TaxTMI 
TaxTMI 
TaxTMI 
2017 (2) TMI 1099
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....of section 9(1)(vi) r.w.s.160/163 of the Act without assigning any reasons and justifications. ITA No.1074 to 1076/Mds./2015 4. The facts as narrated in the assessment year 2002-03 are that the assessee is carrying on the business of transporting coal by time chartering of vessels. In the course of business, the assessee had availed the services of vessels owned by Foreign Shipping Companies ('FSC' in short), as well. The assessee had paid charges to those foreign companies for moving coal from various ports in India destined to Chennai and Tuticorin ports. The coal is brought to Tamilnadu ports for the consumption of Tamilnadu Electricity Board. According to the AO, the assessee had engaged FSCs in the previous year relevant to the impugned assessment year for moving coal as stated above and paid charges for engaging those vessels. The AO observed that the FSCs have not filed any return for the income accruing and arising in India. He further observed that the charges paid by the taxpayer was on account of the use and hire of the ship and hence, it was royalty within the meaning of sec.9(1)(vi) of the I.T.Act, 1961 and Article 12 of the respective tax treaties. Accordingly, he ....
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....Sales Tax Act. In so holding, this Court also referred to the decision reported in (2000) 119 STC 182(SC) (20th Century Finance Corpn. Ltd. V. State of Maharashtra) and the decision of the Apex Court reported in (1999) 113 STC 317 (Aggarwal Brothers V. State of Haryana) for the understanding of the expression 'use or right to use'. This Court also referred to the decision reported in (2005) 145 STC 91 (SC)(Bharat Sanchar Nigam Ltd. V. Union of India) and pointed out to the attributes in right to use goods for the purposes of attracting the charge to hold that a transfer of right to use goods implied transfer of effective control for use. In that context, going by the charging provisions under section 3A of the Tamil Nadu General Sales Tax Act, this Court held that in a time charter party, there being no transfer of effective control for use, the transactions would not attract Sectgion 3A of the Tamil Nadu General Sales Tax Act." 5.1 The ld. A.R. further submitted that the assessee cannot anticipate and pay based on subsequent High Court order and Explanation 5 to sec.9(1)(vi) introduced in 2012. To support his view, he relied on the decision of the Ahmedabad Bench of the Tribunal....
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....operational difficulties. Further, most such foreign entities are likely to have nil or at best very meager assets in India which may be totally inade3quate to recover the tax dues. According to the ld. DR, sec.195 of the Act, is an answer to the above difficulty as it provides the mechanism for deduction of tax at source. He relied on the judgement in the case of CIT & Ors. Vs. Samsung Electronics Co. Ltd. & Ors. (2010) 320 ITR 209 (Kar), the Karnataka High Court held that while u/s.195(1), an obligation on the part of the person responsible for paying to a non-resident does arise if and only if the payment partakes the character of income payment. Every resident payer making a payment to a "non-resident recipient" in respect of any goods/service supplied by the non-resident, which the resident payer is making use of in the running of its business or any other activity indulged in as part of the business/professional activity of the resident recipient prima facie bears the character of an income receipt and therefore, the obligation under sub-sec.(1) of sec.195 springs up. Therefore, he submitted that it is imperative for a payer to ensure that the provisions of sec.195 are strict....
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....ered basis to non-resident shipping company amounts to 'royalty' since ship is equipment. Hence, such amounts are assessable under Explanation 2(iva) to sec.9(1)(vi) of the Act. Thus, the payments are liable for TDS deduction u/s.195 of the Act. 6.6 Further, the ld. DR submitted that 'royalty' means the consideration paid for 'the use or right to use'. Thus, when the use or right to use the ship for an economic benefit is given to the assessee, the consideration for the use of the industrial, commercial and scientific equipment is 'royalty', assessable under Explanation 2(iva) to se.9(1)(vi) of the Act. Therefore, he submitted that for the purposes of the Income-tax Act, under the time charter, the payment made being for the use of the ship, the same comes within the meaning of the word 'royalty'. 6.7 According to the ld. DR, ship could be considered as an equipment and sec.43(3) of the Act defines 'plant' to include ships. There is a separate provision relating to income of shipping companies under Chapter XIIG of the Act. Sec.115V of the Act defines various terms like bare boat charter, bare boat charter-cumdemise, Director-General of Shipping, factory ship, fishing vessel, etc....
