TaxTMI 
TaxTMI 
2020 (11) TMI 415
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....on the following grounds: On the facts and in the circumstances of the case and in law, the AO, based on directions of DRP has; GENERAL 1. erred in assessing total income at Rs. 31 .95,27,485 as against returned income of Rs Nil; Taxability of receipts on hire of vessel on time charter basis of Rs. 30,45,66,351/- 2. erred in holding that charges received on account of time charter services rendered by the Appellant for the vessel 'Smit Borneo' to Leighton India Contractors Private Limited in India were rendered for the 'use' of industrial, commercial or scientific equipment, thereby treating the same as "Royalty" under section 9(1)(vi) of the Income Tax Act, 1961 ('the Act'): 3. erred in holding that the impugned time charter services shall be covered within the definition of the term "Royalty" under Article 12(4) of the India - Singapore Double Tax Avoidance Agreement ('DTAA'); 4. without prejudice to the above, erred in not applying the special deeming provisions of section 44BB of the Act, wherein 10% of the gross receipts shall be deemed to be income of the Appellant; Taxabil....
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.... initiating penalty proceedings under section 271(1)(c) of the Act. The above grounds of appeal are mutually exclusive and without prejudice to one another. The Appellant craves leave to add/ alter/ amend/ delete/ withdraw any or all of the grounds at or before the hearing of the appeal so as to enable the Income tax Appellate Tribunal to decide the appeal according to law." 2. Briefly stated, the assessee is a company incorporated in Singapore, operating in the maritime sector and primarily engaged in the business of salvage, wreck removal, environmental protection and consultancy. During the year under consideration the assessee company had time chartered its vessel "Smit Borneo" along with crew to M/s Leighton India Contractors Pvt. Ltd., for providing services for exploration or extraction of mineral oils to Oil and Natural Gas Corporation ('ONGC'), in connection with I-tube and Flexible pipe installations for ONGC Pipeline Replacement Project-3 and Heera RD Phrase-II Pipeline Project. The assessee had filed its revised return of income for A.Y. 2014-15 on 23.03.2016, declaring its total income at Rs. nil. Subsequently, the case of the assessee was selec....
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....her its receipts were covered under Section 44B of the Act, the assessee answered in the negative. It was submitted by the assessee that for applicability of Section 44B twin conditions were cumulatively required to be satisfied viz. (i) the assessee should be in the business of operation of ships; and (ii) the amounts received by the assessee or by any person on behalf of the assessee shall be on account of carriage of passengers, livestock, mail or goods shipped at any port in India. It was submitted by the assessee that as it had time chartered its vessel "Smit Borneo" along with the crew to Leighton India Contractor Pvt. Ltd., which in turn was being used for providing services for exploration or extraction of mineral oils to ONGC in connection with its I-tube and Flexible pipe installations for ONGC Pipeline Replacement Project-3 and Heera RD Phrase-II Pipeline Project, its income earned during the year was not on account of transportation of passengers or goods, but merely from chartering of vessel along with the crew. As such, it was submitted by the assessee that given the nature of its activities and further use of the vessel by the charterer the primary condition for the ....
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....mitted by the assessee that Article 12 of the tax treaty provided that the consideration for the use, or the right to use of any industrial, commercial, or scientific equipment was to be considered as a royalty. It was submitted by the assessee, that as its 'agreement' for time charter of the vessel was for providing the vessel along with the crew on a time charter basis and not a simpliciter hiring of any vessel/equipment, the same thus being an agreement akin to providing of services would not qualify as 'royalty'. However, the A.O after considering the aforesaid reply of the assessee was not persuaded to accept the same. It was observed by the A.O that the 'agreement' which resulted into income to the assessee was executed between the assessee and Leighton India Contractor Pvt. Ltd., and not with ONGC. On the basis of his aforesaid observation, the A.O was of the view that the claim of the assessee that the nature of its 'agreement' with Leighton India Contractor Pvt. Ltd. was akin to providing of services in connection with exploration of mineral oil under Sec. 44BB was not tenable. Apart from that, it was observed by the A.O that now when the assessee had not offered any incom....
