Paper Mills Company), the Supreme Court held that where the term is statutorily defined or judicially interpreted, the Court may not look at the dictionary mean....
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....f the property due to wear and tear and obsolescence and such several factors that ultimately lead to the "retrieval" of the property. Depreciation is granted in respect of such assets as are used in the business and is calculated on the Written Down Value. Ship, as a capital asset, is also granted depreciation at such rate as are prescribed under the Rules. The Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 introduced a new scheme of granting depreciation in respect of block of assets in the place of earlier system of depreciation on industrial assets. The expression of block of assets is defined in Section 2(11) of the Income Tax Act as group of assets, falling within a class of assets comprising tangible assets, being buildings, machinery, plant or furniture etc. Block of asset, as a concept, under which a group of assets falling within the block, are given the same rate of depreciation. The significant effect of this is stated to be that a sale of an asset comprised in the block may get matched by acquisition of a new asset, so that the need for ascertaining the terminal profits or loss would not arise and the re-rolling benefit as between capital assets, enti....
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....n to be given "in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed and (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed." Explanation 3 gives the meaning of 'assets'. Thus, going by the above and the definition under Section 43(3), the fact that in the depreciation table, ship is given a different percentage or treated as a different block of asset separate from rest of the plant, does not mean that 'ship' is not a 'plant'. We have sufficient instances under the table giving different depreciation rates to 'building' as 'plant' depending on the user. This would only show that classification for different rate of depreciation is a matter of administrative decision within the framework of those falling within the meaning of "asset", which term includes plant and machinery, and it is totally unsafe for one to understand the width of the meaning of 'plant' from the depreciation table and this is more so in the context of the definition under Section 43(3) also. 100. Thus, even going by the as....
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....ich the section is dealing, would attribute to it. The word "plant" is to be given a "very wide" meaning. In its ordinary sense, it includes whatever "apparatus" is used by a businessman for carrying on his business but it does not include his stock-in-trade which he buys or makes for sale. It, however, includes all goods and chattels, fixed or movable, live or dead which the tradesman keeps for permanent employment in his business. (2) But the building or the "setting" in which the business is carried on cannot be plant. (3) The thing need not be part of the machine used in the manufacturing process but could be merely an apparatus used in carrying on the business but having a "degree of durability". (4) Merely because the asset has a passive function in the carrying on of the business, it cannot be said that it is not plant. It may have a passive operation and if it has, it is prima facie a plant unless there was good reason to exclude it from that category. It must be a "tool in the trade" of the businessman. (6) Gross materiality or tangibility is not necessary and, in fact, intangible things like ideas and designs contained in a book could be "plant". They fall under the categ....
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....r's liability under Employer's Liability (Defective Equipment) Act, 1969 imposing vicarious liability on the employer for a defective article. On the death of an employee of a oil-bulk ore carrier owned or operated by a company, by name Bibby Tankers Ltd., the dependants of the deceased laid their claim for compensation. The ship sank due to a typhoon off the coast of Japan. The ship broke in half causing her to capsize with no opportunity for those on board to escape or send distress messages. On the allegation that the company failed to take proper steps to ensure that the ship was constructed in accordance with the Lloyd's Rule in force in 1976 when the vessel was in the course of construction and that by reasons of the provisions of the Employer's liability (Defective Equipment) Act, 1969, the manufacturers were liable for the negligence and hence liable to pay compensation. The question that arose therein was as to whether ship was an equipment?. Section 1(3) defined "equipment" as including plant, machinery and vehicle. It was observed that the expression "equipment" was enacted to extend the natural meaning of the term equipment to refer to ship as plant and machinery. Befor....
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....ny source outside India alone is excluded in 9(1)(vi) of the Income Tax Act. In other words, royalty payable by a resident in India to a non-resident in respect of any right, property or information used or services utilised for the purposes of business or profession carried on by him in India would satisfy the definition of 'royalty'. Explanation (2) defines what royalty is. Clause (iva) of Explanation 2 states that consideration paid for use or right to use any industrial, commercial, scientific equipment but not including the amounts referred to in Section 44BB would be royalty. Thus, one has to note that the royalty payment is among other things relates to use or right to use any industrial, commercial or scientific equipment for the purposes of business or profession carried on by the resident herein and the said royalty is payable to a non-resident foreign enterprise. It is no doubt true that Clause (iva) refers use or right to use of any industrial, commercial and scientific equipment and not plant and machinery, nevertheless we may point out that the key word in the Clause herein is the use or right to use any industrial, commercial or scientific equipment. Thus, read in th....
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....referred to Entry 43 List I, namely, Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations but not including co-operative societies and Entry 32 List II, namely, Incorporation, regulation and winding up of corporations, other than those specified in List I and universities incorporated trading, literature, scientific, religious and other societies and associations; co-operative societies and held "the very mention of co-operative societies both in Entry 43 of List I and Entry 32 of List II along with other corporations give an indication that the Constitution makers were of the view that co-operative societies were of the same genus as other corporations and all were corporations. In fact, the very express exclusion of co-operative societies from Entry 43 of List I is indicative of the view that but for such exclusion, co-operative societies would be comprehended within the meaning of expression "corporations". 109. Applying the said decision to the issue on hand, that the express exclusion of Section 44BB of the Income Tax Act is restricted only to those specified therein, learned standing counsel appearing of ....