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....led: - the assessee is a ship belonging to, or chartered by a non-resident - it carries passengers, livestock, mail or goods; - the aforementioned are shipped by the ship to a port in India - must be in occasional shipping business Considering the magnitude of the voyages undertaken by the freight beneficiary, the ld. DR, submitted that the freight beneficiary is not engaged in occasional shipping but in regular shipping business and hence would be outside the scope of sec.172 and the same view is followed by the Tribunal in the case of ITO v. International Taxation v. Marine Containers Services (India) (P) Ltd. (Rajkot) in ITA No.61/(Rajkot)/ 2012. He relied on the judgement of Bombay High Court in the case of CIT vs. ORIENT (GOA) (P) LTD (2010) 325 ITR 554, it is set out that tax having not been deducted at source from payment of demurrage charges to foreign shipping company, s.40(a)(i) was clearly attracted; assessee being a resident company, there was no question of invoking sec.172. 6.10 According to the Ld. DR, the assessee is a company, incorporated under the provisions of Indian Companies Act, 1956, is an admitted position. The assessee cannot be said to be nonresiden....
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.... u/s.163 of the Act in respect of income of a non-resident specified in sub-sec.(1) of sec.9. 7. In reply, the ld.A.R submitted that section 40(a) disallows only those expenses which are covered under section 30 to 38 of the Act. The payments made to non-resident company in the nature of direct cost for earning the profit, the same are not covered by section 40(a), hence this expenditure needs to be allowed from the costs while arriving at the profit as defined under section 28 and there cannot be any disallowance under section 40(a)(i) in respect of this expenditure. It was vehemently argued that the payments made to foreign shipping companies are covered under section 172 and hence the provisions of section 195 do not apply to this case. It was argued that once it is found that the provisions of section 195 are not applicable to a specific payment then there cannot be any disallowance under section 40(a)(i). The ld.A.R relied on the Tribunal order in assessee's own case for assessment year 2005-06 & 2007- 08 and also the judgment of Supreme Court in the case of Transmission Corporation of Andhra Pradesh Ltd. reported in [1999] 239 ITR 587 (SC) and also the decision of the Ho....
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.... in time charter of vessels in this case constitutes 'royalty'. This perception seems to be misconceived. The Hon'ble Delhi High Court in the case of Asia Satellite Telecommunication Co. Ltd. vs. DCIT (supra) has held that two things are necessary to christen a payment as a 'royalty' under Explanation 2 appended to clause (vi), which speaks about possession and control of the vessel in the given case, the assessee neither has control nor possession over the vessels. The Captain/Master and the crew is instructed, directed and controlled by the ship owner only and not by the assessee. The assessee simply informs the description of the cargo to be carried on and from which port to which port the cargo has to be transported. Thus, it becomes clear that the assessee neither has control nor the possession over the vessel in question. The decision of the Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Limited and others vs. UOI (2006) 282 ITR 273 (SC), of which the Id. AR has placed reliance, the Hon'ble Apex Court has laid down the significance to hold license required to be operated in question. It is only a person but holds requisite license as required by the statute, who ca....
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....harter hire is erroneous. 8.3 Further, it is to be noted that in assessee's own case for the assessment year 2005-06 in ITA No.920/Mds./2010, the similar issue in dispute came for consideration before this Tribunal while deciding the issue by way of challenging the order of CIT passed u/s.263 of the Act. The Tribunal ITA No.920/Mds./2010 vide order dated 17.04.2012 observed that provisions of the section 195 is not applicable to this hire charges paid to foreign shipping company, then there cannot be any disallowance u/s.40(a)(i) of the Act. Even this was once again affirmed by the Tribunal while disposing off Miscellaneous Petition filed by the Revenue in MA No.130/Mds./2012 dated 11.10.2012. Further for assessment year 2007-08, similar issue came for consideration before this Tribunal in ITA No.1206 & 779/Mds./2011 vide order dated 04.10.2011 for assessment year 2007-08 held as under:- "13. We have heard rival submissions and have perused the entire record available before us. The assssee had hired vessels from Foreign Shipping Companies (FSC for the transportation of coal for Karanataka Power Corporation Limited; based on the availability of cargo and vessels. The vessels ....