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....essee had claimed to have received an amount of Rs. 1,31,80,903/- towards reimbursement of expenses from Leighton India Contractor Pvt. Ltd. It was the claim of the assessee that the aforesaid receipts were in the nature of reimbursement of certain costs which were incurred by the assessee on behalf of Leighton India Contractor Pvt. Ltd., viz. costs incurred for obtaining fresh water, fuel, lubricants, repair cost etc. It was the claim of the assessee that the reimbursement of the aforesaid expenses was provided for in its 'agreement' with Leighton India Contractor Pvt. Ltd. In order to fortify its said claim, the assessee had in the course of the assessment proceedings referred to the relevant clauses of the 'agreement'. However, it was observed by the A.O that the aforesaid receipts were intrinsically linked with the receipts from time charter of the vessel. Apart from that, it was noticed by the A.O that the assessee had not provided any details as to what actual expenditure was incurred by it towards common services, and also as to how the reimbursement had been computed. Further, it was observed by the A.O that there was also no evidence on record that the market value of the ....
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....es etc., the DRP concurred with the A.O that the same would fall within the definition of industrial, commercial or scientific equipment. Adverting to the definition of 'royalty' as contemplated in Article 12 of the India-Singapore tax treaty, it was observed by the DRP that the said term inter alia included payments of any kind received as consideration for the use of, or the right to use any industrial, commercial, or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b)or 4(c) of Article 8. On the basis of observations recorded in its order, the DRP was of the view that the consideration received by the assessee from Leighton India Contractor Pvt. Ltd. was in the nature of 'royalty' for the use of industrial, commercial or scientific equipment, as provided in Article 12 of the India-Singapore tax treaty, and was thus chargeable to tax as per the rate provided in the said tax treaty. As regards the alternative submission of the assessee, that as its income would be taxable as per the provision of Sec. 44BB of the Act, and hence, the same could not be taxed as royalty as per Article 12 of the India-Singapore tax treaty, the ....
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....by it towards providing of common services, and as to how the reimbursement amount had been computed. Also, it was noticed by the DRP, that the assessee had not provided any such details even in the course of the proceedings before it. Further, it was observed by the DRP that no evidence could be led by the assessee to substantiate that the market value of the services received by Leighton India Contractor Pvt. Ltd. from the assessee were equivalent to the payments which were received by the assessee from any other entity. Apart from that, it was observed by the DRP, that as per Article 12(2)(b) of the India-Singapore tax treaty the assessee was required to pay 10% of the amount of the "gross royalties". As such, the DRP was of the view that the term gross royalties was to be construed as the gross amount i.e without deduction of any taxes or expenses. Accordingly, the DRP observing that the income of the assessee was not being computed as per the provisions of Section 28 of the Act, but as per Article 12 of the India- Singapore tax treaty, which provided for taxing of the gross receipts as royalty, therefore, was of the view that the amount of reimbursement of expenses could....
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....' to Sec. 9(1)(v) of the Act. Apart from that, it was submitted by the ld. A.R, that as the vessel time chartered along with the crew to Leighton India Contractor Pvt. Ltd. was used in connection with providing of services or facilities in the prospecting for, or extraction or production of mineral oils, therefore, the consideration therein received fell within the scope and gamut of Sec. 44BB of the Act, and were thus excluded from the definition of royalty as envisaged in clause (iva) of 'Explanation 2' to Sec. 9(1)(vi) of the Act. In sum and substance, the ld. A.R had claimed that the time charter receipts in its case were not liable to be treated as royalty under the Act, for two fold reasons viz. (i) that, as the vessel 'Smit Borneo' was given on a time charter basis along with the crew to Leighton India Contractor Pvt. Ltd., and there was no passing over of the 'use' or 'right to use' of the said vessel to the charterer, the consideration therein received could not be treated as royalty; and (ii) that, the consideration received being covered by Sec. 44BB of the Act, therein fell within the exclusion carved out in clause (iva) of the 'Explanation 2' to Sec. 9(1)(vi) of the Ac....