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....ce to Clauses (i) to (iv) and (v) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. In the Act, there is enough material to show 'ship' as different from general 'plant and machinery or equipment'. Internationally, 'ship', under time charter, is not taken as an 'equipment'. In common parlance, equipment is known as something related to industry in manufacture and production; commerce in trade and commerce and scientific relating to research. Thus, equipment that is talked about relates to those having relevance and reference to the preceding Clauses alone. 111. We do not agree with this reasoning. The income earned characterised as 'royalty' is defined under Explanation to Section 9(1)(vi) of the Income Tax Act. Royalty is defined in Explanation 2 to Section 9(1)(vi) of the Income Tax Act as consideration for (i) transfer of all or any rights including the granting of a licence in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) th....
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....necessity of reading a limitation on the word equipment; consequently, we reject the arguments of the assessee. We may point out herein that admittedly, the recipient business is to give on hire the ships. Thus ship being a plant, an equipment with which the ship owner operates the business and commercially exploits for earning the income from chartering of ship, rightly, the Revenue assessed this as 'royalty'. 114. This takes us to the second part of the argument on Clause (iva), viz., impact of Explanation 5 of the Act. Learned standing counsel appearing for the Revenue submitted that by the insertion of Explanations 4 and 5, Parliament has not sought to create a fresh charge. The Explanation merely clarifies what is implicit in Clause (iva). Thus, irrespective of Explanation 5, the case of the assessee would certainly fall under Clause (iva). Placing reliance on the decision reported in (2001) 1 ALL ER 403(2001) All ER 403 (Whistler International Limited V. Kawasaki Kisen Kaisha Limited), he submitted that the charterer agrees to pay hire for the Vessel, because he wants to make use of it. Referring to Section 68(105) (zzzzj) of the Income Tax Act levying service tax, he said....
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....roperty; the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB and the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films, the payment would be considered as 'royalty'. As rightly pointed out by the Revenue, as far as the use or right to use is concerned, even going by the OECD commentary, even with the possession of the ship with the owner, the right to use being part of bundle of rights that the owner has and this parted with for a consideration, the Revenue need not take the assistance of Explanation 5 to substantiate its case. With the Explanation, the case of the Revenue becomes more firm on the issue of 'royalty'. 118. Referring to BC Mitra in his Law of Carriage by Sea in....
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....hat what is otherwise includible under equipment, used for industrial, commercial and scientific equipments alone stands excluded. The Explanation has brought in clarity and made it more explicit to the law already in existence. The payment towards the employment of the vessel is clearly in the nature of 'royalty'. The use or right to use the ship for a consideration means and relates to the economic aspect of the equipment as a business asset, and the exploitation of the earning potential of the Vessel. Hence, we have no hesitation in holding that the consideration paid under the time charter fits in with the definition of 'royalty' under Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. 120. As far as BBCD is concerned, Section 115V(b) defines Bare boat charter-cum-demise to mean a bareboat charter where the ownership of the ship is intended to be transferred after a specified period to the company to whom it has been chartered. 121. As far as the present case on BBCD is concerned, parties agreed for payment for hire of the ship and the agreement reserved the right of the assessee to purchase the ship at the end of the contract period or even prior to....
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....ipment or not, considering the view that we have already taken on this, we reject the contention of the assessee in T.C.(A)Nos.2629 and 2630 of 2006. 123. This takes us to the next contention raised, particularly by Mr.P.S.Raman, learned senior counsel appearing for the assessee in T.C.(A)Nos.2629 and 2630 of 2006 questioning the liability under Article 12 of the DTAA. Learned senior counsel submitted that if at all the receipt could be taxed, it could only be under Article 8 and not under Article 12. Mr.Arvind P.Datar, learned senior counsel appearing for the assessee in T.C.(A)Nos.2206 to 2208 of 2006, however, admitted that the case would not fall under Article 8 of the DTAA. Mr.P.S.Raman, learned senior counsel appearing for the assessee submitted Article 3(h) of the DTAA with the Government of Republic of Cyprus defines "international traffic" to mean any transport by a ship or aircraft operated by an enterprise registered and having its place of effective management in a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State. According to Article 8(2) of the DTAA, profits from the operation of ship engaged in in....
