TaxTMI 
TaxTMI 
2017 (2) TMI 849
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....ppellant from 101 vessels which sailed out of India. 2. On the facts and in the peculiar circumstances of the case and in law, the Hon'ble CIT (A) erred in making an addition by denying the benefit of the Tax Treaty to the entire freight of Rs. 1106.89 crores earned by the appellant from its India operations by invoking provisions of Article 24 (limitation of relief) of the Tax Treaty. 3. On the facts and in the peculiar circumstances of the case and in law, the Hon'ble CIT(A) erred in holding that the appellant had failed to comply with the condition of remittance prescribed under Article 24 of the Tax Treaty without appreciating that: * adjustment of cross claims and settlement on account of set-off tantamount to an actual/constructive receipt in Singapore * money was ultimately remitted to Singapore as certified by the appellant's bankers 4 On the facts and in the peculiar circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the learned Assessing Officer ('AO') in holding APL India Pvt. Ltd. ('APL India") as an agency permanent establishment ('PE') of the appell....
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....nce basis i.e. entire freight income is taxable in Singapore irrespective of remittance of freight to Singapore. * Rejecting the clarification dated 21 February 2013 issued by the Singapore Revenue Authorities as sufficient evidence in support of the accrual basis of taxation of appellant's income in Singapore under the Singapore tax laws as well as the non-applicability of Article 24 of the Tax Treaty to the appellant. * Wrongly interpreting the provisions of a foreign tax law (i.e. Singapore Income Tax Act and Circulars issued there under) by holding that the freight income cannot be regarded as Singapore sourced income under the provisions of Singapore Income Tax Act and further disregarding the clarification issued by the Singapore Revenue Authorities on the subject. * Holding that the appellant has filed incorrect tax returns in Singapore although these were duly accepted by the Singapore revenue authorities. 9. On the facts and in the peculiar circumstances of the case and in law, the Hon'ble CIT(A) erred in enhancing the assessment under section 251 of the Income-tax Act, 1961 although she had no powers to do so. 10. On th....
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.... of the ship Gross Receipt Rs. Detention Charges Rs. 1 Conti Germany 84,80,169 - 2 Howrah Bridge 3,00,696 85,467 3 Rajiv Gandhi 1,17,967 - 4 SathaBhum 47,04,892 - 5 TS Nagoya 30,41,420 - 6 Ninos 24,66,622 89,607 7 San Isidro 3,01,568 8 IthaBhum 33,36,428 63,896 2,27,49,762 2,38,970 3. The Assessing Officer further held that assessee could not establish that it is operating these 8 ships on its own and it is quite possible that these ships might be operated by third parties. Accordingly, he applied the provisions of Sec. 44B of the Act and taxed the said receipt @ 7.5%. The Assessing Officer further observed that assessee had an exclusive agent in the form of "APL India Pvt. Ltd.", who performed all the work relating to assessee in all the Indian ports where the assessee"s ships arrived. After detailed discussion, he came to the conclusion that "APL India Pvt. Ltd." is dependent agent PE in terms of Article 5 of India-Singapore DTAA. Accordingly, he brought to tax a sum of Rs. 22,98,870/- in the following manner :- Gross receipt....
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.... dealt and discussed the issue. In sum and substance, her relevant findings and key observations are summarized in the following manner:- i) On applicability of Article 24:- * Freight income is earned from export of goods from India, i.e., source of freight income is located in India. The freight income accrues in or is derived from India and it cannot be said to accrue in or derived from Singapore. * Under section 10(1) of the "Singapore Income Tax Act" (SITA), tax is levied on income that accrues in or is derived from Singapore and also on income, that is, received in Singapore from outside Singapore. Freight income from India does not accrue in Singapore so it can be taxed in Singapore only if it is received in/ remitted to Singapore. ii) On nexus between remittance of freight collected in India and finally remitted to Singapore:- * No nexus / direct link between freight collected from India and amount finally remitted to Singapore by group entity. * The freight collected from India is initially merged with freight remittances from other countries in the central bank account of the assessee maintained in New York. * ....
