TaxTMI 
TaxTMI 
2015 (3) TMI 93
X X X X Extracts X X X X
X X X X Extracts X X X X
....eals) ['CIT(A)'] has erred in confirming the action of the learned Deputy Director of Income-tax (International Taxation) - 4(1) ('DDlT') in denying the benefit of Article 22 of the Double Taxation Avoidance Agreement between India and Switzerland ('Tax Treaty') and holding the appellant liable to tax in India under the provisions of section 44B of the Income-tax Act, 1961 ('IT Act') with respect to its shipping income. 1a. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned DDlT in holding that the exchange of letters between the Central Board of Direct Taxes ('CBDT') and the Swiss Federal Tax Administration does not constitute a mutual agreement as contemplated by Article 25(3) of the Tax Treaty. 1b. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not appropriately taking into consideration the subsequent clarification dated May 27, 2005 issued by the CBDT regarding applicability of Article 22 of the Tax Treaty to shipping profits. 1c. On the facts and in the circumstances of the case and in law, the learned CIT(A) has....
X X X X Extracts X X X X
X X X X Extracts X X X X
....owed in A.Y. 2004-05 also. Explaining the facts, he submitted that the assessee company in incorporated in Switzerland and is engaged in the business of operation of ship in International Seas. Up to the A.Y. 2001-02, the assessee was assessed u/s 44B of the Income-tax Act. After the amendment of India-Swiss DTAA, w.e.f. A.Y. 2002-03, the assessee had started showing its shipping income in India at 'Nil'. This was on account of amendment in Article 22 which allocates the taxing rights to the country of residence in respect of certain kinds of income where are not hitherto dealt in the treaty. Since India-Swiss DTAA does not have a shipping article, therefore, Article 22 will apply and no shipping income can be held to be taxable in India. In the A.Y. 2002-03, the assessing officer accepted that shipping income is covered by Article 22 and therefore, it is not taxable in India. However, from A.Y. 2003-04 on words, the assessing officer held that the shipping income would be taxable in India u/s 44B. He also pointed out that Article 7 of the treaty specifically excludes profits from the operation of the ships in international traffic from the business profit of the enterprise of cont....
X X X X Extracts X X X X
X X X X Extracts X X X X
....P. Ltd . The learned CIT(Appeals) agreed with the AO to the effect that the assessee company was having a PE in India during the year under consideration. He, however, held that the taxability of the profits of the assessee company from operation of ships in international traffic is governed by Article 22 of Indo-Swiss treaty and although the assessee was having a PE in India, the right or property in respect of which the income was paid i.e, ships not being effectively connected with such PE, profits from operation of ships in international traffic is taxable only in Switzerland as per paragraph 1 of Article 22 of Indo-Swiss treaty. The first and foremost issue that is to be considered and decided thus is whether the taxability of profits from operation of ships in international traffic of the assessee company is governed by Article,22 of the Indo-Swiss treaty or not. 32. The learned Special Counsel for Revenue Sbri G.C. Srivastava, has contended the profits from shipping and air transport are specifically dealt with under Article 8 of model convention according to which profits of an enterprice of a contracting State from the operation of ships or aircraft in international traff....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g State i.e. Switzerland which are not dealt with in the foregoing Articles of the Indo-Swiss treaty shall be taxable only in that State. In the present case, the assessee company being a resident of Switzerland, the income, wherever arising would fall within the scope of the residuary Article 22 if the same is not dealt with in any other Articles of the treaty. The question, therefore, is whether the shipping profits are dealt with in any 'Other articles of the Indo-Swiss treaty or not. The contention raised by Shri Srivastava on behalf of the Revenue is that by agreeing to exclude the shipping profits from Article 8 as well as Article 7 of the Indo-Swiss treaty, India and Switzerland had agreed to leave the shipping profits to be taxed by each State according to its domestic law and this undisputed position prevailing upto 2001 did not change as a result of introduction of Article 22 of the treaty with effect from 01-04-2001. We are unable to agree with this contention of Shri Srivastava. In our opinion, as a result of introduction of Article 22, the items of income not dealt with in the other articles of the Indo-Swiss treaty are covered in the residuary Article 22 and their....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icle upto 01-04-2001 dealing with such income. However, as a result of introduction of the residuary Article 22 with effect from 01-04-2001, the items of income not dealt with by any other article are specifically covered in that article and since the taxability of such other income is now governed by Article 22, the same has to be dealt with reference to the said article. This conclusion gets support from the opinion of Mr. Philip Bekar dated 25th June, 2003 filed by the assessee wherein he has opined that Article 7 cannot be regarded as having dealt with international shipping profit and such profits would be covered within the perview of Article 22 of the Indo- Swiss treaty. 35. In support of his action in bringing to tax the profits from shipping to tax in India as per domestic law the AO has relied upon the letter dated 14th February, 2005 issued the Joint Secretary. However, as rightly contended by the learned counsel for the assessee, the said letter has been impliedly superseded by another letter dated 27th May, 2005 issued subsequently wherein reference was made to two letters written earlier dated 29th October, 2003 and 18th December, 2003 accepting that the taxability o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....view that since the services rendered by the merchant bankers did not "make available" any technical knowledge etc. to Mahindra & Mahindra Ltd., such technical services would travel from Article 7 to Article 13. The Special Bench, however, took note of Article 7(9) of the DTAA between India and United Kingdom which provided that "where profits include items of income which are dealt with separately in other articles of this convention, then the provisions of those articles shall not be affected by the provisions of this article" and held in view of the said article that technical services would have to go back to article 7 for determination of whether India can tax fees from such technical services. The stand of the Revenue that exclusion of an item of income from an article means that such item has been "dealt with" thus was not accepted by the Special Bench of ITAT by implication in the case of Mahindra & Mahindra. 