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....does not permit the other State to tax the profits of either voyage. The other State is allowed to tax such an enterprise of the first-mentioned State only where the operations are confined solely to places in that other State." 126. The further example gives on what is international traffic is also worth a reference. It reads as follows: "A cruise beginning and ending in that other State without a stop in a foreign port does not constitute a transport of passengers in international traffic. Contracting States wishing to expressly clarify that point in their conventions may agree bilaterally to amend the definition accordingly." 127. As far as the present case is concerned, the assessee had a BBCD with the Cyprus company whose effective management is in Cyprus, a Country with whom India has DTAA. The definition given in DTAA on 'international traffic' under Article 3(h) and in Article 8 on shipping and air transport shows that income arising from the operation in international traffic are the same as in the OECD model. 128. Thus, going by the commentary and the definition on international traffic and the BBCD, the movement being on the coastal lines of the Indian shore,....
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....r Article 5 of the DTAA, and hence, would fall for consideration under Article 7 in India. 132. What is business connection is considered in the decision of the Supreme Court reported in (1965) 56 ITR 20 (Commissioner of Income Tax V. R.D.Aggarwal & Co.). The Supreme Court pointed out that while business is defined in the Act, there is no definition of the expression 'business connection'. According to the Supreme Court "the expression 'business connection' undoubtedly means something more than business. A business connection in section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the nonresident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the nonresident through an agent, or it may merely be a relatio....
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....ered by it. As such, the non-resident company has no domain over or exclusive use over it. With berthing in different places, he submitted that there is no such thing as permanent establishment. He submitted that if the Court feels that the receipt is not royalty, then the matter has to be remitted for considering this for deciding the question of allocable profits. 135. Before going into the various aspects of the contentions, we may note that the payments could be taxed as business profits only if the receipts are attributable to the permanent establishment Sub-article (4) of Article 7 states that no profits shall be attributed to that permanent establishment by reason of a mere purchase by that permanent establishment of goods or merchandise for the enterprise. As for bringing a receipt under Article 12 as royalty is concerned, it is the converse of Article 7 in the sense that the profits earned by the foreign enterprise is not attributed to the presence of the permanent establishment. Hence the question as to whether the receipt is to be brought under Article 7 or 12 depends on the attributing of the profits to the permanent establishment. 136. As already seen, the Vessel....
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....belonging to the enterprise solely for the purpose of storage, display or delivery; c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; f) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. " 137. From the commentary on OECD under Article 5, we find a good deal of discussion with examples given to explain when and where the permanent establishment could be found. Since both sides placed heavy reliance on this, we may note some of the relevant passages therein. In paragraph 4 of the commentary under Article 5, it is stated that permanent establishment c....
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....ime. It is sometimes difficult to determine whether this is the case.....Further more, the activity need not be permanent in the sense that there is no interruption of operation, but operations must be carried out on a regular basis.... Where tangible property such as facilities, industrial, commercial or scientific (ICS) equipment, buildings, or intangible property such as patents, procedures and similar property, are let or leased to third parties through a fixed place of business maintained by an enterprise of a Contracting State in the other State, this activity will, in general, render the place of business a permanent establishment". 139. Thus for permanent establishment, there must be a place for the business to be carried on through that fixed place. The concept of permanent establishment assumes significance in the context of the determination of the rights of the Contracting State to tax the profits of an undertaking of the other Contracting state. In the context of the various business activities, in the case of equipment, a fixed place can be found to exist even though the equipment by the nature of business may be relocated from one site to another for a single cust....
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....the Contracting States and to carry on business through the permanent establishment, if it furnishes services and those mentioned in Article 12(3)(h) to (k) but not those services in respect of which payments are treated as royalties as defined in Article 12. The substance of the Article 12(4) is that so long as the consideration received by the foreign enterprise does not arise out of the permanent establishment, in the sense of effectively connected or attributed to such permanent establishment, the receipts would be treated as 'royalty'. However, when the receipts paid or credited or effectively connected with such permanent establishment, provisions of Article 7 or Article 14 would be of relevance. Thus, the only difference between Article 7 and 12 is the effective connection between the amount paid and the permanent establishment. 142. From the discussions that we have had in the preceding paragraphs, even though the berth is a permanent establishment of the foreign enterprise, yet, the royalties paid or credited not being effectively connected with or attributed to such permanent establishment, the payment would fall for consideration only under Article 12 and not under Ar....
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....made to a non-resident. It observed as follows: "The scheme of tax deduction at source applies not only to the amount paid which wholly bears "income" character such as salaries, dividends, interest of securities etc., but also to gross sums, the whole of which may not be income or profits of the recipient, such as payments to contractors and sub-contractors and the payment of insurance commission. The purpose of Sub-section (1) of Section 195 is to see that the sum which is chargeable under Section 4 of the Act for levy and collection of income-tax, the payee should deduct income tax thereon at the rates in force, if the amount is to be paid to a nonresident. The said provision is for tentative deduction of income-tax thereon subject to regular assessment and by the deduction of income-tax, rights of the parties are not, in any manner, adversely affected. Further, the rights of payee or recipient are fully safeguarded under Sections 195(2), 195(3) and 197. Only thing which is required to be done by them is to file an application for determination by the Assessing Officer that such sum would not be chargeable to tax in the case of recipient, or for determination of appropriate p....