TaxTMI 
TaxTMI 
TaxTMI 
2018 (8) TMI 855
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....with in the foregoing Articles" occurring therein and thereby making profits from operation of ship[s in international traffic duly taxable under the provisions of Indian Income tax Act, 1961." 2. "Whether on facts and in circumstances of the case and in law, the introduction of Article -22 in the DTAA changes the undisputed position prevailing up to 2001{prior to introduction of Article-22) that profits of shipping were to be taxed by respective counties according to their Domestic Law by virtue of exclusion of shipping profit from the meaning of business profits occurring in Article-7 of treaty" 3. "Whether on facts and in circumstances of the case and in law, the DRP is correct in interpreting the contents of the letter of Joint Secretary(FT & TR) dated 10th December, 2003 to conclude that Income from operation of shipping from International traffic has been agreed to be covered by Article-22." 4. "Whether on facts and in circumstances of the case and in law, the DRP ought to have followed the decision of AAR in the case Gear Bulk(AG) directly on the issue under consideration where it was categorically held that in the circumstances of exclusion of shipping operations i....
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....nt ('PE') of the respondent-assessee in India within the meaning of Article 5 of the Tax Treaty. 2. Without prejudice to the above, the Hon'ble DRP has erred in not adjudicating Ground of Objection (No. 5) taken up by the respondent-assessee wherein it was stated that, no income of the respondent assessee could be brought to tax in India as the arm's length commission paid to MSC Agency (which is taxable in India in the hands of MSC Agency), fully extinguishes the tax liability of the respondent assessee in India. 5. At the outset in this case the ld. Counsel of the assessee submitted that the issue involved in revenue's appeal is squarely covered in favour of the assessee by a series of the decision of the ITAT in assessee's own case. 6. Per contra, the ld. Departmental Representative did not dispute this proposition. 7. We have heard both the counsel and perused the records. The issue involved is the exigibility of tax of the profits of the assessee from the operation of ships in international traffic. We find that the issue was decided in favour of the assessee originally by this tribunal vide order dated 06.11.2012 in ITA No. 2311/Mum/2007 for assessment ....
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....22 of the Indo-Swiss treaty or not. 32. The learned Special Counsel for Revenue Shri G.C. Srivastava, has contended that the profits from shipping and air transport are specifically dealt with under Article 8 of OECD model convention according to which profits of an enterprice of a contracting State from the operation of ships or aircraft in international traffic is taxable only in that State. He has contended that India and Switzerland, however, have agreed to modify Article 8 to exclude shipping profit from its scope. He has submitted that the shipping profits are also excluded from Article 7(1) which provides that the business profits of an enterprise of a contracting State shall be taxable only in that State unless the enterprise carries on business in the other contracting State through a PE constituted therein. He has contended that the combined effect of these modifications in Articles 7 and 8 makes it clear that the profits from the operation of ships in international traffic were left to be taxed by each contracting State according to its domestic law. He has contended that this was an undisputed position and understanding of the true import of the Indo-Swiss treaty till....
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....pto 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 taxability is governed by the said Article with effect from 01-04-2001. Articles 7 and 8 of the treaty therefore cannot be relied upon to say that by agreeing to exclude the shipping profits from said Articles, the shipping profits are left to be taxed by each contracting State according to its domestic law. It is no doubt true that this was the position prior to introduction of Article 22 in the Indo-Swiss treaty in the year 2001 but the same was altered as a result of introduction of the said article inasmuch as it became necessary to find out as to whether shipping profits have been dealt with in any other article of the treaty. Mere exclusion of shipping profits from the scope of treaty could have resulted in leaving the same to be taxed by the concerned contracting State according to its domestic law prior to introduct....
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....as relied upon the letter dated 14th February, 2005 issued by 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 of shipping profits was governed by Article 22 of the Indo-Swiss treaty. As a matter of fact, this position was accepted by the AO himself in the assessment completed in assessee's own case for assessment year 2002-03 wherein the claim of the assessee that the shipping profit is chargeable to tax only in Switzerland and not in India as per Article 22 of the treaty was allowed by the AO. Even in the voyage assessment order passed on 10th June, 2005 u/s 172(4), the AO accepted that the international shipping profits of the assessee company for assessment year 2005-06 were governed by Article 22(1) of the Indo- Swiss treaty. In order to say that a particular item of income has been dealt with, it is necessary that the relevant article must state whether Switzerland or India or both have a r....