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....rds reimbursement of the expenses which were incurred by it on behalf of Leighton India Contractor Pvt. Ltd., as provided in the 'agreement', therein could not be have been assessed as royalty in the hands of the assessee. 12. Per contra, the ld. Departmental Representative (for short 'D.R') relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the assessee had given the use, or right to use of the vessel viz. 'Smit Borneo' to the charterer viz. Leighton India Contractor Pvt. Ltd., therefore, it was incorrect on the part of the counsel for the assessee to claim that the consideration therein received would not fall within the scope and gamut of the definition of the term royalty under the clause (iva) of 'Explanation 2' to Sec. 9(1)(vi) of the Act, and also Article 12(3)(b) of the India-Singapore tax treaty. It was submitted by the ld. D.R that as per the 'Explanation 5' to Sec. 9(1)(vi) of the Act, the fact as to whether the possession or control of the right or property was with the payer, or the right or property was used directly by the payer, would have no bearing on adjudication of the issue as to whether the consideration received for 'use....
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....its 'agreement' with Leighton India Contractor Pvt. Ltd. Further, it was submitted by the ld. A.R, that as the time charter receipts does not fall within the realm of the definition of the term 'royalty' as provided in Article 12 of the India-Singapore tax treaty, thus the said definition provided in the tax treaty would be applicable as per Sec. 90(2) of the Act. In support of his contention the ld. A.R had relied on the order of the Hon'ble High Court of Delhi in the case of Asia Satellite Telecommunications Co. Ltd. Vs. DIT (2011) 332 ITR 340 (Del). 14. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. As observed by us hereinabove, the assessee had sought our indulgence for adjudication of three issues viz. (i) that, as to whether or not the consideration received by the assessee from time charter of its vessel 'Smit Borneo' had rightly been assessed as 'royalty' by the A.O/DRP under clause (iva) of the 'Explanation 2' to Sec. 9(1)(vi) of the Act, and also Article 12(3)(b) of the India-Singapore tax treaty; (ii) that, ....
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....l, commercial or scientific equipment but not including the amounts referred to in section 44BB; (vi) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vii) the rendering of any services in connection with the activities referred to in subclauses (i) to (iv), (iva) and (v)" Further, the term 'royalty' has been defined as per Article 12 of the India- Singapore tax treaty, as under: "3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use : (a) any copyright of a literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including ga....
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.... the same would fall within the scope and gamut of the exclusion carved out in the definition of term 'royalty' as contemplated in clause (iva) of the 'Explanation 2' to Sec. 9(1)(vi) cannot be accepted, and is thus rejected. 16. We shall now advert to the claim of the assessee that as it had time chartered its vessel 'Smit Borneo' along with the crew to Leighton India Contractor Pvt. Ltd., and had at no stage given or parted with the 'use' or 'right to use' of the said vessel to the charterer, viz. Leighton India Contractor Pvt. Ltd., the same thus could not be treated as royalty in the hands of the assessee. On a perusal of the records, we find substantial force in the claim of the assessee that the nature of 'agreement' entered into by it with Leighton India Contractor Pvt. Ltd., was for providing of time charter services, and not for hiring of any equipment. As such, there is substance in the claim of the ld. A.R that the assessee had only time chartered its vessel viz. 'Smit Borneo' along with the crew to Leighton India Contractor Pvt. Ltd., and had at no stage passed over the 'use' or 'right to use' of the said vessel to the charterer. But then, we cannot remain oblivious ....
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....A.R that the time charter receipts would not fall with the realm of the definition of 'royalty', as provided in Article 12 of the India- Singapore tax treaty. For a fair appreciation of the aforesaid issue we need to look into the relevant clauses of the aforesaid 'agreement', which reads as under : Clause 7 (a)(i) Subject to STCW code, The Master shall carry out his duties promptly and the Vessel shall render all reasonable services within her capabilities by day and by night and at such times and on such schedules as the Charterers may reasonably require without any obligations of the Charterers to pay to the Owners or the Master, Offices or the Crew of the Vessel any excess or overtime payment." Clause 7 (b) The Vessel's crew if required by, charterers will connect and disconnect electric cables, fuel, water and pneumatic hoses when placed on board the Vessel for loading and unloading cargoes, and will hook and unhook cargo on board the Vessel when loading or discharging alongside offshore units. Clause 7(d) The entire operation, navigation, and management of the vessel shall be in the exclusive control and command of the....