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....ablishment in India. We are also not in agreement in Department's contention that the payment made in time charter of vessels in this case constitutes 'royalty'. This perception seems to be misconceived. The Hon'ble Delhi High Court in the case of Asia Satellite Telecommunication Co. Ltd. vs. DCIT (supra) has held that two things are necessary to christen a payment as a 'royalty' under Explanation 2 appended to clause (vi), which speaks about possession and control of the vessel in the given case, the assessee neither has control nor possession over the vessels. The Captain/Master and the crew is instructed, directed and controlled by the ship owner only and not by the assessee. The assessee simply informs the description of the cargo to be carried on and from which port to which port the cargo has to be transported. Thus, it becomes clear that the assessee neither has control nor the possession over the vessel in question. The decision of the Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Limited and others vs. UOl (2006) 282 ITR 273 (SC), of which the Id. AR has placed reliance, the Hon'ble Apx Court has laid down the significance to hold license required to be operate....
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....e under section 40(a)(i) for non-deduction at source on the amount paid to FSC for the time charter hire is erroneous and the same is set aside." 8.4 In view of the above earlier order of Co-ordinate Bench in assessee's own case, the issue to be decided in favour of the assessee. Further, judicial discipline requires consistency in its proceedings. Though principle of res judicata is not applicable to the assessment proceedings, yet there ought to be uniformity in treatment and consistency when facts and circumstances are identical. For this purpose we place reliance on the following judgements:- i) DCIT v. K.B.Capital Markets (P.) Ltd., 71 Taxmann.com 354 (Kolaotta), has held that "In assessment years 2006- 07 & 2007-08 the Assessing Officer accepted the plea of the assessee and assessed income declared on purchase and sale of shares as giving rise to STCG in assessment completed under section 143(3). The facts and circumstances in the present assessment year and the assessment years referred to above were identical. Though the rule of res judicata is not applicable but the principle of consistency will definitely apply and on that basis the claim of the assessee should be ....
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....ar unless it is able to demonstrate a change in circumstances in a subsequent assessment year. It also held that where the fundamental aspect permeating through the different assessment years has been found as a fact one way or the other, the parties are allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year" 8.5 In view of the above, we are inclined to decide the issue relating to the disallowance of hire charges paid by the assessee to the foreign company by invoking the provisions of the section 40(a)(i) of the Act in favour of the assessee and against the Revenue. 8.6 Without prejudice to the above findings, the issue in dispute is squarely covered by the order of the Special Bench of the Tribunal in the case of Merilyn Shipping and Transports v. Addl. CIT [2012] 16 ITR (Trib) 1 (Visakhapatnam) [SB] wherein held that when the "expenses" is not outstanding at the end of the close of the financial year, provisions of the section 40(a)(ia) of the Act cannot be applied. Following that proposition, in our opinion, when the hire charges of shipping is not outstanding at the end ....
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....hether the hire charges paid to the FSCs are exigible to taxes or not? 13. The Income-tax Appellate Tribunal, Chennai 'D' Bench had an occasion to consider the nature of hire charges paid by the assessee to FSCs. The issue was considered by the Tribunal in its common order dated 4.10.2011 passed in ITA Nos.1206 & 779/Mds/2011. Those appeals also related to the impugned assessment year 2007- 08. Those appeals arise out of the assessment order passed in the hands of the assessee as such and the issue considered in those appeals was whether the assessee was liable to make deduction of tax at source under sec.195 or not. This is because, the Assessing Officer had disallowed the expenditure claimed by the assesseeuunder sec.40(a)(ia) on the ground that the assessee had not made TDS while making payments to FSCs under sec.195. The Tribunal found that the payments made by the assessee to FSCs were not in the nature of royalty and therefore, sec.195 does not apply as such and there cannot be any disallowance of expenditure under sec.40(a)(ia). 14. A portion of the order of the Tribunal reflected in pages 14 and 15 is reproduced below to make the matter clear :- "It is not the case t....
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....nce to the same payment of hire charges to FSCs clearly shows that what was enjoyed by the assessee on the time charter shall be only a 'permissive right' to use the space provided by the Captain of the ship. The Tribunal has, therefore, categorically held that the payment is not royalty and the payment is covered by sec.172 of the Act. 16. The above decision of the Tribunal straightaway goes to decide the issue in the present appeal placed before us. The tax at compounding rate has already been estimated as provided under sec.172 on the gross hire charges paid to FSCs. Sec.172 is one of the very few sections available for making an assessment and payment of tax in a previous year itself. This special provision is available only in case of foreign ship leaving Indian ports, a discontinued business and in case of a person leaving India. The assessments are made in the previous year itself. In that special scheme, the tax on ships leaving Indian ports is calculated at a presumptive rate. Once the tax is paid on the basis of that presumptive rate, the liability of the foreign ship leaving the ports is discharged. In the present case, the tax has been paid under sec.172, thereby the ....