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....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 article of DTAA only when such article provides for and positively vests the powers to tax such income in one or both States. The mere exclusion of international shipping profits from Article 7, therefore, cannot be regarded as vesting India with a right to tax international shipping profits and such profit, in our opinion, cannot be regarded as "dealt with" by the said article as envisaged in Article 22. 38. The stand of the Revenue is that by excluding the profits from the operation of ships in international traffic from Article 7(1), the same has to be regarded as dealt with by Article 7(1) and it, therefore, cannot fall under Article 22. It is contended that such profit, therefore, will be taxable in India as per the domestic law by applying the provisions of section 44B of the Income-ta....
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....sition 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 not apply to the items of income classifiable as business profits within the meaning of Article 7. It is, however, to be noted that the international shipping profits have been excluded from business profits within the meaning of Article 7. He has also relied on the comments of Professor Klaus Vogal that the expression "not dealt with" used in the said article must not be taken to mean "not unmistakably dealt with" as the said article is neither designed to remove difficulties of interpretation nor even lays to settle them in favour of the State of residence. In this regard, we have already referred to the correspondence exchanged with the competent authorities of India and Switzerland whereby it was mutually agreed to assign a certain specific interpretation to Article 22 in the context of international shipping profits and keeping in view this agreement arrived at between the two competent authorities, we are of the view that the R....
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.... 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 upto assessment year 2001-02 not because of the exclusion contained in Article 7 but because of absence of any article prescribing specifically a tax treatment i.e. distributive rules in the Indo-Swiss treaty. This position, however, has changed as a result of introduction of residuary article 22 prescribing tax treatment or distributive rules for other income which has not been dealt with by any earlier articles of the treaty like the international shipping profits. 42. In assessee's own case, a similar issue came up for consideration for the first time in assessment year 2002-03 when Article 22 introduced in the Indo-Swiss treaty from 01- 04-2001 became operative and applicable. For that year, the return was filed by the assessee declaring Nil income making a similar claim that under the beneficial provisions of Article 22 of Indo-Swiss treaty, it was not liable to tax in Ind....
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....superseded by another letter issued on 27th May, 2005 wherein the Joint Secretary has made a reference to the letters exchanged between 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, Division for International Fiscal Law and Double Taxation Matters, Swiss Federation Tax Administration to the Joint Secretary (FT & TR), Ministry of Finance, Government of India, the contents of which are reproduced below : "We write this letter to you in order to agree on the taxation of profits arising from operation of ships in international traffic in our respective countries in accordance with the provisions of our double taxation agreement. During our negotiation both contracting States decided to tax enterprises that operate in the shipping business according to the internal law of each Contracting State. The term "international traffic" in paragraph 1 subparagraph i) of Article 3 therefore was limited to transport by an aircraft operated by an enterprises of a Contracting State. Consequent....
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....d 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 business in India through a permanent establishment situated therein and the right or property in respect of such income is effectively connected with such permanent establishment. We hope that you interpret these provisions of our double taxation agreement in the same way and therefore will be able to confirm your agreement to us by returning a countersigned copy of this letter. (emphasis supplied in bold letters). We thank you for your cooperation in this matter and look forward to receiving your soon answer." 44. The immediate reply to the above letter was sent by Joint Secretary (FT & TR) by a letter dated 10th December, 2003 communicating that India was not in agreement that income from shipping business in international traffic would be covered under Article 22 and reasons for the same ....
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....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 Joint Secretary (FT & TR) after 10th December, 2003 clarifying the matter further to the Competent Authority of Switzerland whereby it was agreed that profits from operation of ships in international traffic is not covered specifically by any of the articles of the treaty and that Article 22 of the treaty dealing with other income would fall to be applicable in respect of such income. The letter dated 14th February, 2005 of Joint Secretary (FT & TR) relied upon by the AO to deny the treaty benefit to the assessee company thus was superseded by the letter dated 27th May, 2005 and the reliance of the AO on the letter dated 14th February, 2005 to deny the treaty benefit to the assessee company was clearly misplaced. 45. In Article 3 of Indo-Swiss treaty giving general d....