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....ied by the judgment of the Hon'ble High Court of Delhi in the case of Technip Singapore Pte. Ltd. Vs. DIT, 70 taxman.com 233 (Del). In the said case, the Hon'ble High Court relying on its earlier judgment in the case of Asia Satellite Telecommunication company ltd. Vs. DIT (2011) 332 ITR 340 (Del), had observed as under: "34. As far as DTAA in the present case is concerned, the income earned by the Assessee would be treated as royalty only where it is received as consideration for the use of the equipment, i.e., industrial, commercial or scientific. It can also be for use of or the right to use any copyright or for information concerning industrial, commercial or scientific experience. It is clear from the contract itself that the control of the equipment throughout remained with the Petitioner and did not get transferred to IOCL. 35.1 In this context, it is necessary to refer to the decision of this Court in Asia Satellite Telecommunications Co. Ltd (supra). The facts were that the Assessee in that case, Asia Satellite Telecommunications Co. Ltd. (ASTC), a company incorporated in Hong Kong, was carrying on the business of private satellite communications and broa....
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.... taken place in India." 35.4 The Court has held that the concept of dominion or control is sine qua non use. Further Explanation 5 below Section 9 (vi), to the extent it is not beneficial to the Assessee, will have to in terms of Section 90 (2) of the Act, make way for the provision of the DTAA which is more beneficial to the Assessee. This aspect too has been clarified by the Court in Asia Satellite Telecommunications (supra). It was observed: "The effect of an agreement made pursuant to Section 90 is that if no tax liability is imposed under this Act, the question of resorting to agreement would not arise. No provision of the agreement can fasten a tax liability when the liability is not imposed by this Act. If a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it. In case of difference between the provisions of the Act and of an agreement under section 90, the provisions of the agreement shall prevail over the provisions of the Act and can be enforced by an appellate authority or the court. However, as provided by sub-section (2), the provisions of this Act will apply to the assessee in the even....
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....t to use the ship, select the time and decide the route as per its requirement. We have given a thoughtful consideration to the facts involved in the aforesaid case before the Hon'ble High Court, and are in agreement with the claim of the ld. A.R that the facts therein involved are distinguishable as in comparison to those in the case before us, which can be briefly culled out as under: Sr. No. In case of Madras HC ruling In case of assessee 1. Assessee was engaged in the business of moving coal from various ports in India to a particular location in India. Assessee was in the business of providing time charter services in connection with prospecting, extraction or production of mineral oil in India. 2. The place of re-delivery of ships was at the option of the assessee (i.e charterer or the lessee). The place of delivery and redelivery of the vessel was at the location of the assessee (i.e the owner or the lessor) in Singapore (refer Box No. 7 & 8 of the agreement). 3. The masters/captains and others working in the ships are at the disposal of the assessee (i.e charterer or lessee. The entire operation, navigation and management of the vessel wa....
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.... 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." Apart from that, we find that a similar view had also been arrived at by the ITAT Ahmedabad bench 'I' in the case of DCIT, International Taxation, Baroda Vs. Bombardier Transportation India Pvt. ltd. (2017) 162 ITD 586 (Ahd). In the said case, it was observed by the Tribunal that the rendition of I.T support services to the assessee by a Canadian company, even if certain equipment were t....
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....y, both under Sec. 9(1)(iv) of the Act, and Article 12(3)(b) India-Singapore tax treaty. As noticed by us hereinabove, it was inter alia observed by the A.O/DRP that as the mobilisation of the vessel viz. 'Smit Borneo' formed an inextricable part of the time charter services rendered by the assessee, thus the fees therein received were also to be assessed as royalty. As we have concludd that the consideration received by the assessee from time charter of the vessel viz. 'Smit Borneo' would not fall within the realm of the definition of the term 'royalty' as contemplated in Article 12 of the India-Singapore tax treaty, therefore, the mobilisation fees, which as observed by the A.O/DRP formed an inextricable part of such time charter services has to be similarly construed. As such, we vacate the treatment of the mobilisation fees received by the assessee as royalty by the lower authorities. The Grounds of appeal No. 5-7 are allowed in terms of our aforesaid observations. 20. We shall now take up the claim of the ld. A.R that the A.O/DRP had erred in concluding that the amount of Rs. 1,31,80,903/- received by the assessee towards reimbursement of expenses which were incurred by it ....