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....not only for Singapore activity but for entire global operations. Charter hire charges are attributable to the global operations of the assessee. * Hence, discharge of debt does not amount to discharge of debt incurred in respect of a trade or business carried on in Singapore. v) On applicability of Article 24 to income covered by Article 8 * The Assessee's contention that Article 24 applies only to incomes which are 'exempt from tax' and not to incomes which are 'taxable only in one state', by making a distinction between the wordings used in Article 24 and Article 8 of the DTAA, is rejected holding that Art.24 applies only to income which accrues outside Singapore and is not remitted to Singapore. * Reliance placed by the assessee on the decision of Mumbai Tribunal in case of Set Satellite Singapore (Pte) Ltd is distinguishable, albeit the Assessee's case is covered by the decision of the Mumbai Tribunal in case of Thoresen Chartering Singapore Pte Ltd. vi) On accrual of (Indian) freight income in Singapore and taxability on accrual basis and not on remittance basis in Singapore, Ld. CIT(A) held that - Freight i....
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....ed from India'. * Singapore has issued a public circular dated 30th May 1998 which was revised on 15th March 2005 and again on 2nd May 2006 on the subject of TRC. At Paras 6-10, the circular explains that TRC will be issued only when assessee has received the amount in Singapore for which Tax Treaty relief is asked for. ix) On tax return filed in Singapore - Freight income claimed as exempt in Singapore, no liability incurred by (wrongly) including freight income in the Singapore tax return:- * From the Singapore Return, it is seen that the entire income has been claimed as exempt and no tax is really payable in Singapore based on the Return. Hence the assessee incurs no liability by wrongly including the freight income from India in the return of Singapore. Similarly, the lRAS cannot tax the shipping income in any event and their acceptance of a Nil return does not establish that income has accrued in Singapore. x) Conclusion on Article 24 - summary:- * The language of Article 24 is categorical and it provides in clear terms that income for which relief is claimed under the DTAA in India has to be received in or remitted to Singapor....
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....ted to Singapore the assessee is neither liable to tax in Singapore nor can he be subjected to tax there. * When a person is not liable to tax and hence cannot be subjected to tax in Singapore the benefit of DTAA has to he denied as per Article. 24. Mistaken inclusion of such income in a return and thereafter exempting the same is of no relevance. * The assessee has relied on the decision of the SC in the case of AzadiBachaoAndolan to submit that DTAA benefit should be extended to it. The said decision is not applicable because it considers Article 4 of India Mauritius DTAA which provides that a person is a resident of a contracting state if he is liable to unlimited taxation his global income there. Since Singapore does not tax overseas income of its residents unless remitted to Singapore, article 4 of India Singapore DTAA is differently worded, and has to read with article 24. In this case DTAA benefit is not being denied because assessee is not considered as a resident of Singapore but rather in terms of article 24 of the DTAA. It was particularly noted by the SC in AzadiBachaoAndolan that there was no Limitation of Benefit provision in India- Mauritius DTAA. ....
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....s taxable on an accrual basis whereas the foreign sourced income is taxable on remittance basis in Singapore. In case where the trade or business is carried on in Singapore, i.e. the place of management is in Singapore then, the income from said trade or business is treated as accruing in or derived from Singapore. Here, the assessee is carrying on business in Singapore and is also effectively managed from Singapore,therefore, under the domestic law of Singapore the entire freight income earned by assessee from its global shipping operations is treated as accrued in Singapore and is taxable irrespective of its remittance. In support of his contention, he drew our specific attention to income-tax returns filed by assessee in Singapore for the relevant year to show that the entire freight income from shipping business has been declared and shown in the income-tax return. Thereafter, he drew our specific attention to the Certificate/Confirmation given by "Inland Revenue Authority of Singapore" (IRAS) which is appearing at page 106 of the Paper Book, wherein it has been categorically confirmed that Article 24 of DTAA does not apply to freight income earned by the assessee. The said cla....
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....ourt in the case of UOI vs. AzadiBachaoAndolan, 263 ITR 706(SC) and Hon'ble Madras High Court in the case of CIT vs. Lakshmi Textile Exporters Ltd., 245 ITR 521 (Mad), that certificate issued by Tax Authorities of the foreign state is binding. 9. Without prejudice to the aforesaid arguments that the conditions specified in Article 24 are not fulfilled, Mr.Pardiwalla submitted that, since the freight collected from Indian operations are ultimately remitted to Singapore, the condition of remittance of freight collected to Singapore as provided in Article 24 stands satisfied. He explained that the freight income arising from assessee"s shipping operations is first collected in bank account centrally maintained in New York (Citibank account), which is done purely for commercial and administrative reasons due to time difference between New York and Singapore and once the funds are deposited, various debts and liabilities are discharged and the balance amount is remitted to Singapore bank account. Thus, the condition of remittance to Singapore stands settled. 10. On the other hand, the ld. CIT-DR, Ms. Vandana Sagar after referring to the various observations and findings given ....
