AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (8) TMI 855
X X X X Extracts X X X X
X X X X Extracts X X X X
....le-22 of DTAA on account of the phrase "not dealt 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n holding that MSC Agency (India) Pvt. Ltd. ('MSC Agency') constitutes a Permanent Establishment ('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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 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 domesti....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., 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 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 profit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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 tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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(....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be taxable in the State of residence irrespective of whether the resident has a PE in the other State or not 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve 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 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 b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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) re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f was understood in a certain way as expressed and clarified in the letter dated 29th October, 2003 issued by the Competent Authority of Switzerland and reply thereto given by the Indian 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 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 al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nal, 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....portation * 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 / 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 pub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cope and authority of M/s 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. 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 e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 in 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. 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 contra....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Indo-Swiss Treaty) viz. a right or property in respect of which income paid will be effectively connected with a permanent establishment has been explained. It is stated that for the purposes of paragraph 21(1), a right or property in respect of which income paid will be effectively connected with a PE if the economic ownership of that right or property is allocated to that PE. It is stated that the economic ownership of a right or property in this context means the equivalent of ownership for incometax purposes by a separate enterprise with the attended benefits 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,....