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....pping 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 Ruling in the case of Gearbulk AG (supra) wherein a similar issue has been stated to be decided in favour of the Revenue holding that income derived from operations of ships in international traffic is liable to tax in India as per domestic law rejecting the contention of the assessee that Article 22 of the Indo-Swiss treaty applies to such income and allocates taxing rights to the country of residence i.e. Switzerland. He has contended that although the said decision of Authority for Advance Ruling is not strictly binding on the Tribunal, it has a grate persuasive value and their being no decision of the Tribunal, High Court or the Supreme Court directly on the issue, the decision of Author....
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.... of the very assessee in which such a ruling was given and that too in 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 precedence value in general. We are, therefore, unable to accept the plea of Shri Srivastava that the issue under consideration be decided in favour of the Revenue following the decision of the Authority for Advance Ruling in the case of Gearbulk AG (supra) . In our opinion, the item of income in question i.e. international shipping profit cannot be said to be dealt with in any other articles of the Indo-Swiss treaty and the taxability of the said income thus is governed by residuary Article 22 introduced in the treaty with effect from 01-04- 2002. 49. Having held that the taxability of international shipping profits is covered by Article 22, it is necessary to ascertain whether the assessee compa....
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..... 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 / or arrivals and to quote freight rates and announce freight traffic and amendments, subject to the freight policies and instructions of the Principals. To provide regular reports and information concerning latest market trends and competition advice developments. 3.13 To arrange for public relations work (including advertising, press................agreed by the principles. 3.14 To issue, sign and stamp on behalf of the Principals ................................. to perform these duties. 5.00 Principals' Duties: 5.02 The Principals will provide the Agents with any necessary funds to cover creditors and any advance disbursements in respect of the Principal's business within the region, which may be specifically agreed as ....
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....rein 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. Income-tax 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 the meaning given in the "Webstors Revised Unabridged dictionary" and in the words and phrases, permanent edition, Shri Mukul Rohotogi has opined that the expression "effectively connected" must be understood to mean that there is a powerful, complete or thorough control of the ship by the agency. In his view, the shipping company, however, has no such control whatsoever over the ship and since it is only working as an agent who makes bookings and perform other ancillary services, it cannot be said that the ship has any effective connection with the agency. He has stated that to say that the ships are effectively connected with the ag....
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....he correct accounting principles where the ships are shown as assets of the branch. 54. In the case of Sumitomo Mitsui Banking Corporation (supra), the Special Bench of this Tribunal had an occasion to consider and interpret the meaning of the term "effectively connected" used in paragraph No. 6 of Article 11 of the Indo- Japanese treaty which reads as under : "The provisions of para 1, 2 and 3 shall not apply if the beneficial owner of the interest, being a resident of the contracting State carries on business in the other contracting State in which the interest arises, through a PE situated therein or performs in that other contracting State independent personal services from a fixed base situated therein and the debt claimed in respect of which the interest is paid is effectively connected with such PE or fixed base. In such a case, the provision of Article 7 or Article 4 as the case may be shall apply." 55. The Special Bench in this context noted that the provisions of Article 11(6) of the Indo-Japanese convention were pari-materia to that of Article 11(4) of the OECD Model Convention and after taking into consideration the purpose and scope of Article 11(4) of the OECD M....
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....fits and burdens (e.g. the right to the income attributable to the ownership of the right or property, the right to any available depreciation and judicial exposer to gains or losses from the appreciation or depreciation of that right or property). 57. Keeping in view the relevant portion of the OECD commentary on Model Tax Convention on Income and on Capital (condensed version) published in July, 2010 and the ratio of the decision of Special Bench of this Tribunal in the case of Sumitomo Mitsui Banking Corporation (supra) as also the opinion of Philip Baker and Mr. Mukul Rohotogi which conforms to the said ratio, we are of the view that the right or property in respect of which the shipping income is earned by the assessee i.e. ships cannot be said to be effectively connected with the permanent establishment in India . Such income, therefore, will not fall under Article 22(2) but will fall under Article 22(1) and accordingly shall be taxable only in the State of residence of the assessee company i.e. Switzerland and not in India. In that view of the matter, we uphold the impugned order of the learned CIT(Appeals) holding that the international shipping profits of the assessee co....