37. As already observed, the expression "dealt with" used in Article 22 have to be read in the context of purpose of double tax avoidance agreement which is allocation of taxing jurisdiction. From this angle, an item of income can be regarded as "dealt with" by an art....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e also unable to agree with the contention of Shri Srivastava that if the stand of the assessee for international shipping profits are not taxable in India but are taxable in Switzerland after the introduction of Article 22 in the Indo-Swiss treaty with effect from 01-04-2001 is to. be accepted, the amendment with effect from 1st April, 2012 whereby such income is included in Article 8 thereby giving the State of residence the sole right to tax the same would render a futile exercise, because as a result of the said amendment made in the year 2012, the international shipping profits shall be taxable in the State of residence irrespective of whether the resident has a PE in the ether State or net and whether the rights or property are effectively connected with such PE or not which was not the position earlier prior to 2012 even after insertion of Article 22. 40. Shri Srivastava has relied on the commentary of Professor Klaus Vogal wherein while explaining the scope of Article 22, the learned Commentator has stated that the said article does net apply to the items of income classifiable as business profits within the meaning of Article 7. It is, however, to be noted that the intern....
X X X X Extracts X X X X
X X X X Extracts X X X X
....een India anti Libya which has no clause prescribing the tax treatment for capital gains nor any residuary clause such as other income clause. The capital gains earned by a resident of Libya in India thus is taxable in India if exigible as per the domestic laws in view of the absence of a more beneficial clause in the relevant treaty. This position can be further understood by reference to DTAA between India and Malaysia which has no clause prescribing a tax treatment for capital gains but has a residuary clause i.e. other income clause in Article 22 which prescribes distributive rules with respect to items of income for which no rules have been prescribed in the earlier articles of the agreement. The taxability of capital gains earned by a resident-of Malaysia in India thus will 'be 'governed by the distributive rules contained in Article 22 if they are more beneficial to the assessee than the relevant provisions contained in the Indian Income-tax Act. These examples will further support and substantiate the view that international shipping profits were being taxed in India under the domestic law up to assessment year 2001-02 not because of the exclusion contained in Artic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by the AO and in the assessment completed u/s 143(3) vide an order dated 09-03-2004 for assessment year 2002-03 , he held that with the introduction of new Article 22 in the treaty, the income of the assessee from profits from shipping operation in international traffic were taxable only in the State of residence i.e. Switzerland and not in India. 43. There is no dispute that the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to assessment year 2002-03 wherein the claim of the assessee was accepted by the AO. In the year under consideration, he, however, has taken a different view relying on the letter dated 14th February, 2005 issued by the Joint Secretary. As pointed out by the learned counsel for the assessee, the said letter has been superseded by another letter issued on 2ih May, 2005 wherein the Joint Secretary has made a reference to the letters exchange~ the competent authority of India and that of Switzerland dated 29th October, 2003 and 18th December, 2003. Copies of the said letters are placed on record. The first letter dated 29th October, 2003 was sent by Professor Dr. R. Waldburger, Vice Director, Divisio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....herein, or performs in the other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." Accordingly, any income derived by a resident of one of the Contracting states not specifically dealt with in any of the other Articles of our agreement falls under Article 22. According to paragraph 1 of Article 22 such income is taxable only' in the country of residence, unless the beneficial owner carries on business in the other Contracting State through a permanent establishment and the right or property in respect of such income is effectively connected with such permanent establishment (paragraph 2 of Article 22). Considering these provisions, we are of the opinion, that income derived by a resident of Switzerland from India out of operation of ships in international traffic, shall fall under Article 22. Further, it is our understanding that such income would be liable to tax only in Switzerland unless the beneficial owner carries on busine....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ax laws of the said country." (emphasis supplied in bold letters). As is clearly evident, it was agreed by the Indian Competent Authority that profit from operation of ships in International traffic is not. governed specifically by any of the articles of the treaty and that Article 22 of the DTAA dealing with other income would fall to be applicable in respect of such income. The AO, however, relied on the letter dated 14th February, 2005 written by Joint Secretary (FT & TR) to DGIT, International Taxation clarifying that India has not accepted that income from operations of ships in international traffic accruing to a resident of Switzerland will not be taxable in India in view of applicability of Article 22 of Indo-Swiss treaty and such income will be taxable only in accordance with the domestic law of the State. As pointed out by the learned counsel for the assessee, another letter dated 27th May, 2005 thereafter was written by Joint Secretary (FT & TR) to the DGIT, International Taxation enclosing the letters dated 10th December, 2003 and 18th December, 2003 issued in the matter for necessary action. As already noted by us, letter dated 18th December, 2003 was written by the J....