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....". Thus, after referring to the various documents and literature she summarised her arguments that Singapore follows a quasi-territorial basis of taxation whereby only income earned in or derived from Singapore is taxed in Singapore.The income earned from sources outside Singapore is not subject to Singapore tax till such time that the income is received/remitted in Singapore. Thus, the observations and conclusion of CIT(A) are in accordance with the correct interpretation of Article 24 and also the Singapore tax laws. 11. We have heard the rival submissions, perused the relevant findings given in the impugned order as well as the material referred to before us. Before we dwell upon the issue as to whether the limitation clause as appearing in Article 24 of India-Singapore DTAA is applicable to the facts of present case or not, it would be relevant to peruse the relevant Article itself, which for the sake of ready reference is reproduced hereunder :- "Article 24: Limitation of relief - 1. Where this Agreement provides (with or without other conditions) that income from sources in a Contracting State shall be exempt from tax, or taxed at a reduced rate in that C....
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....x by reference to the amount thereof which is remitted to or received in the resident state and not by reference to the full amount thereof. If both the conditions are satisfied, then only the exemption is allowed or the reduced rate of tax is levied on the amount so remitted. The key phrases which need to be borne in mind while understanding Article 24 is "under the laws in force in other contracting state" (Singapore). Here, in this case, the income of assessee-company from shipping operations is not taxable on remittance basis under the laws of Singapore, albeit is liable to be taxed in-principle on accrual basis by virtue of the fact that this income under the income tax laws of Singapore is regarded as "accruing in or derived from Singapore". The shipping income from overseas is not treated as foreign income because it is accrued in and derived from Singapore. From the plain reading of Sec. 10(1) of Singapore Income Tax Act it can be inferred that firstly, the tax is on income accruing in or derived from Singapore and it is completely irrelevant whether the income is received in Singapore or not and; secondly, where the income is accrued or is derived from outside Singapore, t....
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....regard, the physical flow of funds is not relevant and Article 24(1), which seeks to limit relief under the DTA where the relevant income is subject to tax in Singapore on a remittance basis, would not be applicable to the freight income from Indian operations. 6. We hope that this is sufficient to address your query. If you require any further clarifications, please do not hesitate to contact us. Yours faithfully LAU KIAT PENG (MS) SENIOR TAX OFFICER CORPORATE TAX DIVISION for COMPTROLLER OF INCOME TAX" [Emphasis added is ours] From the aforesaid Certificate/Confirmation given by IRAS, it is ostensibly clear that the freight income derived by the assessee- company from the Indian operations was accrued in or derived from business carried on in Singapore. As such, it is regarded as Singapore sourced income and assessed to tax in Singapore on accrual basis and not on remittance basis. In light of this Certificate, there cannot remain any iota of doubt that the freight income derived by assessee-company from Indian operations in terms of Singapore Income Tax Act is to be reckoned as accrued in or derived from business carried in Singapore and not some ki....
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....ed, it was certified that the income in question derived by ST Shipping would be considered as income accruing in or derived from the business carried on in Singapore and such income therefore, would be assessable in Singapore on accrual basis. It was elaborated that the full amount of income would be assessable to tax in Singapore not by reference to the amount remitted to or received in Singapore. In fact, the certifying authority went on to opine that in view of such facts, Article 24.1 of the DTAA would not be applicable and consequently, Article 8 would apply. 18. To this later opinion of the Revenue authority of Singapore, we may not be fully guided since it falls within the realm of interpretation of the relevant clauses of DTAA. However, in absence of any rebuttal material produced by the Revenue, we would certainly be guided by the factual declaration made by the said authority in the said certificate and this declaration is that the income would be charged at Singapore considering it as an income accruing or derived from business carried on in Singapore. In other words, the full income would be assessable to tax on the basis of accrual and not on the basis of rem....
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.... such a situation, the treaty protection will be restricted to the amount which is taxed in that other contracting state. In simple words, the benefit of treaty protection is restricted to the amount of income which is eventually subject matter of taxation in the source country. This is all the more relevant for the reason that in a situation in which territorial method of taxation is followed by a tax jurisdiction and the taxability for income from activities carried out outside the home jurisdiction is restricted to the income repatriated to such tax jurisdiction, as in the case of Singapore, the treaty protection must remain confined to the amount which is actually subjected to tax. Any other approach could result in a situation in which an income, which is not subject matter of taxation in the residence jurisdiction, will anyway be available for treaty protection in the source country. It is in this background that the scope of LOB provision in Article 24 needs to be appreciated." 20. Under the circumstances,in our opinion, Assessing Officer and the Commissioner committed serious error in passing the impugned orders. Before closing, we may briefly touch on one more asp....
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....le 24 would not be applicable. Here, in this case also, the Hon"ble Court has heavily relied upon the confirmation letter/Certificate issued by IRAS which confirmed the taxability of global shipping income in Singapore on accrual basis. Their Lordships have also referred to the Rajkot Bench of the Tribunal in the case of Alabra Shipping Pte Ltd., (supra), which also lays down the same proposition. Thus, the conclusion and finding of ld. CIT (A) stands negated by these decisions and same is rejected. Further in light of the Hon"ble High Court judgment, the reliance on the decision in DIT (IT) vs. Thoresen Chartering Singapore (Pte.) Ltd. (supra) as heavily relied upon by ld. CIT (A) and Ld CIT DR, no longer holds good. 12. There is another angle to interpret Article 24, which is that, the said Article purports to exclude tax exemption in India if the income is not remitted or received in Singapore for taxation purpose on the premise that this is a foreign income to Singapore. First of all, it has to be seen whether shipping income is exempt from tax in India and; secondly, whether the shipping income is foreign income to Singapore which would then be taxable upon receipt or remit....
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....As stated in our earlier part of the order, during the relevant previous year assessee had shown freight receipts from shipping in respect of 136 ships and claimed the freight income of these ships as not taxable in India in terms of Article 8 of India-Singapore DTAA. The Assessing Officer held that out of 136 ships, assessee could not produce the Certificates in respect of 8 ships on which he denied the benefit of Article 8 and accordingly, out of the total freight receipt of Rs. 1104.58 crores, the benefit of Article 8 was denied on the freight amount of Rs. 2.29 crores only. The CIT (A) noted that out of 136 ships, 81 ships were under connecting carrier agreement (charter party agreement) and in respect of 16 ships, only Validation Certificates were filed. Thus, 97 ships were not owned, leased or operated by the assessee, which is the condition precedent for availing benefit under Article 8. After reproducing Article 8, she held that the profits derived from transportation by sea should be on the ships owned or leased or chartered by the assessee. The assessee, for earning the income from operation of ships, so as to be eligible under Article 8(4) should be the owner, lessee or ....
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....She further noted that the assessee had explained that in all 211 mother vessels were used to transport the goods from 97 feeder vessels. However, the assessee was able to show that only 60 vessels out of the 211 mother vessels used it to further transport the goods were operated by it. In respect of this freight the assessee is eligible for DTAA benefit in terms of clause (d) of para 4 of Article 8 of the DTAA. Based on her observation, she denied the benefit of Article 8 of on the freight receipts of Rs. 97,29,89,746/- in the following manner :- Sr. No. Name of Agreement/ Vessel name No of ship s Collections (Mother Vessel Documents submitted) Collections (Mother Vessel Documents not submitted) Freight + Detention I Non-Exclusive Connecting Carrier Agreement (Includes 4 ships for which addition made by AO) 81 136,51,47,435 63,93,43,868 200,44,91,303 II Ship Validation Certificate 16 30,84,44,733 33,36,45,878 64,20,90,611 TOTAL 97 167,35,92,168 97,29,89,746 2,64,65,81,914 III No Documents (Addition made by AO) 04 1,36,89,191 ....
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....pect of certain ships by her is that firstly, the entire leg of journey has not been done through a vessel which is owned, leased or chartered by the assessee, i.e., it has been done through feeder vessels and; secondly, in respect of certain ships there was only Joint Service agreement with the feeder vessel, i.e., there was no use of any mother vessel owned by the assessee. She has mainly relied upon the definition of Article 8 as given in India-Singapore DTAA to come to the conclusion that operation of the ships in international traffic should be carried on by the owners or lessees or charterers of the ships. In the case of journey, part or full journey by feeder vessels under slot charter arrangement does not fall within the scope of good carried by the owners, lessee or charterer of ships, therefore, benefit of Article 8 cannot be given and for this proposition she had relied upon certain coordinate bench decisions. Again this aspect of the issue she has inferred from para 4 of Article 8. For the sake of ready reference the relevant provision of Article 8 under India-Singapore DTAA reads as under:- "Article 8: Shipping and air transport 1. Profits derived by ....