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... covered by Article 22. 46. In the case of CIT vs. Arun Dua 186 ITR 494, it was held by the Hon'ble Calcutta High Court at page 496 of the report that if an agreement between two parties has been understood in a certain way and has been acted upon by them, it would not be open to the Tax Officer to give another interpretation to the agreement. In the present context, the Indo-Swiss treaty especially the scope of Article 22 thereof was understood in a certain was as expressed and clarified in the letter dated 29th October, 2003 issued by the Competent Authority by letter dated 18th December, 2003 agreeing that there being no other article of the treaty dealing with profits derived from shipping operations in international traffic, the taxability thereof was governed by Article 22. We are of the view that the revenue authorities in India therefore are not justified to take a different view by assigning different interpretation to the relevant clauses of the treaty than the one understood by both the parties to the said agreement. 47. In support of the Revenue's case on the issue under consideration, Shri Srivastava has heavily relied on the decision of Authority for Advance....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ught to its notice. 48. In the case of ADIT (International Taxation) vs. Green Emirate Shipping & Travels 100 ITD 203 (Mum.), reliance was placed on behalf of the Revenue on the ruling given by the Authority for Advance Ruling in the case of Abdul Razak A. Meman 276 ITR 306 which was directly applicable to the issue under consideration. 'The Tribunal, however, declined to treat it as a covered matter relying on the decision of Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) wherein it was held that the ruling given by the Authority for Advance Ruling is not even binding on the Commissioner of Income Tax and authorities sub-ordinate thereto in any case except in the case of the very assessee in which such a ruling was given and that too ill respect of transaction in respect of which such ruling was given. It was held by the Tribunal that whatever be the respect and deference judicial authorities indeed have for the rulings given by the authority the Authority for Advance Ruling not being a part of judicial hierarchy cannot lay down a binding precedence. It was held that the ruling given by the Hon'ble Authority for Advance Ruling, therefore, has no precede....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eral Conditions:- 2.01 The agreement covers all ports in the Region and/or inland agency work within the Region nominated in clause 11 and covers the following duties:- * Sales and Marketing * Bookings * Documentation * Equipment Control * Equipment Control * Inland Transportation * Operations cost control * Vessel Operations/Husbandry * Disbursements * Systems/IT 2.02 The Agents undertake not to accept the representation in the Region of any other Principals for the service in direct competition or with direct conflict of interest with the Principal's activities in section, without written consent, which shall not be unreasonably withheld by the Principals. 3.10 Marketing Sales and Documentation:- 3.11 To provide marketing and sales activities for the services of the Principals in the Region, to canvass for and book cargo, to publicise the services and to maintain contact with Shippers, Consignees, Forwarding Agents, Port and other Authorities and trade organizations. 3.12 To provide statistics and information, and to report on cargo bookings and use of space allocations. To announce sailing and J or arrivals and to quote freight rates and announce freight traff....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e relevant clauses of the agreement between the assessee company and M/s. MSC Agency India Pvt. Ltd. defining the scope and authority of MIs MSC Agency India Pvt. Ltd. and its commitment to work exclusively for the assessee company and not to accept the representation of any other principle for the-same services in the same region without the written consent of the assessee company. 52. The next issue that arises for our consideration in this context is whether the property in respect of which international shipping income was received by the assessee company through shipping business carried on in India through the P .E. situated therein i.e. ships was effectively connected with such permanent establishment. The expression "effectively connected" used in this context in the Article 22(2) of the Indo-Swiss treaty is not defined either in the said treaty or even in the domestic law i.e. Incometax Act. The said term, therefore, has to be understood using the general principles of common law keeping in mind the common uses associated with the phrase. The assessee has filed opinion of Shri Mukul Rohotogi, Additional Solicitor General, Supreme Court of India wherein after referring to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... effectively connected with the permanent establishment in India. They are the assets of the shipping company and have no connection with any agency PE in India save that the PE may clear inbound cargo and book outbound cargo which is carried on those ships. Where the ships are owned or chartered by a non-resident shipping company and the agency PE merely clears inbound cargo and books outbound cargo and carries out similar ancillary functions, the ships are clearly not the assets of the PE nor are they is some other way effectively connected with a permanent establishment. According to him the concept of "effectively connected" can be applied in practical terms where branch accounts are drawn up for the PE based upon the correct accounting principles where the ships are shown as assets of the branch." The aforesaid decision and the conclusion of the Tribunal will apply mutatis mutandis in this year also and therefore, respectfully following the same, we hold that the issues as raised by the assessee in the grounds of appeal are allowed. 4. Now we will take up department's appeal, vide which following grounds have been raised:- "On the facts and in the circumstances of the case ....