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....operation" connotes the fact or condition of functioning or being active i.e., some kind of activity. The operation of ships cannot be understood merely as an operator of ships or a person who operates the ships. The word "operation of ships" has to be understood in a broader sense of carrying out shipping activity. The carrying of shipping activity could be as an owner of a ship or as a lessee of a ship or as a charterer of a ship. Here, the word "owner" has to be inferred as a person who owns a ship and the word "lessee" as a person who owns the ship for a given lease period. The word "charterer" has to be understood as a person who charters or hires a ship for a voyage. The Law Lexicon (P. Ramanatha Ayier, 2ndEdn.), defines the word "charterer" as "one who, by contract acquired the right to use a vessel belonging to another. One who charters or hires or engages the whole or part of a ship under an agreement of Charter Party for a voyage". Here, the word "charterer" does not mean the owner or lessee of a ship. The word "charter Party" has been defined in Law Lexicon as "an indenture of covenants and agreements made between merchants and mariners concerning their sea affairs. It i....
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....hire, as a ship, on contract. vi) Modern legal usage dictionary defines the term "charterer" as under:- "a person to whom a vessel is chartered in a charter party." vii) Oxford dictionary defines the term "charterer" as under:- "A contract to hire an aircraft, ship, etc. for a special purpose." viii) Maritime and Shipping Dictionary 2012, defines the term "charter" as under: "A voyage charter whereby the ship owner agrees to place a certain number of container slots ("TEU and/or FEU) at the charterer's disposal." 24. From the above definitions of the term "charter" or "charterer", one thing is amply clear that it means hiring of vessels or a ship or a part of its space under an agreement for a voyage. Thus, even a part of a space in the vessels for a particular journey is also considered as "charter of ship" or "charterer". In the decision of Balaji Shipping U.K. Ltd. (supra), while referring to the judgment of Tychy (supra), the High Court have noted that a "slot charter" and a "voyage charter" of a part of a ship are in a sense charterers of a space in a ship. 25. From the above discussion, the following infe....
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.... resort to slot hire agreements. This enables them to transport the goods not on behalf of the owner of the vessel which has granted them a slot hire facility, but in their own name on behalf of their clients. The contract of carriage of goods by sea is thus performed by such enterprises on a principal to principal basis with their clients and not as agents of the owners of the ships and/or their clients. The slot hire agreements are therefore, at least indirectly, if not directly, connected and interlinked with and are an integral part of the enterprise's business of operating ships. 25. Without availing slot hire facilities, an enterprise would be unable to carry on its business of operating ships in international traffic at all in many cases. They may well loose much of their business. Even if business expediency is irrelevant to the interpretation of the DTAA, it indicates the close nexus between slot hires and the business of operation of ships in international traffic. If the DTAA is construed to include activities directly or indirectly connected to the operation of ships, it would include slot charters. 26. The second type of case poses some diff....
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....ssee or charterer", however, the interpretation of the word "slot charter" within the ambit of definition of "operation of ships" clearly indicates that even if the journey has been undertaken either partly by feeder vessel under a charter/slot charter arrangement and partly by mother vessel or through and through a charter/ slot charter arrangement, it would still fall within the ambit of "operation of ships" in terms of Article 8. Their Lordships after referring to the English judgment have observed as under:- "12. Before referring to the provisions of the Act and the DTAA, it is necessary to understand the nature of connecting carrier Agreements which provides for the hire of container slot spaces. In Maritime Law (6th Edition) the author Christopher Hill states:- SLOT CHARTER PARTIES This has reference to the carriage of containers, or to use current jargon, TEUs (20 foot equivalent units). The ship owner or operator "rents out" or hires a "piece" of space (a percentage of the total space available on the vessel) for carrying TEUs in return for which he receives hire calculated in accordance with the number of slots (accommodation for each TEU) payabl....
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....ith the contentions of the ld. Senior Counsel that even if the entire leg of journey is undertaken by a shipping company through and through charter arrangement or joint service arrangement, the benefit of Article 8 cannot be denied, because it will still fall within the ambit and scope of "operation of ships" under Article 8 (even under India- Singapore DTAA). 17. So far as the issue of establishing linkage between transportation by feeder vessel and mother vessel of the ship owned or leased by the assessee, as discussed in the decision of MISC Berhad (supra), which has been heavily relied upon by the ld. CIT-DR, we find that in that case the benefit of Article 8 was denied to part of the shipping journey which was carried through feeder vessels under slot charter arrangement with third party despite the fact that Assessing Officer himself has given a finding that there was a linkage between the transportation cargo by feeder vessel belonging to other enterprise to the main voyage carried out by the mother ship owned by the assessee. The assessee in that case had established that there is a linkage between the transportation right from the Indian port to hub port by the feeder ....